July 3, 2014 / 12:02 PM / 5 years ago

Croatia lacks leadership, favours public over private business: World Bank

ZAGREB (Reuters) - EU member Croatia is stuck in recession because it lacks leaders to champion change and favours the public sector at the expense of private businesses, the World Bank’s resident representative told Reuters.

Croatia's Prime Minister Zoran Milanovic speaks to the media upon arriving at a European Union leaders summit at the EU council headquarters in Brussels December 19, 2013. REUTERS/Laurent Dubrule

Dashing hopes that its entry to the European Union last year would recharge the economy, Croatia has lost almost 13 percent of its economic output since 2008 and is forecast to lose more this year.

“Croatia is likely to face a sixth recession year in a row which is quite a peculiar phenomenon. The structural problems, which the successive governments have not dealt with, are preventing the economy from growing,” Hongjoo Hahm, the Bank’s representative for Croatia, said in an interview on Thursday.

The World Bank projects an economic decline of around 0.5 percent this year.

Hahm said the authorities’ attempts to revive the economy were relying on micro-initiatives through various state agencies, with no proper coordination between policymakers.

“What’s lacking is leadership in economic reforms, a clear vision in what direction the economy wants to go. The economy needs someone who would efficiently coordinate the fiscal framework with structural reforms and thus open space for private-sector led growth,” Hahm said.

“Otherwise, we can expect much of the same in the future which is not satisfactory for the Croatian citizens,” he added.

Prime Minister Zoran Milanovic’s Social Democrat-led government, in office since late 2011, has largely failed to revive the economy, create jobs and launch major reforms. His public support has dwindled to record low levels.

Hahm said little has been done to help small- and medium-sized firms (SMEs) to thrive, and the government was wrong to rely too much on the public sector and investments by state-owned firms.

“There is a lot of red tape on the municipal level and the government’s spending favours the public sector. The courts are slow when dealing with land registry or labour issues.”

He said Croatia piled too much of the tax burden onto small private companies, which are already struggling to get financing from a cautious banking sector, while some promised tax changes to spread the burden have not been enacted.

“It is bizarre that Croatia, which has one of the highest-taxed economies in Europe, does not have a property tax despite a lot of assets being in property and many of them being idle. On the other hand, the SMEs are overtaxed,” Hahm said.

He acknowledged the government’s efforts to reduce its budget deficit and set EU rules enforcing fiscal discipline should help.

The European Commission wants Zagreb to reduce its budget gap to below three percent of gross domestic product by the end of 2016 from this year’s target of some 4.5 percent. Many local analysts say Croatia may fall short of the target.

Reporting by Igor Ilic; Editing by Zoran Radosavljevic and Ruth Pitchford

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