PRESIDENT TUDJMAN ADDRESSES PARLIAMENT ON STATE OF THE NATION PT. 2

( Editorial: --> 0492 ) IV. THE ECONOMY 1. Introductory Evaluation of the Past Period In spite of the many-sided negative legacy of the former system, of the difficulties inherent in transition, and, first and foremost, of the war-time suffering caused by the Yugocommunist and Serbian aggression, over the past seven years of existence of the young Croatian State considerable results have been achieved in the stabilisation and development of the Croatian economy, and in its transformation from a socialist into a market economy. Already in its first Constitution, enacted in 1990, Croatia opted for a market economy, based on private ownership and free enterprise, but also for the social state principle. Even in the most difficult years of war and aggression we succeeded in avoiding the pitfalls of a war-time economy and started to structure a modern legislation matching the legal foundations of successful market economy countries. Similarly, we have been able to achieve the transformation and privatisation of the greatest part of the Croatian economy in a way which has proved, in the objective judgement of international experts, to be more successful even than the most progressive countries in transition. Within the scope of these efforts we also enacted the Denationalisation Law. In line with the latest, voucher privatisation scheme, which has become possible only after the cessation of war-time circumstances, many citizens - the population of the war-affected areas - have been able to acquire shares of many companies. Already in conditions of war and semi-isolation, in October 1993, we embarked upon the Stabilisation Programme in order to stop rampaging hyperinflation and create the conditions for accelerated restructuring and stable economic growth. The effect of the Stabilisation Programme surpassed all expectations of national and international experts alike. The growth of prices was curbed immediately, and then retained at the level of about 3 percent a year, whereby Croatia has become one of the countries with the lowest rate of inflation and a most stable economy. As of early 1994 the economy recorded a positive rate of growth of the gross national product; the initially modest rate of one to two percent increased considerably in 1996, and amounted to about 7 percent in 1997. This is a clear indication of the soundness of our economic policy. Owing to its sound macroeconomic policy Croatia is one of the few countries which can boast to have achieved, over several years, results which practically meet the Maastricht criteria, that is, the criteria to be met by European Union countries in order to join the common EURO currency system (allowable level of public debt, state budget deficit, inflation, currency float and long-term rate of interest). The incontestably successful Croatian economy has had a decisive influence on its favourable international credit rating; in this regard, Croatia is ranked among the first forty countries in the world. All these results have been achieved in spite of major sacrifices due to aggression and occupation of a considerable part of national territory. The negative economic effect of the disintegration of the former market, the negative legacy of the socialist system and the consequences of war have inevitably affected the standard of living of our citizens. But, was there a different way of freeing ourselves of the Yugoslav and communist yoke, of creating our own State, establishing sovereignty throughout its territory and thereby providing for a better future of the Croatian people? All these are priceless achievements. Had we failed, history would have condemned us, and the results attained represent its most magnificent pages. 2. Economic Trends in 1997 In economic terms 1997 may be said to have been very successful. It was distinguished by a high rate of growth of economic activity, as expressed by the 7 percent growth of the gross domestic product. Even with such a dynamic rate of economic development, economic stability has been maintained and reinforced, which is of outstanding importance. In 1997 Croatia achieved the highest rate of growth of the gross domestic product and the lowest rate of inflation among all countries undergoing transition. The continuous growth of industrial output for more than two years is particularly encouraging. In 1997 the rate of growth of industrial output was 6.8 percent. In 1997 high rates of growth have also been recorded in other activities, such as agriculture, the construction industry, traffic and transportation, trade, tourism, financial services etc. The reconstruction of war-affected areas has also provided a major contribution to production and economic life. By the end of 1996 about 63,000 family homes and apartments were reconstructed through various organised activities. About 5 billion kuna was spent for the purpose, out of which the assistance of the international community accounted to only one percent. The reconstruction of an additional 6,350 housing units was organised in 1997; out of these, 5,740 were completed by the end of the year. The reconstruction of about 1,500 homes and apartments is currently under way in the Croatian Danubian Region; additionally, the reconstruction of 500 apartments in the Region is funded by the European Union. In addition to housing, schools, churches, the basic infrastructure and economic facilities are also being reconstructed and built in the war-affected areas. In spite of the major efforts and reconstruction results, Croatia still cares for about 113,000 displaced persons and about 100,000 refugees. In 1997 the Government has been intensively engaged in the rehabilitation and restructuring of companies. The rehabilitation of several dozen companies saved about 35,000 jobs. In 1997 noteworthy results have also been achieved in the financial sphere. The state budget deficit amounted to only 0.99 percent of the gross domestic product - only one-third of the Maastricht limit! International reserves at the