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«GLOBAL JOBS PACT Supporting Strategies to Recover from the Crisis in South Eastern Europe COUNTRY ASSESSMENT REPORT Republic of CROATIA Viktor ...»

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International

Labour

Organization

GLOBAL

JOBS

PACT

Supporting Strategies to Recover

from the Crisis in South Eastern Europe

COUNTRY ASSESSMENT REPORT

Republic of CROATIA

Viktor GOTOVAC

DECENT WORK TECHNICAL SUPPORT TEAM AND COUNTRY OFFICE FOR CENTRAL AND EASTERN EUROPE

Supporting Strategies

to Recover from the Crisis

in South Eastern Europe

Country Assessment Report: Croatia Viktor Gotovac Decent Work Technical Support Team and Country Office for Central and Eastern Europe Copyright © International Labour Organization 2011 First published (2011) Publications of the International Labour Office enjoy copyright under Protocol 2 of the Universal Copyright Convention. Nevertheless, short excerpts from them may be reproduced without authorization, on condition that the source is indicated. For rights of reproduction or translation, application should be made to the ILO Publications (Rights and Permissions), International Labour Office, CH–1211 Geneva 22, Switzerland, or by email: pubdroit@ ilo.org. The International Labour Office welcomes such applications.

Libraries, institutions and other users registered in the United Kingdom with the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP [Fax: (+44) (0)20 7631 5500; email: cla@cla.co.uk], in the United States with the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923 [Fax: (+1) (978) 750 4470; email: info@copyright.com] or in other countries with associated Reproduction Rights Organizations, may make photocopies in accordance with the licences issued to them for this purpose.

Gotovac, Viktor Supporting strategies to recover from the crisis in South Eastern Europe: country assessment: Croatia / Viktor Gotovac ; International Labour Organization, Decent Work Technical Support Team and Country Office for Central and Eastern Europe. – Budapest: ILO, 2011 1 v.

ISBN: 9789221253846; 9789221253853 (web pdf) International Labour Organization; ILO DWT and Country Office for Central and Eastern Europe employment / unemployment / social protection / social dialogue / labour policy / economic recession / economic recovery / Croatia 13.01.3 Also available in Croatian: Strategije potpore za oporavak od krize u jugoistocnoj Europi : Ocjena Republike ˇ Hrvatske, ISBN: 9789228253849; 9789228253856 (web pdf), Budapest: ILO, 2011 ILO Cataloguing in Publication Data The designations employed in ILO publications, which are in conformity with United Nations practice, and the presentation of material therein do not imply the expression of any opinion whatsoever on the part of the International Labour Office concerning the legal status of any country, area or territory or of its authorities, or concerning the delimitation of its frontiers. The responsibility for opinions expressed in signed articles, studies and other contributions rests solely with their authors, and publication does not constitute an endorsement by the International Labour Office of the opinions expressed in them. Reference to names of firms and commercial products and processes does not imply their endorsement by the International Labour Office, and any failure to mention a particular firm, commercial product or process is not a sign of disapproval.

ILO publications can be obtained through major booksellers or ILO local offices in many countries, or direct from ILO Publications, International Labour Office, CH–1211 Geneva 22, Switzerland. Catalogues or lists of new publications are available free of charge from the above address, or by email: pubvente@ ilo.org Visit our website: www.ilo.org/publns Table of Contents List of Boxes, Figures and Tables

Acronyms

Foreword

Introduction

1. Overview of the Social and Economic Context

2. Impact of the Crisis on Employment, Enterprises and Workers

2.1 Labour Force Participation

2.2 Employment Trends

2.3 Unemployment Trends

2.4 Labour Market Vulnerability

2.5 Wage Developments

2.6 Human Capital Formation

–  –  –

4. Roadmap: Policy Priorities for Job Recovery

References

–  –  –

Table 1 Sources of GDP growth (2003–2007)

Table 2 Structure of employment, Croatia (2006–2010)

Table 3 Key unemployment indicators, Croatia (2006–2010)

