A Reform Agenda for the Global Economic Crisis

Remarks by Ambassador James B. Foley to the American Chamber of Commerce Luncheon - Hotel Westin, Zagreb - November 10, 2009

Thank you, Arn, for the warm welcome. It was a pleasure to have had an opportunity to sit down with you, the AmCham Board and past AmCham presidents recently, to hear about the important work you are doing on behalf of the business community in Croatia.

Esteemed members of the Croatian government, Ambassador Loughlin, AmCham Board members, Ladies and Gentlemen,

I consider myself extremely lucky to be the U.S. Ambassador to Croatia at this moment in our history. Our relationship has never been stronger. The fact of Croatia’s membership in NATO has the deepest significance, beyond the obvious implications. It means that we will fight and die for each other, if necessary.It means our destinies are linked together.  It means that Croatia is a secure independent nation that can look to the future, for perhaps the first time in centuries, with confidence.

It is also a great period in our relationship because Croatia is so very close to entering the European Union. Of course, we are unable to walk through the EU door with you, but I seriously doubt that there is a stronger advocate for Croatia’s EU membership than the United States. Why is this the case? It is because our security guarantee makes us directly concerned with Croatia’s well-being. It is because we strongly believe that the accession process will help Croatia adopt and implement many of the reforms urgently needed to modernize the country’s institutions and economy. And it is because we cannot conceive of a stable and prosperous future for the peoples of Southeastern Europe were the door to the EU to be closed to Croatia.

However, I must acknowledge that this is also a very difficult time for the Croatian people. The global economic crisis has badly damaged Croatia and greatly diminished the capital available for both private and public investment worldwide. From what I have observed in just two months here, Croatia is lucky to be endowed with remarkably capable citizens and tremendous natural resources. Perhaps because of that, I have sensed an understandable but dangerous temptation to believe that simply surviving until the global economy recovers will be enough to return Croatia to the path of steady growth.

Unfortunately, nothing could be further from the truth. Not a global economic recovery nor Croatian entry into the EU will suffice to make Croatia competitive in the new globalized economy. The pitiless logic of globalization is such that no country, including my own, can consider itself safe; only the most consistently dynamic, innovative and liberated economies will flourish in this context. We may debate among ourselves the relative merits of liberal vs. social economic policies, but there is no debate about the nature of the global economy:it is a free market. Capital flows to the most attractive, remunerative and, usually, liberal markets. If there are barriers, it flows elsewhere. If it is difficult or unprofitable to do business in a given country, business will go somewhere else. It will go where there are profits to be made.

It is no secret that Croatia’s business and investment climate is less than ideal. This is perfectly understandable. Croatia is a newly independent country. It has recently emerged from nearly half a century under a suffocating and dysfunctional state-dominated economic system. The Croatian people had thus been accustomed to expect much of the state in regard to social and economic welfare. And capitalism itself, as happened in many former communist countries, acquired a bad name because of the illegal or unethical doings of those who profited, thanks to their connections, from privatization schemes.

Every nation has the right to choose the economic model that best suits its values and aspirations. No single example is appropriate for every circumstance. At one end of the spectrum of possibilities is the United States, which has perhaps the most liberal economy in the world, where taxation is relatively light and much is done to stimulate entrepreneurship by individuals and businesses, large and small. We also have a social safety net that is more modest than some of our fellow advanced democracies. We are struggling with that problem today, as President Obama is attempting an historic reform of our health care system, which currently leaves 40 million Americans without medical insurance. Others may therefore not wish to follow our model, although I believe there is much to emulate. At the other end of the spectrum are models such as Germany and Sweden, successful countries that manage to combine dynamic economies with generous welfare systems that hopefully will prove sustainable over time.

But unfortunately the one non-negotiable fact is that a country has to be able to afford its economic model. And that is the difficult problem facing Croatia today – the fact of persistent budget deficits and high foreign debt, which means that the status quo has become unsustainable. With few obvious financial means at its disposal, Croatia needs to find new ways to attract foreign investment and above all to encourage and stimulate the entrepreneurial skills of its people. And it is in that sense that the global economic crisis can and should actually be seen as an opportunity for Croatia. Most democracies find it exceedingly difficult to institute far-reaching changes and reforms when times are good. President Obama’s chief of staff, the former U.S. Congressman Rahm Emmanuel, famously said that “you should never let a good crisis go to waste.” Croatia cannot afford to waste the opportunity this crisis represents.

