Cause and Effect in European Politics and Law

Economy of Zero Growth or an Ethnomarket Model?

Adelina Marini, June 7, 2013

Croatian media, companies, supermarkets, politicians and analysts are counting the last days remaining to the official accession of Croatia to the EU on July 1st. The entire country is coloured in huge advertisement billboards of big supermarket chains or simply big companies which, aside from advertising their products, are also hinting how much cheaper and diverse it will be in the common market. Before and after the central news programmes of the big TV outlets there are commercials of big companies that count the days or wish "welcome" in all the official EU languages, which as of July 1st will become 24. All this, however, does not change sensibly the oppressive sentiments in the country, depressed by a five year long recession and the not very inspiring economic perspectives.

Economists, entrepreneurs, big business and economic publications have begun more frequently discussing the forecasts about the Croatian economy after its accession to a union where growth in the past years has turned into a very difficult goal to achieve. The main question that is being asked in the past months here is are the Croatian companies prepared for the competition that awaits them on the European market and unpleasantly often the answer is "no". This answer could be heard again during the second annual meeting Global&Local, organised by the influential business weekly Lider. According to the Croatian economist with whom euinside recently spoke, Dr Damir Novotny, who opened and moderated the meeting, Croatia is not ready yet for Europe.

A thesis which was confirmed by several other panelists, representatives of big global companies. But what does, in fact, mean being prepared, is a question that started bothering me while I was listening to the speakers. On the one hand, the small and medium sized companies had not invested enough, if at all, in increasing their competitiveness and productivity and as a result it is possible to experience a shock on the common market, where precisely because of the prolonged recession every company is trying to increase its added value in order to survive in the growing more exacting market and under pressure from the dynamically developing huge economies in the rest of the world, like China, the Latin American countries and since recently Africa.

A new structure is needed. But what type of economy do we want?

Some firms, though, look at being prepared in another way - is the country attractive for investments. And precisely this question unleashed a thorough discussion which even went as far back as in the beginning of the 1990s. According to the representative of Siemens Mladen Fogec, if a country has been in a crisis for five years this means that the companies have exhausted all their reserves and in general there is no perspective. Tomislav Slat from 3M supported this thesis, saying that if there is a market that grows by 6-7% per year and Europe grows by 2% or even less, it is natural investors to go where growth is fast and dynamic. Both representatives said, however, that it is the political level that is not prepared. Mr Fogec was very colourful in the way he made his point about the lack of a long-term vision about the development of the Croatian economy. He gave the example of parking lots in Zagreb which progressively shrink to open space for the latest open café.

This, he said, in a time where it is already difficult to find a place to park my car, creates uncertainty for me. In a broader context, the lack of certainty can be expressed in he lack of knowledge how will things change in the next 2-3 or more years. We cannot one day say there will be a tax on property and the next day change our minds, as was the case with the proposal of the minister of finance as of March 1st this year to be introduced a new property tax to replace the municipal fees. The minister travelled hundreds or even thousands of kilometres across the country to explain the advantages of the draft legalisation, but a little before it was sent to Parliament for approval, the junior partner in the ruling coalition - the Croatian People's Party (HNS) - refused to support it. Hence, the draft was left hanging in the air.

Uncertainty create also the permanent discussions whether to raise VAT by 2 percentage points or not (by the way, Croatia is among the countries in the EU with the highest VAT rate - 25%); will the big energy projects be implemented or not. On all these questions, indeed, there is no certainty at all, added Mr Fogec, and even more disappointing is that the government does not have a strategy. His colleague from 3M focused on another aspect of security. It is important in what condition the infrastructure is - railways for instance, which are in a desperate condition and the government is currently borrowing money to save the company and invest in new rail tracks and carriages. It is also important whether the airports have sufficient cargo capacity, as the same applies to ports. Investors see all these things as a priority when deciding whether to invest in a country. Second come the judiciary and working efficiency. It is important to work between 8 and 16 o'clock, not to be at work between 8 and 16 o'clock, Mr Slat underscored, according to whom companies had enough potential internally to increase productivity even before they start investing in new equipment, which, too, increases productivity.

