Cablegate: Economic Issues in the Croatian Elections: Is 4x4 Greater

DE RUEHVB #0981/01 3060703
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E.O. 12958: N/A

Ref: A) Zagreb 938, B) Zagreb 950

1. SUMMARY: This is the second in our series (REF B) previewing
issues and parties for Croatia's Nov. 25 parliamentary elections.
With the vote less than a month away, Croatia's two main political
parties are trying hard to draw distinctions on economic policy.
Given the large degree of consensus on other major issues, such as
EU and NATO accession, the economy provides a natural area for
differentiation. Although the parties have devised catchy formulas
to summarize their economic plans, the only two clear policy
differences are on the need for further privatization (which the HDZ
vaguely favors and the SDP vaguely opposes), and introduction of a
capital gains tax (which the SDP explicitly favors, and the HDZ
explicitly opposes). This comes despite the fact that many polls
indicate that such existential questions as pensions, unemployment
and the cost of living are nearest to voters' hearts. In the end,
EU pressure will remain a stronger spur for reform than electoral
politics. END SUMMARY.

Economic Stats Good, But Public Does Not Think So
--------------------------------------------- ----
2. Parliamentary elections in Croatia are scheduled for November 25
and economic themes have played prominently. Since the summer, the
opposition has worked hard to denigrate what is, in most accounts,
an economy that should favor the party in power. The ruling
Croatian Democratic Union (HDZ) has overseen four years of steady
growth, stable inflation and declining deficits and unemployment,
giving it a strong basis on which to lay claim to the mantle of
responsible economic stewardship. The economy has grown steadily at
between 4 and 5 percent. Inflation has been contained between 2 and
3 percent. Significant arrears in pensions have been paid down.
Unemployment, which was 14.3 percent in 2003, has dropped to 11.8
percent. PM Ivo Sanader tells voters that if his party is returned
to power, they can expect even better results over the next four

3. The Social Democratic Party (SDP) is attempting to neutralize
this apparent advantage, likening HDZ-led prosperity to a Potemkin
village built on foreign credit. The SDP's candidate for Prime
Minister, Ljubo Jurcic, regularly points to Croatia's economic
growth as too slow for the country's stage of development, noting
that 2 percent in Germany translates into a greater per capita
increase than 5 percent in Croatia. He also singles out Croatia's
high level of foreign debt, which currently stands at over 85
percent of GDP, as a harbinger of instability and the sign of an
economy built on little more than consumption and credit.

4. For its part, polling data indicates that the Croatian public
remains largely pessimistic about its own economic circumstances.
Public opinion focuses on persistently high unemployment, rather
than the fact it is dropping; on the subsistence level of many
pensions, rather than the improved (although still shaky) finances
behind the system; or on the high cost of living, rather than the
government's success in controlling inflation.

HDZ: 3x7 = More of the Same

5. The HDZ has packaged its economic platform as "3x7", promising 7
percent GDP growth, 7 percent unemployment and 7 development
projects for Croatia between now and 2010. While lacking in detail,
the party program promises to finish privatization, restructure
state companies and continue with infrastructure investments,
without raising taxes and eliminating the budget deficit by 2010.

6. To prove that he means business, PM Sanader and his ministers
have been omnipresent in recent months, cutting ribbons on new
roads, tunnels and bridges and overseeing the privatization of
Croatian Telecom (ref A), which brought quick profits to thousands
and lifted the Zagreb exchange to new heights. Sanader says that
changing leadership now would undo these gains and reduce confidence
in Croatia among foreign investors, particularly as a result of the
opposition's pledges to introduce a capital gains tax.

SDP: 4x4 > 3x7

7. The SDP formula of "4x4" is based on a plan, tinged with old
central planning instincts, to identify four key industries for each
region of Croatia and then aid four competitive companies within
each of those industries. The plan offers no specifics as to how
its once and future government would go about picking new winners in
the economy. Nor does it address how any state aid would affect the
country's already high levels of debt or past muster with the EU's
requirement that Croatia, as a candidate country, trim, rather than
expand, state subsidies. Jurcic, when pressed for details, says
that expert groups will determine the best course of action once his
party comes to power. Overall, the SDP has treated higher GDP growth

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as the elixir for all of the country's ills, promising that the
gains from economic growth would be funneled to "social

Despite Rhetoric, Large Areas of Agreement

8. In fact, the HDZ and the SDP, as well as most of the smaller
parties, agree on many key economic issues. All parties call for
the reform of Croatia's sclerotic judicial system, increased
efficiency in public administration, and improved education as keys
to unlocking greater economic potential. Both also point to the need
for Croatia to secure sources of energy and to continue to modernize
its infrastructure.

9. The only two clear policy differences so far in the campaign have
been on privatization and capital gains taxes. While the HDZ calls
for continued privatization (without specifying what more they would
sell), Jurcic has criticized privatization as "selling the family
silver", raising particular concerns if the investors are foreign.
On tax policy, the SDP promises to introduce a tax on capital gains
and to ease taxes on reinvested profits, while the HDZ argues that
the tax regime should be left alone to give predictability to
investors. The contrast between the HDZ's pledge of "no new taxes"
and the SDP's commitment to new levies has formed the backbone of
the HDZ's current billboard campaign.

10. COMMENT: Given the constraints of EU candidacy and Croatia's
economic integration with its EU neighbors, Croatia's economic
prospects in the coming four years will depend more on continued
growth in tourism receipts and a favorable regional economic
climate, than on programs of 3x7 or 4x4. In the final analysis,
neither party is entirely convincing regarding its commitment to
painful and sometimes expensive reforms in the judiciary and public
administration. Continued EU pressure, and funding, will be crucial
if the next government is to increase the pace from the current HDZ
government's achievements. END COMMENT.


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