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Croatia: Corruption, Organized Crime and the Balkan Route
By Katelyn Foster, Research Associate, Adriatic Institute for Public Policy



The Adriatic Institute's annualized International Leaders Summit on Economic Growth (ILS) took place in Zagreb, Croatia with a strategic ILS Economic Roundtable in Ljubljana, Slovenia on May 17 and 18, 2006. The economic conferences brought the world's leading economic reformers and proponents of free market ideas led by Mart Laar, Member of Parliament, Former Prime Minister of Estonia and pioneer of Eastern Europe's free market reforms, Dr. Daniel Mitchell, The Heritage Foundation (USA), Peter Jungen, President of European Enterprise Institute (Germany) and Entrepreneur, Dr. John D. Sullivan, Executive Director, Center for International Private Enterprise (CIPE), an affiliate of the US Chamber of Commerce, Daniel Schwammenthal of The Wall Street Journal.

Strategic partners of the summit included World Development and Empowerment, Philip Morris, Applied Ceramics, HVB Splitska Banka, Letica Corporation, The Heritage Foundation, The Stockholm Network, , Business HR, Newspaper Direct, General Graphic, Kindin Design, Pro-Foto, Hertz and AmCham Croatia.

ILS Economic Roundtablewith Prime Minister Janez Jansa - Ljubljana, Slovenia

Slovenia's Prime Minister opened the ILS Slovenia event followed by Mart Laar and an economic roundtable that included Slovenia's business, media, political and academic leaders at the Grand Union Hotel, Ljubljana, Slovenia. In his opening remarks, Prime Minister Janez Jansa conveyed the importance of examining Estonia's success in implementing free market reforms including the highly praised tax reform - the flat tax and other vital market reforms.

''High economic growth is the basis for prosperity,'' said Prime Minister Jansa. The Slovenian prime minister went to further mention the low level of economic growth in Slovenia compared to Estonia and other Eastern European nations. In the autumn of 2005, PM visited Estonia and his comments were reported in The Economist print magazine stating that Slovenia should embrace Estonia's free market reforms including the flat tax. PM Jansa went on to further comment that at one time Slovenia was the economically far ahead of Estonia and Slovakia, now these Eastern European tigers are leading the way and leaving Slovenia behind with reforms producing higher economic growth rates, attracting foreign direct investments and creating prosperity.

At the Slovenian ILS economic roundtable, the Slovenian Prime Minister was joined by Dr. Andrej Bajuk, Slovenia's Finance Minister, Dr. Andrej Horvat, Head of the Slovenian Government's Office for Growth and the Slovenian Prime Minister's economic team working on implementing market reforms from introducing the flat tax and labor law reform to privatization.

The Slovenian government has prepared a document outlining strategies for economic reform and a willingness to implement market reforms. The Prime Minister of Slovenia further communicated the need to move forward with market reforms and with a focus on achieving higher rates of economic growth.

Mart Laar, Former Prime Minister of Estonia and pioneer of Eastern Europe's free market reforms commended Prime Minister Jansa's for their proposal to implement reforms and to learn more about Estonia's road to reforms and the success that it brought to the small Baltic nation.

Mart Laar, said, ''Reforms were difficult for Estonia and the many Eastern European nations that went through the process, yet political leaders need to understand that it is the right thing to do. I know what you are experiencing, because 12 years ago, I was there. I understand the challenges and obstacles but you must go forward and just do it!''

Laar shared Estonia's economic success with Slovenia's leaders and highlighted the Baltic Tiger's introduction of its corporate profit tax rate of 0%, the personal income flat tax of 20% that is attracting expatriates and foreign direct investments, 33% contributions (payroll taxes), flexible labor market which resulted in economic growth at 10% for third consecutive year and 2% unemployment rate. Estonia's ''e-government'' has transformed the nation into the EU's most technologically advanced nation.

The economic roundtable included Slovenia's policymakers and members of the academia and government leaders joined by ILS speakers.

The lengthy question and answer session in Slovenia covered a wide range of pertinent issues. The participants including business and media leaders, parliamentarians and senior government officials exhibited tremendous interest in Estonia's success and the transformation taking place in nearby Slovakia. The participants realized regional competition matters as Estonia was compelled to reduce its flat tax rate to 20% and moreover, Austria's corporate tax rate was reduced to 25% from a high of 34% due to Slovakia's low flat tax rate of 19% introduced in 2004.

