The Size of Government
IS GOVERNMENT SPENDING TO HIGH?...
Elections in Croatia are considered largely as free and fair. Some minor violations occur, however not of a kind that could endanger the integrity of the very process. This is confirmed through observation reports by OSCE and other domestic and international watchdogs during the last presidential and parliamentary elections. In May, citizens were able to cast their votes in the elections for European parliament. Once again, the turnout was low, at around 30%, with ruling Croatian Democratic Union (HDZ) and opposition Social Democratic Party (SDP) winning 4 seats each, out of 12 reserved for Croatia in the European parliament. These elections served as a major test for the upcoming presidential elections, scheduled for late-2019, especially for the two above-mentioned political parties.
Political landscape is pluralistic and diverse, with several new parties emerged in recent years, providing citizens with a wide spectrum of political views. However, this trend also made increase of far-right parties and groups in the society, contributing to more nationalistic and conservative political narrative. Representatives in the 151-seat Sabor, the Croatia’s unicameral national assembly, are elected through proportional representation system, in 12 constituencies.
Democratically elected officials in Croatia have effective power to govern the country without interference from unconstitutional veto players. 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. Still, there are several influential players in Croatia that are able to influence political decisions, although that is rather for mutual benefits by those influential players and politicians in power. 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. Same applies to war veterans, who comprise large
portion of the society, thus representing an influential factor on politics. Also, corruption among high ranking public officials proves to be one of the biggest threats to country’s democracy. Several scandals that emerged in the last couple of years were decisive elements for voters at the elections.
Croatia continued on its way of improving media environment. There is a wide range of TV, radio, print and online media outlets in the country, that provides citizens with diverse, objective and independent reporting. Country was ranked as 64thon the Reporters without Borders 2019 World Press Freedom Index, making improvement by 5 places as compared to last year. Investigative journalism is present and has an important role in scrutinizing the ruling political elite. However, journalists who choose this line of reporting are often target of violent attacks, physical and verbal harassment, intimidation and threats. A journalist was physically attacked in June 2018 in Zadar, with a warning that attacks would continue if he did not stop reporting on the ruling HDZ activities. 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. According to Reporters without Borders, one of the biggest problems for press freedom in Croatia remained defamation charges for insulting state symbols or publishing humiliating content. Therefore, self-censorship is not rare.
Judiciary in Croatia has lately been halted and stagnant in progress towards more independence from the executive branch of power. Thus, the country fails to fully overcome its (communist, followed by authoritarian-nationalist) heritage, itself in both forms negligent towards rule of law, and catch up with the mainstream tendencies in the EU. Additionally, as Freedom House has noted in its Freedom of the World 2019 report, there are influences on the judiciary also by the right-wing NGOs or by the ruling HDZ party (or some factions thereof), as for instance manifested through a disputable reversal of a 1945 court verdict against suspected complicit in WW2 war crimes. In commercial disputes, as the portal GAN notes, there is still a danger of court partiality and/or corruption.
Croatian judiciary has made it to secure for the arrest and extradiction of the fugitive tycoon, former owner of Agrokor Ivica Todorić, from the UK in November 2018, while the subsequent proceedings in Croatian court have meanwhile slowly unveiled (taken the importance of the case on one and its relative simplicity on the other hand). Generally, backlog of cases is considerable. On the top of it, in high profile cases at Croatian courts justice is often impeded by unexpected and disputable acquittals, or witnesses who change their statements in the midst of a trial, or through different other seeming outside manipulation. As Freedom House notes, prison conditions in Croatia still „do not meet international standards due to overcrowding and inadequate medical care”.
Except briefly in the mid of this decade, Croatia`s score has remained under 50/100 on the Transparency International`s Corruption Perception Index. In 2018, the country fell to place 60/180, scoring 48. Agrokor scandal was mostly in the focus of public attention. Former owner Ivica Todorić was extradicted from the UK and is awaiting trial in Croatia. Once praised world-wide for innovative solutions and smart government intervention regarding restructuring of Agrokor`s debts (so as to avoid them being paid by taxpayers` money and at the same time avoid negative domino effects on much of the Croatia`s economy), Minister of Economy Martina Dalić was later herself caught in a conflict of interest and had to resign. Some far worse cases of non-transparency occurred at the local
level in Croatia, whereafter the suspects (usually Mayors) remained in their positions, mostly through political trade-offs with politicians at the national level. The most notorious case is capital Zagreb, with clientelism being just the most visible misdeed of its long-standing Mayor Milan Bandić. On the other hand, it is exactly the local level whereby, in some towns, such as Bjelovar, new, innovative solutions are being sought and found to increase transparency and accountability of local administration, by narrowing ground for would-be illegalities through fiscal prudence and more openness towards public.
