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Republic of Croatia: Selected Issues and Statistical Appendix

Author(s):
International Monetary Fund
Published Date:
August 2004
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III. Employment Protection in Croatia18

A. Introduction and Summary of Conclusions

35. This chapter discusses the economic implications of employment protection in Croatia. Labor market performance in Croatia has been relatively poor, even compared with other Central and Eastern European countries (CEECs). Recent studies, such as Rutkowski (2003), attribute this poor performance, among other factors, to the strict employment protection in Croatia. Schneider and Dominik (2000) point out that stringent employment protection could also provide an incentive for firms to move to or remain in the informal sector in order to lower labor costs. A large informal sector could have a number of unwanted implications. Tax collections could be lower (indeed the Croatian Ministry of Finance has repeatedly blamed the size of the grey economy for unsatisfactory tax collections). Moreover, it could lower the productivity of the overall economy, as a recent study by Farell (2004) suggests: firms in the unofficial sector tend to be small, and their small scale limits their ability to fully utilize new technology and business practices, which drags down the productivity of the overall economy. This chapter presents the main stylized facts about employment protection and labor market performance in Croatia and examines the link between employment protection and the shadow economy.

36. The main conclusion is that the strict employment protection in Croatia is likely to have negative economic implications. Circumstantial evidence suggests that employment protection may have played an important role in explaining Croatia’s poor labor market performance. Also, empirical tests indicate that employment protection is correlated with the size of the shadow economy. The policy implications of these findings are that Croatia could enhance employment in the official sector, expand the tax base, and boost productivity by relaxing employment protection. Labor law amendments implemented at the beginning of this year, which lowered Croatia’s employment protection legislation (EPL) index by 23 percent,19 are an important step in this direction.

B. Employment Protection and Labor Market Performance in Croatia: Stylized Facts

37. Stringent employment protection may be significant in explaining the poor labor market performance in Croatia. There is no consensus in the literature on the overall effect of employment protection on the aggregate level of employment and unemployment over the economic cycle. However, it is widely agreed that stringent employment protection increases the incidence of long-term unemployment (Blanchard 2000), as it makes labor turnover difficult in the course of economic cycles. This issue becomes relevant in particular when the economy is hit by a severe negative shock, such as the transition from a planned to a market economy or a war, both of which Croatia experienced in the 1990s.

38. The labor market in Croatia has not performed well. In the early 1990s, economic restructuring and privatization significantly increased redundancies. The war between 1991 and 1995 worsened the situation. While labor shedding by many firms led to improved productivity, it also contributed to massive inflows to unemployment. Although economic growth has been brisk since the mid-1990s, outflows from unemployment, including outflows to jobs, have not accelerated, and have been falling short of inflows until 2000.20 The labor force survey-based unemployment rate has been hovering around 15 percent for the past five years, which is relatively high even among CEECs (Figure 1). In addition, the share of long-term unemployment in total unemployment has been significantly higher in recent years (hovering around 55 percent) than in major CEECs, such as the Czech Republic, Hungary, and Poland (averaging around 45 percent). Finally, the labor force participation rate has remained low at around 50 percent. In particular, unemployment is high and participation is low among the young. The overall low participation may reflect poor availability of job opportunities and mismatch problems.

Figure 1.Unemployment Rates, 1993-2002

(In percent)

39. Firm-level data reveal that the job reallocation in Croatia is sluggish. Croatian firms yearly terminate about 5 percent of all jobs, compared with the job destruction rate of 10–11 percent in other CEECs.21 At the same time, the job creation rate in Croatia is only 3½ percent, compared with 7-11 percent in other CEECs. These figures point to the stagnant nature of Croatian labor market and indicate that the Croatian economy does not seem to undergo the same intensive enterprise restructuring as the leading reformers among CEECs.

40. Labor costs cannot explain the stagnant job creation in Croatia. A gross wage comparison in manufacturing sector among CEECs by the World Bank (2003) suggests that gross wages in Croatia are higher than in most of other CEECs. However, economy-wide unit labor cost comparisons show that Croatia has held a relatively strong position in recent years among CEECs (Figure 2). Furthermore, the gross wage in relation to GDP per employee indicates that Croatian workers are not overpaid compared with those in other CEECs (Figure 3).

Figure 2.Unit Labor Costs, 1998-2003

(In Euros; 1998Q1=100)

Figure 3.Gross Monthly Wages and GDP per Employee, 2003

41. Moreover, the unemployment benefit system in Croatia is not particularly generous. The unemployment benefit in Croatia is a flat rate benefit and the fixed maximum amount is only about one-fourth of the average wage. Figure 4 compares the replacement ratios of unemployment benefits in CEECs for the past 10 years, measured as the stipulated unemployment benefits in percent of previous year’s earnings. The comparison reveals that the replacement ratio in Croatia is relatively low. Also, relatively few unemployed receive the unemployment benefit in Croatia and the duration of the benefit payment is capped at 312 days, which is not out of line compared with other CEECs (Figure 5). The benefit coverage rate has been below 20 percent since the mid-1990s, reflecting two factors: (i) the unemployment rate is highest among new entrants to the labor market, who do not qualify for the unemployment benefit; and (ii) a large proportion of the unemployed are long-term unemployed, who are no longer eligible for the benefit. All these characteristics—low replacement rate, moderate duration of the benefit payment, and limited coverage—suggest that the labor supply disincentives related to the unemployment benefit system are likely to be modest in Croatia.

