Croatia's COVID-19 Crisis Management: from Well-Played Half-Time Towards Gradual Meltdown in the Second-Half

Croatia's COVID-19 Crisis Management: From Well-Played Half-Time Towards Gradual Meltdown in the Second-Half

Act 1: Plenković’s Government Well-Played Half-Time…

At the outset of the pandemic in March Croatia was on a steady course in terms of economic growth. Croatia was among the minority of EU member states that still managed to finish the first quarter of 2020 with a 0,3% growth, year on year. According to the Economic and Fiscal Policy Guidelines 2020-2022 Government expected real economic growth of 2,5% in 2020 and a continued reduction in the public debt to GDP ratio down to 68%, in line with its determination to proceed with an ambitious goal to adopt the euro in 2023.1 Notwithstanding the fact that during Plenković’s reign fiscal policy could have been even more counter-cyclical, which could have provided for even faster reduction in public debt, as well as the fact that Croatia proved as a laggard in implementing Country Specific Recommendations under the European Semester, Croatian economy benefited from several years of a relatively favourable external environment. Twin deficits (fiscal and current account) turned into surpluses since 2015 and Croatia’s external position improved markedly. Things were starting to look only sour at the end of February but nobody seriously expected what came with full force in the following months. After initial reluctance to opt for a national lockdown, which was also not unsual in comparison to other European peers, Croatian Government responded to the COVID-19 shock with one of the most stringest set of restrictions at the end of March among all EU-27 member states, based on the COVID-19: Government Response Stringency Index.2 Apparently, the main purpose of this approach had been to contain the virus prior to the Croatian parliamentary election that were held on 5th of July and prior to the start of tourist season, especially since the tourism has played such a significant source of growth over previous decade. This approach shaped the half-time score

1 Government of the Republic of Croatia, Gov't adopted Economic and Fiscal Policy Guidelines 2020-2022 (Government of the Republic of Croatia, 1 August 2020), https://vlada.gov.hr/news/gov-t-adopted-economic- and-fiscal-policy-guidelines-2020-2022/26538 2 Our World in Data, Coronavirus Government Response Tracker, https://www.bsg.ox.ac.uk/research/research- projects/coronavirus-government-response-tracker. of Croatia’s pandemic crisis management that looked very favourable due to low death and infections count. It seemed as if Croatia had managed to control the spread of a virus. At the end of May Prime Minister Plenković stated during his campaign trail that Croatia and Croatian Government have defeated the pandemic. The economic price was relatively high and Croatian economy suffered one of the sharpest downturns of all EU-27 member states. If we look at the percentage change of GDP compared with the same quarter of the previous year, only France, Italy and Spain performed worse than Croatia during the second quarter (Q2). Having said that, social cohesion was still kept by Plenković Government’s extensive furlough scheme that have led to one of lowest falls in employment rate in the EU, if we compare Q2 2020 data with that of Q4 in 2019.3 The aforementioned furlough scheme was financed by the state with approximately 10 billion kunas. These sums were paid out in the period from April till October, with almost 630.000 employees included in the scheme at one point in time. Additionally, out of 81,4 billion euros granted to 15 EU member states within SURE instrument (Support to mitigate Unemployment Risks in an Emergency) with the goal of supporting national short-term work allowance schemes, Croatia was granted 1 billion euros in favourable loans (one of the largest per capita allowances).4,5 The additional boost to macroeconomic and social stability came after both the ECB and the Croatian National Bank (CNB) had agreeded upon establishing a currency swap line in mid- April. This agreement allows for a bilateral exchange of Croatian kuna into the euro and vice versa to the tune of 2 billion euros. Exactly this manoeuvre has removed depreciation pressures from the Croatian kuna and calmed down financial markets. All of this was further reinforced by the fact that Croatia was admitted to the ERM II on 9th of July, which represents a milestone in the process of euro adoption.

