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Financial Times
       Private debt overshadows Goldilocks scenario, by Eric Jansson, November 12, 2007
    Telecommunism" helps power stock market growth,
by Eric Jansson, November 12, 2007
    Investor comes full circle, by Eric Jansson, by Eric Jansson, November 12, 2007
    Crowds inflict profitable pain, by Eric Jansson, November 12, 2007
    A data conundrum prevents deeper analysis, by Eric Jansson, November 12, 2007

The Economist
    Stars and Soggy Bottoms, January 4, 2007
Judge or be Judged, February 16, 2006

Wall Street Journal
    Back in the Balkans, by Kyle Wingfield, October 25, 2007
    Croatian Spin Doctors, November 15, 2006

European Voice
Croatia's seaside socialism and crony capitalism, by Edward Lucas, July 27, 2007  


Financial Times

Private debt overshadows Goldilocks scenario

By Eric Jansson, Financial Times
Published: Nov 12, 2007

Working papers from the International Monetary Fund usually make dry reading. But one such paper has caused a splash in Zagreb, as campaigning kicks off in advance of the country's November 25 parliamentary election.
The IMF paper titled "Vulnerabilities in Emerging South-eastern Europe - How Much Cause for Concern?" published last month, argued that south-east Europe had begun to show imbalances similar to those seen in East Asia before financial crisis struck a decade ago.

In a tone more prescriptive than accusatory, the authors refrained from criticising individual governments in the region, which has experienced some of Europe's swiftest economic growth in recent years. Nonetheless, they highlighted acute imbalances in Croatia, which has a higher debt level as a percentage of GDP, and a higher current account deficit, than the East Asian average before that region's 1997 crisis, despite achieving slower GDP growth, 4.8 per cent in 2006.
With the highest external-debt-to-GDP ratio of any non-EU country in Europe and the greatest exposure to foreign currency loans, Croatia faces a growing risk of financial hiccups, the authors wrote: "The probability of a sudden stop increased between 2000 and 2006, especially in Croatia and Serbia. The probabilities are driven by the rising degree of euro-isation and the extent to which tradable consumption is 'financed' from abroad."

Ivo Sanader, the prime minister, and his finance minister, Ivan Suker, quickly brushed the critique aside. "There is no financial crisis. Croatia is servicing its debts," Mr Sanader said.

But the paper's assertions provide fresh ammunition to Croatia's main opposition party, the Social Democratic Party (SDP), which has made similar concerns central to its election campaign. Economic mismanagement under Mr Sanader's Croatian Democratic Union (HDZ) has threatened economic stability, Social Democrats say.
Ljubo Jurcic, the SDP's prime ministerial candidate and chief economic strategist, argues that Croatia's economy has immense capacity for growth, but that it has been wrongly managed. Citizens have grown accustomed to an inflated standard of living "based on household debt", he says.

The dispute sets Croatia on course for an election focused closely on economic issues.Mr Sanader's government has done much to bring Croatia more securely under the wing of the EU, with which the country began accession negotiations in 2005. He and his cabinet ministers describe their economic reform programme within the broad context of EU accession, emphasising a need to harmonise legislation with the acquis communautaire , the vast body of EU law. The HDZ portrays any challenge to this course as a potential risk to EU entry, which the Sanader government until recently promised could be achieved by 2009.

Yet the IMF paper warns against such approaches, asserting that the "EU halo effect" lowers perceived risk, sometimes unjustifiably.

The HDZ supports central bank measures aimed at limiting commercial credit growth. Its programme also includes paying down external debt, and the government has taken steps in this direction during the past year. Yet government claims that Croatia's external debt is shrinking exclude private-sector debt. Overall external debt rose from 30 per cent of GDP 10 years ago to 85 per cent last year. Central bankers predict it will rise to 86 per cent this year.

"External vulnerabilities have begun to appear and to create risks for stability," says Ljubinko Jankov, executive director of research and statistics at the Croatian National Bank, the central bank.

With financial markets experiencing a higher than usual degree of unpredictability amid a global "credit crunch", economists have begun focusing with new keenness on the price of borrowing, especially as Croatia has a growing share of short-term debts, which magnifies rollover risk.

"If there is a big global shock, it is for sure going to be a big problem for this whole region, including Croatia," Mr Jankov says.

Economists at Zagreb's European-owned banks continue to offer upbeat assessments, noting steady GDP growth, low inflation and the central bank's strict regulation of credit growth.

"Looking at credit default swap spreads there is no evidence of concern from investors and I, for a change, actually agree with Mr Suker that the current situation is stable," says Goran Saravanja, chief economist at Zagrebacka Banka, owned by Italy's UniCredit Group.

Mr Saravanja says both the SDP-led coalition that governed from 2000 until 2003, and the current HDZ government, pursued credible courses of economic reform after a decade of authoritarian rule.

The current government showed a willingness to tackle sensitive economic issues when it re-indexed pensions. Recent reforms won praise from the World Bank, which called Croatia the world's second best reformer for last year in its Doing Business 2008 report. Next year ministers must tackle economic restructuring at the state-owned shipyards and elsewhere.