Figure 4.Stipulated Replacement Ratio of Unemployment Benefits to Previous Earnings, 1993-2002

(In percent)

Figure 5.Duration of Unemployment Benefits, 1993-2002

(In number of months)

42. However, employment protection in Croatia is among the strictest in CEECs. According to the estimated value of the EPL index, employment protection in Croatia is even stricter than in most of the EU-15 and other CEECs (Table 1). Individual dismissals are costly due to the long advanced notice period and high severance pay. Collective dismissals are even more difficult mostly because of the overly inclusive definition of collective redundancy. Although fixed-term employment is a way of circumventing the high costs of terminating regular employment contracts, the labor law until recently restricted its use by requiring that fixed-term contracts were signed only on an exceptional basis.

Table 1.Employment Protection Legislation Index (EPL) of Selected CEECs
Croatia3.6
Hungary1.7
Poland2.0
Czech2.1
Slovakia2.4
Estonia2.6
Slovenia3.0
EU average 1/2.4
Italy3.4
Portugal3.7
Spain3.1
UK0.9
United States0.7
Japan2.0
Sources: World Bank (2002) and OECD Employment Outlook 1999.

43. Strict employment protection is also likely to have discouraged entry or expansion of new businesses in Croatia, which have been the engine of job creation in other CEECs.22 According to World Economic Forum’s “Quality of the National Business Environment Rank”, which ranks almost 100 countries based on survey scores of various factors affecting the business environment, Croatia ranks significantly behind the major CEECs, such as the Czech Republic, Hungary, and Poland. Croatia ranks worst in “cooperation in labor-employer relations”, which could be explained by the strict employment protection. The share of employment by small and medium-sized enterprises (SMEs), a proxy for new businesses, is 46 percent in Croatia, compared to well over 50 percent in major CEECs.

44. With a view to making the labor market more flexible, the labor law was amended in July 2003. The amended labor law, which entered into effect at the beginning of 2004, has lowered Croatia’s EPL index by 23 percent. The main changes include: (i) relaxing restrictions on the use of fixed-term contracts; (ii) easing the pre-conditions for valid dismissals; (iii) shortening the advanced notice period from 6 to 3 months; (iv) reducing the amount of severance pay from half to one-third of the monthly pay; and (v) relaxing the definition of mass lay-offs.

C. Employment Protection and the Shadow Economy

45. This section analyzes in more detail the role of employment protection in explaining the size of the shadow economy using cross-country data on selected OECD countries and CEECs. Although there is disagreement about the definition of shadow economy and estimation procedures of its size,23 many studies in this field find a growing trend in the share of the shadow economy relative to the official economy among the majority of OECD countries during the past 10 to 20 years.

46. Stringent employment protection leads to increased labor costs in the official economy. It provides an incentive for firms to move or remain in the informal sector in order to lower labor costs. Since labor costs can be shifted onto employees, it could also provide workers with an incentive to work in the shadow economy. Schneider and Pöll (1999) present some empirical evidence of this using firm-level data in Germany.

47. Cross-country comparisons indicate that strict employment protection is correlated with a large shadow economy. Figure 6 plots the size of the shadow economy in percent of GDP and the EPL index of 20 OECD countries and 7 CEECs and shows a clear positive correlation. As mentioned above, different methodologies give rise to different estimates of the size of a country’s shadow economy.24 This study uses the estimations provided by Schneider (2002) because the study covers a large variety of countries and reports the most recent estimates (average of 2000/01 on 22 transition economies and average of 2001/02 on 21 OECD countries). As the EPL index only exists for a smaller number of countries, the sample size is limited to 27 countries.

Figure 6.Strictness of Employment Protection and Size of Shadow Economy

48. However, other factors also affect the size of the shadow economy and have to be controlled for to assess the impact of employment protection.25 Almost all studies point out that the tax and social security burden is one of the most important factors in explaining the size of the shadow economy. The bigger the tax wedge in the official economy, the greater the incentives to work in the shadow economy. Business regulations also affect the size of the shadow economy. Finally, it is widely recognized that the quality of infrastructure and effectiveness of public services improve as a country becomes richer. This indicates that the incentives to work in the unofficial sector become weaker as a country develops and per capita income grows.

49. Even after controlling for the tax wedge, business regulations, and per capita income, employment protection is still significant in explaining the size of the shadow economy. Table 2 reports the results of OLS regression of the size of the shadow economy on the log of per capita GDP, the EPL index, the tax wedge on labor income, and a business regulation index.26 As expected, the coefficient of per capita income is significantly negative, while the EPL coefficient is positive and highly significant: evidence that less employment protection is correlated with a lower share of the shadow economy even after controlling for other factors. This is consistent with a strand of literature (including Tokman 1990 and Loayza 1996) suggesting that labor regulation is a major factor behind the dynamics of the unofficial economy. However, it is in contrast with the findings of Johnson, et al (1998), who did not find significant evidence of a positive relation between labor regulation and the size of the shadow economy. Finally, contrary to a lot of existing studies, neither the tax wedge on labor income or business regulation index is significant. These results suggest that the strictness of employment protection plays a more important role in explaining the cross-country difference in the size of the shadow economy than the tax burden on labor income or business regulations.