Croatian National Bank continue to increase, and reached at the end of 1997 the level of about US $2.5 billion. They are at the level of three-month imports and, thus, assure an orderly external liquidity of the country. The rehabilitation and restructuring of four leading banks continued in 1997. So far the Croatian Government has invested more than 3 billion kuna, in cash and bonds, into the rehabilitation of these banks. The results achieved so far in this process are good. In formal and technical terms, the rehabilitation of all the four banks (Splitska, Riječka, Slavonska and Privredna) is completed. Of course, the overall restructuring of all these banks and the entire banking system has not been completed yet. Bank rehabilitation and greater competition in banking have brought down rates of interest and improved the efficiency of monetary policy management. Private domestic and foreign currency savings are increasing because of growing trust in the national banking system. As compared to December 1996, in December 1997 private foreign currency deposits increased by 44 percent, and kuna deposits by as much as 63 percent. Because of its good credit rating, Croatia can negotiate foreign loans under more favourable terms and conditions. However, what is even more important is the ever increasing interest of foreign investors regarding investments in Croatia. Already in 1996 the direct foreign investments in Croatia totalled about half a billion US $, or about 2.7 percent of the gross domestic product. In terms of the level of direct foreign investment in 1997, Croatia ranked second among transition countries, Hungary having been the first. Interest in direct foreign investment in Croatia continues to increase. During 1997 contracts have been agreed, or are about to be agreed, with several foreign investors, each of whom is prepared to invest an amount exceeding all past direct foreign investments in Croatia. Direct foreign investments are more acceptable than foreign borrowing not only because they are inherently durable and because they do not involve internal and external liquidity risks, but also because the foreign investor as a rule brings in technological and management knowledge, the market and, finally, bears the investment risk. Of course, the generally favourable economic trends in Croatia in 1997 were not devoid of certain negative phenomena. They refer to the current account deficit, and especially to internal illiquidity and unemployment. The current account deficit is normal or inevitable in a country at such a level of development and engaged in such deep structural changes. Such a country has to rely on foreign capital imports. Therefore, the problem does not lie in the deficit as such, or even in its current level, but in the trend of its faster growth such as manifested in 1997. However, in consideration of the sources of financing the current account deficit, this does not imply a problem - where Croatia is concerned - which might cause major financial upsets. Nevertheless, if it is not stopped, further growth of the current account deficit could affect Croatia’s foreign credit rating. With regard to internal illiquidity, which is one of the forms of grey money creation and which offsets the positive macroeconomic policy effects, it is one of the typical examples of behaviour inherited from the former system. The prevention of this most serious phenomenon requires more efficient creditor protection, a more consistent application of the Bankruptcy and Court Order Execution Law, and the financial restructuring of business operators. Although statistics overrates the problem of unemployment in Croatia, it is nevertheless of a primary significance because of its economic, social, demographic and political dimension. The Government is preparing a comprehensive programme, to be completed by May 1, 1998, intended to essentially alleviate the problem. The programme is focused on achieving the following goals: - more efficient stimulation of development of small-scale entrepreneurship, and professional and regional labour mobility; - removal of all elements prompting or facilitating unjustified growth of recorded unemployment from the welfare system; - efficient prevention of moonlighting; - reduction of taxes and contributions on salaries in order to promote employment. The revival of economic activity in 1997 has also influenced the continued growth of the standard of living of the population. As compared with late 1996, in late 1997 salaries increased on the average by 12 percent in real terms. Some public companies were also among the economic subjects with the highest salary growth. At the same time, salaries lag behind in government administration, the judiciary and in social activities - education, culture, science and the arts. This has a very negative effect on the efficiency of all these services and on their human resource improvement, and it also involves other negative phenomena. Although average pensions have increased by more than three times in the period between 1993 and 1997, the growth of pensions still lags behind the growth of salaries. In spite of the considerable increase, the level of the majority of pensions is unacceptably low, and every effort is required in order to increase pensions as soon as possible in line with the maximum material potential of the State. This is to be achieved by a determined reform of the pension fund and of the pension insurance scheme. 