| BUSINESSWEEK ONLINE : JULY 17, 2000 ISSUE | ||||||||
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| INTERNATIONAL -- EUROPEAN BUSINESS
Croatia: An "A" in Politics, a "C" in Economic Reform (int'l edition) Its new regime is popular abroad, but it's slow-footed This month, the World Trade Organization will make room for a small, struggling country that has come a long way: Croatia. It's one sign among many that the recently embattled Balkan nation is emerging from its nightmare past. From small-but-bustling Zagreb to the battle-scarred eastern borders with Yugoslavia, Croatia is finally turning itself into a post-communist country. Since the death last December of Franjo Tudjman, the autocratic President, a reformist coalition has shifted power to a more accountable Parliament, freed the press, liberalized trade, and attacked corruption. Such moves have earned quick kudos. The WTO opened its doors in recognition of a tariff-reduction schedule Zagreb set earlier this year. Croatia is already part of NATO's program for prospective members and close friends, Partnership for Peace. The European Union has invited Zagreb to begin discussing associate membership. LOOKING OUTWARD. Terrific news, all of it. But the economy is another matter. Prime Minister Ivica Racan has inherited an ungodly mess from the Tudjman years. The government and the corporate sector are awash in debt. Excluding receipts for a single large privatization, Zagreb's budget deficit last year, at $1.5 billion, was equal to 8.4% of gross domestic product. The economy may grow by 2% this year, but unemployment is 21%. And many observers say Racan's coalition is procrastinating. ''They've gathered a certain reputation internationally,'' says Georg Weiher, managing director of Siemens' Croatian subsidiary, which has invested heavily in recent years. ''But they have failed to perform economic reforms that are essential.'' No one denies the new government's startling political performance. Racan's six-party coalition decimated the Croatian Democratic Union, Tudjman's former party, in elections held a month after the old man's funeral. Since then, the nation's 4.5 million people have begun looking outward rather than within. Gone is the defensive nationalism that Tudjman encouraged after Croatia's four-year independence war with Yugoslavia. The U.S. and its allies hope Croatia will be an example to other Balkan nations in the making. In June, Washington doubled bilateral assistance, to $40 million. The EU, which is sending about $18 million this year, will triple that in 2001. That will help on the economic side, certainly. And Racan needs it. Public debt is $14 billion; include state-owned companies, and it comes to $21 billion--roughly the equivalent of last year's GDP. The public-sector rot spread when the previous regime stopped paying its bills. As a consequence, the old state agency that clears commercial payments has blocked an estimated third of all corporate bank accounts because the companies can't pay their debts. It's not that Zagreb hasn't responded. It plans to make good on $2.5 billion in past-due pension payments, and it has cut payroll taxes by 3.5%. But it's not enough soon enough, many analysts assert. Plans for private pension funds have been pushed back to 2002. There is no plan to restructure hobbling state companies or to enforce bankruptcy laws in the private sector. Racan wants to privatize hundreds of state companies, but until the debts are cleaned up, he's unlikely to find many takers. None of this is lost on foreign investors. Many are attracted by Croatia's strengths--an educated workforce combined with low wages. Last year, Croatia drew $1.3 billion in direct foreign investment, including $850 million that Deutsche Telekom paid for a 35% piece of Hrvatske Telekomunikacije, the state phone company. But the new coalition has yet to see a surge in newcomers. ''This government seems to lack sophistication,'' says Andrew Kenningham, an analyst for Merrill Lynch & Co. in London. ''They give the impression that there is not a big fiscal problem.'' Goranko Fizulic, Racan's economy & privatization minister, dismisses such criticisms. Zagreb, he says, plans to offer large investors tax exemptions for up to 10 years. ''It's unrealistic to expect we will have an immediate flow of foreign investment in our first few months,'' Fizulic adds. That may be. But the support Zagreb has won from the West will mean more pressure to deal with Croatia's structural ills. The faster Zagreb gets moving, the easier its burden will be. By Christopher Condon in Zagreb _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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