Croatia is now entering an "interesting" phase, says Mr Saravanja. "We have to see how post-2000 Croatian economic policy stands up to a downturn in the economic cycle, and we have not seen that yet."

Beneath the debate over financial risk, other economic fundamentals may be at issue in the upcoming election. Mr Jurcic, though representing the traditionally centre-left Social Democrats, sometimes casts these in terms of "free market competition". He speaks of "preparing the atmosphere for tax cuts", including a 50 per cent cut on health care contributions.

Mr Jurcic's message that small businesses should be able to operate on terms equal to those enjoyed by the country's big companies strikes a chord with citizens who still feel cheated by Croatia's "tycoonisation", the local term for corrupt privatisation in the early post-communist period.

The HDZ is vulnerable to criticism from this angle, says Joel Anand Samy of the Adriatic Institute, a free-market thinktank. "In Croatia, crony capitalism is flourishing but not entrepreneurial capitalism, and it frustrates people," he says.
Damir Polancec, the deputy prime minister and HDZ candidate, suggests such criticism is overblown and that economic results speak for themselves, with GDP growth up to 6 per cent in the first half of this year. "A few years ago, one would become an entrepreneur because there was no alternative. Today, people are coming because of ideas, coming up with their own projects," he says.

In fact, few analysts expect significant policy changes after the elections, whoever wins. Mr Jurcic embraces some free market ideas, arguing that unproductive companies should have support withheld, and calling for a liberalised labour market. But he also praises former Yugoslav industrial performance and says that aggressive reforms are "politically impossible" in Croatia. Parts of the SDP's programme still carry a whiff of central planning, such as a plan to set up advisory "project teams" for industry.

Polls suggest voters are evenly split. Many have come to realise that with EU accession dominating the country's agenda, a new government led by either main party may struggle to leave an individualised mark on economic policy.

Financial Times

'Telecommunism' helps power stock market growth

By Eric Jansson, Financial Times
Published: Nov 12, 2007

Even by the dynamic standards of central and eastern Europe, Croatia's capital markets have lately been growing at an extraordinary pace.Nowhere has this been more evident than at the Zagreb Stock Exchange, a floorless exchange quartered in one of the capital's new glass office towers.

Within the past 18 months, the ZSE has risen out of obscurity to claim a place alongside exchanges in Warsaw and Prague as one of the few in the region to attract the attention of big fund managers worldwide. Trading in Zagreb is tiny when compared with big markets, but it is accelerating at a clip.

"At the beginning of the year, we had between 300 and 800 trades per day. Now, we have 3,000 per day, with a peak volume of 8,000," says Roberto Motusic, the ZSE's managing director.

Just a handful of big sales brought about this surge in trading, driven by both foreign and domestic demand.
The first of these was a prolonged bidding war last year for Pliva, a drugs company co-listed at the ZSE and London Stock Exchange, during which Barr Pharmaceuticals of the US outbid Actavis, an Icelandic company, to acquire Pliva for $2.5bn. Later in 2006 came an initial public offering of shares in INA, the state-owned oil company in which Hungary's MOL was already the strategic investor. Recent months brought big share offerings from Pliva, which sold its veterinary arm Veterina through the exchange, and local construction giant Ingra, among others.

By far the latest, greatest lure for local retail investment through the ZSE came one month ago, when the state privatised 32.5 per cent of T-Hrvatski Telekom (T-HT), the former state-run fixed-line and mobile operator controlled since 2001 by Deutsche Telekom.

The state targeted citizens in T-HT's sell-off, and 358,406 of them purchased shares, making this the largest initial public offering in the country's history. Such was the clamour for a slice of the company that roughly one-third of citizen buyers took out loans to buy shares, says Tomislav Vuic, deputy president of the management board at Erste Bank in Zagreb.
The telecom sale immediately became a milestone in the development of local retail stock trading, as "sophisticated investors who really understood the market" combined with first-time investors "opening their eyes" to generate a bonanza, says Mr Motusic.

Buyers purchased shares from the state at 265 kuna each and then watched as the price jumped to 419 kuna on the first day of public trading. The price soon settled closer to 380 kuna - still an overnight gain of 43 per cent.
For many who bought shares with borrowed money, payback was therefore quick and easy.

Yet here controversy creeps in. Critics of the T-HT sale quickly questioned the initial share price set by Croatia's government. "Telecommunism," squawked the Feral Tribune, a weekly newspaper, portraying the IPO as a thinly-disguised cash handout from the governing Croatian Democratic Union in advance of parliamentary elections.
Indeed, government ministers had transparently promoted the sale beforehand, as an opportunity for a "good experience" akin to the INA sell-off 11 months ago, in which citizen buyers also made a tidy overnight profit.
Yet whatever the T-HT sale's political dynamics, Mr Motusic argues against seeing it primarily in these terms. At a time when some local political leaders still mutter Marxist misgivings about private investors in stocks and shares, calling them "crooks" and "speculators", he says the current HDZ-led government is the first in Croatia's post-communist era to back the ZSE enthusiastically. "How can I say I am not happy with that?" he adds.