3. Forecasts for 1998 In addition to its political importance, the termination of the peaceful reintegration of the Croatian Danubian Region is also of a great economic significance. Croatia has thereby restored a very valuable part of its natural resources: extensive areas of highly fertile land, a considerable part of forestry and hunting resources, and rich deposits of oil and gas. The importance of access to the major European inland waterway, the Danube - Main - Rhine Canal, is not to be forgotten either. These resources will certainly play a very important part in the future development of the country. As a whole, economic growth in 1998 may realistically be expected to reach at least the level attained in 1997. This means that we can expect a growth of the gross domestic product of about 7 percent. Appropriate measures intended to regulate domestic consumption and promoting exports should reinforce current economic stability and reduce the current account deficit to an acceptable scale. The Croatian National Bank must enhance its supervision of the operation of banks and savings institutions in order to prevent any quakes in the financial sphere. The need to promote higher domestic savings should be underscored in particular. As of this year Croatia has introduced the value-added tax. In addition to simplifying the overall tax system, it should considerably reduce tax obligations and prevent their evasion, as well as ensure an important incentive to exports, production and employment. As in 1997, the budget deficit in this year should not be allowed to exceed 2 percent of the gross domestic product; this is to be achieved by a consistent fiscal policy. Similarly, the tax burden of the economy should be relieved by 1 to 1.5 percent of the gross domestic product in order to increase the competitiveness of national companies on the domestic and foreign markets, and their investment capability. Tax relief should be a continuous effort, especially with respect to salaries, because taxes and contributions on salaries increase the cost of labour in all activities, especially those with a high labour input. Small-scale entrepreneurship must be stimulated even more energetically in order to revive economic life and provide for new jobs. This is to be achieved in every possible way: from the construction of infrastructure in earmarked zones to the provision of technical assistance and more favourable borrowing terms and conditions. At the same time, due support should be given to those major Croatian companies and concerns whose proprietary identifiable products and successful management make them capable of facing foreign competition in the home and international markets. The privatisation of companies which are still state-owned (tourism, agriculture etc.) should also be sustained with determination. In cases where the privatisation of the whole company would not be appropriate or possible, one should consider the privatisation of specific facilities or property. Partial and selective privatisation should also involve public companies, and predominantly state-owned banks, because of their necessary restructuring and recapitalisation. In this process due account should be taken of national interests in each specific case. Overall experience cautions us that the management of economic subjects remaining in state ownership should be substantially improved. The lack of an appropriate entrepreneurial climate and of capable management is a problem felt not only in state-owned companies. This is a key problem affecting a considerable number of our companies. It should be dealt with by proper management training and, where required and possible, by engaging successful Croatian expatriate businessmen as well as other experts from abroad. We live in a world in which knowledge assumes the decisive role in all fields. This makes investments into people as important, and even more important than investments into all other spheres. In this regard we have to adjust our educational system to national requirements in line with the increasingly demanding international criteria. Opening up to the world is our primary interest. Of course, this has to be done in a meaningful way paying due attention to preserving our economic identity and to protecting our national interests. The development of special, comprehensive relations with the Federation of Bosnia and Herzegovina should be promoted more energetically. As I already mentioned last September, at the opening of the Zagreb Fair, this year the strategy of Croatia’s future development, providing opportunities to all government, social, economic and cultural subjects, has to be adjusted to new circumstances - while, however, taking due account of general and special national-state interests in the consideration and decision-making on all issues of general and special interest in internal and international life. V. SOCIAL ACTIVITIES 1. The Croatian School System in 1997 In 1997 the Croatian school system was faced with the complex, and professionally and politically demanding integration of the school system of the Croatian Danubian Region into Croatia’s regular school system. Last autumn 34 primary and 9 secondary schools started operating on the basis of Croatian curricula. In 1997 the Croatian State has also allocated considerable funds to the school system. It should in particular be noted that all primary school pupils in Croatia, and the pupils of Croatian primary schools in the Federation, received their textbooks without charge. Sixty-eight primary and secondary schools have been built or reconstructed, and 4 schools for national minority members are being built. Full computer equipment has been provided to 153 schools, and school libraries have received 78,318 new books. The legislation governing the Croatian school system should be completed this year. This is a task of outstanding importance, and it involves the enactment of new laws and documents, from the basic Law on the School System to the Programme of Long-Term Development of the Croatian School System, intended to ensure a state-of-the- art school system matching Croatia’s national requirements and in line with international experience. The upgrading of the economic basis of the school system should be continued. The primary task is the completion of 33 schools. The construction of 70 primary and secondary schools, and of a number of gymnasia, is also to start soon. The demanding tasks facing the Croatian school system cannot be achieved without satisfied teachers and professors. Therefore, their salaries should be raised to a level worthy of their educational background and responsible service. 