Empowerer

... in the global economy

U.S. Ambassador James B. Foley
Skolska Knjiga Auditorium
March 1, 2012

I want to thank the Innovation Institute for hosting me today, and thank you as well to Skolska Knjiga and the Zuzul family for graciously allowing us to use your hall. The Innovation Institute is an organization dedicated to the dissemination of new ideas and to fostering the spirit of creativity and entrepreneurship needed to make Croatia competitive in the 21st century. It therefore struck me as an ideal forum for discussing the economic challenges facing all of us around the world and here in Croatia in particular.

Let me say from the outset that I am here to share ideas and observations, not to give lessons. I readily acknowledge that my own country is grappling with similar problems of debt and deficits, and that we have yet to find, or at least agree upon, the solutions. Moreover, I recognize that the Croatian government has only recently taken office and that it has done so under very difficult circumstances. To its credit, the new government has clearly articulated, and begun to implement, a much-needed program of economic reform. It has the support of the United States and we wish it every success in this endeavor so critical to Croatia’s future.

That said, having lived in Croatia for the better part of three years and coming closer to the end of my tenure as U.S. Ambassador, I wanted to share some broad observations of a philosophical nature concerning the kind of economy needed to create jobs and prosperity in the 21st century.

At the risk of being provocative, I will begin by saying that, for all the important things we have in common, I have been struck by what seems to be a sharp difference in the ways our two peoples look at some basic economic issues. In the United States, it is only a slight exaggeration to say that the businessman is king. At the very least, he (or she) is seen as a positive role model, both because his success is perceived to be a just reward for individual merit and effort, and because that success contributes to the well-being of others through job-creation and the spread of prosperity. Now anyone familiar with American movies knows that we are also wont to portray businessmen as unscrupulous or rapacious, and it is also true that in the wake of the financial meltdown a few years ago the critique of capitalism has sharpened even in the United States. But still as a society and culture we Americans place the highest value on individual liberty and we believe the free enterprise system is the natural economic expression of our political values and philosophy. We believe the government has essential responsibilities in regulating the market and assuring a social safety net, but we look to the private sector, not the state, as the generator of economic well-being.

In Croatia, by contrast, the profit motive seems to be less celebrated than it is in the United States, and the businessman is often viewed with suspicion. Meanwhile the state is seen as a critical guarantor of economic well-being and even, to a larger extent than elsewhere in Europe, the main source of national wealth. This perspective is to some extent clearly the result of the controversial privatization process that occurred in the 1990s, which was widely viewed as flawed and unfair, and which helped to give a bad name to capitalism. But there are probably deeper reasons for the aversion to capitalism that lie in Croatia’s Yugoslav past. My impression is that there is a high degree of nostalgia for a statist system that seems, at least in retrospect, to have functioned well enough to provide equality, job security and social protection for the greatest number. This is quite understandable, given the unique experience of the former Yugoslavia. Unlike in Central and Eastern Europe, where communism was perceived as an alien and Soviet-imposed system, and where the transition to the market economy was readily undertaken following the collapse of the Berlin Wall, the socialist system of Yugoslavia was home-grown and experienced as more humane and functional than the Stalinist model. Finally, perhaps the most critical difference with Central and Eastern Europe is that the post-communist transition in former Yugoslavia was not a peaceful one. On the contrary, Croatia in particular was born in conflict; it had to fight a war for its very right to exist and for its territorial integrity. The price the Croatian people had to pay in terms of lives and economic destruction was immeasurable. It is no wonder there was little appetite at war’s end for the shock therapy that Central and Eastern Europe went through on the road to a market economy.

However, the consequence of this unique history is that Croatia and the other countries of the former Yugoslavia were in some sense shielded from revolutionary economic changes that in the 1990s swept other parts of the world. During those years capitalism was embraced nearly everywhere, even by countries still ruled by the Communist Party, such as China and Vietnam. And at the same time we began to see the emergence of a global market ultimately linking all the world’s national economies together. Globalization, as we have come to know it, provided countries the opportunity to trade and profit in every corner of the world, but also subjects them to competitive forces without precedent in history.

