El Caso: El Municipio de La Palma y la Reconstrucción de los hechos

Croatia has an open economy which is already considerably integrated in that of the EU and other neighbouring countries. This can be seen from the amount of trade in goods and services and the capital inflow as foreign direct investments. The movement of Croatia’s exchange rate is closely watched by the National Bank (managed flow) with the aim of keeping domestic inflation under control (EC, 2006). Over the period 1995 to 2005 two distinguished periods regarding

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the change in the nominal value of the kuna can be recognised. During the first five years the kuna depreciated against currencies important for Croatia’s trade, i.e. the US-dollar, euro and the marka of Bosnia-Herzegovina while it appreciated against Slovenia’s tolar. Though trade with the USA is not very strong the US- dollar nevertheless is important for Croatia because the exchange in goods with many countries is denominated in this currency. The decline in the value of the kuna against the US-dollar was especially strong in this 5-year period.

The change in fiscal policies which was implemented in 1999 led to a stabilization of the Croatian currency beginning in 2000 or 2001 depending on the foreign currency looked at. The second to last row of Table 4.1 shows the annual change of the kuna against the corresponding currency. These growth rates are all negative indicating an appreciation. This implies that Croatia’s price competitiveness weakened over this period.

This effect was even strengthened by the change in the terms of trade (ToT) for Croatia’s merchandise trade as depicted in the second column of Table 4.2. The ToT worsened almost continuously from 1999 until 2006. Only in 2004 did they improve somewhat compared to 2003 but still remained below the level reached in 1999. In 2005 as well as 2006, they fell again but stabilized at the height of 2003.

Both the appreciation of the nominal value of the kuna and the decline in the ToT worsened Croatia’s price competitiveness during the first half of this decade. This shows up in the deficit of merchandise trade. The last column of Table 4.2 indicates that this deficit increased by about 120% from 1999 to 2006. Also in the period prior to 1999, Croatia always had a deficit in merchandise trade. However, it was considerably lower and increased not as much as after the base year 1999. As a matter of fact, from 1993 to 1999 it grew in total by 50%, i.e. half of that what it went up in the years thereafter.

Given the decline in price competitiveness due to the appreciation of the kuna Croatia has to produce cheaper; i.e. offer its commodities at lower prices and/or compensate the loss in price competitiveness with improving the quality of the goods. Though this observation holds for the entire economy agriculture is less affected by changes in its ToT as will be shown in the next sub-section.

Competitiveness of Croatia’s economy, agriculture with emphasis on the dairy sector 43

Table 4.1 Index of changes in Croatia’s exchange rate, 1995=100

Index (1995=100) of annual average of Croatia's currency to that of

Nominal effective exchange rate, trade weighted average of HRK to

EUR, to tolar and to markaa), index (1995=100) European Monetary Union (EMU) Slovenia Bosnia- Herzegovina USA Year HRK/ EUR HRK/ tolar HRK/ marka HRK/ US$ HRK/basket of foreign currencies 1995 100.00 100.00 100.00 100.00 100.00 1996 100.69 90.79 100.68 103.90 102.86 1997 102.99 88.13 102.55 117.73 108.95 1998 105.61 87.96 106.34 121.65 113.11 1999 112.16 89.33 116.04 135.99 119.46 2000 112.98 84.69 130.15 158.26 120.86 2001 110.52 78.53 128.79 159.45 120.50 2002 109.60 75.12 122.84 150.36 120.01 2003 111.92 74.13 104.86 128.13 120.12 2004 110.91 71.85 94.90 115.40 118.43 2005 109.51 70.80 93.53 113.73 116.51

Average annual change of exchange rates (in %)

1995-2000 2.47 -3.27 5.41 9.62 3.86 2000-2005 -0.62 -3.52 -6.39 -6.39 -0.73 1995-2000 0.91 -3.39 -0.67 1.29 1.54

Source: National Statistical Yearbooks and own calculation..

Note: a) For weighing total merchandise trade (value of imparts and exports) is taken of 9

members of the EMU, not included are Ireland, Luxemburg and Portugal. The 9 countries of the EMU together with Slovenia and Bosnia-Herzegovina account for about 70% of Croatia’s total trade.

Turning to a brief discussion of foreign direct investment this indicator shows a relatively positive picture for Croatia. A study on FDI in Southeastern Europe

(DEMEKAS, 2005) indicates that by 2003 the FDI stock with about 3.0 Euro per

capita was rather high in comparison to all the other countries in this region and not much lower in comparison to Hungary and Czech Republic which reached 3.3 Euro and held the pole position at this point in time. Slovenia had the same level as Croatia while Bulgaria and Romania reported a 20% lower level. Taking into account the necessary caution in interpreting this indicator one can neverthe- less say that Croatia is attractive for FDI reflecting good competitiveness.

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This rather bright aspect is overshadowed by the sector distribution of these foreign capital streams. Over the years 1993 to 2006 only 3% of them went into the food processing sector. Agriculture is not separately mentioned presumably because nothing or not much was invested in this sector. In former candidate countries the food sector was always among those branches which received most FDI. The reasons why food processing did not attract more FDI could be that major foreign processors invested already in other host countries and that Croatian agriculture is not seen to be able to deliver sufficient raw material for large processing activities.

Table 4.2 Croatia’s merchandise trade: Changes in Terms of Trade and trade deficit, 1999 = 100

Year Terms of Trade Trade deficit

1999 100.0 100.0 2000 98.3 114.2 2001 92.8 152.4 2002 90.8 189.7 2003 89.1 216.7 2004 97.4 209.9 2005 90.2 239.9 2006 90.4 227.5

Source: Own calculations based on data from EUROSTAT, 2007.