2. Science, Technology and Higher Education The transformation of the higher education system started in 1997 with the establishment of new schools of higher education. New institutions which started working in 1997 include the first two Polytechnics in Dubrovnik and Karlovac, the teacher training colleges in Petrinja and Čakovec, the Higher Medical School in Zagreb, and the Higher Tourist School in Šibenik. The first international private school - the American Management School - was also opened in Dubrovnik. The regional departments of the Zagreb faculties at the University of Split - the Faculty of Medicine and the Art Academy - became independent faculties. The basic task to be completed this year is the definitive arrangement of the higher education system and of the network of institutions of higher learning. Within the scope of higher education particular attention should also be devoted to the students. The enrolment policies at institutions of higher learning, and the students’ standard of living should similarly be focused on talented and hard-working students. Particular care should be given to improving the social status of students coming from families with modest financial possibilities through scholarships. In 1997 the Government awarded the first two thousand scholarships to the best students, and to students prepared to work on the islands and in war-affected areas. The policy of promoting the employment of young scientific researchers should be sustained. In 1997 about 1,100 best graduates were given the opportunity to acquire their first research experience at universities and scientific institutes in Croatia. This is a project of extreme importance both for the development of science and for the policy of employment opportunities for young people. Moreover, it will also prevent the drain of talented human resources abroad. In this regard, particular note should be taken of the need to provide housing for young researchers in Zagreb, and homes for the future young professors in Osijek. In a way 1997 has been a turning point in scientific research activity. The competitions are over, and scientists have embarked upon 850 research projects and 53 programmes, thus setting off the full implementation of the National Scientific Research Programme. About 400 special stimulating projects for young scientists are of exceptional importance in this regard. In 1998 particular attention should be devoted to the development of technology, and to the liaison of science and the economy. This is one of the essential preconditions for the development of internationally competitive production and provision of new jobs. Particular attention, and considerably higher state assistance, must also be paid to social sciences and the humanities. They play an important part in the consideration and identification of the right answers to basic social issues as related to the realisation of Croatian democracy and the rule of law, spiritual revival and further integration of the Croatian national being, as well as to demographic recovery and accelerated economic development, and the harmonisation of market entrepreneurship and social state requirements. 3. Culture The development of culture must be based on the awareness that cultural identity, the cultural heritage and cultural creativity guarantee the existence of every nation, and that they are an extremely important security and foundation of overall development. Not only Croatian authorities, but society as a whole must devote special care to the reconstruction of cultural monuments damaged or destroyed in the Homeland War, as well of those threatened by the wear of time. At the same time - after the success achieved with the inclusion of Trogir and the Basilica of Euphrasius in Poreč in the World Heritage list - proposals should be prepared for the addition of other Croatian cultural complexes to the UNESCO list. The Croatian State looks after 154 museums and art galleries which treasure more than 5 million items. In addition to the reconstruction of museum buildings and the opening of permanent, new and occasional museum and gallery collections, primary goals for this year include the return of all evacuated museum collections from their provisional war-time shelters. The Ministry of Culture has drawn up a basic report on works of art and culture destroyed and stolen during the Homeland War for the purpose of negotiations concerning their return from the Federal Republic of Yugoslavia. Libraries require the renewal and protection of their holdings, the financing of central library programmes, and continued building repair and equipment. Just as always, the word and the book will be irreplaceable in cultural life and in promoting the overall national interest and image, as well as the interest and image of individual cities and counties. We are therefore committed to promoting editorial activity in the publication of Croatian books and translation of Croatian authors into other languages, as well as the translation of major works of world literature into Croatian, and the presentation of Croatia’s culture abroad. Within overall economic policy we should provide the publishing trade, including magazine publication, with the best possible status, and the same requirement holds good for cultural and scientific activity. Cultural manifestations and events in the country and abroad should be the continuous concern of the Croatian State. Systematic care ought to be exercised in the protection of archive materials in general, and of Homeland War records in particular. A new, standard data processing system should be introduced, and archive buildings equipped and renewed. Programmes focused on the succession of cultural and archive materials should persistently be pursued. In the field of music and the performing arts, the activity of both professional and amateur theatres and institutions of music should be promoted, as well as the activity of leading artists. In 1997 the Ministry of Culture, in cooperation with Croatian Radio and Television, has co-financed the production of six feature films shown at Pula, the venue of evaluation of Croatia’s annual film production. The programme should be pursued in 1998 as well, and it includes the commitment to finance short and animated films, and the financing of the Croatian Film Archives programme in order to ensure the protection of its film holdings. The Ministry of Culture should continue to pursue its intensive bilateral and multilateral cultural cooperation, in particular with the Council of Europe and UNESCO, involving major international projects. Thanks to such cooperation and our cultural policy, in the evaluation of Croatian and European experts alike, Croatia has become one of the 11 European countries which have taken part in major projects. 