VZCZCXRO1096
RR RUEHAST
DE RUEHVB #1009/01 2371152
ZNR UUUUU ZZH
R 251152Z AUG 06
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC 6554
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 ZAGREB 001009 
 
SIPDIS 
 
SIPDIS 
 
TAGS: ECON EFIN HR
SUBJECT: Economic picture mixed in Western Slavonia 
 
 
ZAGREB 00001009  001.2 OF 002 
 
 
1.SUMMARY: EconOffs recently visited several small 
cities in Western Slavonia in an effort to assess 
economic conditions outside of Croatia's thriving 
capital of Zagreb. County and city officials reported 
that, although employment rates are slowly rising, 
incomes in the region are well below the national 
average and the lack of job opportunities continues to 
send young people looking for jobs in Croatia's larger 
cities. Local governments are taking their own steps to 
promote small business development, offering subsidized 
business zones and incubators, as well as favorable 
loans. Although these measures have begun to bear fruit 
in some areas, the region as a whole continues to 
struggle with the legacies of war and economic 
dislocation. END SUMMARY 
 
¶2. A recent World Bank study on Croatian standards of 
living found that Zagreb citizens are 80% wealthier 
than the national average, with Croatia's poorest 
counties and highest unemployment rates located in the 
heavily war-affected and largely agricultural Slavonia 
region. City and county officials in Pozega, Slatina, 
Virovitica and Pakrac report that average monthly net 
incomes in their cities fall between between 2,700 
($475) and 3,500 kunas ($625), well below the national 
average of 4,686 kunas ($830). However, most residents 
are reluctant to characterize themselves as poor or 
register for social welfare benefits, so poverty rates 
are difficult to assess. Many people supplement their 
income through unofficial employment and growing their 
own food, so there are few visible indicators of 
regional poverty. From conversations with local 
government officials and town residents, EconOffs 
learned of the local population's considerable skills 
in the "art of getting by." One recent journalism 
graduate, unable to gain permanent employment, holds 
five part-time correspondent positions just to make 
ends meet. One entrepreneur in Virovitica retains 
permanent employment as a teacher at a technical school 
for income security, while adjusting his honey and wine 
production in accordance with market prices. Private 
debt, however, is rapidly rising here as the cost of 
living increases while wages remain stagnant. 
 
¶3. Even though Pakrac retains many visible scars of 
wartime destruction as a result of its position on the 
frontline in Croatia's 1991-1995 war, all four towns 
appear to be quite prosperous and are generally well 
maintained despite unemployment rates hovering between 
20-31%, significantly above the national average of 
16%. Comparisons between the towns are difficult to 
draw due to their differing wartime experiences, with 
Pakrac primarily trying to provide a semblance of its 
prewar existence, Virovitica attempting to develop as a 
regional business and transport hub, Slatina focused on 
modernizing its agricultural sector and promoting 
itself as a tourist destination, and Pozega attempting 
to recover from bankruptcy. The persistent problems of 
unofficial employment and the "grey economy" remain a 
major problem for all towns, heavily affecting local 
tax revenues and making it difficult for local 
governments to clearly assess true employment. 
 
¶4. Many major employers in the region have slashed 
their workforces as a result of war damage, market 
loss, and privatization. Many retain only a fraction of 
their pre-war workforces, while some major industries, 
such as woodworking in Pakrac, which once employed 
1,400, were completely destroyed in the war. Local 
economies remain highly vulnerable to large firm 
bankruptcies, with Pozega County in particular being 
heavily affected by the recent bankruptcy of the 
construction firm Kamen-Ingrad, once a major local 
employer. 
 
¶5. Recovery of some damaged industries, like Pakrac's 
large woodworks, is not feasible, and local governments 
are struggling to both attract foreign investment and 
encourage local small business growth. Incentives to 
attract and retain skilled workers in war-affected and 
depopulated areas include housing subsidies, government- 
subsidized sporting and cultural events/facilities, new 
school buildings, small business loans, and a 
relatively low cost of living. Substantial aid from 
foreign donors (including USAID) has allowed Pakrac to 
open new schools, public markets, re-electrify, and 
provide other incentives to draw back residents. 
Roughly half have returned since 1995. Pakrac offers 
students stipends to attend university in either Zagreb 
or Osijek, under the condition that the students return 
to work in the area after they complete their 
education. Young residents express the frustration that 
 
ZAGREB 00001009  002.2 OF 002 
 
 
although it has now become necessary to earn a college 
degree to be considered employable, few professional 
opportunities exist within Croatia, leaving them the 
options of either emigration or settling into an 
unrelated and often menial job. Retraining programs for 
the unemployed have been moderately successful, but a 
need exists for self-employment training and 
assistance. 
 
¶6. Local governments in the region have successfully 
created business zones and incubators, offering local 
entrepreneurs office and production space at very low 
cost, pre-established infrastructure (water, 
electricity, gas, waste removal) as well as subsidized 
assistance services (book-keeping, etc.). Pakrac is 
completing a larger new business incubator after 
achieving considerable success with its current 
facility, which currently offers space for 5 start-up 
businesses. Expanded companies that got their start in 
the center have occupied plots in the neighboring 
business zone, with one glass factory now employing 200 
workers (from an initial 10 employees). Virovitica has 
successfully launched the opening of a new business 
zone as well, with all plots reserved for both 
production and services already bought by local 
investors. In addition to the business zones, local 
governments assist start-ups by offering small business 
loans as well as subsidizing the interest on private 
business loans. Special business loan programs also 
exist for women under the age of 30. Employers also 
receive financial incentives from the federal 
government for hiring workers from special groups like 
war veterans over 45 years of age. 
 
¶7. All local governments are eager to both privatize 
public agricultural land and steer production away from 
cereal crops to more lucrative vegetable and fruit 
crops. Slatina's economic strategy has emphasized the 
privatization of public land, with final tenders on 
agricultural plots to be offered this fall. Nearly 700 
family-owned farms operate in the area, and are 
shifting their production toward more profitable 
tobacco crops and the intensive cultivation of 
vegetables in greenhouses and irrigated plots. 
However, export of these agricultural commodities is 
limited by the lack of cold-storage facilities 
necessary for successful produce distribution. Local 
governments across the region recognize this problem 
and assist cooperative efforts to construct and operate 
these facilities.  Some regional farms have also taken 
advantage of the organic food market, which is an area 
of possible growth in the agricultural sector. The 
region's potential for tourism lies in thermal spa 
development, agro- and rural tourism, as well as 
drawing campers, hikers, and hunters to the region's 
large forests and wooded hills. Large-scale recovery of 
the industrial sector is highly unlikely given the lack 
of major investment, and the region's economic growth 
seems dependent on promoting small businesses (light 
manufacturing, crafts, and services) as well as 
efficient agricultural practices.