Croatia should boost investment and skills to sustain growth

For future generations of Croatians to enjoy OECD-level living standards, the economy will need to expand by three per cent a year on average for the next thirty years.

Croatia’s economy has performed well over recent years, driving increases in incomes and well-being. Boosting business investment and skills will be the key to sustaining growth and to achieve furtherincrease in living standards, according to a new report from the Organisation for Economic Co-operation and Development (OECD), a Paris-based club of mostly wealthy countries.

The first OECD Economic Survey of Croatia recommends winding down energy support and avoiding further fiscal stimulus while inflation is high. Croatia’s integration into the euro and Schengen areas at the start of this year is supporting investment, exports, and access to finance.

Closely monitoring lending growth will help ensure that it supports productive investments. Sustaining robust growth over the medium to long term will require further improvements to the business environment, in particular by easing the regulatory compliance burden, by creating a more responsive judicial system and by strengthening the governance of state-owned enterprises.

Released two days after the OECD’s latest interim economic outlook reported a stable but still fragile outlook for the global economy, the Economic Survey of Croatia, which is an OECD membership hopeful, projects the country’s GDP growing by three per cent in 2023 and 2.4 per cent in 2024, after 6.2 per cent in 2022, with rising exports, investment and consumer spending supporting growth.

Croatia’s inflation is inching down after peaking in November last year at 13 per cent, but broad price pressures across the economy remain a concern.

“Croatia’s economy has progressed well and shown remarkable resilience both to the Covid-19 pandemic and to inflation shocks, with per-capita income rising from 61 per cent of the OECD average in 2017 to 71 per cent last year,” OECD Secretary-General Mathias Cormann said, presenting the survey in Zagreb alongside Minister of Finance Marko Primorac.

“To sustain convergence with incomes and living standards across OECD countries, a key priority is to boost investment and productivity, through well calibrated measures to ease the regulatory burden and to strengthen governance of state-owned enterprises,” he added.

“An improved focus on skills development and on boosting employment participation levels, especially of younger and older workers will be important to counter the effects of population ageing and population decline and to more effectively tackle current skills shortages.”

Membership hopes

Croatia is one of six countries (the other five being Argentina, Brazil, Bulgaria, Peru and Romania) with whom the 38-member OECD’s governing council opened accession discussions in early 2022. 

Membership is highly coveted, and widely viewed as recognition of economic progress.

Currently, just eight countries from the emerging Europe region are OECD members: Czechia, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia.

The overarching objective of the accession process is to promote convergence with the OECD’s standards and best practices in government policy, which will help Croatia progress towards OECD income and productivity levels.

The survey estimates that for future generations of Croatians to enjoy OECD-level living standards, the economy will need to expand by three per cent a year on average for the next thirty years. Successful convergence will also require tackling climate change with substantial investments and changes to the economy and infrastructure.

Policy priorities to reduce greenhouse gas emissions should be pricing emissions consistently across emissions sources and investing in energy efficiency of buildings and transport.

The Covid-19 crisis caused only a temporary setback to Croatia’s tourism-led economy, and the country’s direct exposure to Russia’s war of aggression against Ukraine has been limited.

Extensive reforms and investment over recent years have already helped Croatia to increase its GDP per capita, and Croatia is progressing well with implementing its EU Recovery and Resilience Plan. Croatia’s integration into the euro and Schengen areas in January 2023 is also expected to continue to bolster investment and exports.

Lengthy and unpredictable regulatory procedures

While Croatia boasts many young and dynamic firms, overall productivity is limited by a glut of long-established, low-productivity firms—including a large share of state-owned enterprises (SOEs). Young, higher productive firms often fail to grow, reflecting a business climate that weakens competitive pressures and adds to the costs and risks of investing.

Reducing the burden of lengthy and unpredictable regulatory procedures, resolving legal disputes faster and improving public sector integrity will be key for boosting productivity growth. The survey also recommends strengthening the governance of SOEs by adopting OECD standards and listing more firms on equity markets.

Croatia also needs to address a growing need among employers for highly skilled workers, particularly in sectors related to the digital and green transitions. Encouraging more adults to participate in skill-upgrading programmes would help equip the workforce for emerging opportunities. The strong take-up of a new adult education voucher scheme demonstrates that demand exists.

More should also be done to capitalise on Croatia’s potential as a destination for immigrant workers and to encourage skilled emigrants to return, the report recommends.

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