The above described document is the analysis of a group of economists gathered by President's advisor for economy, Dr. Stjepan Zdunic. The material was sent to the Parliament and the Government with the remark that it is for "internal" use, while its introduction states that the Croatian public was not sufficiently involved in and informed about the preparation of a new arrangement with the IMF, and that even the committees in the Parliament did not discuss the IMF deal. Therefore, again, the issues are serious but "I really do not want to meddle". That caution speaks volumes about our mentality (see Krleza) as well as about the political climate in which, as the economy worsens, the authorities increasingly view criticism as open expression of enmity. Although the authorities will, naturally, "defend everyone's right to criticize". Defend from whom? From the authorities?
The object of criticism is the policy that emphasizes the reduction in domestic expenditures. After that and with assistance of the document confirming that we are good boys, signed by the IMF, foreign investors will come to Croatia, which, according to the government, should kick-start the production and investments. However, the authors of the analysis say that the agreement with the IMF has been in existence for more than seven years, but there has been no foreign investment in Croatia in that period. The foreign investors showed interest only in the banks and trade, and have already taken control of a part of Croatian economy. At the same time, the reduction of excessive taxes and a reduction in domestic public expenditures cannot sufficiently quickly give the desired results. The authors warn that the results can only be achieved by a quick increase in production, instead of by redistribution of "a very small" gross national product, which only causes huge problems in the society. They say that only the "victims" of that program are clearly visible, while we are yet to see any favorable effects on the economy.
The analysis claims that the coalition government, with the support of the IMF and the World Bank, continues the policy of its predecessors. Its focus is on the preservation of a stable exchange rate with respect to the Euro and stable prices, so that all measures are geared towards that. The goal of that model is the "reduction of domestic public expenditures through dismantling of the welfare state", as well as the reduction of state's role in the economy. The biggest weakness in all that is that the authorities are not taking into account "the importance of relative pricing policy in the role of support for exports and the substitution of imports by domestic products". Translated to plan speak, that means that the Kuna [Croatian currency] is too strong, and that it should be devalued in some way.
The most successful transition countries, Hungary and Slovenia, stress the authors of the analysis took account of that, so that Slovenia persistently rejected policy recommendations dictated by the IMF. However, Croatia has given up the possibility to respond in the same manner to exchange rate games played by its neighbors. Consequently, among other, a lot of money has been spent on shopping in Slovenian shops.
The reduction of salaries and state budget would also reduce domestic consumption and in turn the gross national product, state the authors of the analysis. Croatian companies can withstand competition from abroad only by increasing their productivity. Lacking investments, the only way to increase productivity is through layoffs and increase in unemployment. Out of all the former Communist countries this process has been going the fastest in Croatia.
The same model assumes that stability of prices will reduce interest rates and thus "naturally" speed up the growth of the economy. In practice, however, warns the analysis, state guarantees are demanded even for the loans given to privately owned firms. The Croatian authorities are "giving best possible guarantees to investors from abroad and to foreign capital" but "are not doing anything in order to at least partly return domestic manufacturers and investors on the market". The too strong Kuna is maintained by foreign currency loans and sale of companies to foreign investors, and money is spent for budget expenditures. As soon as the end of the next year, the authorities will run out of properties suitable for sale to foreign investors, so that the time of unavoidable and "very harsh cuts in public expenditures, with all the (negative) social and political consequences" will follow.
At the same time, the domestic capital will flee the country, as the economy will not be strong enough to use it. That process started last year, at a very high rate. The analysis also advocates preservation of monetary sovereignty, i.e. it opposes the introduction of the Euro as a parallel currency and possible abandonment of the domestic currency.
In the Memorandum sent by the Government to the IFM "employment and welfare get only a perfunctory mention," while there is no discussion of the likely unemployment rate, which is "unacceptable". Croatia has been waiting for seven years for the creation of a strategy that will pull it out of a long-lasting crisis. This strategy should be "formulated by the Government, with possible technical assistance from the World Bank". Suggestions of the IMF should be reduced to the maintenance of an acceptable budget deficit and the balance of payments. But, in order to start overcoming the crisis, Croatia must have her own strategy for accelerated economic development. Privatization cannot be the only component of that strategy, as it has so far inflicted huge damages, so that the industrial production is at the level of 45% of the pre-war production. In the industry, "investment has been decreased to the unprecedented minimum". Croatia needs an active development strategy in order to pull out of an economic depression. That requires a social agreement regarding the goals and manner for overcoming the crisis.
These views are explained on all together 80 pages, including a summary version, so that the politicians who have received them should be able to digest them. But for now reactions have been much stronger in the professional than in the political circles. The analysis states that it was carried out under the auspices of the President's Office and the Economics Institute in Zagreb. But, the director of the institute, Dr. Ivan Teodorovic, has stated that that is not true. People who worked on the analysis, from the institute Zvonimir Baletic, Vladimir Lasic, Bozo Marendic and Stjepan Zdunic, and from the Zagreb University Department of Economics Mato Grgic and Ivan Lovrinovic, can represent their own views. But anything endorsed by the institute must be previously professionally assessed and accepted by the institute. Of course, that does not diminish the value of their work, just as it would not be increased by an endorsement from any institution. It's time to clear up politics. And the proverb says, if you're a rabbit, don't' go to the woods.