Croatian ‘Junk’ Economy Eyes Growth Possibilities

With the Croatian economy rated as ‘junk’, some might fear that EU will have yet another member on the verge of bankruptcy. Croatians are more optimistic than that. They see a great potential for growth – especially in the manufacturing sector.

Almost half of all Uljanik stocks are owned by the workers and their families. Photo: Niels Anton Heilskov.

By Niels Anton Heilskov & Lasse Skou Andersen

PULA, CROATIA. To an outsider, it sounds like an air raid siren. A loud metallic wailing that spreads from the island with its old tall cranes, through the hulls of the unfinished ships at the quays and all the way to the blue gates at the main entrance that are left vibrating. It’s 3 pm. The first worker pops up on the ramp swiping his id card without getting of his bike before racing on. Soon more workers show up in their blue suits making their way through the open gates.

It turns into a constant trail of smiling faces and trotting feed. As the workers make their way home the air is filled with jokes. But as yet another work day comes to an end at Croatia’s biggest shipyard, Uljanik, it’s hard to see what there is to joke about. 20 years ago, 8000 workers would have marched out the gates – today the number is 2600. The company has the capacity to work on 15 ships at a time. But at the moment, only 9 are being built.

“Uljanik means everything for the city of Pula. The town has 50.000 inhabitants and around 10.000 are economically connected to the shipyard. Bankruptcy would be a disaster – nothing less,” says Dino Sverko, leader of the metal workers union at Uljanik.

Though things may sound grim, Uljanik is actually the success story of Croatian shipbuilding. Last year it came out with a profit of 3.300.000 kroner, while other shipyards that were an essential part of the industry in the Yugoslavian era are suffering – 4 of the biggest are so indebted that they have been privatized for 1 kunar, equivalent of 1 krone.

A hobo at the gates of Brussels

In just one month, Croatia will join the EU. The country’s economy has been in recession or stagnation since 2009, while the unemployment rate has reached 21%.

Six months ago, the credit rating bureau Standard&Poor’s delivered another blow to the country’s economical reputation. The company, which has massive influence on the interest rates a country has to pay for their loans, downgraded the Croatian economy to BB+, or, in more common terms: “Junk”

The credit rating bureau is not alone with its criticism of the former Yugoslavian country’s economy. The final progress report from the EU, which is a way for the EU to assess whether the country is ready for EU membership, also contained serious warnings concerning the economical situation and demanded reforms.

Vinko Kandzija, a professor of Economics at the University of Rijeka and an expert on economical integration in the EU, thinks some of the criticism is exaggerated.

“There is no way Croatia is going to be a new Greece. During the pre-accession period, the Croatian economy and official statistics have been under strong EU supervision. And I don’t think Croatia would be allowed to join if there were major concerns,” says Vinko Kandzija.

He does, however, acknowledge a need for reforms that strengthen the competitiveness of Croatian companies.

“The lower level of competitiveness of Croatian companies when compared to EU-based companies is a main reason for the recent situation, and that will need to be addressed” says Vinko Kandzija

From the boom to the slumber

A quick look at the Croatian economy’s development since the end of the Yugoslavian war shows a prosperous picture. The growth rocketed between 2000 and 2007 where the GDP rose 200%. In the same period, the Danish GDP went up with 88%. Tourism has been a key factor for the growth. Today, 14% of all working Croatians are directly employed in tourism.

But Croatia is still a poor country compared to other member states in the EU. In average, a Croatian citizen has 40% less purchasing power than the average citizen in the EU, according to Eurostat. More than 20% live below the poverty line. While tourism has flourished, other areas of the economy have suffered since the break up of Yugoslavia. Looking at the cause of the present economical situation, one word is always going to come up: Corruption.

Croatian economy has been closely affiliated with corruption, and the border between business and politics has at times been almost invisible. The EU highlights this as a major problem for Croatia in attracting investments and regaining growth.

In a recent survey conducted by the professional service company Ernst & Young in May this year, Croatia topped the list when it comes to the citizens’ own perception of corruption in the country.

See Article: Croatia fears brain drain following EU membership

In Croatia, 90% of managers confirmed that bribery and corruption was usual practice. Furthermore, 40% of Croatian respondents answered that bribes were also used to obtain business contracts. To top it off, the Croatian ex-prime minister, Ivo Sanader from the conservative party HDZ, is still kept in jail awaiting his final sentence. He is accused of having taken bribes worth millions of euros from multinational companies.

Behind the metal gates at the shipyard in Uljanik, they are trying to avoid such cases by refusing to have politicians interfere.

“We take pride in not having politicians on the board or in the management. Politicians should not have a say in business, as they have interests that conflict with the interests of the company. I think that is one of the reasons we are not doing as bad as other shipyards in Croatia,” says Dino Sverko.

More than a tourist destination

Given the present economical circumstances in EU, it might seem that the Croatian economy has little hope of regaining growth in the near future. But the Croatian government sees lots of potential areas for growth.

“We mainly see potential in the opening of new markets after joining the European Union. Apart from already established sectors like shipbuilding, I think we should focus on technical and biotechnical industry,” says Srdan Gjurkovic, chairman of the Financial and Central Budget Committee for the government coalition partner HNS. He thinks the government’s tax cuts for entrepreneurs has cleared the way for growth.

Domogoj Milosevic from the conservative opposition party HDZ thinks the tax cuts are insufficient. But he agrees there are plenty of good prospects.

“Overall, I’m an optimist. The EU membership will allow us to get funding for crucial projects as well as open up new markets. Or geographical position means we can become the gateway between Europe and the east, but we need to invest in infrastructure,” says Domogoj Milosevic.

He calls for a change of mindset among business leaders and politicians alike.

