16 November 2007

Getting a grip in Croatia

The rhetoric of economic freedom has entered Croatian politics in a new way, just in time for parliamentary elections - but what does it mean?

By Eric Jansson
Published by BIRN's Balkan Insight

See if you can guess which leading Croatian prime ministerial candidate made the following statements.

Is it Ivo Sanader, the incumbent whose crowning achievement has been to re-brand his Croatian Democratic Union, HDZ as an internationally-minded, market-friendly party of the European centre-right? Or is it Ljubo Jurcic, prime ministerial candidate of the Social Democratic Party, SDP, comradeship of ex-communists, party of the red rose?

On Croatia’s response to globalisation: “We need to remember, we are 12 hours from Silicon Valley, and we are 12 hours from Tokyo.”

On taxes: “We have to prepare the atmosphere for tax cuts.”

On labour policy: “Croatia should have a freer, more flexible labour market including free movement of workers… and this also means importing labour.”

On work ethic: “In Croatia now there is a cult of idleness. We cannot be better off if we do not start to work harder. The government should create an atmosphere for this. It is a psychological, sociological problem.”

On industrial policy: “Yesterday I visited a state-owned company that dries fruit. The capacity of the company is enough for all of Europe, but its amortisation is too high. It cannot cover administrative costs. I asked them if they had a business plan. No business plan. Basically, they had been lazy. In my approach there is no money for a company like this, because there is no future. It’s a sunk cost – finito.”

On how to boost long-term economic stability: “We need to create conditions for a free market, for competition. Competition is the key.”

On whom he would bring into his cabinet, if given the choice of any economist in the world: “It would be Maurice McTigue. He was minister in seven ministries in New Zealand. He is a man who reformed New Zealand from a situation like Croatia’s today, with a high external debt. He is the most acknowledged expert worldwide in this area today."

McTigue, a former businessman and pragmatic anti-socialist, became a hero of free-market economists when he entered government, made huge cuts to New Zealand’s state workforce, slashed agricultural subsidies to zero, shredded the rulebook of big government and put New Zealand to work, sending productivity and profitability heavenward.

If you guessed that these quotes come from Sanader, you were wrong.

Jurcic, the Social Democrat, made the first six statements in a lengthy sit-down interview with the Financial Times, during which he looked ahead to economic reforms he would embrace if his party prevails in closely-fought parliamentary elections on November 25. His praise of McTigue came later, in an interview with Vecernji List, the Croatian daily.

What do we make of this?

The idealist’s hope is that Jurcic means what he says – that he actually wants to rattle Croatia’s status quo by “levelling the playing field”, empowering individuals and the private sector, discarding disincentives to competitiveness and disrupting official corruption.

The cynic’s presumption is that Jurcic, like every politician, wants to be all things to all people. To anti-socialists who believe that individual liberty extends into the economic sphere, he offers soundbites like those above. To anti-HDZers, he is equally happy to challenge the status quo. Yet to others including SDP lefties and undecided voters – many of whom want jobs and stability above all – he offers contradictory ideas, promising not to rock the boat too much.

Who is right about this economist who, to so many people’s surprise, is within striking distance of becoming Croatia’s next prime minister?

One senses that the average voter is perplexed, for who in Croatia isn’t both hopeful and cynical? There is so much to gain in a country that underperforms economically as conspicuously as Croatia does. Yet there is so much to lose in a country that is, after all, growing economically and that, with Sanader’s help, has succeeded in getting itself on course for EU accession just in the nick of time.

In Zagreb, one hears people mumbling about “the lesser of two evils” and “the devil you know”. Such despair sounds unexceptional, but it is the bane of the democracy for which so many Croatians and people of other nations in central and eastern Europe risked so much within recent memory. For voters, election day of all days is not a time to feign ignorance and powerlessness.

One must make some kind of educated choice, and voters are not without reference points. They should be aware of at least two.

First, whatever one thinks of the HDZ, there is little disputing that its economic policy agenda, during its past four years in government, has been overwhelmed by the daunting task of preparing for EU accession. Grilled on economic policy, Damir Polancec, deputy prime minister under Sanader, almost unvaryingly answers back with reference to the EU.