Table 2:OLS Estimation on the Impact of EPL on Shadow Economy
Dependent variable: Shadow Economy as a percent of GDP
RegressorCoefficient Standard ErrorStandard ErrorT-RatioProb.
Constant ***56.81416.3383.477[0.002]
Log GDP per capita ***-6.0171.443-4.171[0.000]
EPL ***4.2341.3873.052[0.006]
Tax wedge on labor income0.0460.0990.466[0.646]
Business regulations1.4771.2941.142[0.266]
R-Bar-Squared=0.607
Number of Observations=27
Note: *** Indicates significance at 1percent level.
References

    Blanchard, Olivier, 2000, “The Economics of Unemployment: Shocks, Institutions, and Interactions,Lionel Robbins Lectures 1-3, Unpublished, London School of Economics.

    Farrell, Diana, 2004, “The Hidden Danger of the Informal Economy,McKinsey Quarterly, 2004, No. 3.

    Feige, Edgar and Urban, Ivica, 2003, “Estimating the Size and Growth of Unrecorded Economic Activity in Transition Countries: A Re-evaluation of Electric Consumption Method Estimates and their Implications,Institute of Public Finance, Zagreb.

    Giles, David, 1999, “Measuring the Hidden Economy: Implications for Econometric Modeling,Economic Journal, Vol 109, no. 456, pp. 370380.

    Johnson, Simon, Kaufmann, Daniel, and Zoido-Lobaton, Pablo, 1998, “Corruption, Public Finances and the Unofficial Economy,World Bank, Mimeo.

    Jurajda, Štěpán, and KatherineTerrell, 2002, “What Drives the Speed of Job Reallocation During Episodes of Massive adjustment?Discussion Paper No. 601, (Germany: IZA, Bonn, October).

    Loayza, Norman, 1996, “The Economics of the Informal Sector: A Simple Model and Some Empirical Evidence from Latin America,Carnegie-Rochester Conference Series Public Policy, 45, pp. 129162.

    Rutkowski, Jan, 2003, “Does Strict Employment Protection Discourage Job Creation?: Evidence from Croatia,World Bank, Mimeo.

    Schneider, Friedrich, 2002, “The Size and Development of the Shadow Economies and Shadow Economy Labor Force of 22 Transition and 21 OECD Countries: What do we really know?,Institute of Public Finance, Zagreb.

    Schneider, Friedrich and Enste, Dominik, 2000, “Shadow Economies: Size, Causes, and Consequences,Journal of Economic Literature, Vol 108, pp. 77114.

    Tanzi, Vito, 1999, “Uses and Abuses of Estimates of the Underground Economy,Economic Journal, Vol 109, no. 456, pp. 338340.

    Thomas, James, 1999, “Quantifying the Black Economy: ‘Measurement without Theory’ Yet Again?,Economic Journal, Vol 109, no. 456, pp. 381389.

    Tokman, Victor, 1990, “The Informal Sector in Latin America: 15 Years Later,” InThe Informal Sector Revised, Center Seminars, OECD, Paris.

    World Bank,2002, “Transition: The First Ten Years. Analysis and Lessons from Eastern Europe and the Former Soviet Union,Washington, D.C.

STATISTICAL APPENDIX
Table A1.Croatia: GDP by Expenditure Category, 2000-05
200020012002200320042005
Proj.Proj.
(Percentage changes)
Real GDP2.94.45.24.33.74.1
Domestic demand-0.35.410.62.03.73.2
Consumption3.62.05.43.22.93.3
Private 1/4.24.47.54.13.54.5
Government 2/2.0-4.2-0.3-0.40.6-1.4
Gross fixed capital formation-3.87.112.016.85.85.4
Private 1/10.05.312.411.58.68.7
Government 2/-32.913.110.942.2-4.9-8.6
Exports12.08.63.118.23.94.5
Imports3.710.113.911.03.82.8
(Percentage contributions)
Real GDP2.94.45.24.33.74.1
Domestic demand-0.35.711.32.24.03.5
Consumption3.01.74.42.52.32.5
Private 1/2.52.74.52.52.22.7
Government 2/0.5-1.0-0.1-0.10.1-0.2
Gross fixed capital formation-0.91.52.74.01.51.5
Private 1/1.60.92.12.31.81.9
Government 2/-2.50.60.61.7-0.3-0.4
Change in inventories 3/-2.42.54.2-4.30.2-0.5
Net foreign demand3.2-1.3-6.12.1-0.30.6
Exports5.14.01.58.52.12.4
Imports-1.9-5.2-7.6-6.5-2.4-1.8
(Percentage change in implicit deflators)
GDP4.74.02.93.22.73.0
Consumption4.73.81.82.32.63.0
Private5.54.71.91.42.22.8
Government2.81.71.35.74.13.7
Gross fixed capital formation4.83.86.53.23.03.1
Exports10.93.30.21.52.22.4
Imports10.13.2-0.20.92.02.3
Nominal GDP152,519165,639179,390193,067205,747220,636
Sources: Croatian National Bank, Ministry of Finance, Central Statistics Bureau, and staff estimates
Table A2.Croatia: Trends in Industrial Production, 1996-2004(Industrial production by main industrial groupings, 2000=100)
Total IndustryEnergyIntermediate

