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CROATIA
>> Regional Overview >> Croatia Overview 
Introduction
Croatia is a key partner in the effort to achieve long-term peace and stability among Balkan nations. Recent, historic changes in the political environment indicate the likelihood of a breakthrough in the government’s approach to broad-ranging reform and to compliance with the key civilian aspects of the Dayton Peace Agreement (Dayton Accord or the Accord). To support the newly elected, pro-Western government coalition formed in January 2000, USAID intends to provide a significant increase in overall funding and to reactivate assistance for economic restructuring.
Resolution of the displaced persons and refugees situation in Croatia and throughout the former Yugoslavia remains a high-priority, U.S. foreign policy objective. Without Croatia’s cooperation, this regional problem cannot be resolved equitably, and unassimilated populations will remain a source of instability and potential violence for the foreseeable future. Croatia’s integration with other Southeast European nations and into Euro-Atlantic institutions is yet another U.S. objective. USAID’s program supports three objectives highlighted in the U.S. Embassy’s Mission Performance Plan for Croatia: to successful Dayton implementation, accelerated return and reconciliation of displaced persons and refugees, and democratization. USAID’s efforts to reintegrate war-affected populations have targeted the most significant, unresolved impediment to implementation of the Accord, namely the need to repatriate such populations to their communities of origin under conditions of security. USAID’s democracy program encourages Croatia’s transition to an open democratic society in which the rule of law, including respect for human rights, orders political, economic and social affairs.
The Development Challenge
Bilateral relations between the United States and Croatia have focused on fulfillment of Dayton and Erdut Agreement commitments – support for ethnic reconciliation, facilitation of return of all displaced persons and refugees to communities of origin regardless of ethnicity, and implementation of broader democratization reforms. The United States, the European Union (EU), and other representatives of the international community have indicated that improved performance in each of these areas is necessary to sustain Croatia’s eligibility for bilateral and multilateral financial support; and to advance Croatia’s prospects for further integration into Euro-Atlantic institutions. Over the past several years, Croatia’s uneven performance in each of these three areas has inhibited relations with the United States and Europe, and impeded its progress towards fuller integration with the community of western democracies.
In FY 1999, Croatia made minimal progress towards fulfilling its Dayton and Erdut Agreement commitments. Cooperation between the Government of Croatia and the international community in 1999 was mostly non-existent. Croatia’s progress in facilitating returns and promoting ethnic reconciliation remained slow, requiring the intensive engagement of the United States and international community in negotiations. However, USAID contributed to limited progress made in 1999 in establishing a non-discriminatory framework to allow all displaced persons and refugees to return to Croatia, regain access to their personal property, and receive reconstruction assistance or compensation without regard to ethnicity. Despite agreements on return and reconstruction procedures, tangible results have been limited, and the number of actual returns to date remains relatively small. Achieving a comprehensive solution of the displaced persons and refugees situation in Croatia and the region, and resolving other post-conflict issues are key challenges facing Croatia for the next several years.
Croatia’s performance in implementing broader democratization reforms was unsatisfactory in 1999. The then-ruling, Croatia Democratic Union (HDZ) party’s open hostility toward independent media, civil society organizations, and other advocates of reform continued to raise questions about the commitment of the Government of Croatia under President Tudjman to basic democratic principals and norms. The HDZ has controlled public television and radio (although in 1999 a new, U.S.-funded, TV network began producing independent news). The government has intimidated independent media. The judiciary is not independent Human and civil rights have not been adequately protected. Despite strong and persistent pressure from the international community to improve performance, Croatia has failed to move resolutely to resolve these issues.
Two bright spots occurred on the democracy horizon in 1999. First, a new U.S.-funded, fiber optic, independent TV network reached approximately 50% of the Croatian population, and is expected to reach approximately 75% of the population in 2000. The network began independent newscasts in late 1999 prior to the parliamentary elections. The second milestone was the passage of a new election law. Implementation of this law in the next round of parliamentary and presidential elections will be a necessary test of its effectiveness given that it is seen by some as an effort to improve and by others as merely a facade.
Assistance from USAID and other donors has been vital to fostering independence of the media, the NGO sector, alternative political parties, and trade unions, providing badly needed technical assistance, training, and financial support to maintain operations and achieve long-term viability. Over the medium term, additional support will be needed to address the greatest development challenge in Croatia -- fostering the development of diverse civil society institutions in order to facilitate and sustain the changes expected with a new generation of democratic leaders in place in Croatia.
Until recently, Croatia’s economic performance was better than many countries in transition. The country has been seen as one of the richest in Eastern Europe; and the most advanced among Southeastern European countries in implementing economic policy reforms largely through agreements with international financial institutions such as the International Monetary Fund (IMF), World Bank and European Bank for Reconstruction and Development (EBRD). Small-scale privatization has been complete for the most part. Substantial progress has been made in price liberalization. Comprehensive legislation exists in most areas of commercial law. All quantitative and administrative trade restrictions have been removed, and the country is in the final stage of the process of acceding to the World Trade Organization. Croatia has adhered to a tight monetary and fiscal policy regime in order to limit exchange rate depreciation. In terms of fiscal reform, improvements have been achieved in taxation. In the last two years, however, budget expenditures have exceeded revenue, contributing to growing fiscal deficits.