One of the benefits of hosting an economic roundtable in Slovenia was to provide media and government leaders along with taxpayers an opportunity to learn from the experiences of Estonia, Slovakia and to better understand the political realities of implementing reforms. This event also provides external pressure to Croatia as regional competition matters and that attracting foreign direct investors becomes each nation's major goal in boosting economic growth.

Third International Leaders Summit on Economic Growth - Zagreb, Croatia
Strategic Focus: State of Croatia's Economy

Mart Laar's keynote address delivered at the opening dinner on May 17 with a visual presentation titled ''Walking on Water - Estonia's Experience'' inspired and informed ILS participants and Croatia's cabinet members about Estonia's dreadful past with runaway inflation of more than 1,000% and total dependency upon the former Soviet Union to a transformed free market economy with annual growth rates of 10%. Through the principled leadership of Mart Laar, (32 years old when he took office) the former Prime Minister of Estonia introduced bold free market reforms in what he called ''shocktherapy.''

Unfortunately, Croatia's Prime Minister Ivo Sanader was not able to speak at the event which was confirmed much earlier and in his absence sent Minister of Foreign Affairs and European Integration, Kolinda Grabar Kitarovic and Minister of Science and Education, Dr. Dragan Primorac who presented Croatia's efforts to become a knowledge based society. Dr. Primorac took time to field questions from the audience and noted suggestions from ILS speakers discussing free market solutions to educational reform.

Estonia's Success - The Baltic Tiger and EU's Most Techonlogically Advanced Nation:

According to the 2006 Index of Economic Freedom by The Wall Street Journal and The Heritage Foundation, Estonia was hailed as ''the EU's most technologically advanced nation" and also the only post-communist Eastern Europe nation included in the top 10 of the Index.
  • 2% Unemployement Rate
  • 10% Economic Growth Rate
  • 85% of taxpayers filed their tax forms online (average time 15 minutes) ??Simplified and flat tax system - size of a postcard
  • 83 % voted online in the most recent Estonian elections
  • FDI - launched innovative companies including Skype that has become a household name and received much of its venture capital from a well-known Silicon Valley capital venture fund.
  • Accountability: At anytime, taxpayers can check government officials' daily expenses billed to the government's credit cards.
  • E-procurement is a reality with greater transparency, check and balance system.
  • ''Economically Free'' - ranked at number 7 in The Index of Economic Freedom,published by The Wall Street Journal and The Heritage Foundation
In a news conference preceding the summit in Croatia, Mart Laar mentioned that Croatia's government should apply ''a common sense approach'' to tackling its economic problems. Laar went on to further state that Croatia's high unemployment rate is shocking and that the low economic growth rate cannot sustain its economy and growing debts. As Laar heard about the challenges facing local businesses and foreign investors, he commented that the government needs to get out of the economy and create an environment that upholds the rule of law with an independent judiciary, to create a transparent system, introduce a low flat tax, drastically reduce the high contributions that employers have to pay and make it easier for entrepreneurs to hire people - a simple solution to lower Croatia's high unemployment rate.

Representing the government in the absence of Croatia's Prime Minister Sanader, Minister of Foreign Affairs and European Integration, Kolinda Grabar Kitarovic and Minister of Science, Education and Sports, Dr. Dragan Primorac spoke at the summit following Mart Laar's opening address.

Strategic Session: Foundation of Free Market Reforms - The Rule of Law, Independent Judiciary, Anti-Corruption Strategies and Transparency

The morning session moderated by Daniel Schwammenthal, The Wall Street Journal, and panelists Vesna Skare Ozbolt, MP and Former Justice Minister of Croatia and Dr. John Sullivan, Executive Director, Center for International Private Enterprise (CIPE) covered this engaging and interactive session.

''The Anti-corruption strategies has been watered down and there is a lack of political will in combating corruption in Croatia,'' said, Vesna Skare Ozbolt. ''EU membership will not combat corruption and it is the task of Croatian's citizens and stakeholders to fight against corruption.'' Skare Ozbolt went on to further explain that there is a perception that corruption is a norm within Croatia and that there is a huge cost on jobs, opportunity and economic growth due to the widespread corruption.