Goods, Except

Energy
Capital

Goods
Durable

Consumer

Goods
Nondurable

Consumer

Goods
199690.077.395.691.273.690.0
199796.290.593.897.296.4100.6
199899.793.897.498.594.7104.9
199998.3102.596.493.3103.998.8
2000100.0100.0100.0100.0100.0100.0
2001105.8100.7104.7117.9101.7107.7
2002109.499.9110.4121.997.8112.1
2003114.8104.3115.5121.1102.4121.1
1996
Q187.385.090.683.871.385.3
Q289.469.397.198.771.086.4
Q388.569.996.892.776.389.3
Q494.985.198.089.675.599.0
1997
Q189.798.685.387.490.890.8
Q295.483.095.898.3108.4100.2
Q394.177.787.893.390.1105.6
Q4105.3102.5106.2109.696.3105.8
1998
Q195.4101.992.695.493.594.7
Q2100.378.0104.1106.996.5104.0
Q3102.487.396.299.895.5115.7
Q4100.9107.896.892.293.5105.0
1999
Q192.0120.584.981.791.189.5
Q299.992.8103.393.0100.9100.7
Q397.787.596.197.3100.8102.2
Q4103.7109.0101.7101.3122.6102.9
2000
Q195.4118.194.579.399.887.8
Q2101.988.3106.0110.9106.5103.0
Q3100.287.996.3111.991.9107.2
Q4102.5105.7103.397.9101.8101.8
2001
Q1100.6114.697.8104.2110.595.4
Q2107.988.9111.2131.2108.9111.1
Q3106.190.3102.3123.590.4114.9
Q4108.7108.9107.6112.796.8109.5
2002
Q1102.4109.4101.7109.097.899.0
Q2110.287.9115.5130.8103.0114.5
Q3110.491.4107.8130.289.9119.6
Q4114.5110.7116.5117.4100.7115.5
2003
Q1107.2116.0106.7105.4101.8106.4
Q2116.892.7121.1134.9107.9125.0
Q3116.195.2113.1128.893.8129.6
Q4119.2113.5121.2115.5106.0123.5
2004
Q1113.2115.3116.2117.1110.5110.2
Source: Central Bureau of Statistics.
Table A3.Croatia: Price Developments, 1996-2004
Consumer PricesProducer Prices
Rate of GrowthRate of Growth
Index