3 Eurostat, Change in the employment rate by age group and country, https://ec.europa.eu/eurostat/statistics- explained/images/2/2e/Change_in_the_employment_rate_by_age_group_and_country_%28Q2_2020_compa red_to_Q4_2019%2C_in_percentage_points%29.png . 4 European Commission, Coronavirus: Commission proposes to provide €81.4 billion in financial support for 15 Member States under SURE (Brussels, 17 November 2020), https://ec.europa.eu/commission/presscorner/detail/en/ip_20_1496 . 5 This is almost 10 times the size of guarantees issued by the Croatian Parliament, which were indispensable for a successful launch of this EU-wide scheme. On top of that, Croatia managed to proceed with parliamentary election in early July that brought about a clear ruling majority. The new Croatian Government was formed subsequently in less than three weeks. Plenković’s slogan ‘Secure Croatia’ was well-accepted on behalf of the large swath of Croatian voters and many voters that are traditionally not in favour of the Croatian Democratic Union (HDZ) decided to reward Plenković Government’s crisis management. By having won surprising 37,3% of popular votes HDZ was able to claim 43,7% of seats in the Parliament.6 As compared to the ruling coalition’s composition also led by HDZ in the period between 2017 and 2020, the new coalition comprises even stronger HDZ as its backbone (HDZ currently commands 66 as compared to 61 MPs in the previous term). Together with two MPs from the ranks of Reformisti and HNS-Liberal Democrats, as well as 8 representatives of national minorities, both Plenković and HDZ enjoy significantly more leeway as compared to previous years. This time around there was simply no excuse for postponing the most pressing structural reforms in the wake of elections since less heterogeneity in terms of government’s composition opens up a space for an ambitious reform agenda. All of this invoked a careful optimism on behalf of many commentators and analysts. Therefore, despite some bumps in the road, everything looked quite promising at the end of July, especially when European Council conclusions on 21st of July made clear that Croatia was allocated a record-breaking sum of 22 billion euros within the next Multiannual Financial Framework 2021-2027 and Next Generation EU programme, the largest sum relative to 2019 output size of any EU member state.7 Having secured EU’s strong financial backing in the ensuing years, Plenković’s Government was able to put all bets on the swift economic recovery propelled by much hoped tourist revival.

6 Državno izborno povjerenstvo, Konačni rezultati izbora, https://www.izbori.hr/sabor2020/rezultati/1/ . 7 Cinzia Alcidi, Daniel Gros and Francesco Corti, Who will really benefit from the Next Generation EU funds? (Brussels: CEPS, 5 October 2020), https://www.ceps.eu/ceps-publications/who-will-really-benefit-from-the- next-generation-eu-funds/ . Act 2: Almost Complete Meltdown in the Second-Half

Unfortunately, in spite of a very promising half-time score with regard to mitigating the impact of COVID-19 shock, the second-half produced the total unravelling of Government’s pandemic approach. In the week before 4th of December Croatia had the fifth largest number of COVID-19 deaths per one million population. At the same Croatia was ranked 31st in terms of cumulative deaths per million population since the pandemic outbreak and it continued its upward climb from the middle of the global distribution during summer months.8 As of this writing, Croatia still had a slight advantage relative to Europe when it comes to Case Fatality Rate (CFR).9 However, this gap has consistently and rapidly narrowed during autumn months.10 Besides suffering a significant death toll, Croatia was also not spared from bad economic news. Croatia was the worst performer if we look at GDP figures in the third quarter (Q3) of 2020, a drop of almost 10%. While France, Italy and Spain bounced back strongly according to the percentage change of their output over the previous quarter, Croatia performed very modestly. EU’s GDP recorded growth rate to the tune of 11.6%, compared to Croatia’s 6.9%. Sadly, despite the fact that the negative percentage change11 in nights spent at tourist accommodation establishments by residents/non-residents has been significantly lower in comparison to other tourism powerhouses such as Italy, Spain and Greece at the height of the tourist season, one can regret that the overall result has not been even better for August, September and October.12 If Croatia, Serbia and Hungary had the strictest restrictions in late March, by the end of August Croatia haphazardly embraced the Swedish approach since easing started in May.