Yes, relations with the EU are hugely important, but Croatia must heed a lesson already grasped retrospectively by the EU’s newest member states: national interest must define the way to accession, not the other way around. To do otherwise is to accept inertia.

Almost nothing could be worse for the political and economic health of a once-daring transition country such as Croatia, which has the potential to be better than “like the EU”, but which must challenge its cozy, top-heavy power structure in order to compete more effectively worldwide.

Second, whatever Jurcic might do as a prime minister in an SDP-led coalition government, what he has already accomplished as a candidate is extremely important.

He has shown sufficient intellectually agility and honesty to acknowledge that Croatia has real policy choices to make within the broad EU accession track. After all, the EU now contains not just Germanic, French, British and Nordic economic models but the comparatively radical economic models of countries like Estonia and Ireland.

Indeed, Jurcic may be too agile intellectually for his own practical political good. He does contradict himself. He criticises industries that under-perform in this unforgiving age of global competition, and yet he says that the former Yugoslavia had “quite good industry”. He aims to empower small and medium sized enterprises, yet one of his policy suggestions is the creation, by the government, of advisory “project teams” – an idea that carries a whiff of central planning, though the candidate strongly denies it.

However, there is some strength in this approach. If Jurcic is of two minds, it is because Croatia is of two minds, too. There is a strong popular sense that the country can do better, and yet the electorate has a certain aversion to risk.

Perhaps Jurcic’s embrace of this contradiction makes him appealing to voters who are likewise flummoxed. Would it make him a good prime minister? It might give him a strong starting point, from which to introduce reforms, or it might render him ineffective. If the latter is true, the most likely result would be that the SDP and its coalition partners would be overwhelmed politically, much as the HDZ has been, by the immense job of preparing for EU accession.

It would be a pity to be left wondering after November 25, as one still wonders today, what Croatia would be like if it really dared to ditch the status quo, scrapping the legacy of its half-discarded socialist economy once and for all.

