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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.”