As a matter of fact, the conversation about whether people work when they are at work was very popular in the beginning of the debt crisis in Europe when there were comparisons of the number of working hours between Greece and Germany, for instance. These comparisons made it clear that the Greeks practically worked longer. In this sense, the remark of the 3M representative was very logical. For him, quality of work is more important than how many hours you spend at your working place. Mladen Fogec pointed to another very important thing - in the private sector wages dropped by 40%, while in the public sector they got significantly increased. Croatia is a strong social state, added Damir Novotny, host of the meeting Global&Local.

During the debate was also touched the issue about whether foreign capital is good or domestic is better. An issue which was provoked by the statement of the representative of the food processing giant Podravka that there were many state-owned companies that actually performed very well and were prepared to face the challenges of the open market. But as there was a danger this discussion to continue for several more hours, Dr Novotny said that a more important question politicians need to address is what kind of economy do we want - will this be a real market economy of the type that dominates in the world today, or should we keep our ethno-market model, as he put it.

The market has boundaries, growth too

During one of the panel discussions at the World Economic Forum in Davos in 2010, when global economic perspectives were being discussed, the participants came to the conclusion that the market is not endless unless we start exporting to Mars. Is it possible the economy to be restructured in such a way that it makes a transition toward zero growth, is a discussion that is taking place in Croatia in the economic circles. In a special debate on the pages of the Lider weekly, several economies point out that in the upcoming years there will be no growth at all or if there were, it will be close to zero. This is part of a new trend of no-growth or zero growth. The economists with which Lider spoke warn that it is not important what is politically possible or impossible, but what is physically impossible and that is unlimited growth of demand in a physically constrained world.

The problem is that the current capitalistic environment requires permanent growth even for the sake of indebtedness so that more services and goods produced by the global economy are consumed. However, there are not enough resources and energy so that the entire population of the planet to be able to live as in the most developed countries. Joze Menziger, a Slovene economist and professor in the economic institute in Ljubljana, directly asks the question "Is economic growth necessary at all?" Humanity's biggest problem at the moment is not how to produce more, but how to create more jobs, he says. Europe's mistake which led to the current crisis is that distribution was to the benefit of capital and to the detriment of employment.

The conclusion from the discussion is that the no-growth trend teaches that the gross domestic product or any other measurement of success of countries cannot be only econometric - it needs to cover all aspects of society. And in continuation of the debate on whether GDP is a measurer of success, the economists with which Lider spoke point out that it measures everything else but not what makes life worth living, like for instance "the beauty of our poetry, the strength of our marriages, the intelligence of our public debates or the respect of our public officials".

Alas, the discussion about what should the economy be in the 21st century not only in Europe, but in Croatia as well, is being conducted only at an expert level. Zoran Milanovic's government believes that it holds things under control and that the recent mantras about austerity and the search of stimuli for attracting investments will do the job and growth will sooner or later come. The recently published statistical data, showing a slowing down of decline, were even interpreted as a reason for optimism by many.

EU is no longer a guarantor of economic prosperity

Jasmin Klaric, a columnist with the Novi list daily, in Rijeka, indirectly joined the discussion, writing that the EU no longer is for Croatia a guarantor of economic prosperity as it once was. The author adds to the already low mood in Zagreb, assisted by torrential rains and danger of floods lately, that nonetheless it is possible the accession to the EU to help a potential recovery because, Klaric, writes, we should admit that if it were not for the negotiations diktat, Croatia would have been today a black hole in the Balkans, "just like two of our eastern neighbours". It is not quite clear which countries he has in mind, but as the saying goes - they should know.

Indeed, EU no longer is what it used to be and will not be what it is now. But what kind of a union will it be depends on all its members and how they will agree to contribute to their common future. A conversation which will come sooner than we think. Yet at the June EU summit, which will be the last voteless for Croatia, will make it clear in what direction will the talks move - be it toward more integration or toward more economic nationalism. Or as Damir Novotny put it - toward ethno an market model.