CROATIA

	FY 1998 Actual	FY 1999 Estimate	FY 2000 Request
Support for East European Democracy	$23,215,000	$12,000,000	$6,000,000
P.L. 480 Title II	500,000	---	---

Introduction.

Croatia is a key partner in the effort to achieve long-term peace and stability among the countries of the former Yugoslavia. In the immediate term, durable peace in former Yugoslavia is contingent on success in implementing key civilian aspects of the Dayton Peace Agreement. In this regard, the most significant unresolved issue is to enable all remaining internally displaced persons (IDPs) and refugees throughout the region to return to communities of origin and live under conditions of security. Without Croatia’s cooperation, the regional problem of IDPs and refugees cannot be resolved equitably, and unassimilated populations will remain a source of instability and potential violence for the foreseeable future. Over the longer term, stability in Croatia and the region is contingent on establishing open democratic societies based on the rule of law, including respect for human rights, with sustainable market economies. Unless democratization takes root throughout the region, it is unlikely that the violent cycle of authoritarian nationalism will ever be broken.

The Development Challenge.

Since the end of the war, bilateral relations between the United States and Croatia have focused on fulfillment of Dayton and Erdut Agreement commitments, including support for ethnic reconciliation (particularly 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, and other representatives of the international community have indicated that improved performance in each of these areas is necessary both 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 toward fuller integration with the community of western democracies.

In FY 1998, Croatia made some notable progress towards fulfilling its Dayton and Erdut Agreement commitments. The transfer of authority over Eastern Slavonia from the UN to the Government of Croatia in January 1998 was a milestone which permitted greater attention to peaceful reintegration of war-affected regions and populations in the region. Improved cooperation between the GOC and the international community in 1998 also led to a series of agreements to establish 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. Croatia’s progress in facilitating returns and promoting ethnic reconciliation, however, has been slow to materialize, requiring the intensive engagement of the United States and the international community. 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 IDP and refugee situation in Croatia and the region and resolving other post-war issues will remain the priority short-term development challenge in Croatia for several years to come.

Croatia’s performance in implementing broader democratization reforms remained unsatisfactory in 1998. The ruling Croatia Democratic Union (HDZ) party’s open hostility towards independent media, civil society organizations, and other advocates of reform continues to raise questions about the government’s commitment to basic democratic principals and norms. Areas of concern include: restrictions on freedom of speech and freedom of association, one-party control of public television and radio, government intimidation of independent media, unfair electoral regulations and procedures, lack of independence of the judiciary, and inadequate protection of human and civil rights. Despite strong and persistent pressure from the international community to improve performance, the GOC has failed to move resolutely to resolve any of these issues.

The intransigence of the current government to democratic reform notwithstanding, there exists in Croatia a cadre of impressive and well-respected democratic reform advocates outside of government circles who merit and need outside support to survive and gain influence in a markedly adverse political environment. For the independent media, the NGO sector, alternative political parties, and trade unions, USG and other donor assistance is a vital source of technical assistance, training, and financial support to maintain operations and achieve long term viability. U.S. disaster assistance (nearly $1.0 million in 1998), through the Office of Transition Initiatives, has complemented efforts under SEED at grassroots strengthening in media and development of local organizations. Over the medium term, the biggest development challenge in Croatia will be to continue to foster the development of diverse civil society institutions in order to prepare the way for a new generation of democratic leaders in Croatia and help overcome the lack of political will for reform.

Other Donors.

The United States has been the most important bilateral donor in the areas of reintegration of war-affected areas and democratic transition. The European Union (EU), Germany, Norway, Belgium, Italy and others are also supporting ongoing reconstruction and reintegration efforts. The UN High Commissioner for Refugees (UNHCR) and the Organization for Security and Cooperation in Europe (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, Canada, Britain, and Sweden have also provided significant support for independent media and civil society development. In the area of economic development, the International Monetary Fund has supported structural adjustment, and the World Bank and the European Bank for Reconstruction and Development are providing substantial resources to support economic development and increased private investment.

FY 2000 Program.