Hate speech remains as the most visible threat to human rights in Croatia. It is present not just at the margins of society but quite often in sport arenas, in show biz, or during political campaigns. It manifests differently: through racism (mostly against Roma, or migrants), or ethnic hatred (mostly against Serbs), or homo- or trans-phobia, or historic revisionism and praising of the WW2 quisling Ustasha regime. In September 2018, the leader of the Serb minority was physically attacked, while there were meanwhile several other cases of hate speech against their organizations. In a number of cases, Croatian border police was accused of using excessive force against illegal migrants who tried to cross over from Bosnia and Herzegovina. However, legal response (through much
stricter laws and somewhat stricter application thereof), as well as civil society`s immunity mechanisms towards hate speech, are gradually improving (e.g. as seen through public outcry over the most drastic cases of hate speech). Many other freedoms, such as those of thought, expression (despite a few threats against journalists), association, education or scientific research (despite pressure by far-right groups to re-shape the academic discourse) are reasonably well maintained in Croatia. Participation of women in politics or on other leading or management positions is in the rise and is higher than in any of the neighboring countries. Domestic violence is still a serious problem, whereby ratification of the Istanbul Convention by Croatia, in April 2018, itself much disputed by conservative groups, might help improve the situation.
Private property rights in Croatia are mostly protected. However, in practice there are many problems stemming from the weakness of judiciary. Although judicial independence is mostly attested, the influence of strong groups with political connections can have a strong impact on courts, including through corruption. Contract enforcement is not efficient due to slow proceedings and unreasonable delays, which makes court litigation long lasting, almost two years on average. There is also the problem of the high number of back logged cases, even though there have recently been some success in reducing them; some of it by transferring non-disputed cases to public notaries. There are courts solely devoted to hearing commercial cases. There is no maximum number of adjournments and
while some IT solutions are being introduced, court digitalization is proceeding rather slowly. Dispute resolution mechanisms are weak an underutilized, while procedures for small claims are burdensome and expensive. The number of courts of the first instance is being optimized in order to ensure a more even case burden, which can vary significantly from region to region. Another significant issue is the uniformity of verdicts, since they can vary substantially from court to court in similar cases, which may be the consequence also of uneven legal interpretation of existing laws. Procedures for resolving insolvency are also very slow, lasting for more than three years on average, and leading to recovery rates slightly above one third of the claim. The most usual outcome is the piecemeal sale of the bankrupt company. There are some restrictions on foreign ownership or control in several industries in the country, the most important ones being in transport and freight sectors, as well as in publishing, education and broadcasting, but the rest of the economy is open to foreign entrepreneurs. The improvement of the cadastre service has been a lengthy reform, which is expected to have strengthened property rights. Land registry has recently been digitalized, and land titles could be assessed online. Most of the land has a clear title, but this is less present in rural areas, since people try to avoid transfer tax. The transfer tax was recently decreased as a part of the reform package from 4% to 3% 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. The situation of non-conforming to local zoning in the coastal areas and turning the blind eye by the authorities at this problem until recently has made the solution of this problem rather complex, and there were cases of clearing of land of these objects without compensation and at the same time political promises that the constructed objects would be legalized retroactively. Acquisition of agricultural land is restricted to local and EU nationals, since the EU accession, but this restriction could easily be circumvented through a long term lease or through setting up 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 as compared to its level of development. Overall government consumption stood at 46% of GDP in 2019, similar to the level in previous couple of years. Croatian economy has been recording growth since 2015, with growth being estimated at 3% in 2019 due to a good tourist season, growing consumption and exports. However, Croatia is the slowest growing economy in the region, alongside Serbia, when compared to its pre-crisis 2008 GDP. Slow growth significantly contributed to high emigration rates of young people, which already have put some constraints on economic activities in certain industries, but which on the other hand have significantly decreased the unemployment rate. Economic improvement is also visible in public finance, allowing