12 November 2007

Private debt overshadows Goldilocks scenario

By Eric Jansson
Published by Financial Times, 12 November 2007

Working papers from the International Monetary Fund usually make dry reading. But one such paper has caused a splash in Croatia, as campaigning kicks off in advance of the country's November 25 parliamentary election.
The IMF paper titled "Vulnerabilities in Emerging South-eastern Europe - How Much Cause for Concern?" published last month, argued that south-east Europe had begun to show imbalances similar to those seen in East Asia before financial crisis struck a decade ago.
In a tone more prescriptive than accusatory, the authors refrained from criticising individual governments in the region, which has experienced some of Europe's swiftest economic growth in recent years. Nonetheless, they highlighted acute imbalances in Croatia, which has a higher debt level as a percentage of GDP, and a higher current account deficit, than the East Asian average before that region's 1997 crisis, despite achieving slower GDP growth, 4.8 per cent in 2006.
With the highest external-debt-to-GDP ratio of any non-EU country in Europe and the greatest exposure to foreign currency loans, Croatia faces a growing risk of financial hiccups, the authors wrote: "The probability of a sudden stop increased between 2000 and 2006, especially in Croatia and Serbia. The probabilities are driven by the rising degree of euro-isation and the extent to which tradable consumption is 'financed' from abroad."
Ivo Sanader, the prime minister, and his finance minister, Ivan Suker, quickly brushed the critique aside. "There is no financial crisis. Croatia is servicing its debts," Mr Sanader said.
But the paper's assertions provide fresh ammunition to Croatia's main opposition party, the Social Democratic Party (SDP), which has made similar concerns central to its election campaign. Economic mismanagement under Mr Sanader's Croatian Democratic Union (HDZ) has threatened economic stability, Social Democrats say.
Ljubo Jurcic, the SDP's prime ministerial candidate and chief economic strategist, argues that Croatia's economy has immense capacity for growth, but that it has been wrongly managed. Citizens have grown accustomed to an inflated standard of living "based on household debt", he says.
The dispute sets Croatia on course for an election focused closely on economic issues.
Mr Sanader's government has done much to bring Croatia more securely under the wing of the EU, with which the country began accession negotiations in 2005. He and his cabinet ministers describe their economic reform programme within the broad context of EU accession, emphasising a need to harmonise legislation with the acquis communautaire , the vast body of EU law. The HDZ portrays any challenge to this course as a potential risk to EU entry, which the Sanader government until recently promised could be achieved by 2009.
Yet the IMF paper warns against such approaches, asserting that the "EU halo effect" lowers perceived risk, sometimes unjustifiably.
The HDZ supports central bank measures aimed at limiting commercial credit growth. Its programme also includes paying down external debt, and the government has taken steps in this direction during the past year. Yet government claims that Croatia's external debt is shrinking exclude private-sector debt. Overall external debt rose from 30 per cent of GDP 10 years ago to 85 per cent last year. Central bankers predict it will rise to 86 per cent this year.
"External vulnerabilities have begun to appear and to create risks for stability," says Ljubinko Jankov, executive director of research and statistics at the Croatian National Bank, the central bank.
With financial markets experiencing a higher than usual degree of unpredictability amid a global "credit crunch", economists have begun focusing with new keenness on the price of borrowing, especially as Croatia has a growing share of short-term debts, which magnifies rollover risk.
"If there is a big global shock, it is for sure going to be a big problem for this whole region, including Croatia," Mr Jankov says.
Economists at Zagreb's European-owned banks continue to offer upbeat assessments, noting steady GDP growth, low inflation and the central bank's strict regulation of credit growth.
"Looking at credit default swap spreads there is no evidence of concern from investors and I, for a change, actually agree with Mr Suker that the current situation is stable," says Goran Saravanja, chief economist at Zagrebacka Banka, owned by Italy's UniCredit Group.
Mr Saravanja says both the SDP-led coalition that governed from 2000 until 2003, and the current HDZ government, pursued credible courses of economic reform after a decade of authoritarian rule.
The current government showed a willingness to tackle sensitive economic issues when it re-indexed pensions. Recent reforms won praise from the World Bank, which called Croatia the world's second best reformer for last year in its Doing Business 2008 report. Next year ministers must tackle economic restructuring at the state-owned shipyards and elsewhere.
Croatia is now entering an "interesting" phase, says Mr Saravanja. "We have to see how post-2000 Croatian economic policy stands up to a downturn in the economic cycle, and we have not seen that yet."
Beneath the debate over financial risk, other economic fundamentals may be at issue in the upcoming election. Mr Jurcic, though representing the traditionally centre-left Social Democrats, sometimes casts these in terms of "free market competition". He speaks of "preparing the atmosphere for tax cuts", including a 50 per cent cut on health care contributions.
Mr Jurcic's message that small businesses should be able to operate on terms equal to those enjoyed by the country's big companies strikes a chord with citizens who still feel cheated by Croatia's "tycoonisation", the local term for corrupt privatisation in the early post-communist period.
The HDZ is vulnerable to criticism from this angle, says Joel Anand Samy of the Adriatic Institute, a free-market thinktank. "In Croatia, crony capitalism is flourishing but not entrepreneurial capitalism, and it frustrates people," he says.
Damir Polancec, the deputy prime minister and HDZ candidate, suggests such criticism is overblown and that economic results speak for themselves, with GDP growth up to 6 per cent in the first half of this year. "A few years ago, one would become an entrepreneur because there was no alternative. Today, people are coming because of ideas, coming up with their own projects," he says.
In fact, few analysts expect significant policy changes after the elections, whoever wins. Mr Jurcic embraces some free market ideas, arguing that unproductive companies should have support withheld, and calling for a liberalised labour market. But he also praises former Yugoslav industrial performance and says that aggressive reforms are "politically impossible" in Croatia. Parts of the SDP's programme still carry a whiff of central planning, such as a plan to set up advisory "project teams" for industry.
Polls suggest voters are evenly split. Many have come to realise that with EU accession dominating the country's agenda, a new government led by either main party may struggle to leave an individualised mark on economic policy.