During the beginning of this year, international media including The Economist's article, 'Judge or be Judged' and The Wall Street Journal's, 'Setback in Croatia's Judiciary' brought significant attention to the problems of judicial reforms in Croatia. The valid concerns spotlight the areas of political campaign financing, government officials running the boards of state owned enterprises, and the lack of checks and balances. Last year, the government authorized a suspicious privatization deal worth over $100 million dollars - Liburnia Hotel Complex that was later halted due to non-profit groups including the Adriatic Institute and local officials demanding transparency. The state operated Croatian Privatization Fund was responsible for this shady deal with the approval of Croatia's government. CPF's president was later fired for his role in the Liburnia Hotel case.

Dr. John D. Sullivan conveyed the importance of combating corruption and shared details pertaining to the costs of doing business in an environment that has imbeded corruption. He began by explaining that the United States passed legislation in the 1970's - ''US Foreign Corrupt Practices Act'' that penalized American companies from engaging in bribery and corrupt practices. This created an unleveled playing field for American businesses as it was enforced by the US government and people went to jail.

Whereas, in Germany and France, until most recently, companies would be able to deduct bribes as a legitimate cost of doing business. In Croatia, many European businesses have been involved in business deals since the early 1990's and many American businesses have complained about the non-transparent environment where back door deals are done with European businesses. This has been a factor in a number of American businesses having challenges including General Electric and others.

In the healthcare sector which has been highlighted by the IMF on its reform agenda for Croatia, the opaque system has created roadblocks for businesses seeking a fair playing ground. Moreover, the public health sector has delayed payments for more than 356 days to private enterprises.

Dr. Sullivan mentioned that the OECD's ''Convention on Combating Bribery of Foreign Public Officials in International Business Transactions'' has been a force for legal enforcement of nations that have signed this agreement. Germany and France and other European nations have signed this agreement and bribery is criminalized.

It is interesting to note that Bulgaria, Estonia, Slovakia and other transitional Eastern European nations have signed this agreement. Croatia is yet to sign this important agreement.

Dr. Sullivan said, ''A law that is not enforced is only a hope. When looking at anticorruption strategies, self-enforcing is vital and there has to be a system of checks and balances.'' Sullivan went on to further mention that international businesses are looking at corruption as a transaction cost that they no longer can afford. In a highly competitive market, targets of destination are low corruption areas.

A think tank in Russia did a study on the cost of corruption. As Dr. Sullivan revealed, the study showed that the cost of corruption was 35% of Russia's GDP.

In looking at supply-side solutions, Dr. Sullivan suggested the following:
1. OECD Corporate Governance Systems
2. Economic Journalism Training
3. Enforcement in host countries
4. Ethics program clearly addressing conflicts of interest issues
5. Roles of Associations
6. Integrity

Demand-side solutions
1. Legal and regulatory reform - simplification
2. Independent auditing agency - outside the government
3. Third party auditing of government funded procurement
4. To have OECD's Corporate Governance that addresses the issue of removing government officials from the boards of state owned enterprises
5. Frame of information laws
6. Transparency through e-government. Embracing Estonia's example in the areas procurement, bidding and privatization done in a manner with greater transparency

''Vigilance is the price of liberty,'' said Dr. Sullivan. ''Eternal vigilance is the price of keeping out corruption.''

Strategic Session: How to Increase Investments, Create New Jobs, and Boost Economic Growth?

Dr. Daniel Mitchell, Senior Fellow, The Heritage Foundation chaired this session with panelists Charlotte Ruhe, European Bank of Reconstruction and Development, Peter Jungen, Venture Capitalist and President, European Enterprise Institute, Natasha Srdoc, President of Adriatic Institite for Public Policy and Robert Maricak, President of General Graphic and Co-Chair of the Adriatic Institute's Business Council.