Facilitating the return of displaced persons and refugees to communities of origin and encouraging broader democratization will continue to be the primary objectives of the USG assistance program in Croatia through FY 2000, Support for general economic restructuring is a lower priority in Croatia due to concerns about the existing government’s commitment to genuine reform and Croatia’s relatively advanced level of economic development. If, however, the next round of parliamentary and presidential elections result, as expected, in significant positive change in the political environment in Croatia, USAID anticipates reactivating support for broader economic restructuring to assist new leaders to deal effectively with a broad range of unresolved economic reform issues and particularly to implement reforms needed to promote broader based growth.

In FY 2000, U.S. assistance for democratic reform in Croatia will continue to support a broad range of civil society organizations, including NGOs, trade unions, independent media practitioners and alternative political parties to support broader democratization in Croatia and encourage broader public participation in political processes. By opening up the political system to such participation, grassroots pressure should build for ethnic reconciliation and reintegration. Because prospects for jobs and income, safety and essential services are key to IDP and refugee returns to their communities of origin, U.S. assistance will continue to support improved municipal services and local governance, human and civil rights protection, small and medium scale private enterprise and agricultural development. Funds under cross-cutting and special initiatives support participant training activities across the portfolio and cover audit, evaluation and other activity support costs.

CROATIA

FY 2000 PROGRAM SUMMARY*
(in Thousands of Dollars)

Acting USAID Mission Director: William S. Foerderer

Strategic Objectives	Economic Restructuring	Democratic Transition	Social Stabilization	Cross-cutting / Special Initiatives	Total
Privatization	--	--	--	--	--
Fiscal Reform	--	--	--	--	--
Private Enterprise	--	--	--	--	--
Financial Reform	--	--	--	--	--
Energy	--	--	--	--	--
Environmental Management	--	--	--	--	--
Citizens' Participation	--	4,550	--	--	4,550
Legal Systems	--	--	--	--	--
Local Government	--	--	--	--	--
Crises	--	--	--	--	--
Social Benefits	--	--	--	--	--
Environmental Health	--	--	--	--	--
Cross-cutting / Special Initiatives	--	--	--	1,450	1,450
TOTAL	--	4,550	--	1,450	6,000
*Support for East European Democracy (SEED) Act funds

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ACTIVITY DATA SHEET

PROGRAM: CROATIA
TITLE: More Competitive, Market-responsive Private Financial Sector, 180-S001.4
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 2000: $0 SEED Act
INITIAL OBLIGATION: FY 1995; ESTIMATED COMPLETION DATE: FY 1999

Summary: Since independence in 1991, Croatia has made satisfactory progress in implementing basic economic reforms needed to create a foundation for development of a market economy. Croatia currently ranks seventh in overall economic restructuring among 27 CEE and NIS countries receiving bilateral support from the US. Despite overall macroeconomic progress, fundamental economic restructuring in areas including banking sector reform, large scale privatization, enterprise restructuring, competition policy and investment policy is still needed to sustain economic growth and enable Croatia to compete in the global economy. Of particular concern is the need to support economic reforms in Croatia to provide a basis for broader distribution of the benefits of economic restructuring.

Key Results: Since 1995, USG funded assistance for economic restructuring in Croatia has been limited to support for financial sector restructuring and development. The principal goals of USAID’s economic reform activities have been to develop an effective and enforceable legal and regulatory framework to support development of transparent, reliable, and participatory financial markets. USAID projects have been important complements to World Bank and IMF programs in Croatia.

Performance and Prospects: Between 1995 and 1998, USAID-funded technical advisors and trainers made excellent progress towards building the technical capacity within the bank supervision unit at the National Bank of Croatia (NBC) and at the Bank Rehabilitation Agency (BRA). Notable intermediate results at the national bank included completion in 1998 of the official manual for on-site supervision of all banks in Croatia, and development of a new uniform off-site bank reporting system maintained at the National Bank. At the BRA, good progress was made towards building technical capacity and developing effective procedures to ensure that the process of rehabilitating and privatizing state-owned banks would be carried out effectively and transparently.

Progress in capacity building was not matched, however, by effective utilization of that capacity. For example, the uniform off-site bank reporting system has not been fully adopted. Further, reluctance on the part of the National Bank and the GOC to authorize trained bank supervisors to undertake regular on site visits, and to take action on information collected during bank reviews, has severely impeded further implementation of the banking sector reform activity. At the BRA, overall progress has been inhibited by reluctance on the part of key managers and partners both at the BRA and within the GOC to authorize the Agency to take bold and resolute action needed to deal effectively with the problems identified.