Crowds inflict profitable pain

By Eric Jansson
Published by Financial Times, 12 November 2007

Carrying thousands of passengers on the Adriatic Sea, the towering cruise liners approach from the south. About three miles short of Dubrovnik, they stop on open water and release tender boats, shuttles that ferry passengers to shore. The tenders motor between the coast and the forested island of Lokrum, toward the walled city's small marina.
But squeezing into the marina can be tricky. Large enough to carry 150 passengers each, the tenders must navigate through a maze of little moored boats while competing for space with glass-bottomed sightseeing vessels that use the same diminutive dock. After careful manoeuvres, the ship-to-shore tenders land and unload passengers who promptly march into the old city.
The docking procedure can be complicated even in the low-season, when no more than two cruise liners arrive at once. But at the height of summer, as many as seven liners sometimes arrive within a short space of time. Then the marina becomes a waterborne traffic jam.
Crowds form on land, too. The exquisite old city, whose international fame multiplied when shells landed on it during Croatia's 1991-1995 war, heaves with pedestrians through the high season. These foreign visitors arrive not just by boat but by aeroplane, coach and car, bound for the famous walls, the gleaming white pedestrian streets, the cafes, restaurants and souvenir shops.
"In August and September sometimes we have had 14,500 tourists in the walled city, all at once. I hate it. I lock myself in my office until the afternoon when things slow down," says Erol Olcan, general manager at the Pucic Palace, the only luxury boutique hotel inside the city walls.
Such high-season crowds are both a headache and a source of profit for Mr Olcan and for many locals. They exemplify the kind of strain being felt as Croatia scrambles to accommodate fast-growing tourist demand. What happens in Dubrovnik, the country's leading tourism boomtown, also happens elsewhere along the coast, though usually on a smaller scale.
Croatia registered 53m tourist nights in 2006, up 36 per cent from 2000. Total annual visitors will exceed 11m this year and could top 12m by 2012, says Zdenko Micic, state secretary for tourism.
As the Croatian tourism industry absorbs this surging demand - which has yet to return to pre-war levels - the country's tourism offer looks less and less like its former self. "The Mediterranean as it once was," the national tourism board's slogan, evokes unhurried tranquillity, not crowds. The slogan still rings true, but a nagging question is what will happen in the long run if growth continues at the current rate.
Mr Micic says he envisages a well-managed shift toward upscale tourism along the coast and a careful preservation of quiet environments on the islands, of which Croatia has more than 1,000.
But change may prove difficult to manage. As new investment pours in apace, some critics already ask whether tourist destinations could put existing assets to work more effectively.
Dubrovnik, in the way it handles crowds, is a glaring example. Goran Vukovic, a local architectural consultant, says the walled city's traditional dockside area - the Lazarica which was formerly used for quarantining sailors - could easily be converted to receive vessels again. A short distance outside the city walls, the Lazarica houses quiet art galleries and offices. If the tenders landed there, rather than at the marina, docking would be simpler, demand for gaudy trinket shops could be displaced, and crowds within the walls would shrink - at least marginally.
Such lateral thinking, Mr Vukovic says, can still help Dubrovnik "to handle the attack of mass tourism" and keep it from becoming "a dead city or a museum like Venice".
However planners are moving in the opposite direction. Expensively reconfiguring the quay walls at nearby Gruz Harbour, they are making room for multiple mega-liners to dock at once.
"We know what sustainability means. We do not want to overbuild our capacities," says Mr Micic.
However, locals are often more sceptical. "We are learning, quite unexpectedly, that money is far more dangerous to Dubrovnik than bombshells," quips Mr Vukovic.
In some cases, rapid growth has led to imbalances between what visitors expect, what they actually receive and what local economies are able to provide.
Sometimes asked to pay the equivalent of €95 for a 90-minute walking tour, visitors to Dubrovnik complain that prices are too high. Yet prices are just as often surprisingly low, as local businesses struggle to adjust prices for a spectrum of clientele that includes mass tourists.
"You can get a pizza and a glass of wine for €7 in the old city. You can't call that expensive," says Mr Olcan.
At the same time, some locals find themselves priced out of their own market. Real estate prices have soared to around €4,000 per sq m.
Andreas Jersabeck, general manager at the Hilton Imperial Dubrovnik, a prominent hotel just outside the city walls, says the fast-rising cost of living has led to an undersupply of cooks, waiters and housekeepers, complicated by seasonality.
"There is a huge shortage of labour in the summer, yet in October people come queuing for jobs when we do not need them," says Mr Jersabeck. Seasonal workers, cannot afford apartment rents.
All agree that the solution involves a move away from mass tourism and an upgrade of accommodation across the country. Some 80 per cent of current space is camping or private rooms, and more than 60 per cent of hotels are 3-star. "We need more 4-star and 5-star rooms," Mr Micic says.