Table 4 Main legislative instruments adopted, Croatia (2009)

Table 5 Active labour market programmes in Croatia

Table 6 Distribution of participants to active labour market programmes, Croatia............... 40

C O U N T RY A S S E S S M E N T: C R O AT I A l 5

Acronyms ALMP Active Labour Market Policy CBRD Croatian Bank for Reconstruction and Development CBS Croatian Bureau of Statistics CCA Croatian Competition Agency CCE Croatian Chamber of Economy CEA Croatian Employers’ Association CES Croatian Employment Service CNB Croatian National Bank ERP Economic Recovery Plan EU European Union EUR Euro FDI Foreign Direct Investment GDP Gross Domestic Product HBS Household Budget Survey HRK Croatian Kuna ILO International Labour Office LFS Labour Force Survey LPE Local Partnerships for Employment MELE Ministry of Economy, Labour and Entrepreneurship MFIN Ministry of Finance PIT Personal Income Tax VAT Value Added Tax

C O U N T RY A S S E S S M E N T: C R O AT I A l 7





Foreword The slowdown of world output triggered by the financial crisis of 2008, spilled over to the economies of South Eastern Europe through a number of transmission channels. Export growth decelerated sharply as a result of the recession in Western Europe and a decrease in domestic aggregate demand. Lending flows and foreign direct investment weakened and detrimentally affected those countries with large external deficits. A fall in remittances affected Gross Domestic Product (GDP) growth in countries where these played an important role in household consumption patterns. Many countries experienced rapid output declines, job losses, worsening conditions of work and mounting poverty rates. In some instances, pre-existing economic and fiscal vulnerabilities limited the policy space for large-scale anticrisis packages. In short, the economic crisis threatened to endanger the gains in human development, stability and economic progress recorded by countries in the region over the last ten years.

At the International Labour Conference of June 2009, representatives of governments and employers’ and workers’ organizations adopted the Global Jobs Pact as a global policy instrument which places employment and social protection at the centre of crisis response. It is based on the ILO’s Decent Work Agenda and the commitments made by the ILO constituents in the 2008 Declaration on Social Justice for Fair Globalization. The Global Jobs Pact addresses the social and economic impacts of the international economic crisis and proposes a portfolio of policies aimed at stimulating job creation, extending social protection, respecting international labour standards and promoting social dialogue for countries to adapt according to their national circumstances.

Against this backdrop, the ILO’s Decent Work Technical Support Team and Country Office for Central and Eastern Europe (DWT/CO-Budapest) researched the impact of the crisis and the policy responses introduced by three countries in South Eastern Europe, namely Croatia, the former Yugoslav Republic of Macedonia and Serbia. It is anticipated that the resulting reports will serve as an input for constituents to understand better the country-specific challenges brought about by the crisis, assist in the development of strategies to stimulate labour demand, expand social protection, and strengthen social dialogue and rights at work.

The country assessment report of the Republic of Croatia was prepared by Mr Viktor Gotovac and undertaken as part of the DWT/CO technical assistance package Supporting strategies to recover from the crisis in South Eastern Europe coordinated by Ms Natalia Popova, Employment Specialist of the DWT/CO. It examines the country situation and policy responses using the Global Jobs Pact as an integrated framework for analysis.

C O U N T RY A S S E S S M E N T: C R O AT I A l 9

The paper was presented during a cross country peer review workshop held in Zagreb on 21 April

2011. The meeting offered a platform for the ILO constituents of Croatia, the former Yugoslav Republic of Macedonia and Serbia to share knowledge on emerging challenges and policy responses with representatives of the government, and employers’ and workers’ organizations of the Republic of Slovenia. We trust that this document will be a useful contribution to policy dialogue in the countries of South Eastern Europe.