Possible Adjustments to Plans: Throughout 1998, it became increasingly evident that the financial sector in Croatia is facing severe problems. The near total collapse of Dubrovacka Banka in March 1998 was a powerful indicator of the poor health of the formal banking sector. Despite growing concerns about the urgency of dealing with problems facing many of Croatia’s banks, the GOC has been slow to acknowledge or to take action to begin to address the major issues. Genuine financial sector reform has been severely compromised by apparent political considerations. In the absence of sufficient political will and commitment by the GOC to deal effectively with problem banks and other financial sector issues, USAID support for financial sector reform in Croatia has been largely curtailed pending a change in political will and direction. There are, however, strong indications that the next 12-24 months in Croatia will set the stage for major change in the country’s political leadership. In that event, USAID would seek to reinvigorate its banking sector reform activities and perhaps -- as needed-- provide other macroeconomic and structural, policy, legal and regulatory reform advice and assistance in support of new political leadership. If that occurs, USAID would extend performance targets for this objective.

Other Donor Programs: USAID coordinates its assistance under this objective with the World Bank, the International Monetary Fund ( IMF), and the British Know How Fund.

Principal Contractors, Grantees, or Agencies: KPMG/Barents Group, Financial Services Volunteer Corps; World Learning.

Selected Performance Measures:

	Baseline	Target
Interest rate spread between deposits and loans declines	19% (1996)	10% (1999)
Share of assets in private banks increase	48%	60%
Gov. Debt Securities issued domestically	0 (1995)	2.5 billion KN
Ratio of Household deposits to GDP	18%	21%
Bankruptcy law implemented	No (1995)	Yes (1999)
% of non-performing bank assets identified and reduced	8% known (1995)	15% (1999)
% of banks examined annually	10% (1995)	100% (1999)
Companies with securities officially registered with the Stock Exchange	1 (1995)	14 (1999)
Capital markets laws and CROSEC regulations in place	No (1995)	Yes (1998)

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ACTIVITY DATA SHEET

PROGRAM: CROATIA
TITLE: Increased, Better-Informed Citizens’ Participation in Political and Economic Decision-Making, 180-S002.1
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 2000: $4,550,000 SEED Act
INITIAL OBLIGATION: FY 1995; ESTIMATED COMPLETION DATE: FY 2003

Summary: Since independence, Croatia has made unsatisfactory progress towards full democratization. Croatia currently ranks 13th in overall democratic reform among 27 CEE and NIS countries receiving bilateral support from the US. Since the end of the war in 1995, Croatia has failed to improve any of the basic democratic indices of political rights and civil liberties and has actually regressed in the area of media freedom. The principal obstacle to systemic democratic reform in Croatia remains the ruling party’s ambivalent commitment and, at times, open hostility to basic democratic principals and civil liberties. The GOC’s unsatisfactory performance in supporting and encouraging broader democratization has restricted the country’s access to European and trans-Atlantic institutions. Performance in this area will continue to be monitored closely and will be the basic litmus test for determining Croatia’s further participation in the process of European integration as well as its eligibility for participation in trans-Atlantic institutions.

In reviewing USG-funded support for democratization in Croatia, it is important to make the distinction between support to the government and support for democratic reformers. Outside of government circles, there exists in Croatia an impressive and well-respected cadre of democratic reform advocates who merit and need outside support to survive and gain influence in a markedly adverse political environment. For the independent media, the NGO sector, alternative political parties, and trade unions, USG and other donors’ assistance funds have been a vital source of badly needed financial support, training, and technical assistance to maintain operations and achieve long term viability.

Key Results: U.S. support for democratic reform in Croatia is aimed primarily at improved performance in civil society development, independent media, and political processes. USAID and other USG funded projects support a broad range of NGOs, independent media outlets and political parties to support broader democratization in Croatia and encourage greater public participation in political processes. Key intermediate results under this Strategic objective are: increased capacity of civil society organizations, more diverse and independent sources of public information, and more representative composition of national and local governments.

