HUP warns: Too much state stifles growth and drives away investments

State interventions are necessary in crises, but they must not become a permanent state as this stifles the entrepreneurial spirit and reduces competitiveness and economic growth, it was emphasized on Thursday at the Economic Coffee titled ‘State Interventionism: Positive and Negative Aspects’, organized by the Croatian Employers’ Association (HUP).

HUP’s Director General Irena Weber stated that they are aware that the state can and must intervene in times of crisis, that is its role. However, too many interventions often stifle initiative and innovation, Weber said, noting that the truth is simple – ‘we cannot do without the state, but with too much state, the economy is not competitive and productive’.

The question arises, Weber said, whether it was really necessary to lower the price of milk for everyone, including those for whom this cost is a negligible part of the household budget, while on the other hand jeopardizing milk producers. Should all citizens have been indiscriminately subsidized for their electricity bills with amounts comparable to two coffees?, she asked. Every excessive regulation and every unnecessary intervention, she asserted, stifles the entrepreneurial spirit, reduces competitiveness, and drives investments out of Croatia.

– Interventions are necessary in crises, but they must not become a permanent state. Because when the state takes on the role of an entrepreneur, the market loses its strength, and society loses its opportunity for growth – Weber emphasized.

Raising wages due to artificial state interventions

HUP’s Chief Economist Hrvoje Stojić highlighted the artificial intervention in labor costs.

– The problem is not whether labor costs should rise; they are likely rising as companies increase added value. But when this happens, you have two strong state interventions – through the doubled wage mass from the budget over five or six years, and when the state makes such moves, it gives itself a ‘volley’ by raising the average wage, which is then tied to the minimum wage, you have two very strong, very artificial interventions that have no basis in the productivity of the real sector – he explained.

This, he said, causes the state to artificially move further away from the reality of the private sector each year. When Croatia is viewed in the context of EU member states, it has the largest gap between the growth of labor costs, minimum wage, and gross added value as the main indicator of productivity. It is undisputed that labor costs will rise in the future, but they should be more closely tied to the movement of added value, Stojić said.

He noted that productivity in the manufacturing industry is three to four times lower than the EU average. The agricultural sector, which is a very vulnerable sector and requires significant investment, has three and a half times lower productivity compared to the EU.

– These are things that can only be changed through targeted and smart investments that increase added value faster compared to other EU member states. If we do not do it this way, we can artificially raise wages for a while longer, but then our competitiveness will collapse. Considering that our productivity has been declining for the last two years, this is an own goal for the real sector that the state is giving – Stojić said.

The state creates problems for entrepreneurs in the name of protecting citizens

Professor Marijana Ivanov from the Zagreb Faculty of Economics stated that she is bothered by the fact that the state does not know when the limit is and when to say enough. State interventionism, as she noted, is something that corrects market externalities and responds in crisis conditions.

– It is somewhat atypical to have one of the highest GDP growth rates in the EU and for the state to be constantly present, always protecting someone, and constantly creating problems for entrepreneurs in the name of protecting citizens. Especially since it is known that the growth of Croatian GDP is increasingly tied to investments and developments in infrastructure in the construction sector – Ivanov said, noting that the state does not pay much attention to the industrial sector, which is less productive than the European one.

Often, the state adopts measures that are detrimental to our industry. Sometimes banks are also targeted, but unfortunately, some companies in the industrial sector suffer as well, Ivanov said. It cannot be, as she noted, that the minimum wage is raised by 15 percent every year, as productivity has not increased in the industrial sector, and on the other hand, nothing is being done to strengthen the share of those industries that create greater added value and are more productive.

In response to a journalist’s question about whether there is room for raising the minimum wage, Ivanov said that the minimum wage has significantly increased in recent years and should not rise more than the inflation rate this year.

Economic analyst Damir Novotny stated that Croatian governments in modern Croatian history have taken it upon themselves to enter the territory of market relations. This is a problem that limits the private sector in planning, investments, and development. According to him, the government must regulate, establish the rules of the game, and not change them every year so that the private sector can plan long-term and create new values.