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Croatia: Importers Flourish As Domestic Industry Stagnates

By Milan Gavrovic

Zagreb, 11 March 1997 (RFE/RL) -- Croatian state television reported with fanfare last week about the opening of a small shoe factory in the northern town of Bjelovar.

An RFE/RL correspondent in Zagreb says the treatment of the story in the tightly-controlled media -- and the reaction to it -- illustrate much about the crisis in Croatian industry today.

The owners of the Bjelovar plant are Italians, and our correspondent says the big-story treatment of the opening is meant to show the business community that foreign entrepreneurs can thrive in conditions that Croatian businessmen are constantly whining about.

That image came under attack the next day, however, when local trade union officials asserted that during a two-month "trial period" the workers at the shoe factory had been working very long hours daily for "trial" wages of 600 to 700 kunas ($100-$120) per month, one third of the average Croatian pay.

Of course, given the tough economic climate, domestic businessmen are similarly pushing down wages and seeking higher productivity from workers. So what explains the ability of a foreigner to invest apparently successfully in Croatia at a time when many Croatian businessmen are accusing the state of pursuing policies which are systematically destroying the country's industry.

Our correspondent says statistics reveal the trend. For three years levels of domestic industrial production in Croatia have been stagnating while imports of all imaginable sorts of goods are flourishing.

Among the elements of the economic policy that have contributed to this the most important is the unrealistically high exchange rate of the Croat kuna, which experts say is 30 to 40 percent overvalued. The high value of the currency makes imports cheaper against Croatian-made goods, which in turn become more expensive to export.

Only four years ago Croatia had a positive foreign trade balance. Now, flooded with imports, it posts an annual trade deficit of $3.3 billion.

Croatian economic analysts say local producers have been starved of profits while thousands of millions of dollars in profits have been reaped by importers. And yet a foreigner shows up to invest in the local textile and shoe industry, a sector of the economy in which some 30 local enterprises have already declared bankruptcy and whose nine thousand workers lost their jobs. So what is the basis of calculation of the Italian producer, which is unknown to domestic businessmen?

There's only one possibility. Namely that the domestic producers are bearing all the domestic costs and cannot survive without selling abroad. But in trying to sell their goods abroad, they are notably disadvantaged by the unfavourable exchange rate.

The foreigner, on the other hand is in the better position, because he does not have to export amid crippling domestic conditions, his aim is to tap the artificially profitable Croatian market through what basically remains incoming trade. His goods are imported in basic form and finished off in Croatia to be sold locally.

His business is thus still based on trade and import, not on production and export. That is how the exchange rate brings him large profits. Avoidance of labor regulations, which is not possible in Italy, crowns it all.

Our correspondent says that given the election campaign it's understandable that the Bjelovar event has been declared a sign of success of the Croat economy.

President Franjo Tudjman's authoritiarian government, consisting of his Croatian Democratic Union (HDZ), is facing key regional elections next month. A recent poll indicates that support for the HDZ is running at about only 30 percent, while the main two-party rival block is running at 35 percent.

Our correspondent says that what many businessmen in Croatia would like to know is why, if the government wants to make a ballyhoo over Bjelovar, it has pursued policies which they see as amounting to systematic destruction of local industry.