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Economic Growth in Croatia: What Have We Learned? Report No. 48879- HR Public Disclosure Authorized CROATIA Croatia’s EU Convergence Report: Reaching and Sustaining Higher Rates of Economic Growth Public Disclosure Authorized (In two volumes) Vol. II: Full Report June 2009 Public Disclosure Authorized Europe and Central Asia Region Document of the World Bank Public Disclosure Authorized CURRENCY AND EQUIVALENT UNITS Currency Unit=Croatian kuna US$1 =HRK 5.6102 (As of April 30, 2009) FISCAL YEAR January 1 – December 31` WEIGHTS AND MEASURES Metric System ACRONYMS AND ABBREVIATIONS AAE Agency for Adult Education IEC International Electrotechnical Commission ADR Alternative Dispute Resolution ILAC International Laboratory Accreditation Cooperation AVET Agency for Vocational Education and ILO International Labor Organization Training CA Company Act IP Intellectual Property CARDS Community Assistance for Reconstruction, ISO International Organization for Standardization Development and Stabilization CEE Central and Eastern Europe OECD Organization for Economic Cooperation and Development CENLE European Committee for Electrotechnical LLL Life Long Learning C Standardization CES ??? MoSES Ministry of Science, Education and Sports CGPM General conference on Weights and MoELE Ministry of Economy, Labor & Measures Entrepreneurship ECA Europe and Central Asia MS&T Mathematics, Science & Technology FDI Foreign Direct Investment FE Fixed Effects NIS National Innovation System FINA Financial Agency PMR Product Market Regulation GDP Gross Domestic Product PPS Purchasing Power Standards GFCF Gross Fixed Capital Formation PPP Public Private Partnership GLS Generalized Least Squares R&D Research and Development GNI Gross National Income RE Random Effects GER Gross Enrolment Ratio REER Real Effective Exchange Rates GPI Gender Parity Index SMA Security Market Act HANFA Croatian Agency for Supervision of SME Small & Medium Enterprises Financial Services HEI ??? HP- Hodrick-Prescott Filter TFP Total Factor Productivity Filter HZMO Croatian Pension Insurance Institute UMIC Upper Middle Income Countries HZZO Croatian Health Insurance Institute VAT Value Added Tax IAF International Accreditation Forum VC Venture Capital ICA Investment Climate Assessment VET Vocational Education & Training ICS ??? WTO World Trade Organization ICT Information & Communication Technology ICMS Integrated Case Management System ZSE Zagreb Stock Exchange Vice President: Shigeo Katsu, ECAVP Country Director: Orsalia Kalantzopoulos, ECCU5 Sector Director: Fernando Montes-Negret, ECSPF Sector Manager: Lalit Raina, ECSPF Task Team Leaders: Paulo Guillerme Correa, ECSPF Sanja Madzarevic-Sujster, ECSPE ACKNOWLEDGEMENTS This report is the product of a collaborative process involving the Croatian Ministry of Finance and the National Competitiveness Council. The team would like to thank Mr. Ante igman (former State Secretary, Ministry of Finance), Mr. Zdravko Mari (State Secretary, Ministry of Finance) and staff at the Ministry of Finance and other line ministries for their comments and support at various stages during the preparation of this report. Early findings of the background work were shared with government and non-government officials, including key donor community representatives, during three workshops organized in the February-June 2008 period. The team is grateful for all the comments received. The World Bank team was led by Paulo Correa and Sanja-Madzarevic-Sujster. It comprised Allen Dennis, Chris Uregian, Doina Cebotari, Donato De Rosa, Gerald Ollivier, Jan Rutkowski, Jana Kunicova, Jean Louis Racine, Jorge Pena Izquierdo, Matija Laco, Naotaka Sawada, Nina Arnhold, Prathima Rodrigues and Smita Kuriakose. Background papers were prepared by Alvaro Escribano, Velimir Sonje, Ana-Maria Boromisa, Victor Gomes, Vedran Sosic, Sanja Crnkovic-Pozaic, Domagoj Racic, Arjan M. Lejour, Gerard Verweij and Bas ter Weel. Dubravka Jerman, Cristina Velazco-Weiss and Maureen Itepu provided editorial and administrative assistance. The report was undertaken under the guidance of Orsalia Kalantzopoulos, Country Director, Fernando Montes-Negret, Sector Director, and Lalit Raina, Sector Manager. Mark Dutz and Mark Thomas were the peer reviewers of the report. In addition, the team would like to thank Michael Edwards, Andras Horvai, Francisco Ferreira and Andrea Mervar for their comments, advice, and help throughout the course of this work. The responsibility for any data and/or opinion expressed in this paper remains exclusively that of the authors. CONTENTS 1. INTRODUCTION .................................................................................................................................................1 A. MACROECONOMIC SETTING ................................................................................................................................2 B. CONVERGENCE....................................................................................................................................................7 2. ECONOMIC GROWTH IN CROATIA: WHAT HAVE WE LEARNED?..................................................11 A. GROWTH DIAGNOSTICS .....................................................................................................................................11 Sources of Growth.................................................................................................................................................12 Can Croatia Achieve and Sustain Higher Growth Rates? .....................................................................................13 B. WHAT ARE CROATIA’S “GROWTH RESERVES”? ................................................................................................16 C. GROWTH SCENARIOS.........................................................................................................................................17 The Impact of the Lisbon Agenda: Results from the WorldScan CGEM..............................................................17 Growth Regression ................................................................................................................................................19 Estimating the impact of different TFP growth rates on economic convergence ..................................................21 3. INCREASING LABOR CONTRIBUTION: EMPLOYMENT AND HUMAN CAPITAL ....................23 A. LABOR MARKET DIAGNOSTICS .........................................................................................................................23 Raising Employment .............................................................................................................................................23 Demographic Challenge ........................................................................................................................................24 Why is labor participation so low in Croatia? .......................................................................................................26 What drives up the unemployment rate? ...............................................................................................................28 B. ADDRESSING THE SKILL GAP: VOCATIONAL TRAINING, TERTIARY EDUCATION AND LIFELONG LEARNING IN CROATIA .....................................................................................................................................................................35 Vocational education and training (VET)..............................................................................................................36 Higher Education in Croatia..................................................................................................................................42 Lifelong Learning..................................................................................................................................................45 4. INCREASING TOTAL FACTOR PRODUCTIVITY.....................................................................................49 A. IMPROVING ALLOCATIVE EFFICIENCY IN CROATIA ...........................................................................................54 What is hindering allocative efficiency in Croatia?...............................................................................................54 How can Croatia induce better allocative efficiency? ...........................................................................................60 Improving Product Market Regulations ................................................................................................................60 Complementary Measures Improving Entry and Exit conditions..........................................................................66 B. AVERAGE PRODUCTIVITY..................................................................................................................................69 The Impact of the Investment Climate on Average TFP .......................................................................................69 Addressing the Causes...........................................................................................................................................71 5. TRADE AND INNOVATION ............................................................................................................................85 A. LEVERAGING THE GLOBAL ECONOMY: THE ROLE OF INTERNATIONAL TRADE ................................................85 Deepening Trade Integration.................................................................................................................................85
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