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Zuzana Murgasova International Monetary Fund

The Sixteenth Dubrovnik Economic Conference Croatian National Bank (Dubrovnik, June, 2009) Discussion of the paper: “ Growing Together: Croatia and Latvia”. Zuzana Murgasova International Monetary Fund

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Zuzana Murgasova International Monetary Fund

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  1. The Sixteenth Dubrovnik Economic ConferenceCroatian National Bank (Dubrovnik, June, 2009)Discussion of the paper:“Growing Together: Croatia and Latvia” Zuzana Murgasova International Monetary Fund The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management.

  2. Outline • The focus of the paper is on long-term growth trends and underlying factors • This presentation is complementary—the focus is on the boom-bust cycle and policy challenges going forward to achieve sustainable growth

  3. Different Pre-crisis Macro Developments

  4. The Boom-Bust CycleDifferent Magnitudes

  5. Need to Change the Growth Model • Capital inflows unlikely to resume to pre-crisis levels, hence credit driven domestic demand expansion not sustainable. • Rebalance growth from non-tradables to tradables Improve competitiveness

  6. How to Boost Competitiveness? Cost side • With stable/fixed exchange rate, internal adjustment (depreciation) needed; wage and incomes policies; government to take the lead. Productivity side • Structural measures to address productivity and improve business environment. • ULC adjustment Also, if tax burden high, create fiscal space through expenditure reduction for tax cuts (Croatia).

  7. Unit Labor Costs and WagesDifferent need for and pace of adjustment

  8. Wages and ProductivityWage level higher in Croatia

  9. Recovery in Trading Partners Matters

  10. Business EnvironmentScope for improvement in Croatia

  11. Croatia: Economic Recovery ProgramHow will it promote growth? • A home-grown comprehensive reform program. • Excellent diagnosis of problems and challenges. • Tackles key reforms needed to improve competitiveness and increase policy space (fiscal consolidation, wage and incomes policies, reduction in pension and health expenditure, labor market flexibility, privatization and reduction of business costs; • Success depends on its decisive and well-sequenced implementation (Pursue expenditure cuts and privatization to ensure lower taxes do not compromise fiscal consolidation; an ambitious Fiscal Responsibility Law is key); • Implementation progress is encouraging (Within weeks of adoption, the authorities are proposing amendments to politically sensitive areas) • If properly implemented, it will instill market confidence and enable Croatia to enter the EU from a position of strength. Speedy Implementation

  12. Hvala

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