Dec. 1994=100
Previous

Period
Same Month

Previous Year
Index

Dec. 1994=100
Previous

Period
Same Month

Previous Year
1996105.63.5101.51.4
1997109.43.6104.02.5
1998115.65.7102.8-1.2
1999120.44.1105.52.6
2000127.96.2115.79.6
2001134.24.9119.83.6
2002136.51.7119.4-0.4
2003138.91.8121.61.9
2001
Jan132.10.416.75121.90.918.20
Feb132.80.516.88120.9-0.848.30
Mar132.5-0.206.05120.4-0.435.50
Apr134.41.426.81120.60.215.10
May135.60.907.25120.70.105.20
Jun135.3-0.204.94120.7-0.014.50
Jul134.0-0.993.82120.1-0.494.00
Aug134.90.704.86118.9-1.003.40
Sep135.20.203.84119.50.483.00
Oct134.5-0.503.21119.50.062.10
Nov134.4-0.102.76117.8-1.48-2.00
Dec134.90.402.55117.1-0.62-3.10
2002
Jan136.21.003.15118.71.43-2.60
Feb136.1-0.102.53117.5-1.05-2.80
Mar136.10.002.74117.60.09-2.30
Apr136.50.301.60118.91.13-1.40
May137.20.491.19119.30.30-1.20
Jun136.4-0.590.79119.50.19-1.00
Jul136.0-0.301.50120.40.710.20
Aug135.8-0.100.70119.7-0.510.70
Sep136.40.400.89121.01.071.30
Oct136.60.201.60120.3-0.640.60
Nov136.90.201.90119.5-0.601.50
Dec137.50.391.89119.70.162.30
2003
Jan138.10.491.38122.22.032.90
Feb138.40.191.68120.7-1.242.70
Mar139.10.482.17123.12.034.70
Apr138.7-0.291.57122.2-0.702.80
May139.10.291.37121.4-0.671.80
Jun138.5-0.391.57121.50.091.70
Jul138.70.101.97122.00.421.40
Aug138.80.102.17122.10.082.00
Sep139.10.191.97122.50.281.20
Oct139.10.001.77120.3-1.810.00
Nov139.30.191.76120.60.300.90
Dec139.70.291.66120.90.261.00
2004
Jan141.10.962.14123.11.830.80
Feb140.9-0.141.80120.8-1.930.10
Mar141.00.091.40122.51.42-0.50
Apr141.30.201.90123.81.091.30
May142.40.782.40126.82.374.40
Source: Croatian National Bank.
Table A4.Croatia: Indices of Real Net Wages and Salaries Per Employee, 1999-2003 1/(1997=100)
19992000200120022003
Total116.6117.0118.9120.4122.7
A.Agriculture, hunting and forestry108.0111.4104.8108.0106.1
B.Fishing104.078.085.387.293.8
C.Mining and quarrying106.4116.3125.9122.7125.3
D.Manufacturing109.3113.3119.5122.1125.1
E.Electricity, gas and water supply115.5111.4110.8110.4114.4
F.Construction107.6102.0107.5116.8121.6
G.Wholesale and retail trade102.7106.8111.0116.9120.1
H.Hotels and restaurants111.2115.6120.3122.9127.6
I.Transport, storage and communication115.9118.9123.8128.4133.0
J.Financial intermediation117.0115.1119.3123.3121.7
K.Real estate, renting and business activities116.7112.9112.6111.8114.8
L.Public administration; social security135.3134.0124.7122.3125.7
M.Education129.1131.6132.6130.8133.5
N.Health and social work129.9133.0130.6126.5127.1
O.Other community, social and personal service activities110.4110.0111.1111.7115.3
Source: Central Bureau of Statistics.
Table A5.Croatia: Composition of Employment, 1999-2003(In thousands)
19992000200120022003
Total1,3491,3391,3521,3631,398
A.Agriculture, hunting and forestry 1/12311010610094
Active insured persons - private farmers9179767065
B.Fishing11112
C.Mining and quarrying88878
D.Manufacturing264256252247248
E.Electricity, gas and water supply2727282727
F.Construction7165667278
G.Wholesale and retail trade153154159165177
H.Hotels and restaurants4041414039
I.Transport, storage and communication8282828181
J.Financial intermediation2829292930
K.Real estate, renting and business activities4950525458
L.Public administration and defense; social security120122121118116
M.Education8082848587
N.Health and social work7472727173
O.Other community, social and personal service activities2931313336
P.Private households with employed persons
Q.Extra-territorial organizations and bodies
R.Other 2/199207220232246
Source: Central Bureau of Statistics.
Table A6.Croatia: Exports by Destination, 1996-2003 1/(In millions of U.S. dollars)
19961997199819992000200120022003
Total4,5124,1714,5414,3024,4324,6664,9046,164
Developed countries2,4782,2722,3812,4482,6632,8792,8493,797
EU countries2,3032,0742,1612,1102,4162,5262,5843,363
Austria198223247276292268366480
Belgium4138403143425143
Denmark465710111117
France8480102108126163159175
Italy9497878027759891,1051,1141,628
Netherlands6962535050474249
Germany839746767676632690612733
Sweden1316192236282346
Great Britain7067718076676372
Other35495485162105145121
EFTA countries41498014844493850
Norway34361134658
Switzerland3741413438423139
Other14312223
Other developed countries135149136189203303227384
Australia45754467
Japan267615364674
Canada8981010979
U.S.A.899789879010786164
Turkey139893891021
Other192317724513972109
Developing countries2,0341,8992,1651,8551,7691,7872,0552,367
Countries of former SFRY1,2191,2531,1671,0911,1891,3641,665
Bosnia and Herzegovina549649654546495561704892
FYR of Macedonia5977646459525970
Slovenia611506432454480426428511
Yugoslavia1727107149172191
Other and unclassified021
Countries of the former USSR1721981908975113114112
Other developing European countries191223247235563644
Czech Republic4046393129344046
Hungary5549524060578380
Poland5647464022202030
Slovakia2222221313151623
Other175988113
Developing Middle East countries6411352424273450
Developing Asian countries54308811931717051
Developing countries of North Africa3929
Developing other African countries270130376210262168214128
Developing countries in the Americas2424488546176616
Developing countries of Oceania00000000
Sources: Central Bureau of Statistics and the Fund staff estimates.
Table A7.Croatia: Tourism—Overnight Stays, 1996-2004(In thousands)
Overnight Stays
TotalDomesticForeign
199621,4554,90916,546
199730,3145,61724,697
199831,2875,28526,002
199926,5635,21521,348
200038,4065,09933,307
200143,4045,02138,384
200244,6924,98139,711
200346,6475,32141,326
2001
Jan25716394
Feb254140114
Mar353177176
Apr1,213246967
May2,0643491,714
Jun5,8265385,288
Jul13,1851,20911,976
Aug14,2421,32712,915
Sep4,5213674,154
Oct918223696
Nov301148153
Dec271134137
2002
Jan23815485
Feb274154120
Mar523176347
Apr1,021249772
May2,8923732,519
Jun5,6035145,088
Jul13,2571,17912,077
Aug14,6131,26313,350
Sep4,5873724,216
Oct1,106239867
Nov304168136
Dec275140134
2003
Jan23615482
Feb273161113
Mar382183198
Apr1,2832531,030
May2,5884262,162
Jun6,5995656,034
Jul13,0221,24211,780
Aug15,7341,34314,391
Sep4,6673934,274
Oct1,220257963
Nov304168136