Peter Jungen communicated that Croatia should not follow Germany's example, however, to look at Eastern Europe's tigers like Estonia and Slovakia that have implemented bold market reforms to boost economic growth. He described that following buzz words such as old Europe's ways in embracing the ''European social model'' would not do much for Croatia. Jungen went on to state that Germany and France have high unemployment rates, low economic growth rates and the problems have just begun as maintaining a huge welfare state is not sustainable. Germany and France have both begun to implement labor law reform albeit at a much slower pace. Jungen described the obstacles overcome by leaders with courage and political will that transformed the failed states of post-communist Eastern Europe to becoming Europe's well known economic tigers.

As an entrepreneur and venture capitalist, Jungen is an advocate of the flat tax and spoke about the simplified tax system that has swept through Eastern Europe. He strongly encouraged Croatia to implement the flat tax and flexible labor laws. Jungen mentioned that Croatia would benefit from the positive results of increased FDI, shift of informal market into the legitimate market and more new jobs for the nation.

Robert Maricak, conveyed an entrepreneurs challenges in doing business in Croatia citing widespread corruption, lack of transparency, government intervening in the economy and selecting favorites and perpetuating cronyism. Maricak went on to further explain that it is very difficult for business in the formal sector to expand and grow due to rigid labor laws and the heavy burden of high taxation. Entrepreneurs and the private sector in Croatia have been very concerned by the Croatian governments efforts to nationalize enterprises and moving into profit areas such as real estate, publishing, advertising (billboards), tourism through public private partnerships in sporting industries and telecommunications.

It is becoming difficult for start-ups and privately owned businesses to bid for public tenders due to lack of transparency and corruption in the system. In Croatia, over 50% of government expenditures are a percentage of GDP and the real percentage of privatization of the total economy is less than 30% compared to transitional nations like Estonia and Slovakia having 90% of the economy privatized.

Dr. Daniel Mitchell encouraged Croatia to look at the free market reforms that have transformed Eastern Europe from the low flat tax rates, flexible labor laws, competition for foreign direct investments that lead to prosperity and higher rates of economic growth. Dr. Mitchell strongly favors tax competition in Europe and has successfully
opposed the EU's efforts in tax harmonization with a coalition of independent free market think tanks and New Europe's leaders.

Dr. John Sullivan, Executive Director of the Center for International Private Enterprise also delivered the keynote address at the lunch in association with AmCham Croatia. Dr. Sullivan encouraged Croatia's business leaders to get more involved in principled public advocacy work and outlined a number of key steps in advancing economic freedom and market reforms. Dr. Sullivan represents CIPE that works in 80 nations around the world and has developed a successful business advocacy program that has brought measured results in nations especially, Eastern Europe's transitional countries.

CIPE also partnered with M.E.S.A 10 - Slovakian think tank headed by Ivan Miklos, Deputy Prime Minister and Finance Minister of Slovakia. The business advocacy work in Slovakia and CIPE's partnerng efforts with independent think tanks including F. A. Hayek Foundation were instrumental in advancing labor law reform, the flat tax and other
important free market initiatives.

As Natasha Srdoc concluded the summit, she compared Estonia and Croatia's economic growth rates and stated, ''With Estonia's high economic growth rates of 10% and Croatia's low economic growth rate around 4 %, Estonia's economy will double in 7 years and Croatia's economy will double in 24 years.'' This comparison reveals that Croatia must move forward in implementing bold reforms before it is left behind.

"This year we featured Estonia and Eastern Europe's successful economies and its pioneer of free market reforms, Former Prime Minister Mart Laar who transformed Estonia into the Baltic Tiger and positioned his nation at number 7 on the Index of Economic Freedom Report, published by The Heritage Foundation and The Wall Street Journal," said Natasa Srdoc, President of Adriatic Institute and Co-Founder of ILS. "Mart Laar is also the recipient of Nobel Laureate - Milton Friedman Award for Advancing Liberty this year and deserves our great admiration and honor for
transforming Estonia through implementing free market reforms and making the Baltic nation - the land of the free and the most technologically advanced nation in the EU. Croatia and its leaders can benefit from Estonia's experiences in boosting economic growth and prosperity."

This two-nation economic summit allowed business, media and political leaders dedicated to reforms to meet and hear first-hand the successful examples and evidences, and apply practical approaches that will create a fair playing field for all. Principled and pro-growth solutions that have transformed nations like Estonia and Slovakia were clearly presented to Croatia's entrepreneurs, owners of small businesses, leaders of major businesses, media and the political arena.