Capital market growth is restrained by central bank rules on commercial credit growth. Alarmed when domestic credit expanded by 24.7 per cent last year, central bankers this year require lenders to place substantial deposits with the bank, for any money lent in excess of 12 per cent growth this year.

Bankers grumble about this intervention, but Mr Motusic says it is helping to shift demand to the ZSE.
"If you have such a restrictive monetary policy and such a hunger for new projects, such a booming real estate market and other sectors, then it is just a question of time when some other type of capital will start seeking ways to invest. It can only be done through venture capital or through the capital market. This really gives a push to our development," he says.

Public share offerings are therefore increasingly common, alongside the privatisation of state-owned companies. Meanwhile, the growing base of active buyers - in contrast to the one-off buyers of INA or T-HT shares - makes the market more liquid.

"Five years ago we had 5,000 to 10,000 Croatian households actively investing in stocks. After INA, it was about 35,000. Now it could be 100,000," Mr Motusic says.


Financial Times

Investor comes full circle

By Eric Jansson, Financial Times
Published: Nov 12, 2007

Matt Sertic's friends had egged him on for years. Fellow Croats had quit communist Yugoslavia to live in and work in the US, and they loved it. Gloria Kolaric, one of his friends who had gone ahead, laughingly recalls telling him, "OK, either come now or I'm giving up on you."

Mr Sertic packed up. In 1985, he quit his job as an economist at a metal works in Sisak, 50km south of Zagreb. He moved first to Arizona and then to California. He could scarcely have imagined that, 22 years later, he would return as a US investor in an independent Croatia to open a factory on the same site as the old metal works.
Applied Ceramics, the Silicon Valley-based company of which Mr Sertic today is president and primary owner and Mrs Kolaric is director of quality, serves a specialised niche in the information technology sector. It manufactures spare parts of ceramics, quartz, silicon and sapphire for clients in the global semiconductor industry, leading makers of microchips.

"It was actually the last thing in my mind that we would start doing something here. There is no market for our products in Croatia. But by coincidence I met an instructor from the technical institute in Sisak who told me they were training people to work on CNC machines, which is exactly the kind of person we are looking for in the States," Mr Sertic says.

Computer Numeric Control (CNC) machines, programmable devices used to fabricate product components, are essential to the company's manufacturing process, so Applied Ceramics spotted an opportunity. The company flew 19 trainees from Sisak to Silicon Valley, taught them more, and now employs them on a new production floor based in privatised facilities at the metal works, which Applied Ceramics purchased and converted. It has invested $12m in the effort so far.

After years of trepidation, US investors have begun to discover Croatia, just as American tourists have begun to do in greater numbers. Moreover, as Mr Sertic's return to Sisak exemplifies, Croatia's large and well-educated diaspora continues to find new ways of doing business back in the old country. Both the US and the diaspora are rich potential sources of investment.

Applied Ceramics has arrived as part of the first big wave of post-war US business investment. Entirely by chance, at the same Sisak metal works, Texas-based Commercial Metals Company has just moved in as well, with a $90m investment in a newly privatised steel pipe manufacturer. That purchase was preceded last year by the $2.5bn acquisition of Pliva, a Croatian drugs maker, by Barr Pharmaceuticals.

"We have seen three significant US investments in Croatia in the past 18 months," says Robert Bradtke, the US ambassador in Zagreb. "This is a sign of increasing interest in Croatia by American investors. After a period four or five years ago when they might have thought business here was too difficult, they now see real opportunities in Croatia."
Foreign direct investment in 2007 already looks certain to exceed last year's figure of ?2.7bn, the country's biggest year ever for FDI. Yet Damir Polancec, deputy prime minister, expresses a common view when he says that Croatia's overall level of FDI is "unsatisfactory".

This eagerness for FDI does not necessarily imply a simple investment environment. Mr Sertic says Applied Ceramics' investment has been costlier than planned and more difficult than anticipated. "In the beginning it looked like we might save some money by coming here, but now it seems we will not," he says.
Incentives offered by the state can be illusory, he warns, and because the rule of law is weak, "negotiation" with officials is commonplace. "You find everything is more or less negotiable. If you yell more, you find that you may pay less. If you do not yell, you will certainly pay," Mr Sertic says.

He praises his local private partners as "very forthcoming, very eager to help". But he adds that unfamiliarity with the needs of IT companies such as his own has led to some difficulties, such as hesitancy at local banks to offer credit lines. After a time-consuming search, Applied Ceramics reached an arrangement with Austrian-owned Hypo Alpe Adria.
Applied Ceramics may be in a better position to weather unwanted surprises than some other foreign investors. Mr Sertic's Croatian background means that he has a network of trusted local friends to call upon. As for costs, even if they rise marginally above the expected level, heavy global demand for the company's specialised products provides a degree of cushion.