Mark Levin Director Decent Work Technical Support Team and Country Office for Central and Eastern Europe

10 l S UP PO RTING ST RAT E GI E S T O RE COVE R F ROM T H E C R I S I S I N S O U T H E A S T E R N E U R O P E

Introduction During the last decade, the labour market performance in Croatia failed to keep pace with high economic growth. Employment losses caused by the winding up and bankruptcy of a large number of companies in the private sector were not countered by sufficient job creation. Unemployment and low activity rates are mainly the consequence of insufficient demand for labour and the mismatch in labour supply and demand. Widespread skill mismatches appear to be major impediments to a more dynamic labour market performance.

The global financial and economic crisis has had a strong impact on the economy of Croatia, and especially on the labour market. Gross Domestic Product (GDP) declined by almost 6 per cent in 2009 and foreign direct investments (FDIs) fell by more than 50 per cent. Real GDP continued to decline in 2010, albeit at a slower pace (–1.2 per cent). Public finances came under strain, with decreasing revenues and higher spending in automatic stabilizers. The introduction of both spending cuts and increased taxes maintained the budget deficit at 3.3 per cent of GDP in 2009 and 4.2 per cent in 2010.

Labour force participation rates decreased, partly as a result of worker discouragement effect Employment dropped, especially for adult men workers. Unemployment rose, particularly for young people (15 to 24). The economic crisis swept away the progress made by the country in job creation since the mid-2000s, in particular the progress in reduction of youth unemployment. These trends cause raising concerns about the risk of a lost generation, e.g. a group of disaffected young people forced to live on the margins of the labour market.

The number of jobs fell at a slower rate than GDP initially, but as the crisis continued, the fall in employment drew close to the drop in GDP rate. Expenditure on unemployment benefit increased from

0.24 per cent of GDP in 2007-08 to 0.37 per cent in 2009 and 0.43 per cent in 2010. This expenditure partially compensated for the income loss due to unemployment, and as such maintained consumption demand and dampened fluctuations in real GDP.

In April 2010 the government unveiled its comprehensive Economic Recovery Plan (ERP) aimed at raising the competitiveness of the domestic economy. The primary measures of the ERP focus on increasing labour market flexibility, reducing business costs and reforming the judiciary. The Plan achieved widespread support from the business community, but its introduction is at an early stage.

The implementation of the government’s reform programme will be a key challenge in creating the conditions for a return to economic growth. This will require a fundamental overhaul of some of the restrictive practices that hinder the businesses environment and the capacity of enterprises to create more and better jobs.

–  –  –

12 l S UP PO RTING ST RAT E GI E S T O RE COVE R F ROM T H E C R I S I S I N S O U T H E A S T E R N E U R O P E

1. Overview of the Social and Economic Context The early period of transition to a market economy in Croatia was marked by a sharp contraction of Gross Domestic Product (GDP). This was mainly driven by a large decline in industrial output.

Enterprise restructuring has given rise to accelerated inflows into unemployment. In 1991 the country recorded the sharpest negative growth rate in GDP, industrial output and employment (Figure 1). The stabilization programme launched in 1993 eliminated hyperinflation and stabilized prices as well as the exchange rate. Since then, industrial output and GDP started to recover, while the labour market continued to shed jobs. The recession of 2000, which affected the labour market with a three-quarter time lag, was overcome by the country thanks to the expansion of private consumption and the recovery of exports.

–  –  –

Source: European Bank for Reconstruction and Development (EBRD), Economic research and data, Paris, 2011, available at http://www.ebrd.com/pages/research.shtml.

In the period 2000–07, Croatia experienced a steady growth of economic activity (with GDP growth averaging 4.5 per cent). The basis of the country’s development was the stable growth of domestic production, with retail, construction and tourism playing an important role and meaningfully contributing to GDP. In 2007, GDP growth reached 5.5 per cent, with an acceleration of 0.8 percentage points compared to the prior year. Private consumption and fixed capital investments contributed most

–  –  –

Table 1 below shows that in the period 2003–2007 economic growth was mainly driven by fixed capital formation and exports.2 Investment growth was by far the most rapidly increasing demand component, rising annually by an average of 28 per cent.3

–  –  –



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