Treatment of Uber Explains Croatia’s Economic Decline

Total Croatia News

In an economy unused to competition, each new competitor is seen as a threat.

After the collapse of communist regimes in Eastern Europe, Croatia was the third richest former communist country, behind the Czech Republic and Slovenia. All former communist countries with which Croatia compared itself at the time are now members of the European Union. Some of them have progressed faster, some have progressed slower, but no new member state has progressed as slowly as Croatia, reports on February 8, 2017.

The problem is not that there was no economic growth in Croatia, but that other countries have been growing significantly faster than Croatia, which is why it is lagging behind them in relative terms. Today, 27 years after the collapse of the communist system, Croatia has turned from the third richest into the second poorest former communist country.

Everybody has their own explanation why this happened. The war, privatization process, socialist mentality, corruption and clientelism, foreign exchange rate, rampant public spending, lack of strategy, too much influence of the state in economy, and poor entrepreneurial climate are just some of the more frequently mentioned causes.

However, one of causes was discovered in 2014, when the Institute of Economics in Zagreb published the results of its research on market dynamism and productivity of Croatian companies, which was conducted in cooperation with the World Bank. The research revealed a devastating lack of market dynamism which is reflected in a low number of new companies appearing in the market and low number of existing companies being liquidated. The rate of entry of new companies into the market was only 5.5 percent, while the regional average was 13.2 percent. The difference was slightly lower in terms of businesses leaving the economy: in Croatia it was 6.5 percent, while the average in the region was 12.6 percent. The same study went a step further and suggested that the market mechanisms were totally distorted, because more productive companies were leaving the economy, while those less productive continued to exist.

The main reason for this is a combination of institutional factors that make it difficult to establish new companies and the political economy which protects existing interest groups against new competition. Perhaps the most visible example of this phenomenon is Uber.

Uber came to Croatia at the end of 2015. It entered the market of taxi services that has many institutionalized barriers to entry which allow the existing market players to hamper Uber’s normal operations. However, even though the arrival of Uber did not reduce the demand for traditional taxi services, but has instead created a new demand for transport services where this demand did not exist before, regulators still do not know what to do with Uber.

Instead of adjusting regulations to allow Uber to operate normally so that the market could continue to grow, there is growing impression that it is not welcome, although its business model creates new value for the economy, allows new forms of employment which are more flexible, and provides more efficient use of resources.

The problem is that, in an economy which is not used to competition, each new company in the market with more efficient methods of doing business will be perceived as a threat which needs to be eliminated. As the study found – in order for the unproductive companies to survive, those which are more productive must disappear. By eliminating unwanted companies one by one, the society is rejecting an increase in productivity and is being condemned to further economic decline.

Uber can therefore serve as a good metaphor for insufficient market dynamism, one of the key causes of Croatia’s economic downturn. As a society, it does not want to build a culture of success and it does not want to face the changes. It does not want to create a business climate in which new and innovative companies will operate normally and prosper. Croatia apparently wants to “embalm” current unproductive market structures, although that can only bring economic results which will lead to further decline in economic rankings.


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