Croatia: From 3rd Richest to 2nd Poorest of New EU Members

Lauren Simmonds

Research from the Economic Institute in Zagreb and the University of Dubrovnik brings with it some interesting findings…

As Poslovni Dnevnik writes on the 5th of December, 2017, over the past decade, Croatia has deepened its process of de-industrialisation and the subsequent loss of price competitiveness, making Croatia go from the third richest to the second poorest new member state of the European Union, according to research results presented on Tuesday at the Zagreb Institute of Economics.

Results of the research during the first year of the scientific project ”Re-industrialisation of the Croatian Economy – REINDUCE” suggests a prevailing trend of decreasing labour-intensive activities within the manufacturing industry in all the countries that make up Central and Eastern Europe over the past decade.

However, in countries with an active industrial policy, such as the Czech Republic and Poland, this process was accompanied by a technological collapse of the industry and the growth of sector competitiveness, as well as the share of a value-added processing industry in the overall economy, which is why these countries are, in contrast, examples of what successful re-industrialisation should look like.

On the other hand, in countries like the Republic of Croatia, the past decade has been marked by the decline in industrial competitiveness, by the increase in the share of low-tech-intensive activities within the manufacturing industry, and by the reduction of the industry’s share in total added value.

In other words, in EIZ’s statement, while successful former transitional countries have reindustriated the economy through their own respective policies, in Croatia, the process of de-industrialisation has not only continued, but deepened as well.

This is illustrated by the fact that Croatia held a share of the manufacturing industry in the gross domestic product (GDP) of 24 percent back in 1990, while in 2015, this share was halved to just 12 percent.

At the same time, the share of high-tech products in total industrial production slightly decreased, while in several other countries, with the exception of Lithuania and Latvia, total industrial production has increased.

Similar trends are also present in regard to the share of employment in the manufacturing industry and its labour intensity.

This unfavourable economic structure has direct implications on overall economic growth as standardised labour-intensive activities have lower growth potential than technologically intense, sophisticated industries.

The situation is more unfavourable as it has been observed that over the past fifteen years, all other new European Union member states have increased their share of the manufacturing industry and have undergone structural transformation within it, while Croatia has very much stagnated in this respect.

The research also suggests that there has been further deepening of the differences in export competitiveness of the manufacturing industry between the leading countries of Central and Eastern Europe and the Republic of Croatia.

In countries such as the Czech Republic, Slovakia and Poland, there has been a considerable rise in the sophistication of export products in highly technological and knowledge-intensive activities. On the other hand, the results for Croatia reveal the loss of price competitiveness, accompanied by a lack of improved quality-based competitiveness. 

”It is therefore not really unexpected that from the beginning of its transition to this very day, Croatia has gone from the third richest of the second poorest new member state of the European Union,” the statement read.

The research shows that re-industrialisation has the greatest impact on improving the sophistication of export products from the manufacturing industry. It also established the existence of a link between the development of digital infrastructure and the share of employment in the manufacturing industry, which is usually considered a prerequisite for the so-called “fourth industrial revolution”.

Increasing industrial employment with the purpose of accelerating re-industrialisation contributes not only to new jobs, but to measures such as subsidies to certain sectors or reductions in various corporate tax burdens.

Upon evaluation of these two approaches to re-industrialisation, it can be suggested that tax cuts have a greater impact on re-industrialisation than they have on sectoral interventionism. The impact of tax cuts on job creation in the industry is almost five times higher than the targeted subsidies for certain specific industrial sectors.

This discovery could be particularly important for Croatia as a country, which has the second highest rate of tax on profit out of all of the newest members of the European Union from Central and Eastern Europe, as it opens a direct channel through which public policies can spur stronger re-industrialisation.

Finally, the study also identified the depreciation of the foreign exchange rate and the reduction of interest rates, i.e – the cost of financing as important determinant for the increasing of the significance of the manufacturing industry in the economy, concluded the research funded by the Croatian Foundation for Science, conducted by scientists from the Department of Economics and Business Economics of the University in Dubrovnik and the Economic Institute in Zagreb.


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