Despite some difficulties, Mr Sertic is evidently bullish on Croatia. In addition to the factory building where Applied Ceramics now works in Sisak, he has purchased a neighbouring tower block previously used a metallurgical institute. He plans to rent it out as workshop space for young local entrepreneurs.

Financial Times

Crowds inflict profitable pain

By Eric Jansson, Financial Times
Published: Nov 12, 2007

Carrying thousands of passengers on the Adriatic Sea, the towering cruise liners approach from the south. About three miles short of Dubrovnik, they stop on open water and release tender boats, shuttles that ferry passengers to shore. The tenders motor between the coast and the forested island of Lokrum, toward the walled city's small marina.

But squeezing into the marina can be tricky. Large enough to carry 150 passengers each, the tenders must navigate through a maze of little moored boats while competing for space with glass-bottomed sightseeing vessels that use the same diminutive dock. After careful manoeuvres, the ship-to-shore tenders land and unload passengers who promptly march into the old city.

The docking procedure can be complicated even in the low-season, when no more than two cruise liners arrive at once. But at the height of summer, as many as seven liners sometimes arrive within a short space of time. Then the marina becomes a waterborne traffic jam.

Crowds form on land, too. The exquisite old city, whose international fame multiplied when shells landed on it during Croatia's 1991-1995 war, heaves with pedestrians through the high season. These foreign visitors arrive not just by boat but by aeroplane, coach and car, bound for the famous walls, the gleaming white pedestrian streets, the cafes, restaurants and souvenir shops.

"In August and September sometimes we have had 14,500 tourists in the walled city, all at once. I hate it. I lock myself in my office until the afternoon when things slow down," says Erol Olcan, general manager at the Pucic Palace, the only luxury boutique hotel inside the city walls.

Such high-season crowds are both a headache and a source of profit for Mr Olcan and for many locals. They exemplify the kind of strain being felt as Croatia scrambles to accommodate fast-growing tourist demand. What happens in Dubrovnik, the country's leading tourism boomtown, also happens elsewhere along the coast, though usually on a smaller scale.

Croatia registered 53m tourist nights in 2006, up 36 per cent from 2000. Total annual visitors will exceed 11m this year and could top 12m by 2012, says Zdenko Micic, state secretary for tourism.

As the Croatian tourism industry absorbs this surging demand - which has yet to return to pre-war levels - the country's tourism offer looks less and less like its former self. "The Mediterranean as it once was," the national tourism board's slogan, evokes unhurried tranquillity, not crowds. The slogan still rings true, but a nagging question is what will happen in the long run if growth continues at the current rate.

Mr Micic says he envisages a well-managed shift toward upscale tourism along the coast and a careful preservation of quiet environments on the islands, of which Croatia has more than 1,000.

But change may prove difficult to manage. As new investment pours in apace, some critics already ask whether tourist destinations could put existing assets to work more effectively.

Dubrovnik, in the way it handles crowds, is a glaring example. Goran Vukovic, a local architectural consultant, says the walled city's traditional dockside area - the Lazarica which was formerly used for quarantining sailors - could easily be converted to receive vessels again. A short distance outside the city walls, the Lazarica houses quiet art galleries and offices. If the tenders landed there, rather than at the marina, docking would be simpler, demand for gaudy trinket shops could be displaced, and crowds within the walls would shrink - at least marginally.

Such lateral thinking, Mr Vukovic says, can still help Dubrovnik "to handle the attack of mass tourism" and keep it from becoming "a dead city or a museum like Venice".

However planners are moving in the opposite direction. Expensively reconfiguring the quay walls at nearby Gruz Harbour, they are making room for multiple mega-liners to dock at once.

"We know what sustainability means. We do not want to overbuild our capacities," says Mr Micic.
However, locals are often more sceptical. "We are learning, quite unexpectedly, that money is far more dangerous to Dubrovnik than bombshells," quips Mr Vukovic.

In some cases, rapid growth has led to imbalances between what visitors expect, what they actually receive and what local economies are able to provide.

Sometimes asked to pay the equivalent of ?95 for a 90-minute walking tour, visitors to Dubrovnik complain that prices are too high. Yet prices are just as often surprisingly low, as local businesses struggle to adjust prices for a spectrum of clientele that includes mass tourists.

"You can get a pizza and a glass of wine for ?7 in the old city. You can't call that expensive," says Mr Olcan.
At the same time, some locals find themselves priced out of their own market. Real estate prices have soared to around ?4,000 per sq m.

Andreas Jersabeck, general manager at the Hilton Imperial Dubrovnik, a prominent hotel just outside the city walls, says the fast-rising cost of living has led to an undersupply of cooks, waiters and housekeepers, complicated by seasonality.
"There is a huge shortage of labour in the summer, yet in October people come queuing for jobs when we do not need them," says Mr Jersabeck. Seasonal workers, cannot afford apartment rents.

All agree that the solution involves a move away from mass tourism and an upgrade of accommodation across the country. Some 80 per cent of current space is camping or private rooms, and more than 60 per cent of hotels are 3-star. "We need more 4-star and 5-star rooms," Mr Micic says.