8 Statista, Coronavirus (COVID-19) deaths worldwide per one million population as of December 4, 2020, by country, https://www.statista.com/statistics/1104709/coronavirus-deaths-worldwide-per-million-inhabitants/. 9 The Case Fatality Rate (CFR) is the ratio between confirmed deaths and confirmed cases. 10 Our World in Data, Case fatality rate of the ongoing COVID-19 pandemic, https://ourworldindata.org/coronavirus . 11 Compared to corresponding period of the previous year. 12 Eurostat, Percentage change (compared to corresponding period of the previous year) in nights spent at tourist accommodation establishments by residents/non-residents – monthly data, https://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=tin00172&plugin=1. However, unlike Sweden, in the months from July to November Croatian Government tolerated large social gatherings such as weddings or night clubs without any clear limitation on the number of attendees.13 Since the disease outbreak Croatia has remained one among the European countries with the lowest number of COVID-19 tests per 1000 people.14 Even though Plenković’s Government opened up Croatia to the mass influx of tourists in July, Croatia did not require mandatory PCR tests for foreign entrants to country, which could have significantly reduced the transmission. In terms of using sophisticated technology to combat the pandemic, Croatia neither used thermographic cameras on its borders nor demanded obligatory use of the government-sponsored STOP COVID-19 app in designated public spaces. Furthermore, Croatia introduced fines for citizens who do not wear protective masks indoors or who host large social gatherings contrary to the prevailing epidemiological measures only in December, when it was already too late. In combination with relatively ambiguous and incoherent epidemiological standards, that were too often communicated, interpreted, enforced and internalised selectively on behalf of the National Civil Protection Headquarters and Plenković’s Government, Croatia regrettably failed to contain the virus. At the end of March 94% of Croatians endorsed pandemic-related measures introduced by the National Civil Protection Headquarters. Furthermore, 65% of citizens thought that Croatia was performing better in the fight against the deadly virus as compared to other European countries.15 This should be contrasted with the fact that a significant share of Croatian citizens lost confidence in the National Civil Protection Headquarters at the beginning of

13 Swedish approach until November always rested on restricting social gatherings up to 50 attendees and it still rests on the strong cultural trait of keeping physical distance between people that prevents the rapid virus transmission. 14 Our World in Data, Total COVID-19 tests per 1,000 people, https://ourworldindata.org/grapher/full-list- cumulative-total-tests-per-thousand-map?stackMode=absolute&time=2020-11-14&region=World . 15 Dnevnik.hr, Istraživanje Dnevnika Nove TV: Vlada ima gotovo nezabilježenu potporu građana u borbi protiv epidemije koronavirusa (Nova TV, 28 March 2020), https://dnevnik.hr/vijesti/koronavirus/istrazivanje- dnevnika-nove-tv-vlada-ima-nezabiljezenu-potporu-gradjana-u-borbi-protiv-koronavirusa---599459.html . December. 37,8% of respondents did not have confidence in the latter institution’s work while 38,1% deemed that the pandemic measures had been too lax.16 All of the aforementioned events and processes gradually led to the premature end of tourist season due to massive exodus on behalf of Austrian, Slovenian and German tourists that make up the bulk of foreign visitors to Croatia, and who were either regulary warned by their own governments to avoid travelling to Croatia as a high-risk destination or were subjected to testing/quarantine measures upon returning back home. This is best observable in the Q3 GDP data compared to the same quarter in previous year. Exports of goods fell by only 3% while exports of services dropped by staggering 45,3%. For a more detailed overview of Croatia’s GDP statistics please consult Table 1.17 The crisis also had a devastating impact on public finance which can be discerned from Table 2. Table 1

Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Final consumption expenditure 2,9 3,8 1,8 -10,1 -5 Households 3,1 4 0,7 -14 -7,5 General government 2,7 3,3 4,7 0,5 1,5 Gross fixed capital formation 5 4 3,1 -14,7 -3 Exports of goods and services 7,9 6,9 -2 -40,7 -32,3 Goods (fob) 9 1,7 1,4 -10,4 -3 Services 6,9 16 -8,1 -66,9 -45,3 Imports of goods and services 5,2 2,5 -5 -27,5 -14,1 Goods (fob) 5,6 2,8 -0,9 -24,5 -9,9 Services 3,5 1,5 -23,5 -42,2 -33,3 Gross domestic product 2,8 2,3 0,2 -15,4 -10 Source: Croatian Bureau of Statistics

16 RTL.hr, Veliko istraživanje RTL-a: Kome građani najviše vjeruju? (RTL.hr, 5 December 2020), https://www.rtl.hr/vijesti-hr/video/vijesti/420620/veliko-rtl-ovo-istrazivanje-kome-se-u-pandemiji-najvise- vjeruje-podrzavaju-li-gradjani-zatvaranje-kafica-i-teretana-i-jesu-li-promijenili-misljenje-o-cijepljenju/ . 17 Croatian Bureau of Statistics (First Release), First Quaterly Gross Domestic Product Estimate Thirs Quarter of 2020 (DZS, 27 November 2020), https://www.dzs.hr/Hrv_Eng/publication/2020/12-01-01_03_2020.htm . Table 2

2019 2020 2021 2020/2019 2021/2020 Total revenue (bn kunas) 139,92 131,102 147,262 -13% 10,40% (e) Total expenditure (bn kunas) 139,869 155,891 157,926 11,50% 1,30% (e)

