Croatia’s productivity performance lags its CEE neighbors.
Croatia’s overall productivity only mar-
ginally increased over the last 15 years, compared to a significant rise in most other CEE countries. While
drivers of productivity are difficult to identify, quality of national institutions and regulations, the business
environment, and the innovative capacity of the domestic economy are often put to the forefront.
Improving the effectiveness of Croatia’s public administration would positively affect the quality of
public service delivery and trust in public institutions.
According to World Bank data on the quality of
governance, in 2017 Croatia was ranked 23
rd
among the 28 EU member states regarding government ef-
fectiveness. This multidimensional indicator captures perceptions of the quality of public services, the
quality of the civil service and the degree of its independence from political pressures, the quality of policy
formulation and implementation, and the credibility of the government's commitment to such policies.
Increase in the quality of public sector institutions would also lead to a higher level of trust in the fairness
and efficiency of these institutions and in government in general facilitating implementation of reforms.
Easing regulatory constraints would facilitate business operation and growth.
A comparison with peer
countries reveals the slow pace of business environment reforms in Croatia. The 2019 World Economic
Forum’s (WEF) Global Competitiveness Report ranks Croatia 63
rd
globally, the lowest among EU member
states. Croatia also continues to lag peer EU countries in key Doing Business indicators, including starting
a business, dealing with construction permits, access to credit and resolving insolvency.
Croatia's general government expenditure-to-GDP ratio, at 46.1 percent in 2018, is well above the level
prevailing in most of its CEE peers, while the incidence of taxation is correspondingly high, creating a
burden for the economy. Croatia especially stands out for the size of its public sector wage bill, which
limits fiscal space for more productive spending and raises concerns about fiscal sustainability during eco-
nomic downturns. This highlights the importance of boosting the efficiency of public sector spending to
generate savings for the budget, while improving the business environment. Moreover, extensive state
ownership has the likely consequence of impairing growth since average productivity and allocative effi-
ciency are lower in sectors with high state presence. A large SOE footprint affects factor returns, influences
output prices by limiting product market competition and reduces private firms’ incentives to invest, inno-
vate and become more productive.
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