ECONOMIC ISSUES IN THE CROATIAN ELECTIONS: IS 4X4 GREATER

UNCLAS SECTION 01 OF 02 ZAGREB 000981 SIPDIS SIPDIS SENSITIVE STATE FOR EUR/SCE E.O. 12958: N/A TAGS: ECON PGOV HR ELECTIONS SUBJECT: ECONOMIC ISSUES IN THE CROATIAN ELECTIONS: IS 4X4 GREATER THAN 3X7? Ref: A) Zagreb 938, B) Zagreb 950 ¶1. SUMMARY: This is the second in our series (REF B) previewing issues and parties for Croatia's Nov. 25 parliamentary elections. With the vote less than a month away, Croatia's two main political parties are trying hard to draw distinctions on economic policy. Given the large degree of consensus on other major issues, such as EU and NATO accession, the economy provides a natural area for differentiation. Although the parties have devised catchy formulas to summarize their economic plans, the only two clear policy differences are on the need for further privatization (which the HDZ vaguely favors and the SDP vaguely opposes),and introduction of a capital gains tax (which the SDP explicitly favors, and the HDZ explicitly opposes). This comes despite the fact that many polls indicate that such existential questions as pensions, unemployment and the cost of living are nearest to voters' hearts. In the end, EU pressure will remain a stronger spur for reform than electoral politics. END SUMMARY. Economic Stats Good, But Public Does Not Think So -------------- -------------- ¶2. Parliamentary elections in Croatia are scheduled for November 25 and economic themes have played prominently. Since the summer, the opposition has worked hard to denigrate what is, in most accounts, an economy that should favor the party in power. The ruling Croatian Democratic Union (HDZ) has overseen four years of steady growth, stable inflation and declining deficits and unemployment, giving it a strong basis on which to lay claim to the mantle of responsible economic stewardship. The economy has grown steadily at between 4 and 5 percent. Inflation has been contained between 2 and 3 percent. Significant arrears in pensions have been paid down. Unemployment, which was 14.3 percent in 2003, has dropped to 11.8 percent. PM Ivo Sanader tells voters that if his party is returned to power, they can expect even better results over the next four years. ¶3. The Social Democratic Party (SDP) is attempting to neutralize this apparent advantage, likening HDZ-led prosperity to a Potemkin village built on foreign credit. The SDP's candidate for Prime Minister, Ljubo Jurcic, regularly points to Croatia's economic growth as too slow for the country's stage of development, noting that 2 percent in Germany translates into a greater per capita increase than 5 percent in Croatia. He also singles out Croatia's high level of foreign debt, which currently stands at over 85 percent of GDP, as a harbinger of instability and the sign of an economy built on little more than consumption and credit. ¶4. For its part, polling data indicates that the Croatian public remains largely pessimistic about its own economic circumstances. Public opinion focuses on persistently high unemployment, rather than the fact it is dropping; on the subsistence level of many pensions, rather than the improved (although still shaky) finances behind the system; or on the high cost of living, rather than the government's success in controlling inflation. HDZ: 3x7 = More of the Same -------------- ¶5. The HDZ has packaged its economic platform as "3x7", promising 7 percent GDP growth, 7 percent unemployment and 7 development projects for Croatia between now and 2010. While lacking in detail, the party program promises to finish privatization, restructure state companies and continue with infrastructure investments, without raising taxes and eliminating the budget deficit by 2010. ¶6. To prove that he means business, PM Sanader and his ministers have been omnipresent in recent months, cutting ribbons on new roads, tunnels and bridges and overseeing the privatization of Croatian Telecom (ref A),which brought quick profits to thousands and lifted the Zagreb exchange to new heights. Sanader says that changing leadership now would undo these gains and reduce confidence in Croatia among foreign investors, particularly as a result of the opposition's pledges to introduce a capital gains tax. SDP: 4x4 > 3x7 -------------- ¶7. The SDP formula of "4x4" is based on a plan, tinged with old central planning instincts, to identify four key industries for each region of Croatia and then aid four competitive companies within each of those industries. The plan offers no specifics as to how its once and future government would go about picking new winners in the economy. Nor does it address how any state aid would affect the country's already high levels of debt or past muster with the EU's requirement that Croatia, as a candidate country, trim, rather than expand, state subsidies. Jurcic, when pressed for details, says that expert groups will determine the best course of action once his party comes to power. Overall, the SDP has treated higher GDP growth ZAGREB 00000981 002 OF 002 as the elixir for all of the country's ills, promising that the gains from economic growth would be funneled to "social development." Despite Rhetoric, Large Areas of Agreement -------------- ¶8. In fact, the HDZ and the SDP, as well as most of the smaller parties, agree on many key economic issues. All parties call for the reform of Croatia's sclerotic judicial system, increased efficiency in public administration, and improved education as keys to unlocking greater economic potential. Both also point to the need for Croatia to secure sources of energy and to continue to modernize its infrastructure. ¶9. The only two clear policy differences so far in the campaign have been on privatization and capital gains taxes. While the HDZ calls for continued privatization (without specifying what more they would sell),Jurcic has criticized privatization as "selling the family silver", raising particular concerns if the investors are foreign. On tax policy, the SDP promises to introduce a tax on capital gains and to ease taxes on reinvested profits, while the HDZ argues that the tax regime should be left alone to give predictability to investors. The contrast between the HDZ's pledge of "no new taxes" and the SDP's commitment to new levies has formed the backbone of the HDZ's current billboard campaign. ¶10. COMMENT: Given the constraints of EU candidacy and Croatia's economic integration with its EU neighbors, Croatia's economic prospects in the coming four years will depend more on continued growth in tourism receipts and a favorable regional economic climate, than on programs of 3x7 or 4x4. In the final analysis, neither party is entirely convincing regarding its commitment to painful and sometimes expensive reforms in the judiciary and public administration. Continued EU pressure, and funding, will be crucial if the next government is to increase the pace from the current HDZ government's achievements. END COMMENT. BRADTKE