PRESIDENT MESIC'S ECONOMIC VIEWS: YUGONOMICS?

C O N F I D E N T I A L SECTION 01 OF 02 ZAGREB 000336 SIPDIS SIPDIS E.O. 12958: DECL: 03/13/2016 TAGS: ECON PINR HR SUBJECT: PRESIDENT MESIC'S ECONOMIC VIEWS: YUGONOMICS? REF: ZAGREB 320 Classified By: Ambassador Ralph Frank for reasons 1.4 b/d. ¶1. (C) Summary: Croatian President Stjepan Mesic has no constitutional authority to set economic policy, which is the sole preserve of the Prime Minister. However, as the politician frequently cited as one of the most popular in Croatia and one possessed of moral authority, a rare commodity among those in his line of work in the Balkans, Mesic frequently speaks out on economic issues. Mesic,s views on the economy are not easily categorized, but they clearly reflect a degree of nostalgia for past certitudes mixed with distrust for what he periodically derides as &neo-liberalism.8 Mesic sees himself as the defender of Croatia,s beleaguered working class and the unemployed. Although he seems to be aware that only greater foreign investment and faster economic growth will bring higher living standards to Croatia,s citizens, he has not fully made the transition to a realization that Croatia,s heavily subsidized industrial sector is unlikely to bring this about. Mesic seems to believe that a &Scandinavian model8 can be superimposed on Croatia,s economic reality, despite his apparent awareness of the country,s many economic shortcomings. In Mesic,s view, Croatia needs high levels of foreign investment, high growth rates and full employment, none of which seem to him incompatible with tax rates that discourage job creation, social spending the state cannot afford and industrial subsidies that have done little but postpone the inevitable for ailing industries. End Summary. ¶2. (C) The enduring popularity of President Stjepan Mesic is unusual among Croatian politicians, as is his political longevity. Mesic is one of only a few to have held high office under both the old and new regimes, having served as the last president of Yugoslavia shortly before Croatia declared independence in 1991. However, the ideological journey that took Mesic from the rotating presidency of Yugoslavia to the presidency of independent Croatia has been rockier where economics are concerned. Although there can be little doubt that Mesic knows that Croatia cannot turn back the economic clock, his public statements make frequent allusions to Croatia,s lost industrial might and the security and predictability of the cradle-to-grave socialist welfare state. It should come as no surprise then that such views are also shared by a large segment of the Croatian public that has seen its standard of living decline over the last 15 years in the face of war, economic mismanagement and the pressures of globalization. ¶3. (C) Mesic,s economic views defy easy categorization. On the one hand he denounces globalization and free markets, but on the other urges the government to do more to attract foreign capital and make Croatia a competitor in the global knowledge economy. Mesic frequently says that reducing Croatia,s stubbornly high unemployment rate must be the first priority and urges policies to that will stimulate higher growth rates and job creation. However, Mesic never really proposes a means to this end. Speaking at a recent conference on economic policy for 2006, Mesic said that the government must concentrate on &increased production, increased employment, modern industries, greater exports, low inflation and investment in education and health.8 This was in contrast to his annual Christmas address, which he used to denounce &unbridled capitalism that serves only the interests of capital to the detriment of social values and, as a consequence, to the detriment of the people.8 Mesic went on to say that the &the growth and increased competitiveness of our economy, in contrast to that of others, must not be carried out at the expense of impoverishing Croatian workers and their exploitation under the threat of social and job insecurity.8 ¶4. (C) In some respects, Mesic,s incoherent economic views are reflected both in the Croatian public and among the political class. Although few Croats pine for the lack of political freedom in the old Yugoslavia, there is a widely shared nostalgia for the economic security of that time when, at least within the circle of Eastern European and Non-Aligned countries, Yugoslavia represented something of an economic beacon. Mesic,s calls for a &social market economy8 thus find great resonance, even if they are hard to reconcile with Croatia,s limited means. It is not surprising then that the state plays a larger role in the Croatian economy than in almost any other economy in Europe, or that attempts to reform the enormously costly state health care system run into opposition on both the right and the left. When the Croatian Employers Union recently proposed reforming Croatia,s complex and fraud-riddled tax system, their proposals were shot down by both Mesic and Prime Minister Ivo Sanader as compromising the principle of income redistribution and social equality (despite the fact that ZAGREB 00000336 002 OF 002 those in the upper brackets rarely pay at the highest rates and capital is not taxed at all). ¶5. (C) Econ Off approached Mesic,s principle economic advisor, Dubravko Radosevic, seeking a clarification of the President,s views on the economy. Radosevic, who is well-read and has a strong understanding of how the global market economy works, spoke at length about the well-known economic problems Croatia faces and the challenge of stimulating growth given the country,s fiscal and monetary constraints (see reftel). On Mesic, however, he said simply that the President does not subscribe to any particular economic theory, but that he wants to see the unemployment rate come down and living standards rise. He said Mesic views himself as the advocate of average citizens and will intervene with the government when he believes that their interests are not being fully defended. ¶6. (C) Mesic, of course, does not have to make economic policy and so enjoys the luxury of ideological inconsistency. Sadly for Croatia, however, such thinking is not limited to those politicians with only ceremonial functions. The combination of nostalgia and the habit of living beyond their means has made it very difficult even to have a serious debate about the economic choices facing Croatia, much less to implement some of the tough reforms necessary to unburden the economy. FRANK