4. Health Care In the health care system, 1997 was distinguished by sustained efforts to improve health services (efforts which have continuously been going on since 1990), the replacement of obsolete technology, reconstruction of health care facilities destroyed in the Yugo-Serbian aggression, and organisational and developmental projects. Particular attention was devoted to the vulnerable population groups such as pensioners, disabled persons and victims of the Homeland War. Special standards have been introduced according to which more funding, as compared to previous years, is allocated to the provision of health services to these groups. A by-law has also been enacted concerning orthopaedic aids which are now accessible to all disabled persons. The reconstruction of health care facilities continued in 1997, and new equipment worth 470 million kuna was acquired. With its acquisitions of new technology over the past three years Croatia has reached West European standards in terms of state of the art laboratory and radiological diagnostic equipment, as well as in terms of intensive care unit equipment. Health care facilities destroyed during the aggression have also been reconstructed. Among the 94 hospital construction and reconstruction sites particular mention should be made of those in Vinkovci, Dubrovnik, Pakrac and Gospić. Among major projects implemented in 1997 a worthwhile project refers to the restoration of health care on the islands. The Government has accepted the plan, and the Croatian National Parliament has decided to include it in the 1998 budget. A transplantation medicine project has also been completed, putting Croatia on a par with West European countries. Last year also marked the start of a health promotion project accepted by the World Bank. It involves educational and organisational measures focused on changing smoking and drinking habits, improving diet and concern for one’s health, and on the need for preventive check-ups. Within this context, the school-age health care service has been revamped entirely, emphasis having been placed on prevention. The yearly plan for the privatisation of primary health care has been fulfilled completely. Eight hundred and forty outpatient departments in health care centres have been privatised, and after signing the lease contract, the physicians (and their teams) became private practitioners. The overall tuberculosis prevention service has been reorganised. Epidemiological data indicate a decline of the disease in terms of both new cases and of the death rate, in spite of the war and a period of post-war social crises. A central crisis management service has been organised for persons subject to aggressive moods or prone to suicide. All county centres now have departments dealing with such problems. As compared with 1990 the number of suicides has decreased. In 1997 the health care system of the Croatian Danubian Region has successfully been reintegrated into the general Croatian system. The reconstruction of all health care facilities is being planned so that they can quickly reach the technological standard of other health care facilities. However, 1997 was also marked by the first serious upsets in health care financing, which is the concern of the Croatian Health Insurance Institute. On the one hand, consumption grew uncontrollably, especially in hospitals, requiring the introduction of administrative limitations; on the other hand, the inflow of funding fell short of the plan. Namely, the Croatian Health Care Institute could not fully collect its claims from the Pension Fund, and from the counties and economic subjects. This led to a chain reaction and to considerable delays in the payment of drug and supply suppliers. Such a situation should not be allowed to continue and requires an immediate solution. Therefore, like most other countries, we are faced with problems of health care financing. The causes are to be found in the fact that new medical technology potentials and requirements exceed by far and large even the economic potential of the most developed countries. Therefore, this is a huge and pressing problem even in much wealthier countries with a rate of health care service consumption far in excess of that in Croatia. This fact should be clearly stated in order to explain, if not to avoid, the dissatisfaction stemming from unrealistic expectations which must be reduced to a level matching our actual possibilities. In view of the foregoing, and especially because of the current partial illiquidity of the Croatian Health Care Institute, the functioning of the system must be reconsidered, the incentives upgraded and new incentives introduced, in keeping with our possibilities and positive international experience. In the process, solidarity should be maintained at the level of basic health care which the State ought to provide to all. This could be achieved by promoting quality and competition among the providers of services, including public and state institutions; on the other hand, energetic support ought to be given to private enterprise, personal responsibility and the user’s own health investment, while providing several health care options as well as stimulating competition among insurance providing institutions in their supply of better insurance conditions. 271639 MET jan 98