The purpose of this article is to analyse the Global Competitiveness Report 2011 – 2012, with a particular emphasize on Croatian case. This policy analysis also gives free market policy proposals necessary to increase Croatian competitiveness. Competitiveness can be defined as a favourable set of policies for increasing productivity which means higher profitability of invested capital and higher income prosperity.
The top ten countries in terms of competitiveness include Switzerland, Singapore, Sweden, Finland, United States, Germany, Netherlands, Denmark, Japan and United Kingdom. They are followed by Hong Kong, Canada, Taiwan, Qatar, Belgium, Norway, Saudi Arabia, France, Austria, Australia, Malaysia, Israel, Luxembourg, South Korea, New Zealand, China, United Arab Emirates, Brunei Darussalam, Ireland and Iceland at the 30th place. Among post-communist countries, Estonia is the most competitive (ranked 33rd), followed by Czech Republic (ranked 38th), Poland and Lithuania. Croatia is ranked 76th.
According to precise methodology which calculates the average index of various indicators in twelve pillars of competitiveness, Croatian perspective is the following:
Institutional indicators are very low in all areas, which include public trust of politicians, corruption and organised crime, favouritism and lack of transparency in decision making process, property rights protection, inefficient and politically dependent judiciary, wasteful budgetary spending, regulative burden on business freedom, investor protection, business ethics, corporate management, auditing and reporting standards and protection of minority shareholders’ interests. The only satisfying indicator in this pillar is related to low business costs of terrorism, crime and violence.
In order to improve its institutional framework, the following policies are needed:
fighting corruption and organised crime
increasing transparency of government and public administration
improving property rights protection
developing the independent and efficient judiciary
reducing the budgetary spending
removing or simplifying administrative procedures and regulations in order to improve business freedom and investment climate
protecting investors from various risks related to public administration inefficiencies, especially at the local and regional level
private firms should invest much more efforts to improve business ethics
In terms of transport sector, Croatia has a relatively developed and efficient roads and railroads infrastructure, while weak port and airport infrastructure. The most competitive advantage is the telecommunications sector with very broad usage of fixed and mobile phones network. The quality of overall infrastructure is high in Croatia which has been a policy result of public investments in railways and privatisation of telecommunications sector.
In order to improve competitiveness of infrastructure, Croatian needs to:
attract private investments in ports and airports
3. MACROECONOMIC ENVIRONMENT
Macroeconomic environment is relatively stable in Croatia. The biggest competitive advantage is low annual inflation rate. Problematic areas include high ratio of budgetary deficit and public debt in GDP, low credit rating and gross national savings. Competitive advantage in terms of low annual inflation is a result of monetarist policy, based on stable currency and price stability approach.
In order to improve its macroeconomic stability, Croatian needs to:
implement radical cuts in budgetary spending in order to reduce the public debt’s ratio in GDP and reach the disciplined and balanced budget
4. HEALH AND PRIMARY EDUCATION
Croatia has competitive advantages due to low health risks of malaria and HIV/AIDS, as well as relatively low infant mortality and relatively high life expectancy. Primary education is a moderate disadvantage.
In this area, Croatia needs to:
improve the quality of primary education curriculum and increase the enrolment rate
5. HIGHER EDUCATION AND TRAINING
Croatia has a weakly trained work force, with low quality of educational system and management schools in particular and low availability of research and training services. Internet access in schools is a moderate disadvantage, as well as secondary and tertiary education enrolment rates. The only competitive advantages are mathematics and science education.
In order to increase labour skills’ competitiveness, Croatia needs:
comprehensive educational reform focused on flexible skills based curriculum
increasing the enrolment rates
further development of private schools
internet access available in all schools
6. GOODS MARKET EFFICIENCY
The main competitive disadvantages in this are very expensive agricultural policy, the extent of taxation and overregulated business environment. Moreover, competitive disadvantages in this area include weak local competition, monopolies, low prevalence of foreign ownership, low buyer sophistication and customer orientation, complex customs procedures and low ratio of imports in GDP. Meanwhile, competitive advantages are short and short business registration period, relatively low profit taxation and trade tariffs.
In order to improve goods market efficiency, Croatia should:
reduce costs of agricultural policies by abolishing all agricultural subsidies
reduce the extent of taxation, primarily the standard VAT rate and excises
deregulate business environment in order to develop a favourable investment climate
deregulate customs procedures
continue protecting free market competition against monopolies and cartels
implement privatisations in all companies where the public sector has ownership ratios, which would also contribute private investment and increased prevalence of foreign ownership in Croatian companies, including the ratio of exports in GDP
7. LABOUR MARKET EFFICIENCY
Croatia has a fully uncompetitive labour market due to low level of labour-employer relations, rigid employment regulations, including rigid firing and hiring procedures, high redundancy costs and high wage cost inflexible with workers’ productivity. Moreover, the “brain drain” level in very high.
Croatia needs a comprehensive labour market reform which should focus on:
increasing labour market flexibility by easy rule on firing and hiring workers
reducing redundancy costs
reducing wage costs by adopting the wages to worker’s productivity
reducing wage costs by abolishing social security contributions and introducing a flat tax rate on wage income
preventing the “brain drain” by creating a free and competitive environment in order to offer good reasons for staying in Croatia
8. FINANCIAL MARKETS AND DEVELOPMENT
The biggest competitive disadvantages in this are low venture capital availability, low affordability of financial services and uneasy access to loans.
In order to improve financial competitiveness, particular policies should contribute:
easier access to loans for entrepreneurial activities and investments
9. TECHNOLOGICAL READINESS
Croatian rankings in this are relatively competitive in relation to broadband internet subscriptions and ratio of internet users in population, as well as the availability of latest technologies. The competitive disadvantages are low level of technological transfer in relation to FDI and low technology absorption in firms.
In order to increase technological competitiveness, policies directed towards improving investment climate should contribute:
increased FDI inflow which will bring new technologies to domestic firms
10. MARKET SIZE
Croatia has a relatively small domestic and foreign market.
In order to increase its foreign markets, Croatia needs to:
develop a comprehensive system of economic diplomacy
continue successful trade integration to the European internal market, including the trade liberalisation with EU/EEA countries and following WTO rules
11. BUSINESS SOPHISTICATION
In terms of business sophistication, the main problems are low number and quality of local suppliers, low production process sophistication and cluster development.
The main focus in this area must be:
improving production processes in industries by more FDI inflow
In terms of innovation, the biggest disadvantages are related to government procurement of advanced technological products, low availability of scientists and engineers, low level of university-industry collaboration in research and development and low private investments in R&D. The only relative advantage in this area is the quality of scientific research institutions.
In order to improve its competitive advantages in terms of innovation, Croatia needs to:
develop close ties between universities and industries in research and development
provide incentives for private investment in R&D
have more engineers on the market
The outline of these twelve competitiveness indicators represents a clear picture of Croatian competitive (dis)advantages. All the problems regarding Croatian competitiveness mentioned in this policy analysis have been known to Croatian experts, policy makers and public for a long time ago. This annual competitiveness report only confirms what the main policy challenges for Croatia are. Therefore, this annual report should be taken into account very seriously by those who have been given the responsibility for making decisions. It is very important to emphasize that mentioned indicators of competitiveness can only be improved by implementation of free market policies.
World Economic Forum (2011): The Global Competitiveness Report 2011 – 2012