Croatian President Franjo Tudjman

Lasting peace will not be quick coming, but with pragmatism and compromise, argues Croatian President Franjo Tudjman, it can be achieved

Do you see a swift resolution to the difficulties facing the region?

After four years of war, and hundreds of thousands wounded and killed, no one can expect the implementation of the Dayton Peace Agreement to be without its problems. It will take a lot of time, patience and effort on everyone's part to establish a lasting peace. The difficulties should be dealt with gradually, in compliance with the letter but also with the spirit of the peace agreement.

Any peace agreement can only be reached through compromise, and compromise means that the demands of individual parties cannot be met completely. Such a compromise solution, in this case the Dayton peace accord, can be effective only to the extent that the parties involved understand that it is the only possible way to protect their basic interests, and that the benefits of the agreement will outweigh the costs. Of course, the efficiency of the agreement also depends upon the concrete support of the international community, and on its determination to implement the agreement at the civilian as well as military level.

I believe that the maintenance of peace is in the interests of all parties involved, and the Croatian military's victories in Bosnia (with the Croatian Defence Council, the HVO and the Bosnian Army) have thwarted any serious opposition to the peace process. After the Serbian defeat in the summer of 1995, the Belgrade leadership understood that the imperialist dream of a Greater Serbia had failed. The Bosniacs in their turn noted that it was impossible to have a unitary, centralised Bosnia, while the Croats in Bosnia saw in the compromise solution a guarantee of their survival and equality within the Bosniac-Croat Federation and its links with Croatia. The historical, religious, cultural and 'civilisational' contrasts which have clashed in this area since ancient times - from the fall of the Roman Empire through the religious schism to Ottoman conquests and the Austro-Hungarian administration - have conditioned the failure of Bosnia as a unitary state, while its violent disintegration was caused primarily by the imperialist Greater Serbian ideology.

What are the government's priorities in 1996?

Our immediate priorities in 1996 include the economic integration of the newly-liberated areas (Western Slavonia, Kordun, Banija, Lika and northern Dalmatia) and the still-occupied regions (Eastern Slavonia, Baranja and Western Sirmium), the reconstruction of those parts of the country destroyed by war, and the return of displaced people. To do this, we must speed up economic reform, privatisation and bank rehabilitation and establish more efficient creditor protection.

In the long term, Croatia, by leaving the Yugoslav socialist system, has firmly committed itself to an open market economy, to the building of a democratic political system, to the rule of law and to the welfare of its citizens. There is no doubt that all of these can be achieved - but only on the basis of a stable economy. In other words, low inflation and the growth of output, employment and the standard of living are the fundamental frames of reference for the future. This is more than wishful thinking: Croatia has the lowest inflation rate of all the countries undergoing the transition to a market economy and renowned institutions, among them UBS and the Deutsche Bank, put Croatia high on their lists of successful countries in terms of inflation rates and expected growth rates.

To what extent will the suspension of trade sanctions against Serbia and Montenegro in 1995 affect Croatia's prospects for economic growth?

Croatia has an open economy. Most of its trade is with EU and CEFTA countries (80 per cent of imports and 75 per cent of exports), though, with the normalisation of political relations (ie recognition within internationally recognised borders), Croatia will be interested in normalising economic relations with Serbia and Montenegro. We are naturally keen to establish mutually beneficial trade relations with our neighbours as independent and sovereign countries. However, this will not have a dramatic impact on our economic development: people tend to forget that the Yugoslav federation, in the 70 years of its history, never functioned as an economic whole. Croatia's trade with the former republics accounted for a relatively low percentage of its overall trade, lower than its trade with other countries. Because of this, the transformation of internal trade into foreign trade, necessitated by the collapse of Yugoslavia, was not the heavy economic blow it was for the former Comecon countries - though undoubtedly it had an adverse effect.

The government is keen to attract foreign investment. What incentives does Croatia offer?

The Constitution guarantees investors that their rights, acquired through the investment of capital, cannot be infringed. The Constitution also provides for the free transfer and repatriation of profit and invested capital, but naturally after all lawful liabilities in Croatia have been met. It should be pointed out that Croatian Company Law affords foreign investors the same rights as those enjoyed by domestic entrepreneurs.

