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Quick Facts
- Population:
- GDP (PPP):
- $95.1 billion
- 1.6% growth
- 0.2% 5-year compound annual growth
- $22,795 per capita
- Unemployment:
- Inflation (CPI):
- FDI Inflow:
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Croatia’s economic freedom score is 61.0, making its economy the 92nd freest in the 2018 Index. Its overall score has increased by 1.6 points, with a spike in the fiscal health score and improvements in government spending and business freedom more than offsetting declines in government integrity and monetary freedom. Croatia is ranked 39th among 44 countries in the Europe region, and its overall score is below the regional and world averages.
Although Croatia lags behind many of its neighbors in structural economic reform, the government has acted to improve the business climate by simplifying the tax code to stimulate growth from domestic consumption and foreign investment. Significant remaining challenges include political volatility and a level of public-sector debt that makes government spending on health care and pensions fiscally unsustainable. Pervasive corruption undermines the rule of law, and protection of property rights is weak.
Background
Croatia declared independence in 1991, contributing to Yugoslavia’s breakup along ethnic and religious lines. Years of Croat–Serb conflict ended formally in 1995 with the Dayton Peace Accords. Croatia joined NATO in 2009 and the European Union in 2013. Prime Minister Andrej Plenkovic of the center-right HDZ party formed a coalition with the liberal Croatian People’s Party and several smaller parties in 2017 after a previous coalition with the center-right Bridge party fell apart. Political uncertainty hinders economic progress. Tourism and shipbuilding are major industries. Croatia’s largest private company, Agrokor, was placed into receivership in 2017 with over $6 billion in debts. High indebtedness, a weak export base, emigration, and the slow pace of privatization remain significant challenges.
The right to own private property is established in Croatia’s constitution and in numerous acts and regulations. Judicial independence is generally respected. Croatia receives notably high marks from international observers for its enforcement of contracts. The law provides criminal penalties for corruption by officials, and the government implements these provisions effectively, but corruption nevertheless persists.
The top personal income tax rate is 40 percent, and the top corporate tax rate is 20 percent. Other taxes include value-added and excise taxes. The overall tax burden equals 37.4 percent of total domestic income. Over the past three years, government spending has amounted to 47.4 percent of total output (GDP), and budget deficits have averaged 3.4 percent of GDP. Public debt is equivalent to 84.4 percent of GDP.
Croatia’s large government bureaucracy and low regulatory transparency contribute to an unfriendly business climate. The labor force is educated, highly skilled, and relatively high-cost compared to regional averages. The unemployment rate is a high 13 percent overall and 40 percent for youths. Powerful interest groups have slowed progress on structural reforms to reduce expenditures and subsidies in areas such as health care.
Trade is significant for Croatia’s economy; the combined value of exports and imports equals 100 percent of GDP. The average applied tariff rate is 1.3 percent. In general, government policies do not significantly interfere with foreign investment. The banking sector is relatively well developed and open to competition, but the number of nonperforming loans has increased in recent years. Financial-sector privatization has progressed well.