Dec308155153
2004
Jan26717593
Feb319181138
Mar488213275
Apr1,3102841,026
May2,8713992,471
Source: Central Bureau of Statistics.
Table A8.Croatia: Imports by Origin, 1996-2003 1/(In millions of U.S. dollars)
19961997199819992000200120022003
Total7,7889,1048,3837,7997,8879,14710,72214,199
Developed countries5,2626,2615,8225,1995,1046,0366,9209,284
EU countries4,6255,4124,9804,4154,3685,2245,9848,032
Austria597709612558529631710940
Belgium10096110114115128155179
Denmark48626165637392117
France199293401393436398555749
Italy1,4211,7051,5001,2401,3111,6571,8502,581
Netherlands176170161142130164201273
Germany1,6021,8411,6161,4411,2981,5831,7422,219
Sweden117147109116112110130193
Great Britain225189176187180226218290
Other139200232160195254330490
EFTA countries179244231201186193211258
Norway2721393431394173
Switzerland144213181158151150166182
Other8101194543
Other developed countries457605611583550618726994
Australia17121168131419
Japan104139146138135143164245
Canada1749185336131640
U.S.A.213266278241239297309366
Turkey27312630234268124
Other79108133116110111156200
Developing countries2,5262,8442,5612,6002,7823,1123,8024,915
Countries of former SFRY8669429538087949411,1131,434
Bosnia and Herzegovina6313715611782127166231
FYR of Macedonia3442565255636774
Slovenia7697567226166277128261,051
Yugoslavia192331395377
Other and unclassified7
Countries of the former USSR253498407711672654114112
Other developing European countries571640572511892933
Czech Republic207208181148179209266353
Hungary193239212174184238318424
Poland5059637394111149213
Slovakia84816547615197141
Other38535068
Developing Middle East countries106186119862361632386
Developing Asian countries3012132502743034727391,067
Developing countries of North Africa269169
Developing other African countries1721985062459256
Developing countries in the Americas14317413415294121153179
Developing countries of Oceania00000000
Source: Central Bureau of Statistics.
Table A9.Croatia: External Debt, 1996-2004 1/(In millions of U.S. dollars, unless otherwise stated)
199619971998199920002001200220032004
March
1. Portfolio Investments1,4621,9552,0572,5713,1803,7324,5256,1246,296
Bonds1,4621,9552,0482,5543,1703,7044,5256,0836,252
Of which: London Club1,4621,4281,4051,3811,2551,106957796715
Money Market Instruments0091792704245
2. Other Investments3,8455,4977,6267,4077,8757,58510,89717,44517,903
2.1 Currency and Deposits4997906155384336341,9763,7453,772
2.2 Long Term2,9354,1686,5416,4436,7826,7698,74513,17213,566
A) Public Creditors1,8901,8672,3062,1582,2692,2302,6063,2843,227
1. International financial organizations6738511,0671,0331,1291,1661,3771,7651,728
a) IMF208232233197159122000
b) IBRD188295345396418469611773776
c) IFC0031297286132109103
d) EBRD108171251219297319375482468
e) EUROFIMA334372788683109125108
f) EIB13110813398745285158158
g) CEB42115243664118115
2. Governments and Government Agencies1,2171,0161,2391,1251,1411,0641,2291,5191,499
a) Paris Club1,014853885772687622630632593
b) Other202164354353453442600887906
B) Private Creditors1,0452,3014,2354,2854,5134,5396,1389,88810,339
1. Banks7361,8333,3023,3673,3983,4784,6808,0228,419
Of which: Guaranteed by government agencies192167198441635734686630609
2. Other Sectors3094689339181,1151,0611,4581,8661,920
Of which: Guaranteed by government agencies221828181410644
2.3 Short Term411539471426661182176528566
A) Public Creditors000000000
B) Private Creditors411539471426661182176528566
1. Banks2793702892474866244269285
Of which: Guaranteed by government agencies000000000
2. Other Sectors133168182180174120132259280
Of which: Guaranteed by government agencies000000000
Total (1+2)5,3087,4529,6839,97811,05511,31715,42123,57024,199
Sources: Croatian National Bank; and Fund staff estimates.
Table A10.Croatia: Consolidated General Government Fiscal Operations by Economic Category, 1998-2003 1/(In percent of GDP, GFS 1986 basis)
199819992000200120022003
Revenue and grants51.148.446.244.044.544.3
Current revenue50.948.346.143.944.544.3
Tax revenue46.944.142.140.540.540.2
Personal Income tax5.95.34.93.94.03.7
Social Security contributions14.113.813.313.012.312.4
Profits tax2.52.41.61.72.12.2
Real Estate Transactions tax0.60.50.50.40.30.3
Taxes on goods and services20.518.719.119.320.420.4
Value-added tax14.714.014.014.014.514.6
Excises4.34.44.85.05.55.4
Customs duties3.03.02.51.91.10.9
Other0.30.30.30.40.30.2
Non-tax revenue (incl. own revenues)4.04.24.03.44.04.1
Capital revenue0.00.00.00.00.00.0
Grants0.20.10.10.00.00.0
Expenditure and net lending54.656.652.750.749.650.6
Expenditure53.855.551.950.049.150.3
Current expenditure45.848.047.044.643.342.9
Expenditure on goods and services26.325.124.522.020.520.1
Wages excl. employer’s contributions11.912.812.911.610.810.9
Other purchases of goods and services14.312.311.610.49.79.2
Interest payments1.61.72.02.22.12.1
Subsidies and other current transfers18.021.120.520.520.720.7
Subsidies2.92.92.92.72.83.3
Current transfers15.118.217.617.817.917.4
Capital expenditure7.97.54.95.35.97.3
Lending minus repayments0.91.10.80.70.60.3
Consolidated general government balance-3.5-8.2-6.5-6.7-5.2-6.3
Primary balance-1.9-6.5-4.5-4.5-3.1-4.2
Sources: Ministry of Finance and staff estimates.
Table A11.Croatia: Consolidated General Government Financial Operations by Economic Category, 2002-03 1/(In percent of GDP, GFS 2001 basis)
20022003
Prel.
REVENUE46.346.4
Taxes28.227.9
Taxes on income, profits, and capital gains6.16.0
Payable by individuals4.03.7
Payable by corporations and other enterprises2.12.2
Taxes on property0.30.3
Taxes on goods and services20.420.5
o/w VAT14.514.6
Excises5.55.4
Taxes on international trade and transactions1.10.9
Other taxes0.30.2
Social security contributions14.014.2
Other revenue and grants4.04.2
EXPENSE46.446.5
Compensation of employees12.412.7
Use of goods and services5.54.9
Interest2.12.1
Subsidies2.83.3
Grants0.10.0
Social benefits20.119.8
Other expense3.43.7
Acquisition of non-financial assets (investment)4.45.9
Net lending0.60.3
OVERALL BALANCE-5.0-6.3
Sources: Ministry of Finance and staff estimates.
