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Economy of Croatia

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Through Mixed economy, Gross domestic product and Nation-building

Croatia's economic history is closely linked to its historic nation-building efforts. Its pre-industrial economy leveraged the country's geography and natural resources to guide agricultural growth. The 1800s saw a shipbuilding boom, railroading, and widespread industrialization. During the 1900s, Croatia entered a planned economy (with socialism) in 1941 and a command economy (with communism) during World War II. It underwent rapid urbanization in the 1950s and decentralized in 1965, diversifying its economy before the independence of Croatia in 1990. The Croatian War of Independence (1991–95) curbed 21–25% of wartime GDP, leaving behind a developing transition economy.

The modern Croatian economy is considered high-income, dominated by its tertiary service and industry sectors which account for 70% of GDP. Tourism in Croatia routinely generates 10% to 15% of total GDP. An emerging energy power in Europe, it has strategic investments in liquefied natural gas, geothermal networks, and electric transport. It supports regional economic activity via transportation networks along the Adriatic Sea and throughout European corridors. It is a member of the Eurozone and Schengen Area. Croatia has free-trade agreements with many world nations and is part of the WTO (2000) and EEA (2013).

History

Up to the 20th century

When Croatia was still part of the Austro-Hungarian Empire, its economy maintained a large agricultural sector with industrialization spreading through larger cities. The Kingdom of Croatia had a high ratio of population working on farmland. Many industrial branches developed in that time, like forestry and wood industry (stave fabrication, the production of potash, lumber mills, shipbuilding). The most profitable one was stave fabrication, the boom of which started in the 1820s with the clearing of the oak forests around Karlovac and Sisak and again in the 1850s with the marshy oak masses along the Sava and Drava rivers. Shipbuilding in Croatia played a significant role in the 1850s Austrian Empire, especially the long-range sailing boats. Sisak and Vukovar were the major centers of river-shipbuilding. Slavonia was mostly an agricultural land and was known for its silk production. Agriculture and the breeding of cattle were the most profitable occupations of locals. The region produced corn of all kinds, hemp, flax, tobacco, and great quantities of licorice.

Initial industrialization began in the 1830s and in the following decades the construction of big industrial enterprises took place. During the mid-19th and early-20th centuries there was an upsurge of industry in Croatia, strengthened by the construction of railways and the electric-power production. Industrialization was faster in central Croatia than in other regions, while Dalmatia remained one of the least developed provinces of Austria-Hungary. In 1918 Croatia became part of the Kingdom of Yugoslavia, which was, during the interwar period, one of the least developed countries in Europe. Most of its industry was based in Drava Banovina (Slovenia) and Banovina of Croatia, but further industrial development was modest and centered on textile mills, sawmills, brick yards and food-processing plants. The economy was still traditionally based on agriculture, with laborers accounting for more than half of Croatia's population. In 1941 the Independent State of Croatia (NDH), a World War II puppet state of Germany and Italy, was established in parts of Axis-occupied Yugoslavia. The economic system of NDH was based on the concept of "Croatian socialism". The main characteristic of the new system was the concept of a planned economy with high levels of state involvement in economic life. As the war progressed the government kept printing more money and its amount in circulation was rapidly increasing, resulting in high inflation rates. After the NDH was expelled from Croatia during World War II, the new Communist Party of Yugoslavia converted to a command economy on the Soviet model of rapid industrial development. By 1948 almost all domestic and foreign-owned capital had been nationalized. The industrialization plan relied on high taxation, fixed prices, war reparations, and export of food and raw materials. Forced collectivization of agriculture was initiated in 1949.

Throughout the 1950s, the Socialist Republic of Croatia experienced rapid urbanization. In 1965, its national economy decentralized which spurred growth of several sectors including a prosperous tourist industry. Following its northern neighbor, the Socialist Republic of Slovenia, Croatia had the second-highest GDP-per-capita from 1953 to 1989. It generated 41% higher GDP-per-capita than the Yugoslav average. Croatia generated 28.5% of Yugoslav GDP or $37.05billion in 1990. Croatia and Slovenia accounted for nearly half of the total Yugoslav GDP and reflected a significantly higher standard of living. In the mid-1960s, Yugoslavia lifted emigration restrictions and the number of emigrants increased rapidly. In 1971, nearly 224,722 workers from Croatia were employed abroad, mostly in West Germany. Foreign remittances contributed $2 billion annually to the Croatian economy by 1990. This, coupled with austerity programs and hyperinflation in the 1980s, led to discontent in both Croatia and Slovenia which eventually fueled its independence movement.

