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Croatia: Country Economic Memorandum
Economic Growth Through European Integration
World Bank,
September 2003
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1 – Croatia’s achievements since Independence have been impressive…
• Profound economic and social transformation
• Markets laws and institutions
• Pre-independence output recovered…
• …despite unstable geo-political environment
• New wave of reforms since 2000
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2- SAA provides a challenge to deepen reforms through EU Integration
• SAA goes well beyond trade
• It will bring laws, institutions and policies in line with the acquis communautaire
– progressive laws and institutions
– efficient factor markets and regulation
– improved business climate
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3 – SAA: a “two-way” road
• Reforms needed for the Acquis are good for growth
• Growth will facilitate EU integration
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4 - “Critical bottlenecks” for sustainable economic growth
• High deficits-debt • Inadequate land registry + property/ creditor
rights • Poorly functioning judiciary • Weak governance • Public administration fragmented, politicized
poorly coordinated
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5 – Competing in Europe will also require:
• Efficient regulatory frameworks – product&factors
• Integration into EU transport and energy networks
• Adequate skills and innovation systems
• Modernizing agriculture
• Phasing in EU environment institutions/standards
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6 - Simultaneous progress in all
reforms synergy
• 6.A - Lengthy reforms should start right away, e.g., fiscal, public administration.
• 6.B - Some reforms are urgent/low cost anyway…, e.g., bankruptcy, governance, labor, judiciary, registries…
• 6.C – Regulation of infrastructure, factor markets are win-wins; need to be accompanied by enhanced skills-innovation systems
• 6.D – Fast convergence to EU agriculture/environment institutions; selective speed of convergence to EU standards
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6.A - Stable macroeconomic environment
Fiscal/debt management could get out of control due to: – exchange rate depreciation, – higher sovereign risk premia– growth slowdown– reform costs
Sources of fiscal savings:– social security– transport– wages and salaries
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6.A - Public Administration Reform
Depoliticize senior civil service
Integrate policy planning with budget process
Consolidate Ministries with focus on needs of market economy
Evaluate city amalgamation for provision of services
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6.B – Productivity can increase through firm’s exit, entry and restructuring.
• Firm Exit: streamlined bankruptcy procedures, Stop bail-outs at tax-payer’s expense.
• Firm Entry: land titling, zoning, building permits, utility connections, visas and work permits.
• Restructuring: Implement EU corporate governance standards
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6.B – Strengthening the Judiciary
• Implement court administration/management systems
• Case management systems
• Judge training on commercial law, compensation
• Out-of-court mechanisms (small claims court)
• Common judiciary practice (regions, judges)
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6.C - Integrating Croatia’s infrastructure networks
• Private sector participation, interconnection of transport and energy networks
• Secondary energy legislation needs to establish price and regulatory regime
• Adopt internationally acceptable economic appraisal methods in transport
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6.C – Financial system stability
• Prudential regulations to internalize exchange rate risk:– liquidity requirements on FOREX deposits
– provisions on FOREX loans
• Strengthen consolidated supervision
• Strengthen CROSEC, enforce new laws
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6.C - Skills and innovation systems
• Innovation-driven growth requires continuous learning, problem solving, critical and reflective thinking
• Shift to demand-driven system of education, training and research – closer links with private firms
• Change what is taught, how it is taught and those who teach
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6.D - Modernizing Agriculture
• Adopt CAP institutions, align CAP instruments
• CAP: good for welfare (poor), not for farmers
• Option before CAP: reduce intervention below CAP levels compensate farmers, increased welfare
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6.D – Environmental compliance
• Meeting EU environmental standards will be costly
• Fiscal costs depend on:
– cost recovery, e.g. volume pricing of water
– private participation, e.g., energy
– phase-in period, e.g., waste water
• Reform scenarios can reduce investment needs by a factor of 2 and fiscal burden by a factor of 3
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7. Conclusions
1. Growth/EU integration - mutually reinforcing objectives
2. Provide a stable macro-financial framework
3. Address critical bottlenecks (legal, judiciary, public administration)
4. Regulatory reforms in product, factor and infrastructure markets
5. Careful evaluation of costs-benefits during phase-in period in agriculture-environment