Please understand: I am not defending globalization, only describing it. It is in many ways a destructive force and many of its fiercest critics can be found in the United States. I know that many tend to equate globalization with Americanization, but the fact is that whole parts of the American economy have been decimated by foreign competition. My own home town of Buffalo, N.Y., has dwindled in population as industry after industry has collapsed or moved elsewhere, often overseas. We in the United States are thus finding it immensely challenging to compete with the emerging capitalist powers in Asia and elsewhere, given their remarkable entrepreneurial dynamism and their low labor costs. But however much we may dislike globalization, there is no escaping its logic. The fact is that in global terms we now find ourselves in a kind of Darwinian universe where only the fittest will flourish. We can complain about a so-called neo-liberal threat to wages, living standards and social protections, but at the end of the day every nation has either to embrace the competitive challenge or accept economic decline. If there is one message I would wish to convey to you today, it is that Croatia needs to become a more competitive society and economy. I am not here to preach an American economic model. Croatia will find the model that best reflects its values and unique historic and cultural experience, and it will undoubtedly be a European model, with greater emphasis on the role of the state than is the case in the United States. My point is simply that a nation has to be able to afford its chosen economic model. Sweden and Germany, for example, feature impressively generous social welfare systems, but this is because they possess remarkably successful and globally competitive capitalist economies.

The harsh reality is that no nation can afford complacency in the face of global competition. My own country is no exception. The United States confronts a number of formidable challenges. Our budget deficits and pattern of borrowing are not sustainable, and threaten to leave an unacceptable burden for future generations of Americans. While tightening our belts we also have to find ways to finance the rising costs of supporting an aging population as millions of baby-boomers reach retirement age, as well as to invest in the renewal of our national infrastructure. We have to upgrade our educational system and better prepare our citizens for the demands of the 21 st century economy. We need, in short, to become more efficient, innovative and productive if we are to remain competitive with the Chinas, Indias, Brazils and the other emerging stars of globalization. But Americans welcome the challenge. The United States is a competitive nation, and competition has made us stronger in the past. As President Obama has indicated, if the 21 st century is to be an Asian century, we intend to be very much a part of it, even as we remain true to our commitments to our closest partners and allies in Europe.

The main reason I am optimistic is that, despite the current difficulties, the United States remains a land of opportunity where the business culture and entrepreneurial spirit are as strong as ever. This spirit of inventiveness, of looking to the future, is arguably the United States’ greatest economic strength. In America the words “profit” and “entrepreneur” are generally positive terms, not cause for suspicion.

In fact, the overwhelming majority of new jobs in the United States come from small businesses that may one day grow to become the next Google or Facebook. Many start ups of course do not succeed, but there is a culture of risk-taking and an accepted process of “creative destruction” that works to keep our economy competitive and future-oriented. In the United States, it is socially acceptable to fail in business. Many of our most successful businessmen failed early in their careers -- such “learning lessons” are almost a badge of honor. This is a matter not only of mindset but of business climate. For example, in many states you can start a business online in less than an hour and for under $10. And these start-ups are crucial to the vibrancy of the American economy. Innovative companies such as Facebook, Google, Microsoft, or Apple, which today employ tens of thousands, did not even exist prior to the 1970s.

This brings me back to Croatia. As I mentioned, Croatia faces many of the same challenges as does the United States and indeed most of the Western democracies. We are all facing a moment of reckoning after years of over-spending and borrowing. The new Croatian government has therefore rightly focused initially on reforming the budget. This is not a choice but rather a requirement to ensure investor confidence in the sustainability of public finances and in macroeconomic stability, and to maintain reasonable borrowing costs for both the public and private sectors. However, as the new authorities have also acknowledged, simply raising taxes and cutting expenditures will not be enough to ensure that all Croatian workers find jobs. They are also focusing on investments in strategic areas that can orient and underpin the country’s future economic growth, and they are expected to tackle structural reforms needed to rationalize and modernize Croatia’s economy.

However there are serious limits to what the state itself can do to stimulate economic growth and create the jobs Croatians are looking for today and into the future. The public funds are simply no longer available, and large-scale borrowing is no longer possible. Growth, jobs and prosperity will therefore depend on the private sector; they will depend on whether the free market is functioning successfully in Croatia. This means the creation of a business and investment climate that encourages and rewards entrepreneurship by Croatian individuals and businesses, and one that is also attractive to foreign capital. In sum, a business and investment climate that is competitive internationally.

As a friend of Croatia I have to say in all candor that such a climate does not exist today. If you ask most of the ambassadors in Zagreb about the experience of investors from their countries, you may conclude not only that the investment climate is not attractive but in some sense is actively hostile. These investors speak of encountering local officials who are suspicious and often antagonistic to their business projects; and of encountering bureaucratic and other obstacles at all levels of government.