What are the major impediments to a healthy and friendly business environment in Croatia? Earlier this year, Michael Porter of the Harvard Business School’s Institute for Strategy and Competitiveness visited and made an assessment of Croatia’s competitive status.  The results were sobering. Croatia ranked in the bottom half -- 63rd of 115 nations on the Global Competitiveness Scale overall. And in several categories -- such as the business impact of rules for foreign direct investment, the impact of taxes on incentives for work and investment, and the burden of government regulation -- Croatia ranked even closer to the bottom of the scale worldwide. Corruption and weaknesses in the legal system were also impediments to Croatia’s competitiveness and attractiveness as a destination for investment. Professor Porter noted that much of Croatia’s recent economic growth was a result of “catching up” following the war and as a corollary to integration into the greater European economy, not from a sustainable competitive advantage. The experience of EU members from Ireland to Latvia is enough to demonstrate that simply being in the EU is no guarantee of growth for Croatia.  Membership in the EU is good and necessary for Croatia but it will not be enough.  The status quo will not lead to Croatia’s success in the global economy.

What is needed is the creation of a business climate that is welcoming to new business, that is capable of quickly and equitably adjudicating commercial disputes, that ensures fair competition and transparent procurement practices, that protects intellectual and corporate property rights, and that provides the opportunity for maximum profit without burdensome tax rates.  Certainly, some individuals can succeed in a business climate that does not provide these institutional capacities.  But too often they are crony capitalists who have learned how to exploit unfair systems for personal gain

As I mentioned, many of the barriers to Croatia’s competitiveness -- such as judicial inefficiency, burdensome and complex government regulation and procedures, excessive tax rates, or unequal competition with state-owned enterprises -- are natural legacies of state-control from the former communist system. Rewarding entrepreneurship, limiting the size of the state and simplifying the regulatory environment are the key reforms, but internalization of the values of the free market will also be critical over the long run if Croatia’s citizens are to be equipped for economic competition and success.

Another legacy of excessive state involvement in the economy is the environment it creates for corruption.  When it is the state, rather than the market—that is, producers and consumers—that determines the allocation of resources, then the temptation is to tilt those decisions toward favored parties.  The United States applauds and encourages the recent steps taken by the Government of Croatia and the State Prosecutors, under the leadership of Prime Minister Kosor, to combat corruption. Corruption is one of the most insidious and destructive forces to a nation’s economy. By rooting it out and prosecuting it, the Croatian government is expressing its commitment to the rule of law and to a fair and just business climate. Some of the recent indictments have reached very prominent leaders in the Croatian economy. It is unfortunate that corruption is alleged at these levels, but if in fact it is proven and the transgressors are appropriately punished, it will send a strong signal to others that this type of activity will no longer be permitted—that impunity is no longer possible. Additional steps should also be considered to further reduce the opportunities for corruption, including greater transparency in public procurement, greater efficiency in public administration, and completion of the planned privatizations of state-owned or managed firms.

Please do not assume that I am here to preach the U.S. economic model, as successful as it has proven over time. We have much ourselves to learn from the world. President Obama himself is known as a listener, not a lecturer. We are dealing with big problems and challenges in the U.S. today – not only healthcare reform, but high debt, resulting from living beyond our means for many years. We are also adjusting fitfully to the turmoil and uncertainty generated by shifting labor and capital flows in the global marketplace. Still, the United States is an incubator of free enterprise, of individual potential and the pursuit of excellence because our economic system rewards those ideals. As a nation and as a government, we keep taxation relatively low so that individuals and businesses have the incentive to grow and expand, we foster innovation by protecting intellectual property, and most importantly, we reward risk and initiative in the marketplace.