In the late 1980s and early 1990s, with the collapse of socialism and the beginning of economic transition, Croatia faced considerable economic stagnation. This included inefficient privatization, the disruption of free trade as well as a large refugee and displaced population, both Croatian and Bosnian. Shortly after Croatia gained independence in 1995, the country entered into an economic recession stemming from fallout related to the broader Yugoslavian economy. During the related Yugoslav Wars, Croatian infrastructure sustained large-scale damage in from 1991 to 1992, especially their revenue-rich tourism industry. The privatization of sovereign assets and transformation from a planned economy to a market economy was unsteady, largely as a result of public mistrust when many state-owned companies were sold to politically well-connected at below-market prices. With the end of the war, Croatia's economy recovered moderately, but lingering corruption stymied economic reforms and foreign investment.

The early 1990s experienced high inflation. In 1991, the Croatian dinar was introduced as a transitional currency, but inflation continued to accelerate. The anti-inflationary stabilization steps in 1993 decreased retail price inflation from a monthly rate of 38.7% to 1.4%, and by the end of the year, Croatia experienced deflation. In 1994, Croatia introduced the kuna as its currency. The central government budget was in surplus in 1997, most of which was used to repay foreign debt. Public debt-to-GDP had fallen from 27.30% to 26.20% at the end of 1998. The consumer-driven economic boom was disrupted in mid-1998, as a result of a banking crisis that saw 14 banks insolvent.

21st century

Croatia emerged from economic recession in 1999, with growth reaccelerating in 2000 through a number of structural reforms. Economic growth in the 2000s was stimulated by a credit boom led by newly privatized banks, capital investment, especially in road construction, a rebound in tourism and credit-driven consumer spending. In 2003, the nation's economy would officially recover to the amount of GDP it had in 1990. Unemployment continued falling, powered by growing industrial production and expanding economic output. Between 2003 and 2007, Croatia's private-sector share of GDP increased from 60% to 70%. Economic growth declined due to the global 2008 financial crisis. After initially the avoiding severe economic disruption neighboring countries faced, Croatia saw a decline in GDP growth from 2009 to 2010, falling flat in 2011. The slow pace of privatization of state-owned businesses and sensitive tourism sector continued to drag on the economy.

Croatia joined the European Union on 1 July 2013 as the 28th member state. The Croatian economy rapidly integrated with the rest of continental EU states, becoming more sensitive to international trade. Italy, Germany and Slovenia became Croatia's most important trade partners. The annual average unemployment rate spiked in 2014 at 17.3%, the third-highest unemployment rate in the EU, after Greece (26.5%), and Spain (24.%). Croatia's heavily backlogged judiciary system, combined with inefficient public administration, especially regarding the issues of land ownership and corruption in the public sector remained a key challenge. Throughout 2015 to 2020, the Croatian economy continued to see positive economic growth. Excess tax receipts in 2016 enabled the repayment of debt and narrowed the current account deficit.

The economy was heavily impacted by the COVID-19 pandemic in 2020 which curbed its revenue-rich tourism sector. During this period, 400,000 workers filed for economic aid and the European Commission estimated an annual economic loss of 9.6%. Later that year, capital city Zagreb was struck by a major earthquake which caused severe infrastructure damage. In 2021, ahead of Croatia's ascension into the Eurozone, the nation posted record gains in exports, industrial production, and credit rating. Its debut automotive industry was formed with the advent of Rimac Automobili in Sveta Nedelja. Croatia's digital economy increased by 16% on average annually from 2019 to 2021. It was estimated that by 2030 its value could reach 15% of total GDP, with the IT sector being the main driver of that growth. Croatia joined the Eurozone and Schengen Area in 2022, with the country adopting the Euro currency in 2023.

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