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About this book

This book examines Croatia's economic and political transformation over the last 30 years. It brings together the best political scientists, macroeconomists and public finance experts from Croatia to provide an in-depth analysis of the Croatian policy-making context and the impact of Europeanization upon its domestic institutional framework. The second part of the book scrutinizes the political economy context and Croatia's long-term macroeconomic under-performance, especially in comparison to other transition economies. The final part explores sectoral public policies, including cohesion policy, education, health, pensions, and local government. The book offers a unique blend of Croatia's political economy framework and public policy analysis.

Table of Contents


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

The central puzzle of Croatia’s post-communist transition has been the extent of economic and institutional divergence with new EU member states bound by common historical legacy and imperatives of institutional transformation following a collapse of the old institutional order. In this chapter we identify two key explanations that stand behind this evolution. First, we claim that the political economy of Croatia’s transition represents the case of partial reform equilibrium where winners represent the biggest threat to successful long-term transition. Second, comparative political economy analysis of five key areas (product market competition, collective bargaining, financial sector, social protection and education) shows that Croatia developed a typical variant of capitalism, which is in its attributes closer to South European capitalisms than to capitalisms prevalent in Central and Eastern Europe (CEE-10) EU member states.
Kristijan Kotarski, Zdravko Petak

Policy-Making Process in the Newest EU Member State


Chapter 2. Policy-Making Context and Challenges of Governance in Croatia

The chapter discusses the institutional context and principal actors in the policy-making process in Croatia. The introductory section describes the basic features of political and economic development after dissolution from Yugoslavia at the beginning of the 1990s. Leaving the Yugoslav federation and socialism did not take place in the context of peaceful establishment of market and democratic institutions, but was followed by a devastating war, which ended in 1995. It was within this context that a democratic system was established, with strong authoritarian tendencies, cronyism and corruption. The direct consequence of such development was the creation of a relatively non-effective framework in policy-making, permeated by strong clientelistic networks and non-efficient mechanisms in governing fundamental public policies. After 2000, the process of strengthening democratic institutions and Europeanization began, which resulted in more inclusive forms of policy-making process. The governance capacity in Croatia is, however, still relatively weak, with low capacity for steering and implementing public policies.
Zdravko Petak

Chapter 3. The Europeanization of the Croatian Political System

The chapter addresses the main institutional changes within the Croatian political system during the process of Croatian EU enlargement (2013), with the emphasis on key junctures and policy reorientations in the process of differential adaptation of new EU member states in general and especially some peculiarities in the case of Croatia. The chapter shows the periodization of three stages in the Croatian case: (1) short introduction in the period before the negotiation process, (2) negotiation process and the fulfillment of EU requirements, and (3) EU membership. In the research on Europeanization of the Croatian Political System this chapter follows the logic of key domestic factors with the qualities of multiple veto points, political and organization cultures, facilitating institutions, the differential empowerment of domestic actors, and learning. Differences in the Croatian case are deeply connected with the key concept in Europeanization studies—the “goodness of fit” between the EU requirements and domestic institutions and practices, developed by different scholars in the field.
Hrvoje Špehar, Ivan Pepić

Chapter 4. Political Attention of Croatian Governments 1990–2015

This chapter examines the scope, dynamics and diversity of government agenda setting in Croatia. Analysis is based on the data set of all government weekly meetings from the Croatian Policy Agendas Project. The data set contains an empirical measure of issue attention that captures how many times the government has discussed and decided upon a particular issue compared to all other issues on the agenda. Constrained by short tenure, information scarcity and limited governance capacities governments have to selectively focus on a small number of problems because their policy attention is limited. Studies across developed democracies show that core concerns of the state, such as defence or the economy, are often prioritized over smaller policy sectors. Government agenda, however, should reflect a set of priorities specific to each government tenure. Therefore, this chapter also asks whether the partisan composition of each Croatian government since the 1990s affects issue attention.
Daniela Širinić

Chapter 5. Interest Groups in the Policy-Making Process in Croatia

This chapter seeks to explore the emergence of the modern landscape of Croatian interest groups and the strategies they use to gain access and exert influence in national policy-making venues. It reflects on specific political and social circumstances that affected the development of the scene of organized interests since the early 1990s. In addition, the article explores elements of different forms of organization and articulation of interests that have become entrenched in policy-making processes in Croatia, ranging from pluralism and neo-corporatism to still widespread clientelistic arrangements with some of the most powerful interest groups. The chapter also provides insights into the main factors that determine interest groups’ influence and choice of lobbying strategies. Finally, it analyses the impact of the EU accession on increasing trends of institutionalization of consultation with interest groups in policy-making and gradual adaptation of interest groups’ influence-seeking behaviour to new policy dynamics at both national and EU levels.
Igor Vidačak, Kristijan Kotarski

Chapter 6. Political Economy of Corruption, Clientelism and Vote-Buying in Croatian Local Government

