New Challenges Before the Government of the Republic of Croatia: Economic Benefits of the EU Accession Negotiations Date

  Prime Minister of the Republic of Croatia Dr. Ivo Sanader

Globus (Business Supplement), December 29, 2004 – Receiving the date for opening accession negotiations is certainly the most important of three key steps that have marked Croatia’s journey towards the European Union (EU) this year. The first step was the positive avis of the European Commission, which was followed by Croatia being granted official EU candidate-country status and, subsequently, the announcement that accession negotiations will begin on March 17, 2005. These are the three premier political events in 2004, for which all citizens of Croatia deserve credit, which is actually their greatest achievement.

            Accession negotiations are due to begin in less than three months, and the government has, as a result, completed the process of forming the negotiations team – comprised of top-level Croatian experts – immediately after the European Commission gave Croatia a date for the start of negotiations. Our aim is to achieve the best possible outcome for Croatia during the talks, which requires establishing a platform and reaching a consensus around it.

DATE OF ACCESSION TALKS – AN AFFIRMATION OF CROATIA

        What is the economic benefit to Croatia as a result of the process of drawing closer to the EU, and especially the announcement of the date of accession talks? First, these processes affirm that Croatia is a country with a functioning market economy in which private property is protected and where the rule of law is respected. This assessment is highlighted in the Opinion of the European Commission, the avis, which was the first document on Croatia’s road to receiving a date for the start of EU accession talks. The opinion and assessment of the European Commission, which were confirmed by Croatia being granted a date for the start of negotiations, are both of utmost significance for all potential investors in the Croatian economy. We can be sure that the number of investors will increase daily and that the positive impact of receiving a date for accession negotiations on the economy has yet to be felt. Croatia’s strategic goal of EU integration requires us to implement a responsible fiscal policy, whose aim is to achieve equal footing for Croatia in regard to competitiveness on the European market.

            The Croatian economy is on the best possible course to meet the average living standard of all citizens of the EU within the next three years. As stated in the first document concerning the economy, the so-called Pre-accession Economic Program (PEP), which the Croatian government presented to the European Commission for its opinion on December 1, 2004, we expect the Croatian economy to achieve a yearly real economic growth rate of between four and five percent. Concurrently, the EU is expected to achieve real economic growth of one to two percent.

            The main catalysts for growth are expected to be investments in key infrastructure, stimulated by a reduction of the fiscal deficit. This means that fiscal adaptation, or a reduction of the deficit, will ensure that overall capital investments remain at six percent of the gross domestic product. It is important to stress that the process of EU integration places new challenges and goals before Croatia that should be realized through comprehensive economic reform.

INCREASED COMPETITIVENESS THROUGH PRIVATIZATION

            The privatization of the state-owned portfolio plays an important role in economic reforms. In this regard, the government’s strategy proposes an intensification of the privatization process, in order to stimulate improved competitiveness and profit-driven strategy in corporations. It is also an axiom that privatization has significant impact on attracting foreign direct investments, as it pools together fresh capital and new technologies.

            The end goal of the privatization process is to increase efficacy and productivity, reduce the share of the public sector in the economy and, finally, to reduce the costs of public administration.

            In this way, private sector development is also stimulated by making corporations, and current state-owned corporations, more competitive as Croatia enters the EU.

            Being well aware of the importance of foreign direct investments to the national economy – since they bring in capital, know-how, new market potential, modernization of production, increased competitiveness of the overall economy and more jobs – the Croatian government is working together with the Multilateral Investments Guarantee Agency (MIGA) and the Foreign Investments Advisory Service (FIAS) to remove the barriers to investment. The government has also launched the One-Stop-Shop project, whose services entrepreneurs will be able to utilize in the first half of 2005 upon their visit to the Financial Agency (FINA). When the entire project is completed in 2007, entrepreneurs and citizens will be able to accomplish the majority of administrative tasks in this way.