Crony capitalism and the heavy role of the state have undermined real structural reform. Meaningful competition policy and financial market reforms, and restructuring of strategic state-owned enterprises has not occurred. Private sector development has been slow. Structural problems in Croatia’s fragile financial sector – such as weak banking supervision, overstated asset quality, and under-provisioned banks – were exposed by recent bank failures. The Russian financial crisis and weaknesses in the economy caused a recession in Croatia in 1998. Croatia’s economy contracted in 1999 – a downturn attributed in large part to weakening domestic demand; poor performance by most export industries; a deteriorating fiscal position driven largely by a rise in public sector wages; and loss of tax revenues, custom duties, and privatization revenues as a result of the Kosovo conflict. The Croatian government entered negotiations with the IMF in April 1999 for a $200 million stand-by agreement, possibly reflecting loss of confidence in the country’s ability to borrow on international markets. External debt stock has risen dramatically over the past few years – from $3.3 in 1994 to $8.0 billion in 1998 (equal to 176% of exports) – though debt service remains manageable (11% of exports in 1998). To produce an internationally competitive economy, Croatia needs to complete implementation of difficult policy, legal and regulatory reforms, and build the institutions of an open-market economy.
USAID assistance in the area of economic reform has been minimal given the unfavorable political environment that existed for many years under the Tudjman regime. With a newly elected, reform-oriented administration in office, increased U.S. assistance in this area is envisioned. Given the amount of effort needed to help overcome obstacles to Croatia’s transition to a fully democratic nation with an internationally competitive economy -- and the potentially more favorable environment for reform -- considering graduation of the country from USAID assistance is at this time premature.
Humanitarian Assistance
About $1.0 million in FY 1999 Support for East European Democracy (SEED) funds were directed to USAID’s Office of Transition Initiatives (OTI) for: quick assistance to the media sector; municipal grants; and cross-border, Croatia-Montenegro commercial assistance. Media funding was to provide assistance to local non-governmental organizations (NGOs) for "Get out the Vote" activities such as printing flyers and making buttons. Two municipal grants were given to the cities of Split and Dubrovnik for assistance to areas damaged during the Kosovo conflict. Split’s grant was to repair libraries, hospitals, and the cultural center. In Dubrovnik, the funds went to kindergartens, the amphitheater, and non-governmental organizations’ kitchens and hospitals. The Barents Group was engaged on the cross-border commercial assistance effort. Other U.S. humanitarian assistance provided in Croatia include $810,000 from OTI in FY 1998 and $536,000 in FY 1999.
FY 1999 Kosovo Supplemental Funds
In late 1999, USAID received $2.0 million in FY 1999 SEED supplemental funds for Croatia. Funds were used for short-term assistance, addressing the negative impacts of the Kosovo conflict. The following activities received funding. America’s Development Foundation gave legal assistance to victims of the Kosovo conflict. The Firm Level Assistance Group (FLAG)/University of Delaware provided help to strengthen agricultural cooperatives in the war-affected areas. OTI was provided with funds for inter-ethnic reconciliation efforts. Opportunity International was given funds to expand their micro loan program to Dubrovnik/Neretva County.
Other Donors
International financial institutions such as the IMF, World Bank and EBRD contribute by far the largest share of financial assistance to Croatia. In the area of economic development, the IMF has supported structural adjustment, and the World Bank and the EBRD are providing resources to support economic development and increased private investment. The World Bank and EBRD plan to increase support in this area substantially given the election of a new, reform-minded government in January 2000. Germany has provided Croatia with the highest level of official development assistance since 1994, mostly through the European Commission and European Union (EU). The United States is the largest provider of direct, bilateral assistance to Croatia. In the reintegration of war-affected areas and democratic transition, the United States plays an important leadership and coordination role. Cooperating with the United States in reconstruction and reintegration efforts are multilateral organizations such as the EU, Organization for Security and Cooperation in Europe (OSCE), and the UN High Commission for Refugees (UNHCR); bilateral donors such as Germany, Great Britain, Norway, and Italy; and international, non-governmental organizations (NGOs) such as Open Society Institute, Mott Foundation, and Freedom House. The UNHCR and the OSCE are major partners on issues related to return of populations and broader democratization. The Open Society Institute, the EU and the governments of Norway, Britain, and the Netherlands have also provided significant support for independent media and civil society development.
FY 2000 Supplemental Request
A supplemental appropriation request for Croatia by the Administration of $35.725 million is pending before Congress. The recent election of a more open, democratic and reform-minded government in Croatia provides a long-awaited opportunity to make headway on Dayton Accord implementation and in the development of a democratic market system. The recently elected leadership has pledged to pursue democratic reforms and to promote long-overdue legal, commercial and economic reforms. Reinforcing Croatians’ decision to end their stagnation and isolation is a new, unanticipated priority. The FY 2000 supplemental request would permit a vigorous economic reform program to begin. Assessments are underway in the areas of banking and payment systems, fiscal reform, commercial law and bankruptcy, agriculture, and foreign investment, and a comprehensive economic reform program can be put in place quickly. Supplemental funds would also permit political party development, support to independent media, and strengthening an independent judiciary as well as local governments’ capabilities. Support for reintegration of war-affected populations as required under the Dayton Accords will continue.
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State Dept. Country Information
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Last Updated on: December 12, 2000 |