Unemployment rate 6,6% 9,1% 9,2% (e)

General government fiscal 0,20% -7,80% -3,10% balance ( % of GDP) (e)

Gross public debt to GDP (%) 72,80% 87,30% 85,30% (e) (e) Source: Government of the Republic of Croatia, Croatian National Bank

Lenient enforcement of already inadequate epidemiological measures finally ushered into ‘lockdown light’ at the end of November that will sap Christmas spending. Bars, restaurants, sport facilieties and gyms have been closed, while all Christmas fairs have been banned. In the end, Plenković Government’s gamble involved a choice between being stringent today and being forced to be more stringent tomorrow. Neither economy nor human lives have been saved as a consequence of this approach, which could have been done more successfully by both targeted lifting and the imposition of restrictions in the period between May and December. Credible and ex ante benchmarks such as the number of infected persons, the number of deaths and the number of critical patients were set aside in shaping Croatian Government’s and National Civil Protection Headquarters’ communication with the general public, as well as in designing a coherent and forward-looking rulebook. It is still unclear what is the precise explanation for the epidemiological situation to spin out of control18. However, Government’s premature complacency, incompetency and reactive stance to let the crisis be always one step ahead, seems to present the most important part of the explanation.

18 One does not need to look for an evidence of complacency too far away. As of this writing, besides Prime Minister Plenković, there are also five ministers who got infected with COVID-19 (precisely one third of the Croatian Government). Act 3: What’s in the cards for Croatia in the post-pandemic era?

2020 represents a true test for Croatia’s economic resilience and policy effectiveness. Regardless of the fact that new vaccines are on the horizon, the first short-term challenge for Plenković’s Government is to restore some of the damaged trust in order to administer vaccines more easily and swiftly. There is still much scepticism towards new vaccines and 57% of respondents recently said that they have no intention of receiving a vaccine.19 Having said that, large scale immunisation will crucially depend on the prominent figures publicly receiving vaccine shots. This fits into the recent findings by the ECFR that the trust that citizens have in the government guarantees their trust in experts – and not the other way.20 After sucessfully overcoming this first obstacle, Croatia will have to set far more ambitious reform targets and muster enough of a political will for their effective implementation. A significant portion of Croatia’s recovery will hinge on favourable external environment, primarily EU’s recovery, since Croatia is a small and open economy.21 Over time, the EU market has grown in importance for Croatian exporters (see Figure 1).

19 Telegram, Najnovije istraživanje; 57 posto Hrvata za sada se ne namjerava cijepiti protiv Covida-19 (Telegram, 16 November 2020), https://www.telegram.hr/zivot/najnovije-istrazivanje-57-posto-hrvata-za- sada-se-ne-namjerava-cijepiti-protiv-covida-19/ . 20 Ivan Krastev and Mark Leonard, Europe’s Pandemic Politics: How the Virus has Changed the Public’s Worldview (Berlin: European Council on Foreign Relations, 2020), https://ecfr.eu/publication/europes_pandemic_politics_how_the_virus_has_changed_the_publics_worldview . 21 However, it is still less dependent on trade as compared to all other EU’s post-socialist member states except for Romania. Unfortunately, in the long run less trade and inclusion into regional value chains creates underdevelopment. Figure 1

Croatia's Export Share With Selected Trade Partners 4,50% 70,00%

4,00% 68,00%

66,00% 3,50% 64,00% 3,00% 62,00% 2,50% 60,00% 2,00% 58,00% 1,50% 56,00% 1,00% 54,00%

0,50% 52,00%

0,00% 50,00% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

China USA Russia Turkey UK EU (right axis)

Source: World Integrated Trade Statistics

Nevertheless, if Croatian Government is seriously interested into taking the rudder of Croatia’s economic ship and being proactive and effective in shaping its policies instead of only being shaped by external circumstances, then there is simply no political alternative to ambitious and vigorous reform agenda. The only unpalatable alternative is the prolonged recovery that will incapacitate economy’s both real and structural convergence, as well as accelerate the already worrisome trend of emigration and population loss (see Figure 2).