Data conundrum prevents deeper analysis

By Eric Jansson
Published by Financial Times, 12 November 2007

When the chef at the Hilton Imperial Dubrovnik sources ingredients for his menu, especially vegetables, he looks across the Adriatic to Italy. Italian produce is "better quality at a lower price", says Andreas Jersabeck, the hotel's general manager, an Austrian.
Similarly, when new hotels spring up on the coast or old ones are refurnished, domestic furniture makers compete for contracts but rarely win. Some 90 per cent of furniture purchased by Croatian hotels and resorts is imported, according to estimates by local industry leaders at Ambienta, a furniture fair held in Zagreb last month.
Such anecdotes do not surprise local economists. Croatia imports more than twice as much as it exports - and not just food, labour and furniture.
However, anecdotal evidence of import dependency challenges the rosy picture of tourism as an important driver of production in the national economy. The more local tourism services depend on imports, the more tourism's economic rewards are exported.
Everyone agrees that tourism plays an important role in Croatia's economy. It accounted for 18 per cent of gross domestic product (GDP) in 2006, and this year has been even busier, service providers say. Visiting tourists - typically 90 per cent of them foreign - stimulate activity in other sectors, notably transport and trade but also construction and agriculture. They also bring with them a fresh supply of hard currency, restraining the growth of a current account deficit that widened last year to 7.6 per cent of GDP.
But the impact of tourism across the economy remains impossible to measure precisely, sector by sector, says Oliver Kesar, a specialist in tourism economics at the University of Zagreb. This is because local statistical resources fall short.
Analysts at the Croatian National Bank and the Institute for Tourism in Zagreb have estimated that 30 per cent of what tourists consume in Croatia is imported, "but without in-depth analysis and complete data these are very rough estimations," Mr Kesar says. By this measure, of the €50 the average tourist spends each day, €35 goes toward domestic goods and services, and €15 toward imports.
How the €35 breaks down by industry locally is guesswork. Current analysis of tourism's impact on individual industries depends on a breakdown of tourist consumption published by the Institute for Tourism in its TOMAS 2004 research project, the most recent research of its kind.
Based on a survey of tourists, this research indicated that of every €50 spent in Croatia, €15 goes toward accommodation, €13 toward food, €6.50 toward transport, €4 toward drinks, €3 toward shopping and smaller amounts on entertainment, excursions and other recreation.
But to know how each of these categories breaks down into domestic and imported goods, to tighten up analysis and forecasting, Croatian economists need to build an input-output matrix of the national economy. They have yet to do so.
"Croatia has experts for partial analyses, but we need an outside expert who has built an input-output matrix before, who can lead such a huge and delicate project," Mr Kesar says.
Such an effort would once have been futile, because a substantial volume of tourism receipts flowed into Croatia's grey economy. A significant portion still does, but a crackdown on tax evasion is gradually pushing such business into the light. Authorities conducted 28,200 inspections of tourism service providers this year, finding 4,400 irregularities along the way.
With efforts like these, data improve, economists say. The result could soon be a truer picture of how Croatian tourism works, and for whom.

