2009 Index of Economic Freedom

Quick Facts

Population:

• 4.4 million

GDP (PPP):

• $63.5 billion
• 4.8% growth
• 4.8% 5-year compound annual growth
• $14309 per capita

Unemployment:

• 11.8%

Inflation (CPI):

• 2.9%

FDI Inflow:

• $3.6 billion

Croatia's economic freedom score is 55.1, making its economy the 116th freest in the 2009 Index. Its overall score is 1 point higher than last year, reflecting marginal improvements in freedom from corruption and government size. Croatia is ranked 38th out of 43 countries in the Europe region, and its overall score is far below the regional average.

Croatia scores slightly above average in trade freedom, financial freedom, and monetary freedom. Inflation is low, and prices are fairly stable, but Croatia's monetary freedom score is hurt by lingering government price manipulations.

Croatia's overall weakness stems from its outsized government. In addition to high levels of government spending, the government's presence in other key areas of the economy is considerable. There is notably heavy regulation of business, labor, and even the right to property. The court system remains vulnerable to corruption, political interference, and inefficient bureaucracy. Significant unofficial restrictions on foreign investment, such as highly politicized regulatory decision-making, add to the cost of investing in Croatia. Burdensome and non-transparent administrative regulations, particularly at the local level, continue to challenge entrepreneurs.

Background Back to the top

Croatia's rapid industrialization after World War II made it the most prosperous area of the former Yugoslavia. As Communism collapsed throughout Eastern Europe and Yugoslavia began to unravel along ethnic and religious lines, Croatia declared its independence in 1991. Years of ensuing conflict between Croats and Serbs ended formally with the Dayton Peace Accords in 1995. Since independence, Croatia has actively pursued greater integration into the Euro–Atlantic community. In April 2008, Croatia formally began the process toward full membership in NATO, with 2009 as a target date. Croatia hopes that membership in NATO will boost its chances of joining the European Union. European Commission President Jose Manuel Barroso recently indicated that Croatia's membership is on track for 2010, provided that key reforms are completed.

Business Freedom 59.9 Back to the top

The overall freedom to start, operate, and close a business is constrained by Croatia's regulatory environment. Starting a business takes an average of 40 days, compared to the world average of 38 days. Obtaining a business license takes much longer than the world average of 225 days. Closing a business is relatively simple.

Trade Freedom 87.6 Back to the top

Croatia's weighted average tariff rate was 1.2 percent in 2006. Some additional customs duties, import licensing for certain goods, non-transparent and burdensome regulations and standards, and customs administration that can be inefficient and prone to corruption add to the cost of trade. Ten points were deducted from Croatia's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 68.7 Back to the top

Croatia has a high income tax rate but a low corporate tax rate. The top income tax rate is 45 percent, and the top corpo-rate tax rate is 20 percent. There is also a value-added tax (VAT). In the most recent year, overall tax revenue as a percentage of GDP was 26.6 percent.

Government Size 31.7 Back to the top

Total government expenditures, including consumption and transfer payments, are very high. In the most recent year, government spending equaled 47.7 percent of GDP. Spending on wage bills and subsidies has helped to raise overall indebtedness to over 80 percent of GDP. Privatization has progressed with the partial divestment of the state-owned oil company and the national telecommunications enterprise.

Monetary Freedom79.0 Back to the top

Inflation is moderate, averaging 3.0 percent between 2005 and 2007. Many price supports and subsidies have been eliminated, but proposed price changes on some 30 products, including milk and bread, must be submitted to the Ministry of Economy for approval. The government also influences prices through state-owned enterprises. Ten points were deducted from Croatia's monetary freedom score to adjust for measures that distort domestic prices.

Investment Freedom50.0 Back to the top

Foreign and domestic investors are accorded national treatment. Despite economic and administrative reforms, bureaucracy can inhibit economic activity. Corruption remains a problem. There is steady pressure to increase transparency and fulfill commitments to adopt EU laws, norms, and practices. Croatia's constitution guarantees the free transfer and repatriation of profits and invested capital for foreign investments. Some capital transactions, such as inward portfolio investment, are subject to government conditions. To acquire property by means other than inheritance, reciprocity, or as an incorporated Croatian legal entity, foreign investors need approval from the Ministry of Justice.

Financial Freedom60.0 Back to the top

Croatia's financial system is competitive, and access to financing for entrepreneurial activity is not difficult. After significant market consolidation, there are now fewer than 35 banks. Two national commercial banks are majority foreign-owned and control almost half of all assets, and foreign banks own over 90 percent of total assets. Supervisory and regulatory frameworks for the financial sector are now more efficient, and credit is allocated on market terms. Privatization and regulatory improvements have done much to re-establish confidence in banking since a series of failures in the late 1990s. The small insurance sector is highly competitive, but the partially state-owned Croatia Osiguranje accounts for 47 percent of assets. The stock exchange has been growing rapidly, with more than 200 companies now listed, and securities markets are open to foreign investors.

Property Rights30.0 Back to the top

Observers view the judicial system as most affected by corruption. The court system is cumbersome and inefficient, and backlogs cause business disputes to drag on for years. Some investors insist that contract arbitration take place outside of Croatia. The government is committed to judicial reform, but much remains to be done. Despite intellectual property rights legislation, piracy of digital media and counterfeiting continue.

Freedom From Corruption41.0 Back to the top

Corruption is perceived as significant. Croatia ranks 64th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. The government has initiated a process to overhaul areas particularly afflicted by corruption: the judicial system, the health system, local governments, political party financing, public administration, and economic agencies. Citizens continue to cite corruption as one of Croatia's most important problems.

Labor Freedom43.4 Back to the top

Croatia's burdensome labor regulations limit employment and productivity growth. The non-salary cost of employing a worker is high, and dismissing a redundant employee is relatively costly. The labor code mandates retraining or replacement before firing a worker. The cost of laying off a worker creates a disincentive for additional hiring.