Figure 2

Emigration, immigration and general population change 50000 4350000

45000 4300000 40000

35000 4250000

30000 4200000 25000 4150000 20000

15000 4100000 10000 4050000 5000

0 4000000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Immigration (thousands) Emigration (thousands) Population (right-axis)

Source: Eurostat

Furthemore, this could also slow down the process of euro adoption. As already stated, both the absolute and the relative increase in public debt will significantly increase in 2020. However, the biggest obstacle to the effective euro adoption is not to be found in the lack of nominal convergence (convergence in nominal variables like inflation, interest rates, budget deficit, public debt and exchange-rate stability). In several years these variables will stabilise or be on a gradual downward trajectory. Nevertheless, real convergence in GDP per capita between Croatia and the EU won’t be within the realm of possible/sustainable unless successive Croatian Governments adopts a steady course of structural convergence, a process that engenders structural reforms essential for enhancing country’s productivity and competitiveness (e.g. education, health and pension system reforms, public administration and judiciary reforms, as well as bloated SOE (state-owned enterprise) sector privatization and professionalisation). So far, real convergence or β-convergence results for Croatia have been disappointing (β-convergence postulates faster economic growth for lower income countries as compared to their more developed peers due to diffusion of technology and of efficient business models). In the EU, there were already several prominent episodes of unsustainable nominal and real convergence such as those observable in Greece and Italy during the last eurocrisis.22 Figure 3 shows that Croatia has fared significantly worse in terms of real convergence as compared to other post-socialist member states. The main reason is to be found in the fact that institutional quality that is so decisive for economic prosperity has been largely absent during the last two decades, as shown in Figure 4.

Figure 3

β-convergence or real convergence in EU member states 70 IE

60 2000 - 50 LT RO EE 40 LV PL 30 BG SK HU CZ HR MT 20 SI 10 DK DE 0 PT ESCY AT 20 40 60 80 100 UK 120 BE 140 -10 FI EL FR SE NL GDP GDP percapita of as EU %,change2019 -20 IT

-30 R² = 0,4144 GDP per capita pps as of EU %, 2000

Source: Eurostat; author's own calculation

22 More importantly, during the first few years of their EMU membership those countries enjoyed both real and nominal convergence paired with pronounced structural divergence. This mainly referred to their sharp deterioration in productivity growth, diverging macroeconomic indicators such as foreign and domestic debt and lingering institutional sclerosis (lack of judicial reforms and privatizations, onerous business regulations and inefficient public administration). Table 4

Institutional quality is decisive for economic prosperity (2000 - 2018) 2 FI 1,8 SE DK NL 1,6 AT DE UK IE 1,4 BE R² = 0,7534 1,2 MT FR EE PT 1 CY SI ES LT HU CZ 0,8

0,6 LV IT PL SK EL

0,4 HR Worldwide Governane Indicators Index 0,2 BG RO 0 0 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000 Real GDP per capita

Source: Eurostat and Worldwide Governance Indicators, author's own calculation23

Croatia as the newest EU member state has the historic opportunity to catch up a train of real economic convergence by pairing both rapid euro adoption and the successful absorption of 22 billion euros over the next decade. Those 22 billion euros allocated to Croatia are composed of Recovery and Resilience Fund (RRF) (9.4 billion) and the long-term budget (12.7 billion). Croatia will receive the total of 5.9 billion of EUR, while the additional sum will be extended as loans to the country. This is one of the highest figures among the EU members states if one compares the size of the allocation and Croatia’s economic output. However, the European Council conclusions also stated that proposed reforms will be a necessary precondition for tapping into the funds. What is still unknown is the extent of

23 The WGI index represents a composite governance index calculated by multiplying each country’s yearly score in every category with equal weight. This procedure is conducted across all six categories (rule of law, regulatory quality, control of corruption, government effectiveness, political stability and voice and accountability). We add this core for every subcategory, for every given year and country, in order to produce a cumulative score which proxies the overall quality of governance. In the final step, we calculate the meand for both variables for the given timeframe. planned conditionality (structural reforms and the rule-of-law stipulations), that might strongly impact the dynamics of EU funding. In that regard, there are two main reasons of why the promised money won’t work its magic on its own. The first one referrs to the still ongoing MFF 2014-2020 where Croatia is at the bottom of the list when it comes to spending EU funds (see Figure 5). Even more important, those percentages say nothing about the efficiency of that spending, especially since Croatia’s spending could have been more aimed at boosting human capital and R&D over the same period. Furthermore, that same spending has a mixed record of avoing corruption in many member states, especially those that lack high-quality institutions such as an independent and efficient judiciary or institutions to control corruption, which is still the case in Croatia.24 The second reason referrs to Croatia’s poor CSR implementation score under the European Semester.25

Figure 5

ESIF 2014-2020: Financial implementation (% spent out of total national allocation) by MS

