1. Croatia’s Post-communist Transition Experience: The Paradox of Initial Advantage Turning into a Middle-Income Trap

In 1952, Croatia’s GDP was 1709 GK dollars and the Yugoslav average amounted to 1333 GK dollars. The socialist countries of Central Europe averaged 2960 GK dollars. As for Southeastern Europe, Croatia’s GDP ranked second to Bulgaria’s (1893 GK dollars) but was ahead of Romania’s (1333 GK dollars) and Albania’s (1046 GK dollars).

For a thorough understanding of the fact that Croatia acquired most of the characteristics of the unsuccessful Southeastern European economies during its transition, one should take into account the cost of dissolution of Yugoslavia and the former Yugoslav market.

Until 1990, Croatia was more dependent on the Yugoslav single market than on its exports to other countries, even though of all Yugoslav republics, it was second only to Slovenia in its exports to the countries of the then EEC. The importance of the then Yugoslav single market is reflected in the fact that the total sales of Croatian companies in other federal units in the mid-1980s was 3.19 times higher than its exports to third countries, mostly those of the then EEC (primarily Germany and Italy) and USSR. Croatia’s import recorded a similar ratio (2.36). Slovenia was even less dependent on the single market (export—1.86, import—1.71). The ratios of other members of the former Yugoslav federation were much higher (Petak 2005: 60). The war, disintegration of the former federation and sudden loss of most of that market resulted in a collapse of a huge number of companies, the loss of hundreds of thousands of jobs and general economic breakdown. The proportions of this breakdown are clearly illustrated by the employee–pensioner ratio. In the late 1980s and early 1990s, this ratio was in Croatia still approx. 3:1 (it should be noted here that back in the early 1950s it was approx. 8:1). In the late 1990s, after many of those who had lost their jobs had been retired, the ratio was reduced almost to 1:1 (Vukorepa 2015).

The research carried out by Slovenian economist Aleksander Bajt showed that the investment efficiency of the socialist Yugoslavia was lower than that of the comparable countries of the then periphery of European capitalism—Ireland, Portugal, Spain, Greece and Turkey. Bajt showed that the highest GDP growth rate achieved by Yugoslavia in the period between 1960 and 1980 was characterized by a markedly large share of gross investments and a markedly small share of personal consumption of its population. The Yugoslav ratio of investments to GDP (0.17) was much lower than the average of the above-mentioned countries—0.265 (Turkey 0.31, Portugal 0.30, Greece 0.27, Spain 0.26, Ireland 0.185). However, Bajt’s paper does not give details of the efficiency of investments in Croatia and Slovenia (Bajt 1988: 13).

Double transition refers to the transition from more or less non-market economic structures into full-fledged market economy and from one-party authoritarian political system into liberal democracy.

The ruling party at that time was conservative Croatian Democratic Union (HDZ).

A vivid example is the case of Agrokor, the largest national company led by the Balkan oligarch Ivica Todorić. The story of Agrokor’s expansion to become the biggest national company can be roughly divided into two periods. The first period marks the expansion on the wings of insider-privatization in the 1990s (Šonje 2017). The second period starts after 2003 and is related to debt-fuelled expansion with the goal of achieving vertical integration through numerous and over-ambitious regional takeovers. From 2003 to 2016 Agrokor amassed 3.5 billion of EUR of debts to creditors and 2.2 billion of EUR debts to suppliers, totalling six times its equity (Buckley 2017). Over-expansion backed by high leverage, poor cost control and inadequate corporate governance structures were important triggers for Agrokor’s collapse. For instance, its owner, Balkan oligarch Ivica Todorić had a 95% stake in the company and was not willing to surrender any control to new shareholders. However, this line of inquiry should not overshadow the political background of this story. Agrokor’s expansion was politically sponsored either directly or indirectly over the last two decades. There are many instances of political sponsorship: insider privatization of Unikonzum and other companies in the 1990s; massive agricultural subsidies; lax enforcement of payments regulation; inadequate financial regulation of promissory notes issuance (CNB was not specially tasked for this job); tolerance for the conflict of interests in the ranks of private pension funds’ managers who also sat in supervisory boards of Agrokor’s companies and used insurees’ payments for investing in Agrokor; lax enforcement of Competition Act; politically sponsored credit lines by the Croatian Bank for Reconstruction and Development (HBOR) and quasi-private Funds of Economic Cooperation. All of this was abetted by lax enforcement of campaign financing regulations and a revolving-door policy between Agrokor and both HDZ and SDP-led governments.

Fiscal illusion presupposes that citizens see things that do not exist (overestimation of fiscal multiplier from public expenditures) and do not see things that do exist (public debt burden and future inefficiency).

WGI index average percentile score represents a composite governance index calculated by multiplying each country’s yearly score in every category with equal weight. This procedure is conducted across all six categories (rule of law, regulatory quality, control of corruption, government effectiveness, political stability and voice & accountability). We then added scores for every subcategory, for every given year and country, in order to produce a cumulative score which proxies the overall quality of governance. Finally, we calculated a mean score by using available data in the period from 1995 to 2015. We also calculated the mean for determining the average level of general government expenditures.

However, the value of Slovenian ECI (Economic Complexity Index) is double the size of Croatian ECI (1.466 vs. 0.773 in 2014).

The Economic Complexity Index measures ubiquity (the number of countries producing identical product) and diversity (the number of distinct products the country makes). More diversity and less ubiquity elevates a country in the rank of knowledge-based economies.

As of 2014, Croatia had the lowest export revenue per capita in constant dollars among CEE economies (Hausmann et al. 2014).

Only Ireland, Greece, Cyprus, Portugal and Hungary posted greater REER depreciations.

This leverage can be measured with the help of wage differential in the private and public sector. Employees in SOEs earn on average 40% more than employees in private sector companies (Trstenjak 2015).

Comparing Croatian capacity to governance with Bulgarian and Romanian, Bohle and Greskovits (2012) point out that, unlike those countries that were weak states in the socialist era, Croatia was initially a ‘capable state’, weakened during the transition period (Bohle and Greskovits 2012: 194).

Bertelsmann’s SGI report for 2017 ranked Croatia at 40th place with respect to the quality of governance, within the list of 41 observed countries, EU and OECD members (Bertelsmann 2017: 17).