Table A12.Croatia: HBOR Operations by Economic Category, 1999-2003 1/(In percent of GDP, GFS 1986 basis)
19992000200120022003
Revenue and grants0.20.30.30.30.4
Revenue0.20.30.30.30.4
Current revenue0.20.30.30.30.4
Tax revenue0.00.00.00.00.0
Non-tax revenue0.20.30.30.30.4
Capital revenue0.00.00.00.00.0
Grants0.00.00.00.00.0
Expenditure and net lending0.50.60.91.01.4
Expenditure0.10.10.10.10.1
Current expenditure0.10.10.10.10.1
Expenditure on goods and services0.00.00.00.00.0
Wages and employer’s contributions0.00.00.00.00.0
Wages and salaries0.00.00.00.00.0
Other purchases of goods and services0.00.00.00.00.0
Interest payments0.00.10.10.10.1
Lending minus repayments0.40.50.80.81.3
Balance-0.3-0.3-0.6-0.7-1.1
Financing0.30.30.60.71.1
Foreign borrowing0.10.50.40.60.6
Domestic borrowing0.2-0.10.20.10.5
Sources: Ministry of Finance, HBOR, and staff estimates.
Table A13.Croatia: Debt Stock of Consolidated General Government, 1997-2003(In percent of GDP)
1997199819992000200120022003
Debt Stock26.725.733.039.340.139.841.5
Domestic12.511.012.514.715.816.717.1
External14.114.720.624.524.323.224.3
Guarantees Stock1.56.27.09.710.210.511.4
Domestic0.90.00.02.23.62.53.0
External0.66.26.97.46.68.08.2
Arrears Stock3.45.05.71.50.50.40.3
Total debt and contingent liabilities31.636.945.750.450.850.753.2
Sources: Croatian Central Bank, Ministry of Finance, and staff estimates.Note: Guarantees stock prior to 2002 based on data provided by Croatian Central Bank and stock from 2002 based on data provided by the Ministry of Finance with smaller differences in total stock and larger differences in distribution between domestic and external guarantees. Local government debt stock prior to 2002 was provided by Croatian Central Bank and from 2002 by the Ministry of Finance registering a generally higher level of local government debt.
Table A14.Croatia: Selected Public Enterprises, 2000-03 1/(In thousands of kuna unless otherwise specified)
2000200120022003
Croatian Railways
Operating balance-304211-426025-836546-779568
Net indebtedness3435508522768761121992647
Number of employees19182184281634515375
Croatian Electricity Company
Operating balance-439660-440758-1231389209
Net indebtedness65518037105711461051415915
Number of employees15905158491502514931
Croatian Forrest
Operating balance1226234290-6443-31195
Net indebtedness95254182871228276240528
Number of employees9908938696989234
Jadrolinija Shipping Company
Operating balance1634481522612619326
Net indebtedness40994850285265387175
Number of employees1661169317141759
Croatian Post
Operating balance-6957987512125691
Net indebtedness43166314022129910865
Number of employees125511226211934
Croatian Airlines
Operating balance-1705893433143112133250
Net indebtedness3178620020122568377
Number of employees8389019921032
Croatian Radio and Television Company
Operating balance-106316101094866707
Net indebtedness58721115485701940996
Number of employees350534873159
Croatian Insurance
Operating balance4448559069849583451074045
Net indebtedness0000
Number of employees2252222421362146
Total
Operating balance-4633631274536464679
In percent of GDP-0.30.80.3
Net indebtedness126865115542022393720
In percent of GDP0.80.91.3
Number of employees658026423061003
Sources: Ministry of Finance and staff calculations.
Table A15.Croatia: Deposit Money Banks’ Accounts, 1996-2004 1/(In millions of kuna; end-of-period)
20032004
1996199719981999200020012002Mar.Jun.Sep.Dec.Mar.
Assets
1. Reserves4,4105,0465,9088,98810,58915,00320,37319,99321,49223,67926,78430,014
1.1. In f/c4,4105,0464,2404,3535,0989,30613,34012,43913,51616,84520,10320,040
1.1. In kuna--1,6684,6355,4915,6977,0347,5557,9766,8346,6809,975
2. Foreign assets12,55016,18612,76312,40019,71032,80825,97826,95127,10131,46635,38335,176
3. Claims on central government 2/16,69315,23914,86416,26419,05520,06021,91822,93523,24322,50921,54421,096
3.1 Bonds arising from blocked f/c deposits8,2916,7145,8025,4204,4843,4202,4732,0471,9991,5181,532994
3.2 Big bonds2,4382,2922,1031,3221,4761,659
3.3 Other claims8,4028,5249,06210,84514,57116,64019,44420,88821,24420,99120,01220,102
4. Claims on other domestic sectors33,69048,59259,59755,40060,36474,28496,218101,018102,609105,689110,374111,940
4.1 Claims on local government1453096549061,1751,2801,4221,3071,2791,2741,5631,580
4.2 Claims on enterprises26,92935,48741,22535,24435,89142,88251,72353,02352,02152,17253,81054,823
4.3 Claims on households6,61512,79617,71719,25023,29830,12243,07346,68749,30952,24355,00155,537
5. Claims on other banking institutions--04569170219214209456432600
6. Claims on other financial institutions1402471941541622819151,3641,145941762652
Total (1+2+3+4+5+6)67,48385,30993,32693,251109,949142,606165,622172,475175,799184,739195,278199,479
Liabilities
1. Demand deposits7,0078,4247,8097,89111,38615,18121,16619,97322,18822,07123,31521,559
2. Savings and time deposits3,3875,5995,6845,3987,65110,21313,00115,05715,82618,26318,37119,678
3. Foreign currency deposits21,81731,27837,97136,96646,90271,83772,05574,06971,10475,41676,03574,070
4. Bonds and money market instruments128134154437478318216154263643598396
5. Foreign liabilities12,46713,80716,17717,20917,81021,85835,02337,45740,45641,44249,93252,252
6. Central government and funds’ deposits1,7216,8757,2985,8296,7305,6356,0955,5165,2535,2695,2835,219
7. Credit from central bank268341,0491,1393291718141434396914
8. Restricted and blocked deposits8,2245,8524,1963,4342,5501,6011,6801,7861,8581,9391,7092,037
Of which: Households’ blocked f/c deposits7,1714,5743,4192,7431,695770319258242177168111
9. Capital accounts15,44117,02719,78621,97524,95325,45526,32326,52626,12026,80927,39027,493
10. Other items (net)-2,977-3,720-6,797-7,026-8,839-9,508-9,956-8,076-7,283-7,456-8,324-3,239
Total (1+2+3+4+5+6+7+8+9+10)67,48385,30993,32693,251109,949142,606165,622172,475175,799184,739195,278199,479
Source: Croatian National Bank.
Table A16.Croatia: Deposit Money Banks’ Credit and Deposit Rates, 1996-2004 1/(Monthly weighted average; in percent, annualized)
On CNB BillsInterest Rates on Credits in KunaInterest Rates on Credits in Kuna