Lest you think I am exaggerating, let me make clear this is not a personal opinion: quite a number of international studies have reached this conclusion based on empirical analysis. For example, the World Economic Forum based in Switzerland publishes an annual Global Competitiveness Index. For the year 2011-2012, the WEF assessed 142 countries from all over the world. This year Croatia ranked 76 th overall – not a good rating, but also not a bad rating. It puts Croatia roughly in the middle globally in terms of its economic competitiveness. Similarly Croatia ranked 80 out of 183 countries on the World Bank’s Ease of Doing Business Index.

However, when you examine specific categories by which the WEF measures the competitiveness of a country’s investment climate, Croatia actually ranks near the very bottom globally:

• Rigidity of employment index: 125 th out of 142.
• Efficiency of the legal framework in challenging regulations: 126 th out of 142.
• Efficiency of the legal framework in settling disputes: 129 th out of 142.
• Wastefulness of government spending: 129 th out of 142.
• Burden of government regulation: 137 th out of 142.
• Agricultural policy costs: 139 th out of 142.
• Extent and effect of taxation: 140 th out of 142.

While these statistics seem depressing, the overall middle ranking results from the fact that Croatia is deemed highly competitive in other areas such as math and science education, scientific research, infrastructure, transport and communications. In other words, Croatia actually possess many of the attributes necessary to be successful economically and competitive globally. Indeed, given the educational level of your workforce, it seems almost absurd that Croatia is ranking so low on such surveys. The good news is that it is possible to improve the ranking dramatically by addressing identified shortcomings, as countries such as Albania and Hungary have done. And the positive consequences of creating a business-friendly environment – investment and jobs – are likewise rapidly attainable.

To an outsider the changes needed to improve the investment climate in Croatia look relatively simple and even easy to implement. Moreover, given that Croatia is otherwise extremely attractive to foreign investors, it is fairly certain that such improvements could lead rapidly to an infusion of capital that the Croatian economy urgently needs in order to grow and produce the jobs Croatian workers are looking for. However, for change to occur there has to be a desire for change. The statistics I cited are not likely the mere product of accident. Rather they indicate a system whose purpose is to make investment difficult and to some degree impossible. So the real question is whether Croatians truly desire a system which fosters an entrepreneurial culture, rewards investment and welcomes foreign investment in particular. That is a question only Croatians can answer. I understand that Croatians are ambivalent in this regard – they want to preserve their country’s unspoiled beauty; they want to protect the environment; they want to safeguard Croatia’s unique culture, traditions and way of life. But they also have clearly not taken vows of poverty and so want jobs for themselves and opportunities for their children. In today’s ruthlessly competitive global economy, they can have this only if Croatia develops a business-friendly climate. Otherwise capital will go somewhere else, as it already does, to places where it is most welcomed.

As to the steps needed to improve the investment climate, a number of my ambassadorial colleagues in Zagreb consulted with businessmen, both Croatian and foreign, to seek advice and ideas. In December we published an article outlining a few targeted actions that would instantly make Croatia a more attractive investment destination and trading partner. I will mention a few of them briefly. The point I would underscore is that these are not American ideas as such; they are best practices of EU member countries. Again, my aim is not to suggest an American model for Croatia but rather to emphasize that Croatia needs to choose for itself to become competitive in the world we live in today.

First, Legally Binding Tax and Customs Opinions: Currently, foreign and domestic companies have no sense of predictability when budgeting for customs and tax assessments, as opinions given can be overturned or dismissed. This creates uncertainty and discourages potential investors. To help address this, a system could be established in which opinions obtained from tax or customs authorities are legally binding, allowing companies to predict tax and customs obligations. The Austrian government introduced such a formal legally binding ruling procedure in early 2011.

Second, Public Procurement Auctions Online: E-auction systems allow bidders to watch online the lowest price being offered for a specific product or service and to keep submitting counter-bids in real-time until the end of the auction. Croatia could establish an online system for public procurement auctions, similar to that which was implemented in the United Kingdom, Austria, and at least forty other countries worldwide.

Third, Deadlines for Permit Decisions: The biggest barriers to investment are the challenges that both domestic and foreign investors encounter when attempting to obtain permits for new development projects. Predictability for domestic and foreign businesses could be enhanced through legislation requiring government offices to abide by deadlines for the review and resolution of permit applications. Several EU countries, such as the Netherlands and Finland, have implemented similar measures.

