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Croatia - Economy

Croatia, which joined the European Union in July of 2013, also has one of the weakest economies in the 28-nation bloc. By 2015 the country had been in recession for six years and unemployment is around 20 percent. Croatia was enduring an economic crisis in 2013. Government debt was growing, and two ratings agencies downgraded government bonds to junk status. The EU had already set aside $855 million to subsidize Croatia in 2013.

The Croatian economy is mainly service-based contributing 67% of the total GDP. According to the country's 2008 preliminary data, its total GDP stands at 370.5 billion in Croatian Kuna or 15,000 per capita in U.S. dollars which makes the its economy higher than some E.U. member states like Bulgaria, Latvia, Lithuania or Poland.

In the industrial sector, ship building is the main industry and accounts for over 10% of all annual exports with a total value of over one billion euro. Aside from ship building, there is also food processing and the chemical industry which also comprises a significant amount in both industrial output and exports. In the total economic output, the industrial sector contributes at least 27% while agriculture is only 6%. However, the exports of blue water fish have increase tremendously because of the surge in demand from countries like Korea and Japan. The country is only a producer of organic food, lavender, olive oils and wines, most of which are exported to E.U. member states.

Another significant source of income is the tourism industry with tourists coming in during the summer season but lately tourists are coming in even during winter taking advantage of the popularity of winter sports like skiing. Over ten million tourists visit each year bringing in over 7 billion Euros. Lonely planet, one of the largest travel guide book has selected Croatia as the world's top destination for 2005 and is currently among the world's top 20 tourist destination. The country has both strong and stable market economy and currency.

Following World War II, rapid industrialization and diversification occurred within Croatia. Decentralization came in 1965, allowing growth of certain sectors, particularly the tourist industry. Profits from Croatian industry were used to develop poorer regions in the former Yugoslavia. This, coupled with austerity programs and hyperinflation in the 1980s, contributed to discontent in Croatia.

Privatization and the drive toward a market economy had barely begun under the new Croatian Government when war broke out in 1991. As a result of the war, the economic infrastructure sustained massive damage, particularly the revenue-rich tourism industry. From 1989 to 1993, GDP fell 40.5%. With the end of the war in 1995, tourism and Croatia's economy recovered moderately. However, corruption, cronyism, and a general lack of transparency stymied meaningful economic reform, as well as much-needed foreign investment.

Croatia's economy grew strongly in the 2000s, stimulated by a credit boom led by newly privatized and foreign-capitalized banks, some capital investment (most importantly road construction), further growth in tourism, and gains by small- and medium-sized private enterprises. One downside to these steadily improving trends was a strong growth in Croatia’s stock of foreign debt, which by 2010 had reached almost 100% of GDP.

Despite the gains, substantial challenges remain. Croatia’s economy was hit hard by the global financial crisis, and has recovered more slowly than many of its neighbors. The country experienced a drop from 2.4% GDP growth in 2008 to a 5.8% contraction in 2009. GDP fell a further 1.2% in 2010 (about $62.25 billion), while estimates for growth in 2011 range from around 1.3% to 1.8%. Official unemployment is 17.6%. Croatia's external imbalances and high foreign debt present long-term risks to its economic well-being, as continued access to foreign credit may be severely limited. An inefficient bureaucracy, relatively high labor costs, and lack of transparency in taxes, fees, and the public tender process have all led to a generally unfavorable climate for foreign investment. To address this, the government has begun to eliminate certain non-tax fees on business, consolidate overlapping government agencies, and identify administrative barriers to foreign investment, but progress is slow. Improvements to Croatia’s judicial system are not yet fully achieved, another hindrance to economic development.

The privatization process, begun in the 1990s, has been unsteady, largely as a result of public mistrust engendered when many state-owned companies were sold to the politically well-connected at below-market prices. The government sold three large metals plants in early 2007, but the Croatian state still controls a significant part of the economy, with government spending accounting for as much as 50% of GDP. Some large, state-owned industries continue to rely on government subsidies, crowding out investment in education and technology needed to ensure the economy's long-term competitiveness. The government is trying to privatize several state-owned shipyards as part of its European Union accession bid. As of April 2011, there were signs of progress in this area, but the process has not yet been finalized.

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Page last modified: 02-01-2015 20:04:28 ZULU