Five challenges for Croatia’s ‘Barbie’

02.06.15

Five challenges for Croatia’s ‘Barbie’

02.06.15
Kolinda Grabar-Kitarovic

By Mikala Sorenson for Global Risk Insights

With a slim margin, right-wing Kolinda Grabar-Kitarovic, nicknamed Barbie, won the Croatian presidency over incumbent Ivo Josipovic. There is more to her than a pretty smile, though. Grabar-Kitarovic has been tried and tested as Assistant Secretary General for Public Diplomacy at NATO, former Minister of Foreign Affairs of Croatia and Ambassador to the US. From February 19, she can add President to that list.

The victory is the smallest part of the job for Ms. Grabar-Kitarovic. Here are five challenges Croatia will face in the short and medium term:

1. Shrinking economy. A persistent recession has weighed Croatia down for several years, and the accession into the EU in 2013 did little to put an end to the sluggish economy. GDP has been falling steadily in Croatia, declining by 0.9% in 2013 according to Eurostat.

The country is now entering its sixth year of recession and output has fallen by 12% over the period. GDP is forecasted to decline by 0.7% in 2014 and increase modestly by 0.2% in 2015 and 1.1% in 2016. The recovery to positive growth is closely intertwined with developments in the rest of EU, seeing as the main trading partners for Croatia are Germany and Italy, who have their own troubles to fight.

2. Unemployment. Like the Eurozone’s Mediterranean pariahs, Greece, Spain and Italy, Croatia struggles with very high unemployment, to the tune of 19%, and 45% youth unemployment. As a consequence, there is a brain drain from Croatia, as skilled and highly educated workers move away in search of better opportunities. Between 2009 and 2012, 32,500 Croats left Croatia seeking employment abroad, citing a hostile domestic job market as the reason.Conditions have only deteriorated since; the youth unemployment rate nearly doubled between 2009 and 2014, and the exodus of educated, young people continues unabated.

In an attempt to address the problem, the European Commission set up the Youth Guarantee program, which previously proved successful in Finland. The scheme aims at guaranteeing young people a job offer, vocational education or apprenticeship within four months of registering as unemployed.

Success is unlikely, however, since Croatia’s problems are akin to those causing Greece, Spain and Italy’s issues, namely lack of competitiveness compared to other, much more productive EU neighbors. The high unemployment rate is a symptom of the structural divide in Europe. Like elsewhere, this has fostered a “lost generation” of youth with no hope of a better future, and the potential for unrest and violent demonstrations as frustrations with the situation remain unsolved.

GraphGraph3. Education sector overhaul needed. The education system is in dire need of reform, as it churns out graduates for jobs that do not exist, equipped with skills that are not demanded. Enrollment levels are below the EU and OECD levels, so the problem is primarily one of mismatches between higher education and the labour market. The subject areas studied are a poor fit for the needs of the economy, resulting in severe underemployment. As the graphic shows, Croatia needs to focus especially on the very beginning of children’s education, as shown by the early childhood education indicator, and the final years of education, exemplified by the indicators for employability of recent graduates, tertiary education attachment and lifelong learning. In particular, school-to-work transitions offer a challenge, due to inadequate career guidance and lack of vocational training.

Graph4. Proper investment in infrastructure. Before becoming part of the EU, Croatia initiated significant reforms in the railway sector, paving the way towards becoming an attractive link between EU and Southeastern Europe. Several stretches of railway had been badly damaged during the wars between 1991 and 1995, and needed repairing and modernization. One such reform was the Vinkovci railway project, which connects Vinkovci, Croatia’s second-most important junction, to the Serbian frontier crossing. The project cost €61 million, of which the EU provided €28.7 million.

Much work remains to be done in the sector, and the EU membership provides an opportunity for Croatia to invest in its infrastructure via EU Structural Funds. A project in the works is a railway bypass system for freight traffic around Zagreb, estimated at €780 million, of which EU funds make up 75%. If the funds are used effectively, emulating Ireland, Spain, Portugal and Poland, Croatia may become a busy international corridor and subject to increased investment.

5. Political opposition. As president, Grabar-Kitarovic has little power to tackle the economic woes, despite pledging to kick-start growth. The prime minister, Zoran Milanovic, and his centre-left government are staunchly opposed to the right-wing Croatian Democratic Union (HDZ), which backed Grabar-Kitarovic.

The new president would stand stronger with a government of her own colours, but HDZ’s leader Tomislav Karamarko appears unwilling to call an early election, so it will most likely be a December election as expected. HDZ is beset with the image of a party laced with corruption, as exemplified when former HDZ PM Ivo Sanader was put on trial for corruption in 2011.

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