for some tax burden relief, with a balanced budget. The public debt is still on a downward spiral, being estimated at 71% in 2019, but its level is still elevated for an economy at this level of development. A new Fiscal Responsibility Law was adopted in September 2018 after several delays. It introduced three new concrete fiscal rules governing the structural balance, budget expenditure and public debt. It also strengthens the autonomy of the Fiscal Policy Commission in the Parliament. The state budget 2019 was improved in quality since it envisaged the recognition of contingent liabilities as part of the budget process. The actuary reforms, implemented recently, have increased the statutory retirement age for both men and women to 67 years of age by 2033 and hardened existing penalties for early retirement, in order to alleviate some of the deficit problems of the state pension system. Also, the retirees are now allowed to work half a day, with the aim of increasing the participation rate, which is also connected to the high emigration rate of the young people to other EU countries. SOEs in the country are numerous, with more than 400 companies, operating in almost all sectors. Some of these companies suffer from low efficiency and generate substantial fiscal costs, and contingent liabilities included, but the overall sector transfers to the budget in 2019 were estimated at 0.4% of GDP. Their management is not depoliticized and professional, enabling political considerations to enter into their daily business. Too many of these companies are considered as strategic, which prevents their privatization. The privatization of inefficient shipbuilding companies such as Uljanik is still not completed, while the government continues to supports companies like this through direct state guarantees. State guarantees were also lavishly used in recent privatization of state owned fertilizer company. Even with several tax reforms initiatives put forward, 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, which also recently increased during the tax reform. VAT is set at a very high level of 25%, being among the highest in the EU, with lower rates for certain products, of 13% or 5%. Social contributions on labour are high. That, coupled with personal income tax, leads to high labour tax wedge, which is higher that the OECD average. The latest wave of tax reform reduced the labour tax wedge on average salary from 37,2% to 36,5% in 2020 through changes in social security contributions rates. However, these tax-reform measures are not considered as being enough to significantly alter the economic situation in the country, since their impact is mostly incremental. More efforts are needed in order to stimulate economic growth.
Business environment in Croatia is not overly business-friendly. Even though several waves of regulatory reforms have cut the red tape and increased the use of online mechanisms in dealing with administrative procedures, bureaucracy is still widespread, increasing the costs of doing business. Another significant problem is in that regulation is frequently changed, making significant alterations in the regulatory environment, which could have a strong impact on terms of doing business in specific industries. Corruption and partial treatment of those entrepreneurs who had good political ties, by the government officials, remained present. Inefficient government bureaucracy, policy instability and tax regulations are considered to be among the most important hindrances to a better
business environment. Starting a business is unnecessarily long (almost 20 days on average), with a high number of procedures and a relatively high notary fees and paid-in minimum capital. This process was, however, made less burdensome by abolishing the requirements to reserve the company name and obtain director signature for company registration, and by lowering the mandatory 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. It takes on average almost 5 months and is also expensive, due to high local utility fees. This process was recently made less expensive by cutting the mandatory water contribution fees. Getting electricity is a streamlined process, but very expensive due to high fees by the public utility company HEP. Although tax payments are rare, and are mostly administered through online mechanisms, tax regulations are considered as complicated and difficult to implement in practice. A significant success through several waves of regulatory reforms that were implemented in Croatia in recent years is attested in the OECD Product Market Regulation research. In 2013, Croatia was the most regulated economy in the EU, while in 2018 it was able to reach the score of the EU and OECD average. Para-fiscal surcharges remain widespread in the economy, contributing to a high tax but also administrative burden. Licensing restrictions for professional services are present, creating barriers to entry into many professions in the service sector. The educational system, as in many other countries of the region, provides little actual links between classrooms and labour market needs. Several waves of labour code reforms took place in recent years in order to increase flexibility of the labour market, but these lackluster measures did not alter much the main issues, so the labour 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 are prohibited for permanent tasks, which protects seasoned workers to the detriment of those with less experience. 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 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 are often significantly higher. 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 increase freight costs and time necessary for the transport of
goods. Main Croatia`s trade partners are EU member states from its proximity, such as Germany, Italy and Slovenia, followed by Central Europe Free Trade Area (CEFTA) countries from the region: Serbia, and 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 not yet a member of either Schengen area agreement or the Euro-zone, which would further liberalize flows of people and capital. Although there are no clear deadlines for its accession yet, the European Commission has officially supported Croatia in its bid for Schengen area membership in late 2019. In recent years the quota for foreign workers (those coming from outside of the EU) has been increasing, especially in the construction and tourism sectors, which themselves have faced considerable labour shortages, due to emigration of Croatian workers to the EU. In July 2020 the last remaining restrictions for Croatian nationals in the EU countries (most notably, in Austria) will be abolished, completely opening the internal EU labour market.