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INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 ZAGREB 000981 
 
SIPDIS 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EUR/SCE 
 
E.O. 12958: N/A 
TAGS: ECON PGOV HR ELECTIONS
SUBJECT: ECONOMIC ISSUES IN THE CROATIAN ELECTIONS: IS 4X4 GREATER 
THAN 3X7? 
 
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 
years. 
 
¶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 
development." 
 
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. 
 
BRADTKE