Key Challenges

Lack of hope driving high emigration rate
For a number of years, Croatia has failed to find a proper way of coping with the fundamental challenges that have a crucial effect on the country’s socioeconomic development. Due to the lack of adequate answers that had characterized almost all of Croatia’s successive governments since the beginning of the EU accession negotiations in 2005, the country lags behind most of the Central and Eastern European EU member states in terms of socioeconomic development. This has created a strong feeling of hopelessness that has resulted in alarmingly high emigration rates in recent years.
Economic growth is
key challenge
Now that fiscal balance has been attained – although public debt is still very high – increasing the rate of economic growth is the key challenge facing the Plenković government and any other government that might succeed it. Reducing income tax rates may increase household consumption expenditure and provide a short-term boost to growth, but would not be enough to ensure long-term convergence. Increasing the participation of the working-age population in the labor market is needed to increase the rate of economic growth, particularly for those above the age of 50, but no measures targeting this demographic have been developed. Although the working-age population has fallen from 3.8 million in 2012 to 3.4 million in 2018, for the first time since 2013, the active population has surpassed the inactive population by about 100,000.
Increases in R&D
spending vital
In order to achieve higher economic growth, Croatia also has to increase investment in research and development, which is far below the level required from Croatia by European Semester. Economic analyses suggest that Croatian GDP has been growing slower than in comparable countries due to a slower growth of exports and a lower share of technologically complex products in exports. Increasing the share of such products in exports, where salaries are generally significantly higher than average, could also be a policy tool that would help retain part of the educated labor force in the country.
Investment rates
remain low
Some observers suggest that private sector investments have been low due to excessive tax rates and quasi-taxation, as well as to increased wage bills intended to retain labor. An alternative explanation is that the relatively low investment rate is due to the low rate of expected future economic growth which disincentives companies to invest in additional productive capacity. In part thanks to the recovery seen in euro zone economies in recent years, Croatia’s export demand has picked up, as has its rate of economic growth. Since joining the EU, the share of exports of goods and services in GDP has increased from 42.7% in 2013 to 51.5% in 2017. At the same time, the decline in the investment ratio has come to an end. From 2009 to 2014, the ratio of gross fixed capital formation to GDP decreased from 25.1% to 19.2%, which was associated with the disincentivizing effect of the long recession on investment. Since then, the investment rate has stabilized and begun to increase, reaching 20.1% in 2017.
Structure of investment must be changed
Largely due to the economic significance of tourism in Croatia, most investment is linked to real estate; changing the structure of investment is therefore also of considerable importance. At the same time, public sector investments are very low and depend heavily on EU funds, which indicates a lack of public administration reform and reflects EU pressures to reduce fiscal deficits by reducing public spending.
Health care, education need attention
There is also a need to improve the quality of human capital by improving the health care and education systems. The health care system faces serious financial difficulties that result in long patient-waiting times and limited health care provision. For this reason, introducing more efficient policies to this sector and boosting public expenditure on health services will be one of the key challenges in the years to come. Reforms in the education system have been launched, but they need to be more comprehensive and more rapidly implemented. In addition, public spending must be increased to improve the education system’s capacity to provide young people a more effective education.
Governance improvements are critical
The final challenge involves introducing serious reforms in the judiciary and public administration. To date, no reforms have been introduced, though improving the quality of governance is essential to addressing the above-mentioned challenges. As it stands, Croatian public administration is both highly centralized and fragmented at the same time, often with a blurred division of competences between the central authority and local authorities.

Party Polarization

Divisions based on different views of history
Policymaking in Croatia has suffered from strong identity-based divisions grounded in competing interpretations of history and socioeconomic transition. Until 2016, the political scene was dominated by the center-right Croatian Democratic Union (HDZ) and the Social Democratic Party (SDP). Both parties largely campaigned on a set of symbolic and cultural values (traditional vs. left-liberal), which exacerbated the polarization of the electorate, made cross-party policy cooperation difficult and resulted in a lack of policy continuity after changes in governments. For some time, however, party polarization has weakened.
New parties diminishing polarization
As a growing number of citizens have become fed up with the traditional political polarization, new political parties have emerged. Under Andrej Plenković, who became chairman of the HDZ and prime minister in 2016, the HDZ has lost some its ideological edge and moved closer to the center. Plenković succeeded in forging coalitions with the centrist Bridge of Independent Lists (Most-NL) (from December 2016 to May 2017) and the center-left Croatian People’s Party – Liberal Democrats (HNS) (since June 2017). The SDS has suffered from infighting since the 2016 elections and has lost support in the polls. (Score: 7)
Henjak, A., Zakošek, N., Čular, G. (2013): Croatia, in: S. Berglund (ed.), The Handbook of Institutional Change in Eastern Europe. Cheltenham: Edward Elgar, 203-234.
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