Financial Times

A data conundrum prevents deeper analysis

By Eric Jansson, Financial Times
Published: Nov 12, 2007

When the chef at the Hilton Imperial Dubrovnik sources ingredients for his menu, especially vegetables, he looks across the Adriatic to Italy. Italian produce is "better quality at a lower price", says Andreas Jersabeck, the hotel's general manager, an Austrian.

Similarly, when new hotels spring up on the coast or old ones are refurnished, domestic furniture makers compete for contracts but rarely win. Some 90 per cent of furniture purchased by Croatian hotels and resorts is imported, according to estimates by local industry leaders at Ambienta, a furniture fair held in Zagreb last month.

Such anecdotes do not surprise local economists. Croatia imports more than twice as much as it exports - and not just food, labour and furniture.

However, anecdotal evidence of import dependency challenges the rosy picture of tourism as an important driver of production in the national economy. The more local tourism services depend on imports, the more tourism's economic rewards are exported.

Everyone agrees that tourism plays an important role in Croatia's economy. It accounted for 18 per cent of gross domestic product (GDP) in 2006, and this year has been even busier, service providers say. Visiting tourists - typically 90 per cent of them foreign - stimulate activity in other sectors, notably transport and trade but also construction and agriculture. They also bring with them a fresh supply of hard currency, restraining the growth of a current account deficit that widened last year to 7.6 per cent of GDP.

But the impact of tourism across the economy remains impossible to measure precisely, sector by sector, says Oliver Kesar, a specialist in tourism economics at the University of Zagreb. This is because local statistical resources fall short.
Analysts at the Croatian National Bank and the Institute for Tourism in Zagreb have estimated that 30 per cent of what tourists consume in Croatia is imported, "but without in-depth analysis and complete data these are very rough estimations," Mr Kesar says. By this measure, of the ?50 the average tourist spends each day, ?35 goes toward domestic goods and services, and ?15 toward imports.

How the ?35 breaks down by industry locally is guesswork. Current analysis of tourism's impact on individual industries depends on a breakdown of tourist consumption published by the Institute for Tourism in its TOMAS 2004 research project, the most recent research of its kind.

Based on a survey of tourists, this research indicated that of every ?50 spent in Croatia, ?15 goes toward accommodation, ?13 toward food, ?6.50 toward transport, ?4 toward drinks, ?3 toward shopping and smaller amounts on entertainment, excursions and other recreation.

But to know how each of these categories breaks down into domestic and imported goods, to tighten up analysis and forecasting, Croatian economists need to build an input-output matrix of the national economy. They have yet to do so.
"Croatia has experts for partial analyses, but we need an outside expert who has built an input-output matrix before, who can lead such a huge and delicate project," Mr Kesar says.

Such an effort would once have been futile, because a substantial volume of tourism receipts flowed into Croatia's grey economy. A significant portion still does, but a crackdown on tax evasion is gradually pushing such business into the light. Authorities conducted 28,200 inspections of tourism service providers this year, finding 4,400 irregularities along the way.

With efforts like these, data improve, economists say. The result could soon be a truer picture of how Croatian tourism works, and for whom.


The Economist

Stars and soggy bottoms
Jan 4th 2007

A new-year salvo of bouquets and brickbats

STAR in the making: Toomas Hendrik Ilves, president of Estonia. Suave, savvy and cynical, this Swedish-born, American-educated political heavyweight has returned from a big job at the European Parliament to put his pint-sized country on the map. Whether delivering the West??s message to Mikheil Saakashvili of Georgia ("Misha: just shut the **** up"), charming George Bush, or hobnobbing with Carl Bildt, his Swedish foreign-minister chum, Mr Ilves had a flying start in 2006 and will be the ex-captive nations' best spokesman in 2007.

Biggest disappointment: Poland's Law and Justice government, which wasted most of 2006 in political intrigue. The dropping of a popular prime minister, Kazimierz Marcinkiewicz, was an unforgivable display of jealousy by Law and Justice's party leader, Jaroslaw Kaczynski. His own lacklustre and devious performance in the top job has since highlighted his predecessor's merits. Poland's prickly and incompetent foreign policy is a black hole in the heart of Europe.

Most worrying trend: Between the Baltic, Black and Adriatic seas there is not a single strong reforming government. Drift, muddle and 2 sleaze were the hallmarks of 2006. Internal and external pressure ought to bring better government - but in some countries political meltdown is a serious danger. Russia's divide-and-rule policy, of flattery, cheap gas and bribes, is nobbling Slovakia, Hungary, Bulgaria and Slovenia. Post-communist elites are wired for quick deals and personal gain, not long-term national interest. The Kremlin knows this.

Politics of the gutter award: Given jointly to Ferenc Gyurcsany, prime minister of Hungary, for admitting that his government had lied, and for turning a blind eye to police brutality; and to Hungary's opposition leader, Viktor Orban, for cynical populism and mystifyingly authoritarian socialist-style policies.