Investor comes full circle

By Eric Jansson
Published by Financial Times, 12 November 2007

Matt Sertic's friends had egged him on for years. Fellow Croats had quit communist Yugoslavia to live in and work in the US, and they loved it. Gloria Kolaric, one of his friends who had gone ahead, laughingly recalls telling him, "OK, either come now or I'm giving up on you."
Mr Sertic packed up. In 1985, he quit his job as an economist at a metal works in Sisak, 50km south of Zagreb. He moved first to Arizona and then to California. He could scarcely have imagined that, 22 years later, he would return as a US investor in an independent Croatia to open a factory on the same site as the old metal works.
Applied Ceramics, the Silicon Valley-based company of which Mr Sertic today is president and primary owner and Mrs Kolaric is director of quality, serves a specialised niche in the information technology sector. It manufactures spare parts of ceramics, quartz, silicon and sapphire for clients in the global semiconductor industry, leading makers of microchips.
"It was actually the last thing in my mind that we would start doing something here. There is no market for our products in Croatia. But by coincidence I met an instructor from the technical institute in Sisak who told me they were training people to work on CNC machines, which is exactly the kind of person we are looking for in the States," Mr Sertic says.
Computer Numeric Control (CNC) machines, programmable devices used to fabricate product components, are essential to the company's manufacturing process, so Applied Ceramics spotted an opportunity. The company flew 19 trainees from Sisak to Silicon Valley, taught them more, and now employs them on a new production floor based in privatised facilities at the metal works, which Applied Ceramics purchased and converted. It has invested $12m in the effort so far.
After years of trepidation, US investors have begun to discover Croatia, just as American tourists have begun to do in greater numbers. Moreover, as Mr Sertic's return to Sisak exemplifies, Croatia's large and well-educated diaspora continues to find new ways of doing business back in the old country. Both the US and the diaspora are rich potential sources of investment.
Applied Ceramics has arrived as part of the first big wave of post-war US business investment. Entirely by chance, at the same Sisak metal works, Texas-based Commercial Metals Company has just moved in as well, with a $90m investment in a newly privatised steel pipe manufacturer. That purchase was preceded last year by the $2.5bn acquisition of Pliva, a Croatian drugs maker, by Barr Pharmaceuticals.
"We have seen three significant US investments in Croatia in the past 18 months," says Robert Bradtke, the US ambassador in Zagreb. "This is a sign of increasing interest in Croatia by American investors. After a period four or five years ago when they might have thought business here was too difficult, they now see real opportunities in Croatia."
Foreign direct investment in 2007 already looks certain to exceed last year's figure of €2.7bn, the country's biggest year ever for FDI. Yet Damir Polancec, deputy prime minister, expresses a common view when he says that Croatia's overall level of FDI is "unsatisfactory".
This eagerness for FDI does not necessarily imply a simple investment environment. Mr Sertic says Applied Ceramics' investment has been costlier than planned and more difficult than anticipated. "In the beginning it looked like we might save some money by coming here, but now it seems we will not," he says.
Incentives offered by the state can be illusory, he warns, and because the rule of law is weak, "negotiation" with officials is commonplace. "You find everything is more or less negotiable. If you yell more, you find that you may pay less. If you do not yell, you will certainly pay," Mr Sertic says.
He praises his local private partners as "very forthcoming, very eager to help". But he adds that unfamiliarity with the needs of IT companies such as his own has led to some difficulties, such as hesitancy at local banks to offer credit lines. After a time-consuming search, Applied Ceramics reached an arrangement with Austrian-owned Hypo Alpe Adria.
Applied Ceramics may be in a better position to weather unwanted surprises than some other foreign investors. Mr Sertic's Croatian background means that he has a network of trusted local friends to call upon. As for costs, even if they rise marginally above the expected level, heavy global demand for the company's specialised products provides a degree of cushion.
Despite some difficulties, Mr Sertic is evidently bullish on Croatia. In addition to the factory building where Applied Ceramics now works in Sisak, he has purchased a neighbouring tower block previously used a metallurgical institute. He plans to rent it out as workshop space for young local entrepreneurs.

Healing the wounds of war

By Eric Jansson
Published by Financial Times, 12 November 2007

When Croatia won its place last month as a non-permanent member of the United Nations Security Council, Vuk Jeremic, Serbia's foreign minister, was quick to congratulate Zagreb. Mr Jeremic hoped the appointment would "lead to a better understanding of problems related to the Western Balkans" at the UN.

Belgrade's warm reaction to its erstwhile rival's diplomatic achievement would have been hard to imagine not long ago.

