The Size of Government
IS GOVERNMENT SPENDING TO HIGH?...
After a few turbulent years, with several snap elections and government reshufflings, the situation in Croatia stabilized to great extent. Despite enjoying a tiny margin of majority in the Parliament, the Government comprised of Croatian Democratic Union (HDZ) and Croatian People’s Party – Liberal Democrats (HNS), built in June 2017, led the country without major disturbances. Citizens are able to cast their votes in a free and fair process based on universal and equal suffrage. Some violations occur during elections, however none that could endanger the integrity of the process. Political landscape is pluralistic and diverse, with several new parties emerged in recent years, providing citizens with a wide spectrum of political views. Representatives in the 151-seat Sabor,
the Croatia’s unicameral national assembly, are elected by proportional representation in 12 constituencies.
Croatia doesn’t have unconstitutional veto players hence elected officials have effective power to govern the country. System of checks and balances among all three branches of power is in place, although in practice the executive dominates the legislative and politicization of judiciary is not rare. The latter provides space for high level corruption, with many cases remaining unresolved, implicating an influential role that wealthy businesses have on political decision-making process. Besides, there are other influential actors in Croatian society. Catholic Church has significant influence on public and political life, and quite often does not refrain from interfering into the political decision making, usually by propagating social-conservative standpoints. While comprising
a large proportion of society, war veterans exercise certain influence on politics as well.
In the light of decline of general press freedom across Europe, according to the Reporters without Borders situation in the media in Croatia is on a track of improvement, with the country holding 69th position in the 2018 World Press Freedom Index, against the previously held 74th. Citizens are provided with a wide range of opinions. Media scene is pluralistic. Still, there are many limitations, to be removed in the upcoming period. Government does not restrain from seeking influence on the most important public and private media outlets, especially on the Croatian National Radio Television (HRT), by trying to interfere into the program management. Journalists are operating in poor market conditions. Physical and verbal harassment is not rare. These developments led to the
practice of self-censorship among them. Defamation charges, often brought against journalists, only serve to additionally spark fear among them, further limiting their objective reporting.* Press freedom score will be updated after data from primary source have been published. For more information see Methodology section.
Following improvements during the previous couple of years, in 2017-2018 the judiciary in Croatia again, and to it sharply, decreased in its independence from outside influences. High-profile trials in general, be it against ex-politicians or other VIPs, including for corruption or other financial misdeeds, saw unexpected turnabouts, with rejection of some previous indictments or rulings, repeated trials, illogical acquittals, escapes of high-level defendants from Croatia across the EU border to neighborhood or further (or vice versa), or suddenly changed testimonies of key witnesses. The increased pressure by various (not least political) lobbies was obvious. Also, Freedom House noted the politicization of the National Judicial Council, which is the body in charge of choosing judges, as
well as controversial appointments to the Constitutional Court in October 2017. Business portal GAN, in November 2017, warned that there has been, further on - for companies suing or being sued in Croatian courts - a high risk of encountering corruption (e.g. in a form of bribery).
Croatia is ranked, together with Saudi Arabia, at places 57-58/180 on the Transparency International`s CPI 2017 list. With 49/100 points, it is a bit above the average world score of 43. Freedom House, in the report NiT 2018, maintained that “corruption remained at comparable levels with previous years” and retained its (negative) 4.25/7.00 points` mark. In 2017-2018, a giant Agrokor scandal emerged – the collapse of a business empire, which since independence had been a concealed state project (supported or tolerated by governments of all colors) of promoting Croatian economy in the SEE region, but has later turned into a giant liability that endangered considerable parts of that very economy. Multiple corruption activity in various directions and/or other misuse of public
resources or public authority seemed to have had occurred, by various actors, much prior (perhaps even during late 1970s) as well as during and after the collapse. Investigation was launched against the owner Ivica Todorić, who tried to hide, first in the neighboring countries and then in the UK. The clarification of all aspects of this case, if or when it occurs in the court of law, might have considerable, long-lasting effects on the economic policies and public opinion in Croatia.
