Croatia Battles its Grey Economy

The Croatian government has re-established the country's financial police and appears to be counting on improved results in the ongoing battle against the grey economy. Analysts, however, caution against overly optimistic expectations.

Croatia hopes that a stepped-up battle against the grey economy during 2005 will significantly boost state revenues. The government's budget proposal, which parliament has approved, projects 11.3 billion euros in income -- a 5 per cent increase year-on-year. Although authorities also cite increases in tax revenues and contributions, many analysts believe reducing unregistered economic activity is intended to be the main source.
"It is clear that the greatest portion of the increase in income … refers to the strengthening of the battle against the grey economy," says Hrvoje Stojic, an analyst with the Hypo-Alpe-Adria-Banc. To this end, the government has re-established the country's financial police force.
Although that is a significant step, Stojic warns, the government should be wary of overly high expectations. Results "will take time" he says, noting that every Croatian government in the past ten years has mounted similar campaigns, with mixed results.
Goran Saravanja, an analyst with Splitska Banka, agrees. "We can only expect noticeable results in the battle against the grey economy within one to two years. It is not realistic to expect results already within the first year, given that time is needed for the system to begin functioning." In his view, success depends not only on the financial police, but on the efficiency of the judiciary, tax department, customs directorate, and other state institutions, and on co-operation between Croatian institutions and those of neighboring countries.
The degree to which unregistered activity permeates the Croatian economy is not known. Various studies have estimated that it accounts for anywhere from a tenth to a third of the nation's GDP. That, says Stojic, is one reason why analysts are hesitant to assess the degree to which the fight against the grey economy could fill the state treasury.
In addition, he says, it is not simply enough to go after small-time offenders. To fully address the problem, the grey economy must be cut off at the root.