Unsung heroes: Another joint award, to Gediminas Kirkilas, Lithuania's prime minister, whose minority administration has surpassed all expectations; and to his old friend and ally, the conservative opposition leader, Andrius Kubilius. A rare example of personal friendship and patriotism surmounting party interest.

Loser: Abandoned by the West, and with a defeatist political elite unable to look beyond Russia, Moldova is sinking. If any postcommunist country faces real collapse, it is this one. Nothing seems to be working in its favour, save that its neighbour, Romania, has just joined the EU.

Eurocrat of the year: Andris Piebalgs, the EU's energy commissioner, a sparkling advertisement for the post-communist countries' political abilities. Unlike most of his fellow commissioners, he understands both the technicalities of his brief and its political dimensions, and has the nerve to take on the powerful energy lobbies in Europe's biggest countries who are as contemptuous of politicians as they are cowardly towards Russia. Clone him.
Most clubbable country: Slovenia, post-communist Europe's most prosperous state, has joined the euro-zone, proving that the common currency need not remain an "old Europe" club. A cautious sort of place: Slovenes talk like Estonians, but act like Austrians.

Soggy bottom: Croatia's sullen and obstructive approach to pluralism, media freedom and the rule of law remains an alarming pothole on the road to further EU enlargement. Nobody wants to upset the murky and convenient status quo.



The Economist

Judge or be Judged
February 16, 2006

Croatia and Romania struggle with judicial reform

CLEANING up the communist-era justice system is one of the ex-captive nations' toughest tasks. Crooks, spooks and politicians have an unhealthy influence, especially on judges and prosecutors rooted in the old system. So the European Union eyes judicial reform closely when considering new members.

Now hiccups in two leading applicants to join the EU, Croatia (which is trying to get a date for joining) and Romania (due to join in 2007 or 2008), have jolted confidence in their commitment to real reform.

In Croatia, a widely admired justice minister, Vesna Skare-Ozbolt, was sacked last week. She had pushed both judicial reforms (such as appointing independent senior judges) and a toughly timetabled anti-corruption programme. These delighted the outside world, but annoyed Croatia's old guard, who prefer the old system of cronies and favours.

The prime minister, Ivo Sanader, says Mrs Skare-Ozbolt, who leads a small centrist party, was disloyal. Others think she was too successful in highlighting the bad habits of the powerful, and also too strong a personality for a government largely run as a one-man band. Her successor, Ana Lovrin, is an undistinguished appointee from Mr Sanader's party, who will struggle to convince outsiders that she has the necessary oomph. One big test will be whether she purges or preserves the justice ministry's upper ranks.

In Romania, the upper house of parliament, the Senate, last week rejected a law that would have created a powerful new national anti-corruption department with the power to investigate legislators.

Then this week a parliamentary committee in the lower house, the Chamber of Deputies, rejected a request by the justice minister, Monica Macovei, to approve search warrants on a town house and country mansion bought cheaply by a former prime minister, Adrian Nastase. In a striking example of Romania's remaining distance from European ideas about conflict of interest, Mr Nastase himself chaired the committee. One of the "big fish" now under investigation for corruption, he is due to be interviewed by prosecutors on February 16th (he denies all wrongdoing).

The Romanian authorities lost both votes because their supporters were absent. 24 members of the Senate stayed away; in Mr Nastase's committee, one key government supporter was ill; another, mysteriously, claimed a pressing engagement moments before the vote.

These are setbacks illustrating the weakness of Romania's government in giving its anti-corruption efforts teeth; they are not yet disasters. Foreign embassies, and an alliance of eight anti-corruption pressure groups, are urging the government to step up its political support for the new law, and for the thorough investigation of Mr Nastase.

An EU mission, including the Commission's secretary-general, Jose Manuel Barroso, and the enlargement commissioner, Olli Rehn, will visit the Balkans this week and chivvy the applicants further. That usually helps concentrate minds on adopting western norms, albeit belatedly and even superficially. But what happens once they are in?



Wall Street Journal

Back in the Balkans,
by Kyle Wingfield, October 25, 2007

SISAK, Croatia - The first thing you notice after passing the gate to the old iron works and the oak trees filled with shrapnel, but before you reach the shiny new machines for polishing silicon wafers, is the sign - brightly painted, low to the ground and slightly trapezoidal, straight out of Office Park, U.S.A. It represents the fresh face that Matt Sertic is trying to put on his depressed hometown, and Croatian business generally.

Two decades ago, Mr. Sertic left his job at these iron works to find success in Silicon Valley. Now he owns the communist-era building where he once worked and is equipping it to make various products for the semiconductor industry.

You might think that Croatian officials, facing 14% unemployment and mindful of the need for foreign investment, would move mountains to smooth the way for this local boy made good. Heavily shelled during the 1991-95 war with Serbia, Sisak is particularly desperate for jobs so that residents don't have to commute - or move - to the capital, Zagreb, about 35 miles away.

If only. Mr. Sertic had to jump through more hoops than he cares to recount to open this week the Croatian division of his company, Applied Ceramics.

