Economic picture mixed in Western Slavonia

UNCLAS SECTION 01 OF 02 ZAGREB 001009

SIPDIS

SIPDIS

TAGS: ECON EFIN HR
SUBJECT: Economic picture mixed in Western Slavonia


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1.SUMMARY: EconOffs recently visited several small
cities in Western Slavonia in an effort to assess
economic conditions outside of Croatia's thriving
capital of Zagreb. County and city officials reported
that, although employment rates are slowly rising,
incomes in the region are well below the national
average and the lack of job opportunities continues to
send young people looking for jobs in Croatia's larger
cities. Local governments are taking their own steps to
promote small business development, offering subsidized
business zones and incubators, as well as favorable
loans. Although these measures have begun to bear fruit
in some areas, the region as a whole continues to
struggle with the legacies of war and economic
dislocation. END SUMMARY


2. A recent World Bank study on Croatian standards of
living found that Zagreb citizens are 80% wealthier
than the national average, with Croatia's poorest
counties and highest unemployment rates located in the
heavily war-affected and largely agricultural Slavonia
region. City and county officials in Pozega, Slatina,
Virovitica and Pakrac report that average monthly net
incomes in their cities fall between between 2,700
($475) and 3,500 kunas ($625),well below the national
average of 4,686 kunas ($830). However, most residents
are reluctant to characterize themselves as poor or
register for social welfare benefits, so poverty rates
are difficult to assess. Many people supplement their
income through unofficial employment and growing their
own food, so there are few visible indicators of
regional poverty. From conversations with local
government officials and town residents, EconOffs
learned of the local population's considerable skills
in the "art of getting by." One recent journalism
graduate, unable to gain permanent employment, holds
five part-time correspondent positions just to make
ends meet. One entrepreneur in Virovitica retains
permanent employment as a teacher at a technical school
for income security, while adjusting his honey and wine
production in accordance with market prices. Private
debt, however, is rapidly rising here as the cost of
living increases while wages remain stagnant.


3. Even though Pakrac retains many visible scars of
wartime destruction as a result of its position on the
frontline in Croatia's 1991-1995 war, all four towns
appear to be quite prosperous and are generally well
maintained despite unemployment rates hovering between
20-31%, significantly above the national average of
16%. Comparisons between the towns are difficult to
draw due to their differing wartime experiences, with
Pakrac primarily trying to provide a semblance of its
prewar existence, Virovitica attempting to develop as a
regional business and transport hub, Slatina focused on
modernizing its agricultural sector and promoting
itself as a tourist destination, and Pozega attempting
to recover from bankruptcy. The persistent problems of
unofficial employment and the "grey economy" remain a
major problem for all towns, heavily affecting local
tax revenues and making it difficult for local
governments to clearly assess true employment.


4. Many major employers in the region have slashed
their workforces as a result of war damage, market
loss, and privatization. Many retain only a fraction of
their pre-war workforces, while some major industries,
such as woodworking in Pakrac, which once employed
1,400, were completely destroyed in the war. Local
economies remain highly vulnerable to large firm
bankruptcies, with Pozega County in particular being
heavily affected by the recent bankruptcy of the
construction firm Kamen-Ingrad, once a major local
employer.


5. Recovery of some damaged industries, like Pakrac's
large woodworks, is not feasible, and local governments
are struggling to both attract foreign investment and
encourage local small business growth. Incentives to
attract and retain skilled workers in war-affected and
depopulated areas include housing subsidies, government-
subsidized sporting and cultural events/facilities, new
school buildings, small business loans, and a
relatively low cost of living. Substantial aid from
foreign donors (including USAID) has allowed Pakrac to
open new schools, public markets, re-electrify, and
provide other incentives to draw back residents.
Roughly half have returned since 1995. Pakrac offers
students stipends to attend university in either Zagreb
or Osijek, under the condition that the students return
to work in the area after they complete their
education. Young residents express the frustration that

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although it has now become necessary to earn a college
degree to be considered employable, few professional
opportunities exist within Croatia, leaving them the
options of either emigration or settling into an
unrelated and often menial job. Retraining programs for
the unemployed have been moderately successful, but a
need exists for self-employment training and
assistance.


6. Local governments in the region have successfully
created business zones and incubators, offering local
entrepreneurs office and production space at very low
cost, pre-established infrastructure (water,
electricity, gas, waste removal) as well as subsidized
assistance services (book-keeping, etc.). Pakrac is
completing a larger new business incubator after
achieving considerable success with its current
facility, which currently offers space for 5 start-up
businesses. Expanded companies that got their start in
the center have occupied plots in the neighboring
business zone, with one glass factory now employing 200
workers (from an initial 10 employees). Virovitica has
successfully launched the opening of a new business
zone as well, with all plots reserved for both
production and services already bought by local
investors. In addition to the business zones, local
governments assist start-ups by offering small business
loans as well as subsidizing the interest on private
business loans. Special business loan programs also
exist for women under the age of 30. Employers also
receive financial incentives from the federal
government for hiring workers from special groups like
war veterans over 45 years of age.


7. All local governments are eager to both privatize
public agricultural land and steer production away from
cereal crops to more lucrative vegetable and fruit
crops. Slatina's economic strategy has emphasized the
privatization of public land, with final tenders on
agricultural plots to be offered this fall. Nearly 700
family-owned farms operate in the area, and are
shifting their production toward more profitable
tobacco crops and the intensive cultivation of
vegetables in greenhouses and irrigated plots.
However, export of these agricultural commodities is
limited by the lack of cold-storage facilities
necessary for successful produce distribution. Local
governments across the region recognize this problem
and assist cooperative efforts to construct and operate
these facilities. Some regional farms have also taken
advantage of the organic food market, which is an area
of possible growth in the agricultural sector. The
region's potential for tourism lies in thermal spa
development, agro- and rural tourism, as well as
drawing campers, hikers, and hunters to the region's
large forests and wooded hills. Large-scale recovery of
the industrial sector is highly unlikely given the lack
of major investment, and the region's economic growth
seems dependent on promoting small businesses (light
manufacturing, crafts, and services) as well as
efficient agricultural practices.