Local politics in Croatia is no different from any other local political environment throughout the transitional world. The system is riven with endemic corruption, serving simultaneously the interests of the politicians (the patrons) and either the rent-seeking private sector, politically connected voters, or any other vested interest (the clients). In such a system the best response function of each agent is to be connected and be part of the appropriate clique, the goal of which is to act upon common interests of all those included. This chapter will present a detailed overview of the political economy of corruption, clientelism, and vote-buying in Croatian municipalities, by examining how corruption helps mayors stay in power, how mayors build their small and powerful coalitions of interests with quasi-entrepreneurs that keep them in power, how they manipulate local public finances, and finally how they benefit from political connections with their national-level co-partisans.
Vuk Vuković

Croatia’s Political Economy


Chapter 7. Long-Term Trends in Croatian GDP Growth

We analyze the long-term trends in Croatian income convergence with respect to the EU. Croatia is the worst performer among new EU members in terms of β-convergence. Stochastic income convergence tests with breaks suggest Croatia is not able to catch up to old EU members, but could still diminish the difference between Croatian and new EU members’ income levels over the long term. Analysis of Croatian gross domestic product (GDP) and gross value added (GVA) growth drivers suggests services-led growth fueled by investments in nontradable sector and government consumption contributed to the observed income divergence as new EU members grew faster, dominantly drawing from the personal consumption, international trade and manufacturing growth. Deindustrialization and technological downgrading of the tradable sector also contributed to slower GDP growth in the observed period.
Anita Čeh Časni, Petra Palić, Maruška Vizek

Chapter 8. Monetary Policy in a Highly Euroized Economy

In this chapter the authors trace the evolution of Croatian monetary policy since independence to the present day. Its aim is to systematically describe and explain a plethora of monetary and macroprudential policy instruments and tools the Croatian National Bank (CNB) used from the moment it was founded, throughout its harmonization with the EU legislative framework, and to explain its future prospects and monetary policy goals. The authors empirically examine deposit and credit financial euroization, as well as associated balance sheet vulnerabilities that pose significant exchange rate and currency-induced credit risks. To demonstrate the potential impact of currency mismatches, authors analyze the case of loans indexed to the Swiss franc. The chapter concludes by a simple econometric analysis of the sensitivity of the nominal HRK/EUR exchange rate, short- and long-term interest rates and investment to foreign exchange rate interventions. This demonstrates the effectiveness of the main monetary policy instrument in Croatia—occasional and unannounced foreign exchange intervention.
Kristijan Kotarski, Marina Tkalec

Chapter 9. Fiscal Policy and European Semester in Croatia: Why Should We Focus on Public Debt?

In this chapter we analyze the mid-term fiscal developments in Croatia through the lens of the European Semester-related indicators, procedures and policies. We show that despite the more favorable fiscal position public debt in Croatia is still excessive when compared to SGP and Fiscal Compact rules, the level of economic development and debt levels in CEE peer countries. This is especially worrying as our empirical results confirmed the thesis that public debt level significantly affects and reduces the effectiveness of fiscal policy, the main economic policy instrument in Croatia. An extended SVAR model with public debt, compared to the baseline model, clearly shows the reduction of impact and cumulative government spending multipliers. Thus policy-makers should not only focus their efforts on further and stronger reduction of public debt only to comply with EU economic governance rules but also to mitigate the negative effects of debt burden on the effectiveness of fiscal policy in Croatia.
Hrvoje Šimović, Milan Deskar-Škrbić

Chapter 10. Banking Regulation in Croatia: Qualitative and Quantitative Assessment

This chapter emphasizes the specifics of the Croatian banking sector and discusses the importance of the regulatory framework for the Croatian banking system in the historical perspective. It analyses the roles of the regulators, bank managers, depositors, taxpayers, borrowers and shareholders in shaping the political economy landscape for banking regulation in Croatia. This covers the period since the demise of socialism until the present day. This is followed by a broad overview of the main developments in the banking sector based on data on financial soundness, with the focus on the period from 2000 onwards. To empirically assess the effects of banking regulation on financial soundness indicators and lending activity, the authors will use vector auto regression (VAR) models. As the key explanatory variable the authors will use the index of regulatory burden and indicator of monetary policy stance, while capital adequacy, liquidity indicators and lending to the private sector are included as variables of interest.
Milan Deskar-Škrbić, Kristijan Kotarski, Luka Brkić

Chapter 11. The Competitiveness of the Croatian Economy: A Comparison of Private and Public Sector Enterprises

A number of comparative international indicators point at the substantial weakness of the Croatian economy in terms of international competitiveness. A general weakness of governance in the public sector is also reflected in the governance of state-owned enterprises (SOEs), as there is no substantial difference between political behaviours in terms of public policies and in terms of enterprises management and oversight. This chapter will review the main results of international comparisons and present the results of a number of studies of market dynamics (entry and exit) and company productivity. Building on this review, the empirical part of the work will analyse financial statements of the top 1000 Croatian companies segmented according to ownership structure. A comparison of a number of financial and supplementary indicators will be used in order to identify statistically significant differences between different ownership clusters, including 100% and majority government-owned (SOE), mixed (minority government-owned) and private.
Velimir Šonje

