piatok, augusta 24, 2007

Croatia doesn´t emulate an Irish Miracle

by Rok Spruk

Coming across B92, I noted this:
"According to its politicians, Croatia is emulating the model of the so-called Irish Miracle of the 1980s, when Ireland transformed itself from a country with a lagging economy and staggering unemployment rate to one of Europe's fastest-growing economies.

Most economic analysts in Croatia believe that it is on the right path to following the success of the Celtic Tiger, and predict that the improving economic trends would continue as Croatia edges closer to EU membership.
The country also expects an added boom in foreign investments, especially greenfield investments, as it continues along the path of European integration."

Regarding the economic analysis, three main points reflect the fallacy of the above-noted statement:
(1) The word "believe" should be used very carefully in economic analysis where "to believe" means that there's no overall range over the effects of the course of economic policy in Croatia. Someone can also believe that Slovenia can become a global success story, but eventually, this wishful goal is severely hampered by endogenous factors such as given conditions of the real-world.
For example:
A believes he can fly, but he can't since he's a human being.
(2) Croatia is not on the right path, on which macroeconomic and business conditions could pursue an economic miracle. First of all, when one analyzes Croatia it should be noted that Croatia is still recovering from GDP decline, following the war period and that there're numerous hikes hampering Croatia's economic performance. For example, high consumption-inflated indebtedness of households and overblown loans to public sector, amounted Croatia's public debt at 90% od the GDP which is presumably a lot for a post-communist economy. Reducing public debt seems principally very similar to fighting inflation. To fight inflation, the central bank should normatively curtail money supply and decrease the size of monetary aggregates to ensure a temporary equilibrium on the money market, to tranquil the stabilization of inflation. In case of public debt, policymakers also have to normalize the conditions to avoid an unprecented credit boom with frigid loans to unproductive sectors of the economy, leading to volatile financial markets and possibly to financial crisis.
(3) Croatia is not emulating an Irish Miracle due to moderately high corporate tax wedge, protectionist trade policy, unskilled labor (the hybe of the education system) and high level of corruption . Could the latter be described as a moral issue? Definitely, it should not be neglected but corruption is mostly the cost, a very low level of trust which defies the contractual confidence of investors, leading the investment side of the economy to avoid large investment because of unpertained risk. What Croatia is now facing, is a terrible access to international markets. In the mainstream media, we can hear how important it is, not to shrink in a trade deficit. How can you expect a man with flu to be competitive to Justin Gatlin in running on 100 meters? It'd be a little bit flawed to expect that a post-communist economy could boost the export of high technology to Netherlands without sufficient capital and investment and knowledge equipment, wouldn't be?

Rok SPRUK is a supply-side economist and a classical liberal. He currently lives in Slovenia where he works and studies economics and business. He recently won a prestigious award called »Golden Matura«. He is interested in economic growth, international economy, macroeconomics, tax and social security reforms and international competitiveness. In the field of business he is focused on strategic management, financial markets, business models, innovations and new economy. His ideas, writings and post are written on his web log called “Capitalism & Freedom”. You can send Rok an email on rok.spruk@gmail.com