1. Croatia: Country Economic Memorandum Economic Growth Through European Integration World Bank, September 2003

2. 1 – Croatia’s achievements since Independence have been impressive… Profound economic and social transformation Markets laws and institutions Pre-independence output recovered… …despite unstable geo-political environment New wave of reforms since 2000

3. 2- SAA provides a challenge to deepen reforms through EU Integration SAA goes well beyond trade It will bring laws, institutions and policies in line with the acquis communautaire  – progressive laws and institutions – efficient factor markets and regulation – improved business climate

4. 3 – SAA: a “two-way” road Reforms needed for the Acquis are good for growth Growth will facilitate EU integration

5. 4 - “Critical bottlenecks” for sustainable economic growth High deficits-debt Inadequate land registry + property/ creditor rights Poorly functioning judiciary Weak governance Public administration fragmented, politicized poorly coordinated

6. 5 – Competing in Europe will also require: Efficient regulatory frameworks – product&factors Integration into EU transport and energy networks Adequate skills and innovation systems Modernizing agriculture Phasing in EU environment institutions/standards

7. 6 - Simultaneous progress in all reforms  synergy 6.A - Lengthy reforms should start right away, e.g., fiscal, public administration. 6.B - Some reforms are urgent/low cost anyway…, e.g., bankruptcy, governance, labor, judiciary, registries… 6.C – Regulation of infrastructure, factor markets are win-wins; need to be accompanied by enhanced skills- innovation systems 6.D – Fast convergence to EU agriculture/environment institutions; selective speed of convergence to EU standards

8. 6.A - Stable macroeconomic environment Fiscal/debt management could get out of control due to: –exchange rate depreciation, –higher sovereign risk premia –growth slowdown –reform costs Sources of fiscal savings: –social security –transport –wages and salaries

9. 6.A - Public Administration Reform Depoliticize senior civil service Integrate policy planning with budget process Consolidate Ministries with focus on needs of market economy Evaluate city amalgamation for provision of services

10. 6.B – Productivity can increase through firm’s exit, entry and restructuring. Firm Exit: streamlined bankruptcy procedures, Stop bail-outs at tax-payer’s expense. Firm Entry: land titling, zoning, building permits, utility connections, visas and work permits. Restructuring: Implement EU corporate governance standards

11. 6.B – Strengthening the Judiciary Implement court administration/management systems Case management systems Judge training on commercial law, compensation Out-of-court mechanisms (small claims court) Common judiciary practice (regions, judges)

12. 6.C - Integrating Croatia’s infrastructure networks Private sector participation, interconnection of transport and energy networks Secondary energy legislation needs to establish price and regulatory regime Adopt internationally acceptable economic appraisal methods in transport

13. 6.C – Financial system stability Prudential regulations to internalize exchange rate risk: – liquidity requirements on FOREX deposits – provisions on FOREX loans Strengthen consolidated supervision Strengthen CROSEC, enforce new laws

14. 6.C - Skills and innovation systems Innovation-driven growth requires continuous learning, problem solving, critical and reflective thinking Shift to demand-driven system of education, training and research – closer links with private firms Change what is taught, how it is taught and those who teach

15. 6.D - Modernizing Agriculture Adopt CAP institutions, align CAP instruments CAP: good for welfare (poor), not for farmers Option before CAP: reduce intervention below CAP levels  compensate farmers, increased welfare

16. 6.D – Environmental compliance Meeting EU environmental standards will be costly Fiscal costs depend on: –cost recovery, e.g. volume pricing of water –private participation, e.g., energy –phase-in period, e.g., waste water Reform scenarios can reduce investment needs by a factor of 2 and fiscal burden by a factor of 3

17. 7. Conclusions 1.Growth/EU integration - mutually reinforcing objectives 2.Provide a stable macro-financial framework 3. Address critical bottlenecks (legal, judiciary, public administration) 4.Regulatory reforms in product, factor and infrastructure markets 5.Careful evaluation of costs-benefits during phase-in period in agriculture-environment