The rate of profit tax paid by both domestic and foreign business in Croatia is among the lowest in Europe at 25 per cent. Foreign investors are exempt from customs duties on the import of equipment, provided that the equipment accounts for at least 20 per cent of the total investment, and that the investment relates to a period of time longer than five years.

Another important point is that Croatia has accepted full convertibility in the current account of the balance of payments by adopting Article VIII of the IMF Charter. Bearing in mind Croatia's international reserves, which total around US$2 billion, these are sufficient guarantees to confirm the high degree of convertibility of the national currency - the kuna - over the longer term. In terms of its geopolitical position and development potential, Croatia is of interest to Asian and other countries as a gateway to Europe, and to western European countries as a gateway to south-eastern Europe.

What will be the priority sectors for foreign investment in coming years?

It is difficult to pinpoint specific areas as developmental priorities: we advocate the comprehensive economic development of Croatia based on market principles. Nevertheless, I can say that we are clearly focused on the speedy construction and modernisation of the infrastructure as the foundation for rapid economic progress. We are particularly concerned with the construction of modern road and rail facilities and, in view of the size of the task, we look forward to foreign investment in the form of, for example, concessions, joint ventures and loans, because we cannot do the job with our resources alone.

The privatisation process is another area in which we are looking for foreign investment. Over the past five years, foreign investment in the privatisation process has totalled 1.7 billion kuna - a not inconsiderable sum given the war risk in this period. This amount does not include Croatian expatriates' investment, which comes to an additional half a million kuna. The Croatian Privatisation Fund manages a portfolio with a book (nominal) value of about 60 billion kuna covering a wide range of companies. This implies great potential for the entry of foreign capital.

Foreign investment is expected not only to increase output, but also to introduce new technologies, modernise the Croatian economy and introduce state-of-the-art management techniques - all focused on improving economic efficiency. Private enterprise already accounts for about 50 per cent of production and employs half the country's workforce.

In our view, Croatia has great foreign investment potential because of:

its stable macroeconomic environment;
its professional, well-trained workforce;
its favourable geographical position;
and its legislation favouring foreign investment.

The tourist industry has been damaged by the conflict. How does the government plan to rehabilitate this important sector in coming years?

Unfortunately, over the past five years the tourist industry has been considerably affected by the aggression against Croatia in several ways. First, normal transport links with the country were disrupted - particularly links with the south, the most popular region with tourists. Second, a large stretch of the Croatian coast was either under direct attack (Dubrovnik, Zadar, Sibenik and Biograd, to name but a few towns) or in the immediate vicinity of the fighting. Third, many tourist facilities were destroyed during the war, while many others were used to accommodate the country's half a million displaced people and refugees. (As late as September 1995, 32,000 displaced people remained housed in 176 tourist facilities.) The liberation of the occupied parts of Croatia has eliminated the main negative impacts on Croatia's tourist industry - but the damage remains: an estimated 450 million kuna will have to be invested in the reconstruction of tourist facilities and hotels.

We will not stop at the reconstruction of what has been destroyed: we also wish substantially to enhance the level and the range of our tourist industry. We plan to secure funding for this from, among others:

the budget (a lesser share, primarily for reconstruction);
foreign loans (for example, the Raffeisen bank has already granted 50 million DM for the 1996 tourist season, and even higher investments are expected);
direct foreign investment and hotel privatisation;
and domestic individual investment into this highly lucrative sector.

Bearing in mind the natural beauty of the Adriatic coast and the interior (for example, the Plitvice lakes and forest hunting grounds), I certainly expect exceptional investor interest. It must also be borne in mind that the development of the tourist industry will depend primarily upon overall economic development in Croatia and on the expected improvement of political relations in this region.

Where do you see Croatia at the turn of the century?

Croatia has never lost its European features, despite the attempts of others, most recently the Serbs, to turn the country into something it is not. Croatia's place is again within the community of states and peoples of western European culture and civilisation. The hesitation - even the opposition - of certain circles in Europe to Croatia's progress towards European integration is therefore neither justified nor conducive to the creation of a community of European states. I am convinced that, by the end of the century, Croatia will no longer stand at Europe's door, but will be an associate member as an independent, democratic and economically progressive state.

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©Kensington Publications 1996