The doubtful blessing of capital imports. Reflections on the fragility of Croatian stabilisation

Communist Economies and Economic Transformation

Volumn 8, Issue 1, 1996, Pages 67-78

  Schönfelder, Bruno ^a  

^a TU BERGAKADEMIE FREIBERG   (Germany)

Author keywords

[No Author keywords available]

Indexed keywords

CAPITAL ACCOUNT; ECONOMIC STABILISATION; MONEY SUPPLY; NATIONAL ECONOMY; STABLISATION PROGRAMME;

CROATIA;

EID: 0030473689     PISSN: 13514393     EISSN: None     Source Type: Journal    
DOI: 10.1080/14631379608427845     Document Type: Article

References (24)

1. A more detailed analysis can be found in Bruno Schönfelder, 'Schmerzlose Stabilisierung in Kroatien?, Südosteuropa, 44, 10, 1995.
2. At the inception of the Croatian stabilisation programme, the Croatian currency still bore the name dinar; it is now called the kuna.
3. As an alternative and useful measure of real appreciation we can refer to the trend of Croatian wages expressed in DM. From mid-1993 to mid-1995 Croatian wages in terms of DM increased by more than 100%. This increase is only partly due to an increase of real wages; living standards have improved only moderately.
4. Owing to the real appreciation, the increase of public expenditure appears most dramatic if expressed in foreign currency. Consequently, critics of the current Croatian government argue that the expenditure of the central budget increased from DM3.4 billion in 1993 to 7.9 billion in 1995. See Privredni Vjesnik, 5 June 1995.
5. The qualification 'in essence' applies because the Ministry of Finance did not actually borrow very much abroad. The point is rather that domestic absorption has increased, and that this increase of absorption would not have been possible without major capital inflows.
6. Presumably it mostly reflects less evasion of turnover tax.
7. Narodna Banka Hravtske and Ekonomski Institut Zagreb, Privredna Kretanja i Ekonomska Politika, 41, 1995. I believe that the official estimate of net capital inflows is fairly correct.
8. Reported gross foreign currency earnings from tourism amount to US$1.4 billion in 1994; the corresponding figure for 1995 will probably hardly exceed US$1 billion.
9. Croatian retail prices for industrial consumer goods exceed prices in Trieste by at least 30%; according to some estimates by as much as 50%. A substantial price differential exists also with Hungary, Austria and to a lesser extent Slovenia. Since most Croatian consumers live close to some border, the reaction to any real appreciation is bound to be powerful.
10. This is an optimistic projection; the 1994 balance of payment statistics report a surplus of transfers amounting to US$459 million.
11. The difference might exceed 100%.
12. The apt term real asset overhang is due to Gerlinde & Hans-Werner Sinn, Kaltstart (Tübingen, Beck, 1993).
13. Czech share prices are also depressed, but the time series of Czech share prices looks different; the drop occurred after a substantial lag. This effect could have been used to avoid a cumulation of the first and the second stock disequilibrium described in this article.
14. The prices for flats which were subject to privatisation might illustrate the level of real asset prices. From late 1991 to late 1994 the Croatian government sold 258 767 former 'social sector' flats. The average price was DM3870 (see Privredni Vjesnik, 21 August 1995). Similarly, the price of summer houses on the Adriatic coast declined so dramatically that it now covers hardly more than 20% of (marginal) production costs. Beautiful summer houses have become available at a price of a few hundred DM per square metre.
15. The Croatian balance of payments statistics report US$583 million foreign investment in 1994, out of which 486 million was portfolio investment.
16. The largest and most problematic Croatian bank, Privredna Banka, shamelessly reported at a press conference in June 1995 that 80% of its assets were frozen ('imobilizirani') and that about half of its 'liquidity' was due to non-compliance with minimum reserve requirements. Obviously, Privredna Banka counts on being saved once more by the government. It is worth mentioning that frozen is not tantamount to worthless. A major part of these assets are public bonds and the like, i.e. paper on which banks earn little or no interest. Under Croatian circumstances public bonds are to be considered as high risk; they can be sold if at all only at a large discount.
17. Croatian banks mostly continue to engage in misintermediation. The 'market' for loans is still dominated by highly politicised banks. Even among the newly founded private banks quite a number are of doubtful reliability. The Croatian citizen, thus, has every reason to be suspicious of banks and shy away from depositing major amounts of money. Prudential supervision has long been established, but so far has not been able to change much.
18. Unlike most other post-socialist countries, Croatia possesses an efficient system for settling cashless transactions. Cheques and credit cards are widely available and used by the public.
19. Officially by 20% since late 1993, in reality maybe even more. To qualify this, the increase of agricultural prices cannot exclusively be attributed to 'overheating', since customs duties have been increased and apparently there has also been a change of market structure towards more monopoly power.
20. For more on this see the reference in note 3.
21. See Susan Schadler et al., Recent Experiences with Surges in Capital Inflows (New York, IMF, 1993).
22. We disregard some temporary reductions which were due to an attempt at interest rate regulation by the Croatian government, but discontinued after a few months.
23. As mentioned, the budget did indeed move towards balance in 1994. However, in post-socialist countries such balance has to be evaluated in the context of the financial situation of the overall public sector. Even though this is difficult, it is safe to say that after such a reconsideration matters never looked rosy.
24. The contribution of the liberated territories to the Croatian GNP always was minor, and considering the destruction and the reduction of the population which have occurred, production on these territories themselves will hardly increase the Croatian GNP by more than 1%. This is also Miljenović's estimate in 'Dividenda mira', Privredni Vjesnik, 4 September 1995. More significant is the impact on middle and southern Dalmatia, which is no longer cut off from the transport network. However, even including these indirect effects, the overall positive supply shock will hardly exceed 5% of the Croatian GNP.