The year 2000 was a turning point inCroatian history, marked by closing the chapter of the warand the first phase of transition. With that, the countryturned its attention to the "secondtransition,"the principle goal of which is to placeCroatia on a path to the European Union (EU). While openingthe economy to global markets through World TradeOrganization (WTO) and CEFTA memberships and reestablishingcooperation with its Southeast European neighbors, thesigning of the Stabilization and Association Agreement (SAA)marked the first firm milestone on Croatia's path toEU. In October 2005, Croatia opened EU accessionnegotiations, with the screening phase concluded a yearafter. Benefiting from successful economic transformationand the EU accession negotiations, growth has remainedsolid, and is roughly on par with the average for theEuropean transition countries. Inflation has been modestdespite higher prices for imported oil, and has been kept incheck partly due to exchange rate appreciation. In fact, thecentral bank has intervened to prevent stronger appreciationin the face of robust capital inflows. However, the oil andcommodity price increases and the aggregate demand pressureshave contributed to a widening of the current accountdeficit in 2005-2007, despite somewhat tighter fiscalpolicy. Building on this foundation, the Government has anunparalleled opportunity to place Croatia on a sustainablegrowth path to achieve better living standards for all andto integrate into EU. To seize this opportunity, Croatianeeds to sustain macroeconomic stability and continuecreating a better climate for investment. In this context,key priorities for the public sector will include: reducingthe size of the state and the fiscal deficit, and therebyhelping to increase private sector productivity andcompetitiveness; and improving public sector efficiency andeffectiveness. This report will suggest ways in which thesetwin priorities may best be addressed.
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