GOC DISMISSES FLAWED ECONOMIC FREEDOM

UNCLAS ZAGREB 000072 SIPDIS SIPDIS E.O. 12958: N/A TAGS: ECON EINV HR SUBJECT: GOC DISMISSES FLAWED ECONOMIC FREEDOM REPORT ¶1. Summary: The Croatian Government reacted sharply to a Heritage Foundation/Wall Street Journal ranking of economic freedom around the world in which Croatia was ranked 109 overall and near the bottom in Europe. The GOC dismissed the Report, saying it did not reflect Croatia's current economic reality. Although some of the Report's conclusions on Croatia are on target, its findings are skewed by a correlation of low levels of government spending with economic freedom, resulting in a higher ranking of many destitute countries in the category of "Freedom from Government" than Croatia's 36.5%. Likewise, a ranking of property rights placed Croatia in a low position, despite the fact that there has never been an expropriation or nationalization in the country. End Summary. ¶2. The Heritage Foundation/Wall Street Journal annual Report on Economic Freedom was received as another unwarranted assault on the GOC's economic policies. The Report rated Croatia's economy as 55.3% free, ranking 109 globally and 37 out of 41 European countries. Both PM Ivo Sanader and Finance Minister Ivan Suker criticized the report for failing to reflect reality in Croatia. They pointed out that the ranking of 60% for financial freedom and 50% for investment freedom are not borne out by facts in a country where foreigners dominate the banking sector and per capita FDI is third in Central and Eastern Europe. ¶3. The Report, which gave Croatia low marks on corruption, protection of property rights, labor freedom, business freedom and freedom from government, leveled some needed and warranted criticisms. For example, there is consensus that corruption remains a problem in Croatia. Likewise, although there has been substantial improvement in easing regulations affecting entrepreneurship, starting and operating a business continues to be hampered by bureaucracy. Also, the country's labor market remains rigid, characterized by low labor mobility, high unemployment and high costs associated with hiring and firing workers. ¶4. Unfortunately, the positive messages in the Report are weakened by two assessments that seem to have little bearing on reality and undermine its overall credibility. In a category called "Freedom from Government" Croatia was given a score of 36.5%, ranking it well below many destitute countries that cannot provide for even the most basic needs of their citizens. The reason for this is that the Report's methodology accounts only for government spending as a percentage of overall GDP and state involvement in industry. States that have nothing to tax cannot spend and therefore rank much higher in this category. Likewise, Croatia was low-ranked for "Property Rights," receiving a score of 30%. Although the authors rightly highlight an ineffective judicial system as a weak guarantor of contract rights, there is no differentiation among countries where private property is at risk from government or even private expropriation, which is not the case in Croatia. Croatia is far from being a model of economic reform, but neither is it mired in its socialist self-management past. BRADTKE