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Croatia: Going Towards Stagnation?


Croatia emerged as a post-communist economy surrounded by a bulk of structural and economic problems that sketch the overall conditions which every nation in transition has typically faced. Recovering from a decade of civil war, Croatia is now on the crossroad between a traditional society guided by the mainstream of heavy government intervention of central involvement in the economy and a modern knowledge-driven economy where the economic policy is pursuing a fundamental pro-growth course of actions. The phenomena of knowledge-driven economy, the pursuit strived to be achieved by the contemporary economic policy in the world, does not arrive from design and intervention but from the quality of business environment to benefit from the exposure of first-class investment environment that marks the competitive potentials in going for output growth as the foremost goal of the economic policy. In this respect, the role of economic policy is essential. Traditional experiments based on Keynesian dimensions of economic policy showed to be based on doubtful foundations whereas aggregate demand had been assumed as the engine of growth. Newer macroeconomic and empirical investigations emphasize the role of human capital and the performance of total factor productivity as the long-term engine of growth.

To diagnose the mechanics of possible economic policy in the future, it is important to emulate different areas of economic policy in the maximum way to ensure vital growth conditions in a long-term perspective. In this respect, the responsibility and credibility of fiscal policy, the legal framework, the nature of tax system, liberalizing the economy from external political vulnerabilities, and the course of macroeconomic policy, play a central functional role in building the framework of competitiveness to let the economy reach the full capacity and long-term growth sustainability.

As the theory of growth explains in a very clear manner, the structural failures such as cumbersome judicial system, inefficient bureaucracy and the wide spread of corruption, add to the scope of lost growth momentum. The costs such as the wide perception of corruption associate as a disadvantage to the business environment which, in turn, leads to possible low inflows of greenfield and foreign direct investment which is an important engine of growth and value-added.

Regarding transition report, Croatia’s rank has not changed despite some progress achieved. The aspects of transitional change where Croatia lags behind its competitors are the accomplishment of large-scale privatization, enterprise restructuring, competition policy, the non-banking institutions with financial supply instruments and the area of infrastructure. While transitional advancement into modern economy with dynamic and competitive economic and structural framework is an important aspect of maturity from the lessons of post-socialism, it is nevertheless important to pay attention to other sources of particular concerns that hamper Croatia’s economic performance and pose a threat to the macroeconomic stability. In a sample cross-country comparison of microeconomic and macroeconomic performance Croatia’s score is mixed in evasive in some areas. For example, Croatia scores comparably well on monetary policy which is demonstrated by central bank’s commitment to tight inflationary policies and the containment of inflation pressure within the forecast zone. Further, Croatia performs soundly on international trade, financial sector and potential for convergence as the country’s parity of purchasing power reached 48 percent of the EU27. However, the list of not-good performance criteria include the evasiveness of private sector investment, transition progress relative to top performers, bad quality of the business environment, regulatory burden, insufficient legal system, rigid labor market and high government spending nevertheless. In most recent year, government spending reached 51,6 percent of the GDP and the government revenue from state-owned enterprises reached 4,1 percent of total revenues.

In the course of growth theory, corruption and the inefficiency of the legal system, is the fundamental impediment to long-term economic growth. Hardly any change can happen without a rudimentary fundamental reform of the legal system to enforce and respect contractual agreements and private property rights, to provide the rule-of-law as a basic public product and to pursue the first-class business environment with ingredients such as low taxation, minimal regulation, deregulated product markets, dynamic investment environment, minimal spending, and openness to foreign ideas, trade and investment which help to build a competitive new economy and result in an unparalleled rise of income, growth and prosperity as many cases of such path around the world have shown without discretionary government involvement in human and economic liberty as preconditions and guarantees for long-term growth and freedom from coercion which government force has thoroughly exercised.

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