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