“We still haven’t realized how closely connected the manufacturing sector and the universities are. In order to gain growth we must understand that manufacturing has to be based on specialized know how,” says Domogoj Milosevic.

Vinko Kandzija shares the optimistic views and agrees with Milosevic on the mindset issues. Kandzija feels that the country isn’t even close to having fulfilled it’s potential in several sectors.

“Tourism certainly can’t boost the economy on its own. Manufacturing and food processing industries have the biggest potential for growth, but they must be in stronger connection with universities in order to create innovation,” says Kandzija, who mentions Uljanik as a role model for the rest of the manufacturing sector.

“Uljanik have achieved success by penetrating market niches in which they do not compete with Chinese shipbuilding companies,” says Vinko Kandzija.

A metal giant clinging to an olive tree

On the island that contains Uljanik’s main construction facilities, we have stopped in the shade of an old olive tree —a remainder of the old grove that used to be here before the Austrian-Hungarian emperor first established the shipyard to build battleships for his navy. Press Officer Denis Jambrosic removes his protective helmet.

This is the only tree left. The myth says olive trees can become thousands of years old. We keep this tree as a symbol of our commitment to this company and its future.”

In that effort, the shipyard will continue trying to boost its efficiency through cuts in staff.

Dino Sverko laughs morbidly.

Except for Uljanik the only work we have here in Pula is in tourism. This is the biggest city in the Istrian region and it would be dead half of the year if we sink.”

Croatia fears brain drain following EU membership

A high youth unemployment rate makes young Croatians want to leave the country. Experts fear a brain drain with detrimental consequences for the country’s economy.

By Lasse Skou Andersen & Niels Anton Heilskov

PULA, CROATIA. The sound of china against wooden tables mixes with buzzing chatter and laughs on the terrace of the cantina at the University of Pula, where the students enjoy a break from their lectures. As is the case with most Danes their age, the young Croatian students here are full of ambition, hope, and dreams for the future.

“After I graduate, I hope to get a good job in a large company and learn from the big boys so that maybe, one day, I can have my own company,” says Denis Taletovic, who is in the final year of his Business and Management studies.

But Denis and his co-students will soon have to face a tough reality check.

The Croatian economy has been in continuous recession or stagnation since 2009. According to statistics from The Institute of Economics, Zagreb,  the unemployment rate is now higher than 20 percent. The newest official statistics from Eurostat show that in the first quarter of 2013, unemployment among the 18-24-year-olds went up to a staggering 51 percent from 48% in the last quarter of 2012. That is more than double the EU average of 23.5 percent and second only to Greece and Spain.

A fact that is making an increasing amount of young people look outside of Croatia in search of a future.

No perspective

The trend is  obvious on social media platforms online – the biggest movement being the Facebook group “Young people, let’s leave Croatia”, which 60.000 people have chosen to join. They are tired of the situation on the job market in the south-east European country and feel that the current centre-left government hasn’t come up with adequate solutions to their problems.

In fact, the government’s attempt of finding young people a place on the labor market was the spark that set off the movement. An internship scheme in which newly graduated Croatians would be put to work for about 230€ a month – approximately a fourth of the country’s average salary – angered many among the youth.

“We are tired of the situation and don’t see any perspectives here. We love our country and would like to stay, but it simply isn’t possible if things don’t change,” says spokesperson for the ‘Young people, let’s leave Croatia’ movement, Iva Augustinovic

SOUND: Not everyone wants to leave – hear a couple of students explain why they prefer to stay

Highly educated first to leave

According to the Croatian Bureau of Statistics, in 2011 almost 13.000 people emigrated, whereas only 8.500 people immigrated to the country . The number of emigrants has been rising continuously since the effect of the crisis hit in 2008. Experts fear that this tendency will become even stronger following the country’s accession into the EU in July this year.

“There already seems to be a clear tendency to leave Croatia, especially among young people. The EU membership makes it easier to work or study in other EU member states. It would have detrimental effects on the Croatian economy if these people never come back,” says Iva Tomic, an economics researcher at Zagreb University, who specializes in labor movement.

“With the exodus of young people today, in a few years we could be left without the pillars of the labor force, employees in the most productive age. If this group of people leaves the country, all their ideas and innovations that would encourage the development of new jobs – would be lost as well,” she says.

Number of yearly emigrants since 2008. Source: Croatian Bureau of Statistics
Number of yearly emigrants since 2008. Source: Croatian Bureau of Statistics

Vinko Kandzija, a Professor in Economics at the University of Rijeka and an expert on economical integration in the EU, agrees.

“The problem will not be the number of people emigrating, but the structure. Namely, the people leaving Croatia will mostly be experienced and educated young people, doctors, medical staff, engineers, etc. In other words, those that could lead Croatia out of the crisis,” says Vinko Kandzija.

See article “Croatian economy has potential for growth”

Government: Jobs are coming

Domogoj Milosevic from the Croatian Democratic Union (HDZ), the biggest opposition party, is well aware of the long-term implications of a high youth unemployment rate.

“I am very afraid of a brain drain. Personally, I have two young, talented friends that have left the country and are now successful businessmen elsewhere in the world. We can’t afford to lose those kinds of people. That is why it is sad that the government doesn’t appear to be taking this problem seriously,” says Domogoj Milosevic.

“We need to create the foundation for a closer relationship between universities and companies and make the transition between education and work more seamless – to the benefit of both the companies and the students,” he says.

The government, however, feels it is already doing what it can to create jobs for the Croatian youth.

“The main target of this government is the struggle against unemployment, and everything we do is focused in that direction. We feel an upturn is now around the corner. Our newest figures show that the industrial production is on the rise again, and that will hopefully result in more jobs being created soon,” says Chairman of the Financial and Central Budget Committee, Srdjan Gjurkovic, from the government coalition partner The Liberal Democrats (HNS).

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