"You have to somehow see that people are not mean. This is just the way systems run, how they live here," says Mr. Sertic, the president of the privately held firm out of Fremont, California, a supplier to Intel, Sony and Motorola, among others. The company has put $12 million into the Croatian venture, which employs about 100 people.

"You cannot be called, for example, "Applied Ceramics Croatia," he begins. "Why not? Well, someone might think that you are a state-owned company." Another picayune trouble arose over naming the street out front - a public road that apparently existed without a name for decades - so that he could put an address on business cards and begin to advertise. "Everything [has] to run through official bodies, and so there are always a lot of people involved and with a lot of people nothing gets decided and nothing gets done, and everything turns political. Even the name of the street."

Registering the business was more of an ordeal. First, the original California business-registration paperwork for the company was deemed too old. Then the Croatian authorities wanted the company's current financial statements to magically be included in those same founding documents, which are now 13 years old. "So it took three months until some judge went on vacation, and another judge came and says, "All right," Mr. Sertic says with a weary chuckle.

To close on the purchase of a building and land, located on a larger industrial park, took over a year. In between the time Mr. Sertic thought he had a deal with the president of the iron works until he was able to move in this past March, he was forced to go through three separate public bids for the property. It took three months to get the supervisory board of the iron works to sign off on the sale, and even longer for them to vacate the place.

Then there were the taxes. Applied Ceramics received government approval to import new, American-made machines without paying the normal 22% tariff. Well, without paying it permanently, anyway. "You have to pay it, even though they return it back to you," Mr. Sertic says. "So then you have to submit all these documents, and then they return the tax to you in two months." If you don't have additional money, then you just wait for this money to use it for the next import.

"So if next month comes another container of equipment, you have to pay again. You cannot tell them, "Look, you owe me one million, and here is coming another million, let's split it, right" No way! You have to pay again. And so that's how the state constantly works with your money, and basically my view is it stimulates you not to do anything," he laughs again. Many small-business owners in Croatia choose to forgo the tax refund rather than deal with the bureaucracy and risk a visit from the state's financial police.

Did he ever think about giving up? "Several times I came to the point that something seems it cannot be done," Mr. Sertic says. "And then I would stop calling or pushing. And then I would find out that, two months later, things get done by themselves."

He had decided to try the European expansion only after talking with a professor in Sisak whose students were training as machinists, chemists and metallurgical engineers. "Then he says, "You know, their best bet is they can be waiters in hotels or in restaurants," supporting Croatia's main growth industry, tourism. "And that looked to me like a huge pity and a waste of talent." With the professor's help, he identified 19 young people who went to Fremont for six to eight months of training. They now form the core of Applied Ceramics' Croatian team.

Eventually Mr. Sertic made it to Tuesday, when dozens of dignitaries, including President Stjepan Mesic, attended a grand-opening ceremony. "What Croatia needs is greenfield investment. We want investment in production for exports," Mr. Mesic told me through an interpreter after the festivities.

Perhaps the president isn't aware that, in his country, state incentives for such investments are, like the names of streets, subject to the interpretation of local officials. Applied Ceramics didn't qualify for "greenfield investor" incentives, even
though it represents an entirely new industry for the country, because it renovated an existing building rather than constructing a new one.

* * *

Mr. Sertic's story, so far, has a happy ending. Many don't. Lawyers and bankers in Zagreb say corruption in the country's judiciary, particularly when it comes to registering property deeds, is pervasive. The Wall Street Journal/Heritage Foundation's 2007 Index of Economic Freedom ranked Croatia only 30% free when it comes to property rights, 34% free from corruption, and 50% free for foreign investors. All three scores are below the world averages in those categories, and Croatia's overall score of 55.3% free places it well below neighbors Slovenia (63.6%) and Hungary (66.2%).

"We have lost on a fairly steady basis good [foreign investors] who come in, try, can't do it and get out," says Mark Gero, a past president of the American Chamber of Commerce in Croatia who has tried since 2000, unsuccessfully so far, to set up a waste-management business.

In the past, Mr. Gero says, "it was who you know here, and the deals that can be done through the people you know." Pressure from foreign investors working inside Croatia, as well as from outside forces such as the European Union, which Croatia aspires to join, has helped to level the playing field only slowly.

For his part, Mr. Sertic says he "never came to be in the situation that I had to grease up anybody with money or promises or anything like that." But he's aware that his new venture will be viewed as a barometer for how much has really changed. "Croatia got liberated in 1991, and then during this first decade, many Croatian Diaspora people returned to Croatia to start something, to invest somewhere, and some of them succeeded, but I would say especially small ones did not," he says.

"So I would say in Silicon Valley there are several Croatian-owned companies that are now looking: Will I survive or not?" He laughs again. "Then they will decide that maybe they can go too."