Sectoral Public Policies


Chapter 12. The Croatian Pension System and Challenges of Pension Policy

After the collapse of the former Yugoslavia, Croatia inherited a ‘premature’ socialist pay-as-you-go pension system. It has undergone many reforms: one systemic reform (from 1998 to 2002, which resulted in the establishment of the three-pillar pension system), and several parametric reforms, the last one encompassing all three parts of the pension system (2013–2016). The existing pension system of unfunded pensions at the beginning of 2002 was replaced by a combined system of unfunded and funded pensions. Thenceforth, the pension system was based on the three pillars: (a) the 1st pillar is an obligatory public pension system, based on inter-generational solidarity; (b) the 2nd pillar is an obligatory funded pension system, based on individual capitalized savings; and (c) the 3th is a voluntary pension insurance system based on individual capitalized savings for those who want to pay even more retirement insurance against the risks of old age. The purpose of the chapter is to provide an analysis of the policy-making process and reform of the Croatian pension system, focusing on its sustainability and adequacy.
Predrag Bejaković

Chapter 13. Health Policy in Croatia: A Case of Free Falling

This chapter analyses health care policies in Croatia over the past 25 years and their effects of the health care system. More specifically, through examples of health financing and health system organization, it describes how the policies, or lack thereof, in this second most costly sector of the economy have brought about a gradual, but steady decline in the quality and efficiency of medical care, medical staff exodus, and other consequences. Topics covered in this chapter include financing and organization of the system as the two largest problems, with an interlay of other concurrent and related problems, such as lack of vision and strategy, corruption, and weak institutions, among others. The chapter also analyzes the role of the stakeholders in creating health policies both through their formal and, more significantly, informal relationships and channels of influence, which clarify the reasons behind the failure to craft coordinated policies.
Dagmar Radin

Chapter 14. Education Policy in Croatia

The chapter describes the changes in educational policy in Croatia from 1990 to 2015 with a brief overview of the previous period and an analysis of policy instruments used in the last decade. In the analysed period, Croatian educational policy has undergone important changes although it was not a priority of key political actors. The analysis is focused on instruments used to achieve the educational policy goals. The goals are defined based on national public political documents, which have determined educational priorities in the analysed period and they are analysed within the context of all changes in national policies, changes in politics and the Europeanization of public policies. The chapter begins with the thesis that selecting instruments depends highly on ideas and interests of key actors.
Tihomir Žiljak, Nikola Baketa

Chapter 15. Cohesion Policy in Croatia: What Have We Accomplished so Far?

The chapter aims to explore the main results achieved so far in the implementation of the cohesion policy in Croatia. It reflects on the actual achievements of EU funding in Croatia so far and what have we learned in that respect when considering further policy developments of the cohesion policy in a small peripheral country such as Croatia. The chapter provides reflections on the institutional and governance issues, particularly addressing how the cohesion policy is changing the approach to planning and implementation of domestic public policies strongly related to EU funding. It also considers the relationship between the cohesion policy and Croatian participation in the EU Economic governance. A further purpose of the chapter is to assess how Croatia, as the newest member state, is progressing with the development of the institutional capacity for successful management of EU funds. Finally, the chapter considers the critical points on the use of EU funds in Croatia and investigates potential solutions for the improvement of the policy.
Jakša Puljiz, Sanja Maleković, Ivana Keser

Chapter 16. Features of Croatian Public Policies

This chapter belongs to cross-sectoral studies of public policies, with Croatia as a case example. Being one of the first works of this kind focused on Croatia, the purpose of the chapter is exploratory—to give initial description of main similarities and differences between Croatian public policies. The chapter develops a qualitative analysis of policy studies of different Croatian sectors to capture some general characteristics of policy-making. As a theoretical framework, taxonomy of European public policies, concepts of policy accounts and policy design are used. A sample of policies belonging to different policy areas present in European countries was analyzed by principles of qualitative content analysis. The chapter describes overall major features of Croatian public policies followed by comparative cross-sectoral analysis.
Ana Petek

Chapter 17. Quo Vadis Croatia? The Interplay of Institutions, Interests and Ideas

The first half of our final chapter gives a brief overview of previous chapters. On the other hand, the second half deals with institutions, interests and ideas and how they mutually interact. This is important since underperforming institutions serve as one of key ingredients for explaining economic stagnation and divergence in Croatia. But what explains the emergence of these ill-suited institutions? We add interests and dominant ideas to our debate. We claim that EBRD data, which we use at length, largely explain that interests alone cannot provide the full explanations of Croatia’s institutional and economic underperformance, despite their importance. Ideas matter a lot in that regard. Even more, they matter when we observe the potential avenue for change in Croatia. Fresh ideas might spearhead the reconceptualization of vested interests and unlock institutional gridlock.
Zdravko Petak, Kristijan Kotarski


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