But bilateral relations have thawed noticeably since Ivo Sanader, as Croatia's newly elected prime minister in 2003, visited Belgrade on a sensitive mission of reconciliation. Serbia returned the favour five months ago, when Boris Tadic, Serbia's president, visited Zagreb and apologised to Croats for war crimes committed by those "acting on behalf of my people".
In the new atmosphere quarrels are few, and prickly issues relating to the war that ended 12 years ago tend to set leaders of the two countries on diplomatic tiptoes.
Even when Mr Sanader took the unusual step of flying to New York last month to protest vigorously against the lenient verdicts against three Serbs tried at the UN's International Criminal Tribunal for the Former Yugoslavia, he treated Serbia gently. In his plea before the General Assembly, Mr Sanader had harsh words for the former Yugoslav regime of Slobodan Milosevic, the late president, and a critical message for the Tribunal. But he said "Serbia" just once, referring to Belgrade's "democratically oriented political forces".
Mr Sanader openly courts those forces in line with the European Union's hopes for harmony in the region. His repeated insistence that the status of Kosovo, Serbia's breakaway province, cannot be resolved internationally "without Belgrade" echoes standard EU rhetoric but is also a prize for Vojislav Kostunica, Serbia's prime minister, a conservative nationalist who has made retaining Kosovo his chief goal. Zagreb is cautious over recognition of Kosovo's independence over Belgrade's objection but would accept any EU-wide decisions. Mr Sanader also speaks of his desire to see Serbia included in the European Union and NATO.
Yet the official warmth between Zagreb and Belgrade is decidedly cautious. Leaders on both sides know what lurks beneath. For many citizens of Croatia and Serbia - especially those who have minimal contact in business or private life with their former Yugoslav compatriots - bitterness from the war era remains.
Contact is less common than it might be, because transport links remain poor. Regular air flights between the two countries were never reinstated after the war, meaning, for example, that Serbian citizens travel with difficulty to Croatian holiday spots on the Adriatic shore.
On the road network, Croatia seems to pretend that Serbia does not exist. Travellers heading east from Zagreb search in vain for signs pointing toward Belgrade. On the former Yugoslav-built Brotherhood and Unity motorway running between the two cities, signs over the eastbound lanes are marked for Slavonski Brod, a city inside Croatia, not even halfway to Belgrade. By contrast, Zagreb is heavily signposted on westbound routes out of the Serbian capital.
Such attitudes are not conducive to trade, which is minimal and growing only slowly. Croatia trades more than twice as much with Slovenia, its western neighbour of 2m people, as it trades with Serbia, a market of 8m not including Kosovo's 2m. Some 5 per cent of Croatian exports go to Serbia, but just 1 per cent of imports come from there.
Still, if one factor points the way out of this post-war era of cautious diplomacy and limited interaction, it is business. Companies working in both countries usually say national rivalries do not extend into this area.
A small but fast-growing example is New Technology, the Croatian daughter company of ComTrade, a Serbian-owned IT manufacturer and distributor. ComTrade robotically assembles its patented personal computers in Serbia and sends up to six truckloads per week to New Technology, along with machines from Fujitsu-Siemens, Toshiba and Acer.
Petar Pintar, New Technology's general manager, says that in its first year of operations the company has captured 1.5 per cent of Croatia's IT market. He says ComTrade's owner told him at the start to follow local laws zealously and to minimise risks of bureaucratic obstruction, and so far has been pleasantly surprised.
"I really do not have the impression that anything is hard to do. One customer, once, told me that he did not want to do business with a company working from Belgrade. But that is one out of 1,000," says Mr Pintar.
A much bigger boost to Croatian-Serbian trade could be seen if Agrokor and Delta, respectively the two countries' largest private-sector companies, follow through on their year-old agreement to merge their region-wide retail operations.
In addition, last year's updated Central European Free Trade Agreement brought Serbia into the pre-EU trade bloc, which already included Croatia, with a new customs union soon to take effect.
Along with the momentum of private sector investments, regional integration could strengthen the practical economic side of a bilateral relationship that is strategically close yet remains politically awkward.
Potential for rancour remains. Proceedings are to open six months from now in Zagreb's genocide case against Belgrade at the International Court of Justice. Some Croatian diplomats say dropping the lawsuit would help to improve bilateral relations, but any such move would risk a popular backlash.

