The shock resignation last July of prime minister Ivo Sanader and his replacement by Jadranka Kosor was a watershed moment in Croatias development.
With it, hopes were raised that the country would shed its legacy of shady business deals and haphazard economic management for a more transparent, sustainable economic model based within the European Union, which Croatia hopes to join in 2012.
Kosor has won plaudits at home and abroad for her strong anti-corruption stance since she came to power, and her catchphrase nobody is untouchable is already famous.
But her one-time boss Sanader continues to be linked rightly or wrongly, as the case is unproven with scandals at power company HEP, postal savings bank HPB, motorway firm HAC, oil and gas outfit INA, and food company Podravka, which have undermined the Croatian publics confidence in the countrys governance and tarnished the countrys international image.
Media reports, again unproven, suggest Sanader has been connected with shenanigans surrounding the emergency nationalization of Austrias Hypo AlpeAdria, with allegations that he benefited from the banks entry into Croatia in the 2000s and canvassed for the granting of a banking licence for Bayerische Landesbank when it acquired Hypo Alpe Adria in 2007.
A series of revelations in the Austrian and German press about Hypo Alpe Adrias business dealings in Croatia with a host of dubious figures, including arms dealers, jewel thieves, war criminals and shady politicians, has led to the coining of the phrase K und K Kroatien und Korruption.
Stung by these foreign press allegations, Kosor has established a special task force aimed at purging Croatia of such charges of corruption. At stake is the countrys reputation and its membership of the EU, its economic future in general and its attractiveness as a destination for foreign direct investment in particular.
The anti-corruption drive comes against a backdrop of a sharp fall in GDP last year of 6%, with the contribution of construction and consumption the drivers of the modest 45% growth in the pre-credit crunch period, both falling by around 20%.
In the meantime, the countrys debt/GDP ratio is set to pass the 100% mark this year pushing Croatia into the highly indebted country class, while unemployment hit a five-year peak in March of around 320,000 (7.1% of the population) and continues to climb, albeit at a slower pace. Foreign investment meanwhile dropped by 55% in 2009 to E1.8 billion, from E4.1 billion in 2008.
Kosor, who has been widely praised by the likes of US foreign secretary Hillary Clinton and German chancellor Angela Merkel for her rooting out of institutionalized corruption in Croatia, will no doubt be hoping that, by taking action against former members of her own government and political party, she will be able to convince the EU finally to agree to admitting Croatia as a member.
Croatia has made remarkable progress on fighting corruption progress that no one, including myself, would have predicted even 18 months ago. But a lot still needs to be done. Luckily, both Croatia and the EU recognize this, says Michael Glazer, chairman of investment banking boutique Aucris in Zagreb.
It has long been an open secret at home and abroad that the problem of cronyism and corruption runs deep in Croatia, but recent months have highlighted the fact that it could extend to the very highest levels.
At the end of March Croatian police arrested former deputy prime minister Damir Polancec on suspicion of corruption at the countrys leading food company Podravka. Until his resignation last October, Polancec was also minister of economy. He resigned after being publicly linked with financial misdemeanours at Podravka, but has repeatedly denied allegations of his involvement in the affair.
INVESTIGATIONS AND ARRESTS
Croatian police launched an investigation into the Podravka case last September, after it was revealed that the food giant was giving loans to other Croatian companies under suspicious circumstances. Several top Podravka officials were detained on suspicion of attempting to acquire a 25% stake in the company using Podravkas own money, which they channelled through another food company and a brokerage firm.
Polancec was a senior manager at Podravka and a member of its supervisory board for a number of years before taking up his government posts in 2005. He has been linked to the affair during his time as economy minister, which so it is alleged would have required him to know what was happening in the company. Podravka was privatized in 1993, but the government still owns a 26% stake in the firm.
Polancec is the most senior official to be arrested on suspicion of corruption in Croatia since Kosor replaced Sanader last summer. Croatian media have alleged that Sanader also knew what was happening in Podravka but kept quiet about it. Sanader for his part in a letter to local daily Jutarnji List following Polancecs arrest has dismissed the allegations as groundless.
While Prime Minister Kosors anti-corruption crusade has been universally praised as a welcome development and is beginning to bear fruit, the widespread losses from, and perception of, corruption in Croatia are estimated at E30 billion roughly equivalent to the cost of the countrys battle for independence in 199195, known locally as the Homeland War.