- Mr. Wingfield edits the Business Europe column.
Copyright 2007 Dow Jones & Company, Inc. All Rights Reserved


Wall Street Journal

Croatian Spin Doctors
November 15, 2006

The European Union shells out millions of euros each year on translation services. How unfortunate, then, that the progress reports that the European Commission published last week for eight potential EU members are so far available only in English. We're not pulling a Jacques Chirac, decrying the dominance of English. The shame here is the fact that the reports don't come in the languages spoken in the countries they scrutinize. That opens the door for politicians who aren't sufficiently committed to reforms to spin the results.

Take Croatia. After Bulgaria and Romania enter the EU in January, Croatia will be next in line. According to the EU report, though, Zagreb still has "no overall strategic framework" for reform. It lacks "clear and transparent rules and procedures with regard to elections and the forming of governments at the local level." It is "still some way from enjoying an independent, impartial, transparent and efficient judicial system." And, "[m]any allegations of corruption remain uninvestigated and corrupt practices usually go unpunished." Those are just the political issues.

So how is the report being received in Croatia? As praise for the "progress . . . when it comes to reforms," if you listen to Prime Minister Ivo Sanader. Many Croats have no choice but to do so since the report isn't available in their mother tongue and, as the Commission noted, the independence of the press is far from perfect.

The Commission says it's never provided candidate reports in their local languages and that this hasn't been a problem before. Well, maybe. But as the bloc expands to more distant frontiers, the number of reforms needed tends to rise and the freedom of the press and civil society to encourage or even monitor them tends to fall.

Enlargement is one of the EU's most valuable functions, because it gives countries like Croatia added incentive to undertake painful but beneficial reforms. Perhaps few Croats would take the time to read these reports in their own language. But, knowing that their statements could be more easily checked, their leaders might think twice about playing spin doctor.


European Voice

Croatia's seaside socialism and crony capitalism
By Edward Lucas
(Appeared in Print and Online Editions)
Vol. 12 No. 29 - 27 July 2006

My first visit to Dubrovnik was as a black-marketeer. Hitch-hiking through the then Yugoslavia in the summer of 1985, my brother and I, fervent evangelists for capitalism, were trying to practise what we preached. A long lift took us from Graz in Austria to the Dubrovnik bus station, but we initially found few takers for the foil-wrapped bricks we had brought from Vienna: Yugoslavs in those days bought their coffee in beans. Then my brother, showing his characteristic business acumen, slit open one of the packages, unleashing an enticing aroma and banishing suspicion. We quickly sold the lot.

This month I was there again, for what at first sight seemed like a meeting of the Balkan Bodyguards' Association. The hotel was full of muscular, alert-looking men in loosely-cut suits, gruffly discussing engine sizes, muzzle velocities, and radio frequencies in a hotchpotch of local languages. But behind the biceps, I glimpsed some politicians, including Nursultan Nazarbayev (Kazakhstan), Mikheil Saakashvili (Georgia), Dan Fried (America's brainbox regional fixer)and top representatives of most of the countries of the neighbourhood.

The conference was Croatia's attempt to show that it is a constructive regional player, friends with its neighbours and worthy of speedy entry to the EU and NATO. To some extent it worked: anything that gets the enlargement train on the rails and moving is welcome.

But there were some curious features. One was a complete absence of any critical local voices. Croatia has a bunch of independent-minded NGOs and institutes. None came, though there were plenty of independent outsiders from farther afield. Equally, there were no opposition politicians from the region-though plenty from elsewhere, such as Carl Bildt, the former Swedish conservative prime minister.

Some might wonder if the Croatian authorities are nervous of something. I tried to find out why. "Don't blame the diplomats: they know it's stupid. It's the foreign ministry protocol department" said one well-informed outsider. "They just make sure that any invitations to undesirable people get lost".

It is hard to avoid the impression of Croatian control-freakery. The authorities have just been criticised by the International Federation of Journalists for appointing a number of political cronies to the board of HINA, the main news agency (and that in itself is odd: why does the state have anything to do with the media anyway?). Some journalists say that advertising from state-owned industries is used to reward friendly media outlets and withdrawn from critical ones. One local think-tank compares Ivo Sanader, the Croatian prime minister, to Vladimir Putin of Russia. That may be too harsh. But there is an interesting analogy.

Just as the top-heavy and incompetent Russian state survives thanks to the rents (unearned income) from the country's oil and gas wealth, Croatia's stodgy economy lives off the rents of tourism. The country scores very poorly on indexes of economic freedom: labour laws are restrictive, taxes high, foreign investment puny.

Yet the combination of climate and coastline is so compelling that only gunfire will keep tourists away (which it did, during the war). Now Croatia has plenty of visitors again, and they are well-fed, well-sunned and well-refreshed. But even in Dubrovnik's top hotels and restaurants you do not feel, to put it mildly, that you are the customer of a world-class tourism industry where intense competition is driving standards ever-upwards.

Yugoslavia was in theory a communist dictatorship, but it did not feel like one. Now in theory, Croatia is a normal capitalist democracy. But it does not quite feel like one. Even the glitziest conferences cannot fix that.

Edward Lucas is deputy editor, international section and central and eastern Europe correspondent for The Economist.