Fourth, Labor Market Reform: I recognize that this is a sensitive matter, but I can tell you that, in my capacity as ambassador, the issue of labor market flexibility comes up repeatedly in my discussions with companies and potential investors. Protections for those who are lucky to have jobs is clearly important, but what about those who cannot find jobs and what about young Croatians who will not have future job prospects if the Croatian economy does not attract investment and grow? Croatia might consider a “social” model, such as the ones implemented by Denmark or the Netherlands -- two countries with very low unemployment rates which strive to balance flexibility for employers to both hire and let workers go with social security and training for employees. In Denmark, they call this system flexicurity: it refers to labor market flexibility in a dynamic economy, and security for workers. Regardless of the approach you choose, if you want greater economic dynamism and job creation, you will have to find a way to make it easier for employers to take on new workers -- and, yes, sometimes, when appropriate, let them go.

Let me make clear that the United States is not only a friend of Croatia but we count on your success as a model and on your leadership in this region. And so we will continue to look for ways to support the strengthening and modernization of the Croatian economy, particularly in the development of entrepreneurship, and investing in Croatia’s youth. This year we are repeating a successful initiative that encouraged Croatian young people to think innovatively. The U.S. Embassy in Zagreb created the Ron Brown Apprentice Program to support business planning and entrepreneurial skills among University students (18-25 years). Our Public Affairs Section called for business plan entries from students in Croatia, Bosnia and Herzegovina, Serbia, Montenegro, Macedonia, and Kosovo; successful businesspeople from each of the countries will evaluate the projects. The top three submissions from each country will win an award and attend this year’s Brown Forum in Opatija. However, investment in Croatia’s youth begins from within. Those of you in the audience who recognize talent, we encourage you to consider sponsoring internships or developing an “Idea Lab” in your business, where you can help Croatia’s next generation of entrepreneurs develop their ideas into a reality. This concept exists throughout the world, and is simply critical to ensure that nurturing business skills becomes part of the economy’s fabric.

Moreover, I would also encourage young Croatians to think globally. An anecdote that was relayed to my embassy by a marketing professor at the University of Zagreb illustrates this point. This professor worked with marketing students in the United States, Britain, and in Zagreb, and asked each group to develop a business plan of their choice. The U.S. students developed a business plan targeting the United States and China; the British students developed one focused on the EU market; those at the University of Zagreb developed a plan focused on. ….. Zagreb.

This inward focus should change, especially as Croatia enters the EU, and I encourage you to think in terms of global opportunities. The European Union after all represents a market of over 500 million people.

Last year, the U.S. Embassy successfully organized “The Brown Forum: U.S. and Southeast European Trade and Investment” in cooperation with the Government of Croatia, the Croatian President’s Office and the Croatian Employers’ Association. The event provided a unique opportunity for over 200 government and business leaders from seven countries in the Southeast European region and the United States to come together for a wide-ranging dialogue about improving the attractiveness of Southeast Europe as a destination for foreign investment and trade. It also resulted in an Action Plan outlining recommended reforms for the region’s governments and business leaders to improve the business and investment potential in the region.

I am pleased to tell you that we and the Croatian Government are again co-hosting the Brown Forum this year in Opatija April 2-3. The “2012 Brown Forum: Economic Opportunities at the Municipal Level” has a slightly different focus. This year, we will gather municipal and local government and business leaders from the region and the U.S. to discuss how local entities can initiate economic growth, provide support to local businesses and market a municipality’s resources and benefits to potential investors. Croatia has enormous potential, but the opportunities need to be understood at every level. We are excited that several mayors from the U.S. and Senator Mark Begich, himself the former mayor of Anchorage, have agreed to travel to Opatija for the Forum to discuss their own experiences attracting investment and transforming the economies of their cities and counties. We have more than a dozen U.S. firms already lined up to attend as well, to interact with Croatian and regional businesses.

In conclusion, let me affirm that the United States believes in Croatia and we are confident that Croatia will embark on the path of making itself successful economically. Croatia has many advantages that so many countries around the world would wish to have; only it is not benefiting sufficiently from these advantages. But the time for change has now come. After successfully meeting the first two monumental challenges in its short history – first, the winning of independence, and second, building of the state and the rule of law while integrating into Western institutions such as NATO and the EU – Croatia is on the cusp now of its third historic challenge, that of making itself competitive in the global economy and creating the conditions for job creation and future prosperity. Croatians are indeed a competitive people and successful in many areas of human endeavor. The newly elected government understands what is at stake and has begun to embark on the path of reform. The conditions are thus set for future success, and we wish Croatia well on its next journey.