In Transparency Internationals 2009
Corruption Perception Index report, Croatias score deteriorated from 4.4 to 4.1, placing it 66th out of 170 countries some 39 places below neighbour and EU member Slovenia.
Independent watchdog Freedom House says in its 2009 Freedom in the World Report: Corruption remains a problem in Croatia, often driven by a nexus of security institutions and businesspeople... Moreover, intimidation of journalists working on corruption issues has gained prominence.
In 2008, Dusan Miljus, a leading investigative journalist for Jutarnji List, who covers the corruption and organized crime beat, was almost beaten to death with a baseball bat by two assailants who have never been caught.
Then a car bomb in Zagreb killed Ivo Pukanic, publisher of popular weekly Nacional, which specializes in investigating political corruption and organized crime, and which has run regular exposés on Croatian politicians unexplained wealth.
The Heritage Foundation, a US think tank, places Croatia 37th out of 43 European countries in its 2010 Index of Economic Freedom rankings. Corruption and political interference, especially with regard to the judiciary, restrict economic freedom, says the foundation. Croatias overall weakness stems from excessive government interference that erodes the economys efficiency and flexibility.
Local NGOs which dared to raise their voices against the tide of corruption that threatened to swamp Croatia have faced crass harassment.
The Adriatic Institute for Public Policy (AIP), for instance, whose president Natasha Srdoc has been one of the harshest critics of former prime minister Sanaders alleged unexplained wealth and his failure to carry out meaningful economic reforms, has been subjected to threats and harassment from HDZ party officials, and the government has ordered audits of the AIPs activities, members and sources of funding.
It is increasingly likely that the European Union will insist on Croatia submitting to being subject to the Co-operation and Verification Mechanism (CVM) as a condition for its entry to the EU in 2012. Under the CVM regime, the EU Commission reports twice a year on progress made in judicial reform, the fight against corruption and against organized crime.
The regime has already been applied to EU members Bulgaria and Romania. Although many Croatians are sceptical about the overall benefits of joining the EU, Damir Grubisa, professor at the Faculty of Political Sciences in Zagreb, thinks otherwise. He says there is increasing public recognition in Croatia that the introduction of EU standards and cooperation with the EUs anti-fraud and corruption unit, Olaf, will play an increasingly positive role in weeding out domestic corruption.
Meanwhile, according to the World Economic Forums latest Global Competitiveness Report 2009-2010, Croatia ranked 72nd out of 133 countries surveyed, dropping 11 places versus the previous survey and the countrys worst result for eight years.
Whats more, tax and excise hikes mean that theres unlikely to be any improvement.
In the near term, according to members of Croatias National Competitiveness Council (NCC), composed of trade union, employers and academic community representatives, Croatian competitiveness has worsened, with the largest efficiency decreases registered in the labour market (down 24 points) and trade of goods (down 18 points).
NCC member Mladen Vedris, a former deputy prime minister, says the survey shows a sharp decline in Croatias competitiveness, especially compared to neighbouring countries, which are becoming increasingly competitive. While a top 50 position is the stated goal of the country, Croatia is moving in the opposite direction. Observers say this should be a clarion call for urgently needed reforms if the country is to be competitive in a globalized economy.
Vedriss call for change is echoed by other NCC members such as phone company T-Coms chief executive Ivica Mudrinic. A one-time HDZ minister, in recent months Mudrinic has been increasingly vocal in his criticism of the hapless response to the global economic downturn by his former party colleagues. He says economic policy has failed to move on from the 1990s, with ministers in denial about the need for change and reluctant to cut the bloated bureaucratic framework in Croatia down to size.
Amid the short-term gloom about Croatias weakening economic credentials, however, there is some longer-term optimism that the country will ultimately effect the necessary changes needed to put the country on a much firmer footing. Glazer at Aucris says that, despite the recent political dithering, Croatia is likely to work out its problems. There seems to be the will to do so. In another six to 12 months, the country will be very different, probably a much better place. Including for investors. Now is a good time to get in to take advantage of that.
He says Aucris is seeing interest from portfolio and strategic investors on the back of improving sentiment towards the country as is it seeks to clean up its act.