Performance and Prospects: Progress toward achievement of this SO has been meeting expectations. In the area of independent media, USAID-funded assistance under the Professional Media Project has supported the development of professional associations including the Croatian Journalists Association with 2,800 members, the nine-member Association of Independent Television Stations and a 14-member Association of Independent Radio Stations. These associations are playing a vital role in efforts to break the government’s monopolistic control of electronic media and to provide alternative sources of news and information for a broad segment of Croatian citizens. USAID has also provided key technical assistance, managerial training, and financial support to sustain independent media outlets currently operating in Croatia. USAID-funded political party development activities implemented through the National Democratic Institute and the International Republican Institutes have enabled alternative political parties to expand political bases through public outreach, professionalize operations, strengthen platform development capacity, advocate more effectively in support of changes to the existing electoral law (which is widely viewed as a major obstacle to a more competitive and representative multi-party democracy in Croatia), and develop a program of national opinion polling to assist the leadership ranks to prepare for and compete more effectively in the next round of national elections. USAID is supporting a broad range of advocacy NGOs under its NGO Sector Development Program administered by the Academy for Educational Development (AED) to encourage increased participation of private citizens in public decision making.

Possible Adjustments to Plans: There is growing evidence that the next 12 to 24 months could set the stage for significant political change in Croatia and mark the advent of a new, more democratic era. New parliamentary elections must be held no later than early 2000 and the next presidential election must be held no later than 2002. The results of a series of national opinion polls in 1998 indicated deep concerns among the voting populace about the overall direction in which the country is headed and clearly underscored a broad-based desire for political change. The poll results also revealed general economic anxiety as well as substantially declining support for the ruling party. If alternative parties can sustain momentum towards effective coalition building and platform and message development, prospects are excellent for a major breakthrough in representation at both the national and local levels. The rise to power of more moderate pro-democracy political leaders from the opposition or from within the ruling party itself would give a major boost to efforts to accelerate the process of democratic transition in Croatia. In FY 2000, USAID’s democratization program will continue to support independent media, political party strengthening and civil society development. USAID will continue to monitor political developments and events closely to identify opportunities to catalyze change.

Other Donor Programs: The USG continues to play an important leadership and coordination role among the international community in promoting democratization in Croatia. The United States has been instrumental in developing an agenda of key policy reforms to support independent media, ensure protection of human rights, strengthen the rule of law and develop more open and equitable electoral processes. USG leadership has also been crucial for developing consensus within the international community to apply pressure on the GOC to adopt reforms. USAID has been effective in using its assistance activities to leverage and coordinate support from other donors to support democratization. USAID coordinates its assistance under this objective with the OSCE, the EU, Norway, other bilateral donors, and international NGOs, including the Open Society Institute.

Principal Contractors, Grantees, or Agencies: The International Research and Exchange Board (IREX), the National Democratic Institute (NDI), the International Republican Institute, the International Center for Not-for-Profit Law (ICNL), the American Center for International Labor Solidarity (ACILS), the Academy for Educational Development, and the American Bar Association Central and Eastern European Legal Initiative.

Selected Performance Measures:

	Baseline	Target
Improvement in the Freedom House Combined Average rating for Croatia*	4.0/Partly Free (1996)	2.0/Free (2000)
Improvement in Freedom House Press Freedom Rating	5.8/Partly free (1996)	4.5/Partly Free (2000)
Improvement on NGO Sustainability Index	4.5/Moderate (1996)	2.5/ (2000)
*Freedom House and NGO sustainability index measures are on a scale of 7 (lowest) to 1 (highest)

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ACTIVITY DATA SHEET

PROGRAM: CROATIA
TITLE: Reintegration of War-Affected Populations 180-S003.1
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 2000: $0 SEED Act
INITIAL OBLIGATION: FY 1995; ESTIMATED COMPLETION DATE: FY 2001

Summary: Despite good progress in Croatia since the end of the war to rebuild war-damaged housing and infrastructure and restore economic growth, there remain several hundred thousand ethnic Croats, Serbs and others from Croatia who have been unable to exercise their right to return. This group includes internally displaced persons (IDPs), Croatian refugees in Bosnia and Herzegovina (BiH) and the Federal Republic of Yugoslavia, and ethnic Croats displaced from BiH.