'Telecommunism' helps power stock market growth

By Eric Jansson
Published by Financial Times, 12 November 2007

Even by the dynamic standards of central and eastern Europe, Croatia's capital markets have lately been growing at an extraordinary pace.
Nowhere has this been more evident than at the Zagreb Stock Exchange, a floorless exchange quartered in one of the capital's new glass office towers.
Within the past 18 months, the ZSE has risen out of obscurity to claim a place alongside exchanges in Warsaw and Prague as one of the few in the region to attract the attention of big fund managers worldwide. Trading in Zagreb is tiny when compared with big markets, but it is accelerating at a clip.
"At the beginning of the year, we had between 300 and 800 trades per day. Now, we have 3,000 per day, with a peak volume of 8,000," says Roberto Motusic, the ZSE's managing director.
Just a handful of big sales brought about this surge in trading, driven by both foreign and domestic demand.
The first of these was a prolonged bidding war last year for Pliva, a drugs company co-listed at the ZSE and London Stock Exchange, during which Barr Pharmaceuticals of the US outbid Actavis, an Icelandic company, to acquire Pliva for $2.5bn. Later in 2006 came an initial public offering of shares in INA, the state-owned oil company in which Hungary's MOL was already the strategic investor. Recent months brought big share offerings from Pliva, which sold its veterinary arm Veterina through the exchange, and local construction giant Ingra, among others.
By far the latest, greatest lure for local retail investment through the ZSE came one month ago, when the state privatised 32.5 per cent of T-Hrvatski Telekom (T-HT), the former state-run fixed-line and mobile operator controlled since 2001 by Deutsche Telekom.
The state targeted citizens in T-HT's sell-off, and 358,406 of them purchased shares, making this the largest initial public offering in the country's history. Such was the clamour for a slice of the company that roughly one-third of citizen buyers took out loans to buy shares, says Tomislav Vuic, deputy president of the management board at Erste Bank in Zagreb.
The telecom sale immediately became a milestone in the development of local retail stock trading, as "sophisticated investors who really understood the market" combined with first-time investors "opening their eyes" to generate a bonanza, says Mr Motusic.
Buyers purchased shares from the state at 265 kuna each and then watched as the price jumped to 419 kuna on the first day of public trading. The price soon settled closer to 380 kuna - still an overnight gain of 43 per cent.
For many who bought shares with borrowed money, payback was therefore quick and easy.
Yet here controversy creeps in. Critics of the T-HT sale quickly questioned the initial share price set by Croatia's government. "Telecommunism," squawked the Feral Tribune, a weekly newspaper, portraying the IPO as a thinly-disguised cash handout from the governing Croatian Democratic Union in advance of parliamentary elections.
Indeed, government ministers had transparently promoted the sale beforehand, as an opportunity for a "good experience" akin to the INA sell-off 11 months ago, in which citizen buyers also made a tidy overnight profit.
Yet whatever the T-HT sale's political dynamics, Mr Motusic argues against seeing it primarily in these terms. At a time when some local political leaders still mutter Marxist misgivings about private investors in stocks and shares, calling them "crooks" and "speculators", he says the current HDZ-led government is the first in Croatia's post-communist era to back the ZSE enthusiastically. "How can I say I am not happy with that?" he adds.
Capital market growth is restrained by central bank rules on commercial credit growth. Alarmed when domestic credit expanded by 24.7 per cent last year, central bankers this year require lenders to place substantial deposits with the bank, for any money lent in excess of 12 per cent growth this year.
Bankers grumble about this intervention, but Mr Motusic says it is helping to shift demand to the ZSE.
"If you have such a restrictive monetary policy and such a hunger for new projects, such a booming real estate market and other sectors, then it is just a question of time when some other type of capital will start seeking ways to invest. It can only be done through venture capital or through the capital market. This really gives a push to our development," he says.
Public share offerings are therefore increasingly common, alongside the privatisation of state-owned companies. Meanwhile, the growing base of active buyers - in contrast to the one-off buyers of INA or T-HT shares - makes the market more liquid.
"Five years ago we had 5,000 to 10,000 Croatian households actively investing in stocks. After INA, it was about 35,000. Now it could be 100,000," Mr Motusic says.