It is not true that the Croatian industry is low-productivity

According to labor productivity per employee, the Croatian economy reaches only 76 percent of the European Union average. Considering that this also accounts for the (in)productivity of the vast public sector, we dare say that this figure does not seem so bad. However, what is truly concerning is that we are increasingly lagging behind in productivity growth compared to Central and Eastern European (CEE) countries. It is better not to compare with Germany. A German industrial worker, in fact, generates added value equivalent to the output of three Croatian workers.

Labor productivity can be defined as GDP or gross added value usually divided by the number of employed persons or hours worked, and it is one of the most important factors influencing GDP growth. According to the World Bank’s calculations, labor productivity in Croatia was 27 percent higher in 2021 than it was twenty years ago. The average productivity growth in other Central and Eastern European economies, however, was 73 percent during that period.

– Low productivity and gross profitability do not allow companies to make larger investments aimed at creating greater added value as a fundamental concept in raising employee wages. Only marathon restraint of unit labor costs at best ensures stagnation of productivity – says Hrvoje Stojić, chief economist of HUP.

The World Bank recently published a report on productivity within growth perspectives, comparing Croatia (and some other countries) with Germany. The results were, according to the authors of the report, surprising: the barrier to greater growth is not the sectoral cross-section of the economy but rather a significant lag in productivity across almost all sectors. In other words, if Croatia relied more on the manufacturing industry like Germany and less on tourism, growth rates would increase, although not as much as we would expect, since Croatia’s lag behind Germany would still amount to 57 percent. What would truly make a difference is increasing the productivity of Croatian companies, which significantly lags behind Germany. Therefore, we need to think about how to increase the productivity of the Croatian private sector.

We randomly selected ten Croatian companies and their comparable counterparts in Slovenia to calculate the difference in their productivity based on business indicators from 2021. To our surprise, considering the myth that all Slovenian companies are much more productive than Croatian ones (according to World Bank data, a Slovenian worker is on average 60 percent more productive than a Croatian one), the calculation showed that out of ten comparable pairs of companies, Croatian companies have higher revenue per employee in six cases.

According to the World Bank’s analysis, the high survival rate of newly established startup companies and their rapid growth negatively reflects on productivity performance in Croatia, as their productivity per employee is on average the same in the first and tenth year of operation. The fact that companies can grow without productivity growth, and thus without improving competitiveness, signals that companies are growing and surviving at rates higher than average not due to their competitiveness or quality but because they face weak competition. This results in growth without challenges and maintains a misallocation of resources towards inefficient companies, affecting the weak growth of overall productivity.

You can read the entire article in the new printed and digital edition of Lider.