Resolution of the IDP and refugee crisis throughout the former Yugoslavia remains a high priority US foreign policy objective. In 1998, the GOC made substantial progress in improving relations and cooperation with the international community on a broad range of issues affecting return of IDPs and refugees to communities of origin. Agreements with the GOC on return procedures, a national return plan and national reconstruction and development plan were significant milestones towards improved GOC performance in meeting its Dayton and Erdut agreement commitments. At the core of these agreements is a commitment by the GOC to adopt more transparent and non-discriminatory policies to encourage return and implement reconstruction assistance. Whether the GOC will actually do what it has promised remains uncertain. USG-funded activities in support of returns in Croatia are important foreign policy tools both for catalyzing returns and for verifying GOC compliance with the terms of its agreements.

Key Results: U.S.-funded activities in Croatia to support return and reintegration of war-affected populations is aimed at three principal intermediate results: (1) growth of small and medium scale enterprises and agriculture to provide jobs and incomes to support returning and remaining populations; (2) improved human rights monitoring capacity and access to legal services for affected populations; and (3) development and implementation of plans by municipalities and local governments to enable all displaced persons and refugees to return to communities of origin.

Performance and Prospects: Progress toward achievement of key results has been as expected. In 1998, USAID initiated the Return Assistance Program (RAP) with the International Organization for Migration (IOM) to support municipalities which demonstrate a commitment to encourage and support returns. During this past year eight municipalities entered into RAP partnership agreements with a total return target of approximately 14,500 people. Actual returns to RAP partner municipalities were estimated at 6,700. In 1999, RAP will expand to a minimum of 16 partner municipalities with a total return target of at least 30,000. Returns facilitated directly under RAP are expected to catalyze larger scale returns throughout Croatia. In the area of humans rights monitoring and protection, USAID-funded assistance has directly supported the development of a legal services and assistance network consisting of 25 local NGO service providers. In 1998, the network provided services to over 25,000 displaced persons, refugees and returnees to resolve legal and administrative issues including citizenship, property rights, professional licensing, business registration and certification, and access to social benefits. USAID support for private enterprise and agricultural development in war-affected areas has benefited over 3,000 entrepreneurs and farmers throughout Croatia. In 1998, the Firm Level Assistance Group (FLAG) provided direct technical assistance and training to thirty client firms and twelve farmers’ associations. FLAG has expanded its support network to include all war-affected areas in Croatia. Firms receiving FLAG support reported an average 4% increase in employment and 17% increase in sales revenue. FLAG also helped to establish over 250 new business linkages in Croatia and abroad for firms in eastern Slavonia-- a major war-affected area. Through the end of 1998, the USAID funded micro-loan project implemented by Opportunity International had disbursed approximately 650 loans valued at $3.8 million to small scale entrepreneurs and farmers in the region. Micro-loan recipients have been able to sustain nearly 900 jobs while creating over 700 new jobs for area residents.

Possible Adjustment to plans: The originally envisioned time frame of December 1999 for achievement of this strategic objective needs to be extended through at least 2000 to allow adequate time to achieve a comprehensive solution to the IDP and refugee situation in Croatia and the region. During FY 2000 remaining funding under this objective will be used to sustain USAID funded activities in the area of local governance and economic development. As progress in Croatia is closely linked to progress in Bosnia and Herzegovina (BiH) and the Federal Republic of Yugoslavia (FRY), greater emphasis in will be placed on facilitating cross-border returns between Croatia and BiH and the FRY and in identifying opportunities to support regional cooperation on trade and investment issues.

Other Donor Programs: The GOC in 1998 estimated the forward costs of reconstruction of war damaged housing and infrastructure at $2.5 billion. The GOC has committed itself to allocating $500 million annually through 2003 from the national budget to meet these costs. USG assistance is closely coordinated with the GOC, the OSCE, the EU, the World Bank, UNHCR, and the governments of Norway, Belgium and other bilateral donors. Strong donor coordination among the international community has been instrumental in pressuring the GOC to adopt more fair and transparent policies and procedures to support multi-ethnic returns.

Principal Contractors, Grantees, or Agencies: America’s Development Foundation, the International Organization for Migration (IOM), Opportunity International, the Small Enterprise Assistance Fund, the University of Delaware, World Learning, and the Urban Institute.

Selected Performance Measures:

	Baseline	Target
Overall Number of displaced persons and refugee returns	0 (1997)	210,000 (2000)
Number of Partner Municipalities	0 (1997)	16 (1999)
Number of returnees to Partner Municipalities	0 (1997)	30,000 (1999)
Human and civil rights monitored and protected	Unsatisfactory (1996)	Significant quali- tative improvement each year

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