Not being a businessman myself, I struggled before today with how to illustrate for you how America rewards entrepreneurship. I finally decided to ask my brother-in-law, since he is a small business owner in Seattle, Washington. He is a talented engineer who worked for many years for a large company, until he decided in 1997 to strike out on his own. Today he owns a successful engineering consulting and testing company. It employs six people, three part-time. I asked him how difficult it was to establish the business. It turns out he needed permits or authorizations from three levels of government: federal, state and local. It took him one business day to complete and submit all three applications. All three approvals were received within two weeks.

I asked about taxes.  He pays quite a number of taxes – including a state revenue tax called Business and Occupation tax, which takes 1.5% of the firm’s gross earnings.  He pays federal business income tax on net profits, and pays personal income taxes as would any citizen. He also pays for his employees’ unemployment and accident insurances. Washington State is probably at the higher end of the taxation spectrum in the U.S. On the other hand, my brother-in-law enjoys many kinds of tax loopholes and tax incentives that allow for various kinds of business write-offs. He also made the point that he believes his taxes are paying for indispensable public goods and services that are being delivered honestly and efficiently. (My brother-in-law is the rare businessman in America who is also a liberal. Or you could say that he is the rare liberal in America who is also a businessman.)

He also told me that in his state it is virtually as easy to fire as it is to hire an employee. In most cases, Washington state law allows either party to terminate the business relationship for convenience, as long as there is no discrimination for age, sex, gender or religion. Finally, in terms of his dealings with the legal system, he said that he has won every case against a client who had not paid his bill, and recently won a case against the state over a taxation issue.

Again, I tell this story to illustrate what a business-friendly environment can accomplish. Think, also, about the story of the two guys in a garage in California with nothing but an idea -- an idea that Steve Jobs and Steve Wozniak developed into today’s Apple Computer.  Still, I am partial to my brother-in-law’s story, and not only because he is my wife’s brother, but also because he is a Croatian-American. Their family’s American story began 90 years ago when two brothers left extreme poverty in Korcula to become fishermen near Seattle on the salmon run to Alaska. One brother was drowned, the other survived, and his family are the kind of people who still call America the land of opportunity. In my view, they demonstrate what Croatian ingenuity can achieve when given the necessary encouragement and opportunity.

How do we in this room help to create a business-friendly environment in Croatia? Every business represented here has a stake in the success of the Croatian economy, every business and government leader here today has a voice. Under my leadership, the U.S. Embassy in Croatia is committed to using our platform to support activities that will contribute to the improvement and growth of Croatia’s economy. We will advocate individually for U.S. businesses that encounter barriers to their success in Croatia; we will also strongly advocate for structural and systemic changes in the aspects of Croatia’s business environment that create barriers to free and efficient trade for all businesses. We will offer expertise and know-how to Croatian institutions, public and private, that want to learn from our successes, and yes from our failures, in the international economy and global marketplace. We will invite government and business leaders and decision-makers to the United States so that we can demonstrate first-hand the technologies, policies and business principles that support and enable successful international trade.

We are willing to share that experience because we want to see Croatia succeed in the international marketplace. That success will bolster the Croatian-American economic partnership and contribute to prosperity for both nations.  But it will not happen without a commitment to the ultimate goal of free and fair trade between our two nations. The reality is that, as suggested by Professor Porter, the National Competiveness Council of Croatia and the World Bank, EU accession will not alone make Croatia competitive in the global economy.  That will require reforms to address deep structural and institutional problems and to dismantle the barriers identified by companies like yours that have made the commitment to come to Croatia, or are hesitating to invest because of them.

I welcome the opportunity over the next several years to work with each of you and with the Government of Croatia to strengthen our trade relationship and deepen our friendship. It is our duty as friends of Croatia to assist in the difficult process of change as best we can, both when leadership contemplates the hard decisions, and when they are implemented.

I am confident that Croatia will succeed, and that we can help you succeed. The words that inspired my own country one year ago—“yes, we can”—strike ancient chords of optimism in the American psyche.  Croatia for its part has a deeper store of historic experience and achievement to draw upon in the face of difficulties today. A nation that struggled for century upon century with foreign occupation and yet managed to retain its identity, to fight off invaders and defend our civilization, and at last to prevail in the homeland war and restore its independence is a nation that can summon the will and shoulder the sacrifices necessary to achieve whatever it sets as its national goals and priorities. Yes, you can.

Thank you very much.