Structural Changes in Manufacturing Industry of Croatia

Increase of competitiveness on the world market and growth of exports are significant signs of success in the process of restructuring in the post-socialist economies. In Croatia, however, exports (of goods) were explicitly stagnant in the entire period 1999- 2000. In this paper various factors are investigated which can be responsible for such an outcome. Attention is aimed at: costs of production and profitability of firms in manufacturing industry, features of investments, development of small and medium size enterprises and foreign-exchange regime. Author comes to the conclusion that process of restructuring in manufacturing industry in Croatia was present in the period under observation. However, given low investment activity, gains in productivity were obtained mainly as a result of reduction in the redundant labor force. A rise in costs triggered by introduction of the VAT system and subsequent expansion of public expenditure in 1998, as well as new costs stemming from an explosion of arrears in 1999, have not been offset by analogous decrease in the unit labor cost. At the same time, due to high liberalization of imports and de facto fixed foreign-exchange regime and consequent overvaluation of domestic currency, high stability of prices was sustained. In such circumstances losses in the firms in manufacturing industry were continuously present, being in some years more than twofold greater than profits. Conclusion is that the fixed foreign-exchange regime should be abandoned and a kind of a crawling band with asymmetric interventions should be adopted. With a support of an appropriate monetary and wage policy and further efforts for public expenditure restraints, competitiveness of Croatian exports on the world market could be enhanced.