Croatia is a parliamentary democracy consisting of executive, legislative, and judicial branches. The executive branch consists of the president and the Council of Ministers. The president, who is the head of state and commander-in-chief of the armed forces, is elected by popular vote to a 5-year term of office and may serve a maximum of 2 terms. The president appoints the prime minister and the cabinet, as well as the Council of Ministers, whose members are proposed by the prime minister. The Croatian legislature is the parliament (Sabor), which consists of a Chamber of Deputies and a Chamber of Counties (Zupanije), all of whose members are elected to a 4-year terms. The first chamber has between 100 and 160 deputies and the second 68 members.
The judicial branch of the government consists of the Constitutional and Supreme courts. The Constitutional Court makes decisions on the constitutionality of laws and has the power to repeal a law and to impeach the president. It consists of 11 judges elected for 8-year terms by the Chamber of Deputies at the proposal of the Chamber of Counties. The Supreme Court holds open hearings and makes its judgements publicly. Its judges are appointed for life.
During its first 8 years of independence Croatia was ruled by the Croatian Democratic Party (HDZ) and its president, Dr. Franjo Tudjman, who remained head of state until his death in 1999. During this time the government was preoccupied with the war and was slow to privatize state-owned enterprises and attract foreign investment. The ruling HDZ party has occasionally, for political purposes, supported trade legislation that has benefited certain industries and economic sectors. After the elections in 2000, a coalition of 2 parties, the Social Democratic Party (SDP) and the Croatian Social Liberal Party (HSLS), came to power. The new government— led by President Stjepan Mesic and Prime Minister Ivica Racan—is dedicated to economic and social reform but, by the end of 2001, had not been in power long enough to show significant results.
As a former socialist country, Croatia is battling against the legacy of strong state control over the economy. This control had some positive results, such as a significant post-war reconstruction effort launched by the government which, due to the lack of domestic capital, relied mainly on foreign borrowing. On the down side, however, it was very difficult for the private sector to expand or compete in a state-dominated economy; the government frequently exploited important positions in industry for political gain, which prohibited the private sector from entering the field.
Croatia generates government revenue through a wide range of taxation measures and is one of the most highly taxed countries in Central Europe. Heavy taxation has slowed the growth of the private sector and contributed to the rise of an informal economy whose interactions are not subject to taxation. Personal income tax paid on individual earnings ranges from 20 to 35 percent and value-added tax (VAT), paid on domestic sales and on most imports, is fixed at 22 percent. An import duty , levied on goods and services, is paid by the importer, while there are further taxes payable on property transactions, inheritance and gifts, tobacco and alcohol, and motor vehicles.
In 1993 the government launched a relatively successful economic program to stabilize prices and the exchange rate , which slowed inflation to approximately 3 percent by 1995. Since then, inflation has increased slowly by approximately 0.5 percent to 1 percent per year. At the same time, the government's continuing high rate of taxes and military expenditure to finance the war hindered the recovery process. During the first few years of the economic stabilization program, the currency remained stable, partly due to improvement in the economic climate, but largely because the central bank artificially maintained this stability.
The government established a Privatization Fund (CPF) to oversee transfer of state-owned enterprises to private hands. The privatization process used several methods, including the sale of company shares to employees at a discount, a system whereby vouchers are distributed for use in place of cash to bid for shares in companies undergoing privatization and to award compensation for property that had been taken away by the communist regime. These measures, however, were not very successful. They proved easy to abuse and led to many cases of corruption. Privatization of utilities and the country's main oil producer has been slow, as these are considered strategically valuable enterprises by many in the ruling party.
Croatia's ratio of pensioners (retired workers collecting government benefits) to workers is very high and puts a heavy burden on the economy. To ease this burden, the government, with help from the World Bank, introduced pension reforms. A 3-band pension system was approved but, by 2001, had not yet been implemented. This system will keep part of the monthly retirement contribution in government funds, while a portion will go into a privately managed fund.
The new government elected in 2000 managed to make a significant impact on speeding up privatization of the banking and telecommunications sectors, and in late November 2000, Croatia became the 139th member of the World Trade Organization.