Croatia - Overview of economy

Prior to World War II, peasants comprised more than half of Croatia's population and the country's economy was based largely on agriculture and livestock. Croatia's northern region is rich in agricultural soil and has been exploited for those purposes since ancient times. The coastal regions are not as lush but have a perfect combination of climate and soil for growing grapes, olives, and citrus fruit. Industrialization took place after

World War II when Croatia became a part of the Socialist Federal Republic of Yugoslavia. During this time, the economy diversified, industry and trade grew rapidly, and tourism developed swiftly. Since Croatia and Slovenia were the most developed of the Yugoslavian republics, profits from their industries were used to develop poorer regions of the federation. This factor, together with hyper- inflation in the 1980s and austerity programs imposed by the federal government, led to both Croatia and Slovenia opting for independence from the Yugoslav federation at the beginning of the 1990s. Croatia's bid for independence was met with military force by the Yugoslavian government, unleashing a war that lasted from 1991 to 1995.

Prior to 1991, Croatia was part of a socialist -dominated country. Since then, it has been going through a transition from state-controlled economy to free-market system , but the conflict with Yugoslavia had a devastating effect on its economic infrastructure . During the war, parts of the country were destroyed or damaged. Many people became refugees, forced to rely on assistance from the state, while a large portion of the state budget was used for defense. The cost of material damage caused by the war was estimated at US$27 billion, more than the country's 2000 gross domestic product (GDP) of US$24.9 billion. The war also brought a substantial reduction in trade between Croatia and the former Yugoslav republics, and caused difficulties in competing in European markets. Croatian tourism, a very important contributor to the country's GDP, suffered disastrously, as did trade and industry.

At the end of the war, Croatia began a slow process of economic rehabilitation. The structure of the Croatian economy is currently similar to that of a developed western economy, with services accounting for 71 percent of the GDP, industry for approximately 19 percent, and agriculture for 10 percent.

The country's major economic sectors are tourism and trade. Croatia has a beautiful coastline and many national parks, which attracted hundreds of thousands of annual visitors before the war. After the war ended in 1995, tourism revenues steadily increased, approaching the pre-war levels. In terms of trade, Croatia's major export industries include chemical products, textiles, shipbuilding, food processing, and pharmaceuticals. Agricultural production does not satisfy domestic needs, and food products comprise a significant part of the country's imports. Other imports include machinery and transport equipment, chemical products, and fuel.

The total foreign debt of Croatia stood at US$8.3 billion in 1998. Although the debt has been growing since 1991, the rate of increase has been much slower than the increase in government revenues. In 1991 the debt accounted for 12.3 percent of the government revenue, but by 1996 this figure had fallen to 8.4 percent. More than half the debt was to private creditors such as large banks and businesses, while the balance was in outstanding loans from the International Monetary Fund (IMF), the World Bank, and the European Bank for Reconstruction and Development.

European Union countries have contributed nearly US$1 billion to reconstruction efforts in Croatia since 1991. Some of the aid went to assist over 600,000 displaced people and 250,000 Bosnian refugees. The country received co-finance for most major projects from 3 sources: the World Bank, the European Bank for Reconstruction and Development, and Hermes Kreditversicherungs, known as Hermes. Hermes is a consortium of a private insurance company and a quasi-public company which provides credit insurance on behalf of the German government. Projects financed by these sources have included post-war reconstruction of infrastructure, support for the health sector, and improvements in the financial, enterprise, and agricultural sectors.

Foreign direct investment (FDI) has played a significant role in Croatia's banking sector and its pharmaceutical industry. According to CEEBICnet Market Research, current FDI in Croatia exceeds US$3.6 billion, most of it invested in mixed ownership enterprises, those owned jointly by foreign and local entities. Major investors have come from Germany, Austria, Italy, the United States, and the Netherlands.

Although the private sector has grown since Croatian independence, the country still has a fairly undeveloped enterprise sector consisting of small and mediumsize operations. Between 1996 and 1999 employment in these businesses remained static due to a poor business environment, high taxation, and difficulties in obtaining appropriate financing for expansion.