90% 77% 80% 69%68% 70% 66%65% 60% 56%55%55%55%55%55%54% 50%50%50%50% 49%47%47%47% 50% 46%44% 40%40%40%39%38% 40% 35% 30% 20% 10%

Italy

Spain

Malta

Latvia

France

Cyprus

Poland

Ireland

Austria

Greece

Croatia

Finland

Estonia

Czechia

Sweden

Belgium

Bulgaria

Slovakia

Slovenia

Hungary

Portugal

Romania

Denmark

Germany

Lithuania

Netherlands Luxembourg

UnitedKingdom Source: Open Data Portal for the European Structural Investment Funds (ESIF)

24 William Bartlett, Kristijan Kotarski and Frank Bönker (2020) Croatia Report - Sustainable Governance Indicators, Gütersloh: Bertelsmann Stiftung. https://www.sgi-network.org/docs/2020/country/SGI2020_Croatia.pdf . 25 We calculated the implementation score by adding up only Country Specific Recommendations whose fulfillment was full, substantial or there was some progress, as opposed to instances where there is only limited or no progress at all. Figure 6

European Semester - CSR implementation score 35% 33,33%

30,23% 30%

25%

20%

15%

10% 7%

0% Milanović's Government Orešković's Government Plenković Governments 1&2

Source: Economic Governance Support Unit (EGOV) database; author's own calculation

Hence, the EU needs to design a conditionality mechanism that will prevent the emergence of a bureaucratic process that fosters bottom-up approach driven by special interests in EU countries.26 Independent of this process, Plenković’s Government needs to avoid labelling spending plans as ‘green, social and digital’ just in order to please the European Commision, since this will only allow for pay-outs with little benefits in terms of structural transformation. The newly adopted 2030 National Development Strategy (NDS) does not fit the purpose since it lacks ambitious targets, clear key performance indicators (KPI) and time trials. There are also two other major downsides to it. First, the 2030 NDS does not provide any reasonable course of action to reduce Croatia’s excessive reliance on the income stream from tourism. Croatia simply needs to hedge against potential volatility in tourism by creating a conducive institutional framework for other sectors to thrive. Second, the 2030 NDS

26 Guntram B. Wolff, Without good governance, the EU borrowing mechanism to boost the recovery could fail (Brussels: Bruegel, 15 September 2020), https://www.bruegel.org/2020/09/without-good-governance-the-eu- borrowing-mechanism-to-boost-the-recovery-could-fail/ . dedicates only three short paragraphs to fighting corruption and does not mention clientelism at all.27 If Croatia wants to become a successful EU member state and avoid remaining 26th least developed member of a club, Plenković Government needs to seriously rethink its existing approach and political arrangements, especially the skewed relationship between the big and inefficient state on the one hand, and fragile and underdeveloped private sector on the other (see Figure 7). Therefore, the NDS 2030 Strategy should only serve the short- term function of satisfying the formal criterion to obtain access to the EU funding. The currrent political equilibrium is very unfavourable to the long-term vision of development. Whether Croatia's political elite is ready to show ownership of the reform process and provide a new overarching vision is to be seen. What is certain is that it is quickly running out of time. If and until that moment comes, Croatians can only count that businesses which succeeded in spite of the current system such as Infobip, Nanobit and Rimac Automobili will provide more time, as well as a motivation to change to those willing to contest the grim reality.

27 The sum of subsidies, compensation of government employees and intermediate consuption totals on average 21% of GDP in the period from 2000 – 2018. Only Finland, Sweden and Denmark spend more on those three categories among EU-27 sample. Those countries enjoy far higher level of economic and political development. Hence, we can assess that those expenditures in Croatia do not fit into legitimate social democratic approach to public spending, but that their primarily serve the purpose of ‘selective inclusion’ of political clients (Kotarski and Petak (2020) When EU Political Convergence Fails in New Member States: Corporate and Party State Capture in Croatia and Czech Republic, Europe-Asia Studies, (forthcoming)).

Figure 7

Institutional development and public expenditure 55 DK

2018) FI - SE FR 50 BE AT

IT 45 HU HR SI DE LU EL NL PT 40 PL CZ MT ES EE UK BG SK CY

35 LV LT RO IE R² = 0,2998

Average Average generalgovernment expenditure, GDP % (2001 30 0 0,2 0,4 0,6 0,8 1 1,2 1,4 1,6 1,8 2 Average WGI index (2001-2018)

Source: Eurostat and Worldwide Governance Indicators, author's own calculation