            In regard to the level of direct foreign investments, Croatia ranks high on the list and is, among countries in transition, immediately behind Poland, the Czech Republic and Hungary. However, most of these investments have gone into large privatization projects and sectors that are mainly oriented towards the domestic market. Export-oriented greenfield investments, which have the capacity to shape the economic structure of Croatia, while increasing the dynamics of development, have not been present at an adequate level. Because of this, the Croatian government has decided to establish, as part of the One-Stop-Shop concept, the agency InvestCroatia. The goal of the agency is to proactively attract export-oriented greenfield foreign investments.

COMPETING ON THE EUROPEAN MARKET

Croatia will also have to strengthen the capacity of its judicial system in order to fulfill the political and administrative criteria required of all EU candidate-countries. Specifically, this means that we need to, in the shortest period possible, simplify administrative procedures in land-registers, which implies better organization of cadastral-registries, first and foremost by way of technological modernization and the establishment of an electronic land-registry. The introduction of authorized land-registry officials, following the example of Austria, should greatly reduce the time necessary to resolve cases. On the other hand, it is important to invest maximum effort for reducing the time it takes to complete judicial and bankruptcy cases, which will ensure a strengthening of the position of creditors in bankruptcy proceedings.

            Reforming instruments that regulate bankruptcy proceedings is important for fulfilling the intended goal of the bankruptcy process, which is, first, to enable bankrupt debtors to quickly sell their property; second, to restructure a bankrupt company; and third, to achieve transfer of ownership to a business leader who will be able to return productivity to the firm. In addition, a legal presumption has been introduced by the Supreme Court to lessen the burden on courts. Cases will be transferred from overburdened courts to those with a smaller number of pending cases in order to equalize the workload.

            Our strategic goal of integrating into the EU requires us to implement a responsible fiscal policy that aims to place Croatia on competitive footing with other players on the European market.

            Ultimately, along with the expected economic growth and the continuation of investment in infrastructure, it is important to raise living standards for Croatian citizens. It is predicted that fiscal adaptation, through deficit reduction to two point nine percent of the GDP by 2007, will allow for the fulfillment of the Maastricht criteria in the realm of consolidated state debt. Following a fiscal deficit of six point three percent of the GDP in 2003, the planned fiscal adaptation in the coming period will enable the stabilization of the foreign debt and the elimination of high debt risk. 

            In 2005, we will reduce the deficit to three point seven percent of the GDP. This represents a fiscal adaptation of two point six percent, which is a giant step for economies that are even more developed than Croatia’s. This shows that this government has demonstrated to its citizens and the international community that it is serious, credible and responsible in dealing with public finances.

TOWARDS A KNOWLEDGE ECONOMY

The development of the Croatian economy depends on investments in the public sector, but it is perfectly clear that more resources need to be allocated for private investments, which have, according to the latest data, increased their share in the GDP. In this context, I would like to stress that state investments are an unavoidable and necessary instrument in narrowing the economic gap between Croatia and EU countries. Because of this, Croatia will continue to invest in its transportation infrastructure, but also in other important sectors such as the energy sector. Clearly, Croatia’s energy needs will only rise as the economy continues to grow, which is the case in all developed nations. Investments will focus on modernizing the transfer of electricity, to improve efficacy and decrease losses. Investments in ecological programs also cannot be avoided, because economic development must not have a negative impact on the environment.

            The Croatian government has placed special emphasis on reforming the education sector, with the goal of creating a competitive work force in the future. At the same time, this implies better collaboration between employers and institutions of higher education. Such cooperation will fulfill the demand for educated individuals and experts, which are sought in a market economy that is based on skill and know-how.

            I should highlight our successful partnership with the International Monetary Fund (IMF), which concluded a new stand-by arrangement with Croatia in August 2004, an important signal of support and confidence in the Croatian government’s reform agenda, aimed at creating a truly European Croatia, a Croatia of economic prosperity, stability and well-being.

Translation of a text by Croatian Prime Minister Dr. Ivo Sanader, which appeared in the Croatian weekly Globus (Business Supplement) on December 29, 2004.