THE SHADOW

Although the last shots were fired at Serbia some 13 years ago, with the Dayton Peace Agreement signed in December 1995, the legacy of former Yugoslavia and the various Yugoslav wars of succession persisted much longer. The rebuilding of the damaged villages and towns (including the Adriatic pearl of Dubrovnik) proved easier than erasing widespread virulent nationalism, which to its neighbours resurrected memories of the Second World War and Croatia’s own Nazis, the Ustasha. The December 1999 death of nationalist first President Franjo Tudjman – whom critics say shares equal blame with Serbia’s Slobodan Milosevic for Yugoslavia’s violent collapse – marked the beginning of Croatia’s long journey towards normalcy.

THE SOLUTION

The 2000-03 SDP government of Ivica Racan (who died last year) and subsequent right-of-centre Croatian Democratic Union (HDZ) governments have all sought to bring Croatia into the mainstream, succeeding in creating a stable two-party system. The current right-of-centre coalition, headed by Prime Minister Ivo Sanader, was elected in November 2007 and reassuringly includes an ethnic Serb among its senior ministers; meanwhile, leftist Stipe Mesic holds the presidency. All have prioritised NATO membership – which was granted at this year’s Bucharest summit – and EU accession, with the government aiming for 2010. Economic reforms, privatisation, steady GDP growth of around 5% a year, low inflation (under 3%) and the still ongoing improvement of the business environment have boosted FDI to an annual €2.7bn-€3bn, much coming from the Croatian diaspora in the US, Canada and Australia.

THE REBRAND

The glossy website of Croatia Invest suggests a modern, dynamic European nation that is open for business; naturally, Croatia’s sunny Adriatic location is stressed rather than the more complex, harder-to-sell Balkan reality. Key sectors include real estate and tourism, both of which have attracted the lion’s share of FDI, despite prices being higher than in other post-communist countries (worth keeping in mind in the event of a downturn). Successful reforms led the most recent World Bank Doing Business survey to list Croatia as the world’s second best reformer and Transparency International’s 2007 upgrade to 64th place, from 69th, in its annual Corruption Perceptions Index.

THE CHALLENGES

Despite admirable progress with reforms, doing business can still be very frustrating. Bureaucracy is rife, with some 38 permits needed to open a business; corruption remains a problem (though much less so now with public tenders); and the judiciary is slow and opaque. The elite is dominated by people who got rich quick in the rough and ready privatisations of the Tudjman era, which has led critics to say Croatia is still dominated by crony capitalism. Meanwhile, economic concerns remain: although unemployment at 11% is at a historic low, youth unemployment is currently between 25% and 30%. Regional development away from Zagreb and the booming coast has been slow and uneven.

THE FUTURE

Although Zagreb is committed to fast-track EU accession, and is moving to fully align its laws, reforming public administration will be a challenge. Given its past, Croatia’s application was always going to be carefully scrutinised; however, the fact Brussels now recognises that Bulgaria, Romania and Cyprus were given membership prematurely – the first two before they had sufficient reformed, the latter before the Greek Cypriots had committed to resolving the Cyprus problem – may delay Zagreb’s accession further. Although relations with Belgrade have improved markedly, continued bad relations with EU member Slovenia – with whom Croatia still has outstanding territorial claims – may also cast a shadow.

SHOULD I INVEST?

With Croatia having one of Europe’s highest debt to GDP ratios – around 90%, three times more than a decade ago – a balance of payments deficit of around 8%, and an arguably overvalued currency, the Kuna, the credit crunch has raised some external financing fears, although an otherwise pragmatic economic policy should reassure. Tourism and real estate remain the obvious areas for investment, although the lack of greenfield projects suggests this is probably best done via an existing project and with a well-connected local partner.