Hate speech has been in rise in Croatia overall, as Council of Europe warned in its May 2018 special report. It manifests through racism (mostly against Roma, or migrants), ethnic hatred (mostly against Serbs), homo- or trans-phobia, or praising of the WW2 quisling Ustasha regime. As US State Department warned, there is occasionally vandalism against the property of the hated groups, e.g. against Serbian Orthodox Church. Laws against all those were recently tightened, but are still selectively applied. A new form of extremist clerical-conservative activity emerged - intimidating the patients or staff of the abortion clinics, for which purpose networks of hospital-insiders, online activists and volunteer street preachers were created in several towns in Croatia and northern Serbia. Those
groups usually have a broader agenda, of reducing sex education in schools and reversing the legal recognition and protection of same-sex unions. Many other freedoms, such as of thought, expression, association, education and scientific research are well maintained in Croatia, even though the most provocative pieces of art (such as some anti-nationalist theatre plays) might encounter violent or prohibitive response. Participation of women in politics or on other leading positions is in the rise and is higher than in neighboring EU countries. In contrast to these, Amnesty International warns that cases of domestic violence are still inadequately processed hence the victims remain under-protected. According to Balkan Insight, between 2012 and 2016 Croatia was the largest - among Central and Southern Europe countries - exporter of arms and military equipment to MENA countries, whereby final users and modes of use were just superficially controlled.
Private property rights in Croatia are mostly protected. However, there are many problems stemming from the judiciary, which leads to many problems in practice. Although judicial independence is mostly attested, the influence of strong politically connected groups can have a strong impact on courts. Corruption within the judiciary is still present. Contract enforcement is not efficient due to slow processes and unreasonable delays, which makes court litigation long lasting - almost two years on average. There is also an issue of the high number of back logged cases, although some non-disputed cases were transferred to public notaries. There is no maximum number of adjournments. Automation of court procedures is still in its inception. Procedures for resolving insolvency are also very
slow, lasting for more than three years and leading to recovery rates slightly above one third of the claim. There are some restrictions on foreign ownership or control in several industries, the most important ones being in transport and freight sectors, as well as in publishing, education and broadcasting. The cadastre service improvement has been a lengthy reform, which would expectedly improve the situation regarding proprietorship of real estate and strengthen property rights. The land registry has recently been digitalized and land titles can be assessed online. But there are still problems: although most of the land has a clear title, this is less orderly updated in rural areas since people try to avoid the transfer tax, itself set as high as 4%. Property rights over land and property are separated, which in practice could pose many technical and legal problems. Land Registry Offices are still inefficiently slow, burdening the process of property registration. Non-conforming to local zoning rules in coastal areas, and turning a blind eye on it by the authorities until recently, have made the solution to this problem rather complex. There were cases of clearing the land of these objects without compensation and at the same time cases of political promises that built objects would be legalized retroactively. Acquisition of agricultural land is restricted to local and EU nationals, since the EU accession. But this restriction can easily be circumvented through a long-term lease or through a local legal entity in foreign ownership. The property of legal entities from other former republics of Yugoslavia is often disputed and was recently under attack through the legislation that would put them in lease by the state instead of handing them back to their rightful owners.