Indexed to f/c
Interest Rates on Credits in f/cInterest Rates on Deposits in KunaInterest Rates on Deposits in Kuna

Indexed to f/c
Interest Rates on Deposits in f/c
35 days

(In percent)
1996 Dec8.018.4618.9719.504.159.465.09
1997 Dec8.014.0614.4013.614.357.634.77
1998 Dec9.516.0613.046.954.117.473.98
1999 Dec10.513.5412.536.754.276.624.23
2000 Jan10.515.3212.766.654.324.024.18
Feb10.511.6712.856.634.276.193.95
Mar10.412.9412.176.934.106.813.96
Apr9.814.5912.285.324.036.363.81
May9.112.5212.186.983.916.003.83
Jun8.013.4811.697.263.596.753.83
Jul7.811.4611.305.723.346.403.78
Aug6.99.9011.216.033.426.433.77
Sept6.810.7311.646.533.476.673.59
Oct6.710.9211.606.233.485.773.53
Nov6.710.9011.346.573.575.643.51
Dec6.710.4510.747.703.405.543.47
2001 Jan6.610.8110.267.833.455.193.13
Feb6.610.8910.276.483.605.223.27
Mar6.68.989.826.803.605.643.26
Apr6.48.999.816.833.545.403.13
May6.39.3210.347.153.325.943.09
Jun5.59.8810.156.803.185.692.98
Jul-9.399.316.503.045.292.93
Aug4.19.279.646.513.114.632.96
Sept5.09.469.816.443.104.982.83
Oct5.08.539.375.933.064.582.75
Nov4.59.569.685.612.994.402.59
Dec3.49.519.295.942.764.582.60
2002 Jan3.715.289.558.262.482.992.72
Feb3.414.289.287.762.323.322.62
Mar-13.479.216.202.022.892.62
Apr3.013.428.196.381.943.762.60
May2.713.448.637.481.972.782.57
Jun2.212.788.216.711.913.392.58
Jul1.911.898.126.481.753.592.59
Aug2.012.357.996.551.773.442.59
Sep2.011.818.545.791.713.392.56
Oct2.012.548.046.181.673.622.52
Nov2.111.918.296.461.583.582.54
Dec2.110.918.255.911.552.922.55
2003 Jan2.111.268.096.191.613.612.54
Feb2.111.438.556.331.643.302.50
Mar2.211.308.415.701.443.612.37
Apr2.211.418.036.551.403.522.36
May2.311.588.074.601.352.982.26
Jun2.411.557.685.841.373.612.24
Jul2.511.158.054.741.363.252.22
Aug2.512.087.966.191.503.142.17
Sep2.611.718.124.771.793.402.22
Oct-12.008.095.731.703.372.20
Nov-12.007.395.581.503.252.14
Dec-11.457.075.621.663.482.22
2004 Jan-12.127.005.261.773.672.46
Feb-12.427.996.001.893.782.38
Mar-11.767.484.581.983.702.38
Source: Central Bureau of Statistics.

Prepared by Tetsuya Konuki.

EPL index is a weighted average of 22 indicators which represents the degree of restrictions to hire and dismiss workers. It takes values from one to six, and the higher the value the stricter the employment protection regulations.

See Rutkowski (2003) for detailed discussions on labor market performance in Croatia.

Rutkowski (2003) presents cross-country comparison of job creation and destruction among the CEECs.

The feature “Controversy: On the Hidden Economy” in Economic Journal (Vol. 109, No. 456, June 1999) documents the differing opinions of, e.g., Tanzi (1999), Thomas (1999), and Giles (1999).

See Schneider and Enste (1999) and Feige and Urban (2003) for illustrative examples.

Schneider and Enste (2000) provide an illustrative survey on this issue.

Business regulation index as of 2001, compiled by the Economic Freedom Network, is used as a measure of strictness of business regulations. It takes into account price controls, time required for new business entry, and the extent of irregular payments to business regulators. It ranges from 1 (most strict) to 10 (most liberalized).

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