Size of government in Croatia is excessive. General government consumption stood at 46% of GDP in 2017, which is a minor moderation as compared to previous years when it had reached almost half of the GDP. After several waves of recession that hit the economy since 2008, Croatia is now recording solid growth rates, that reached 2.8% in 2017, due to a good tourist season, growing consumption and growing exports. This had positive consequences on the public finances as well: Croatia finally experienced a strong fiscal surplus, after years of chronic deficits. The public debt was significantly reduced in 2017, from 84% to 78% of GDP, due to the rising economy and new fiscal revenues, but this level is still too high for an economy at this level of development. SOEs are numerous - more than
400 companies – themselves operating in almost all sectors. These companies suffer from low efficiency and generate substantial fiscal costs, contingent liabilities included, to the state. Their management is not depoliticized and professional, thus enabling political considerations to enter the daily business. Too many of those companies are considered as strategic, which prevents their privatization. On the other hand, operational restructuring of the highway companies is under way, although slower than anticipated. But, a part of their debt was successfully refinanced. Although the recent tax reform somewhat decreased taxes on income, taxes in Croatia remain high. Corporate tax rate is set at 18% (with a lower rate, of 12%, for SMEs below a certain threshold). The personal income tax is progressive, with two tax rates, of 24% and 36%, and with a relatively high tax deduction. VAT is set at a very high level of 25%, the highest one allowed in the EU, with lower rates for certain products, of 13% or 5%. The hospitality and tourism industry is now taxed with the standard VAT rate, instead of the preferential one. Social contributions on labour are high, which, coupled with the personal income tax, lead to a labour tax wedge higher than the OECD average.
Business environment in Croatia is not too conducive to business activities. There are frequent changes of legislation that make significant alterations in the regulatory environment, with strong impact on terms of doing business in sector-specific industries. Bureaucracy and red tape are widespread, increasing costs of doing business, even though the regulatory reform in recent years has increased the use of electronic resources in this area. Partial treatment by government officials and corruption remain present, albeit not omnipresent. Inefficient government bureaucracy, policy instability and tax regulations remain to plague the business environment. Starting a business is unnecessarily long, with a high number of procedures and a relatively high notary fees and paid-in minimum
capital. Obtaining a construction permit is a poorly conducted process, both slow and burdened with a high number of administrative tasks, with as many as 22 different procedures that need to be tackled with, but also being expensive due to high local utility fees. Getting electricity is a streamlined process, but very expensive due to high fees charged by the public utility company HEP. Although taxes are mostly administered online, tax regulations are also considered complicated and difficult to implement in practice, with a high number of annual payments. Para-fiscal surcharges are also widespread in the economy, contributing to a high tax but also administrative burden. Little progress has been made in easing licensing restrictions for professional services, whereas these barriers bar entry to many professions. The educational system, as in many other countries of the region, is inefficient, providing little actual links between classrooms and labour market needs. Although several waves of labour code reforms took place in order to increase flexibility of the labour market, the legislation remains very rigid concerning hiring and firing procedures. Duration of notice periods and severance pay package significantly increase with the years in tenure, while fixed contracts have still been prohibited for permanent tasks, which protects seasoned workers to the detriment of younger ones. On the other hand, working hours are flexible, and there is no maximum duration to fixed-term contracts and redundancy obligations. Collective bargaining is mostly concentrated in industries where SOEs play a dominant role and in public sector.
Freedom of international trade in Croatia is mostly respected. As a member of the European Union since 2013, Croatia implements the common EU trade policy. Therefore, the tariffs applied on imports are low, with the MFN applied rate of 5.1%, but those for agricultural products could be more pronounced. But non-trade barriers in the form of technical standardization and certification pose effective barriers on goods coming from abroad. Customs office is efficient, without lengthy or complicated procedures neither for imports nor exports. The quality of road and port infrastructure is satisfactory, but the railroads, operated by a state company, do not follow this trend, creating considerable bottlenecks, which increases freight costs. Main Croatia`s trade partners are EU member
states from its proximity such as Germany, Italy and Slovenia, followed by Central Europe Free Trade Agreement (CEFTA) countries from the region, e.g. Serbia, or Bosnia and Herzegovina. The National Bank continues to exert control over the flow of short-term capital, which is mostly connected to the exchange rate policy of the national currency, the kuna (HRK). Croatia is expected in due time to join the Schengen Area and the Euro-zone, which would further liberalize flows of people and capital. However, there are still no clear deadlines set.