Croatia: Living Standards Assessment Promoting Social Inclusion and Regional Equity Zagreb, February 14, 2007 A World Bank Study

Overview and Summary of Key Findings 1. Poverty in Croatia is quite low Only a relatively small share of the poor faces hard-core deprivation Recent poverty trends ambiguous, though some indications of improvement 2. Poverty can be reduced further (better still, eliminated!...) through faster job creation and better targeted social spending Employment status is an important poverty correlate (plus age, education) Benefits of improving allocation on social safety nets: poverty could be eliminated by reallocating spending from less well targeted programs to the means-tested social support allowance 3. Some regional disparities in Croatia, though no higher than in other European countries Report paints a finer picture of disparities at the county-level, though regional profile is more robust and reliable While living conditions do differ across Croatian regions: (i) these differences are not significantly more than other EU countries (ii) taxes and transfers play a significant redistributive role Differences in human capital explain a good part of regional disparities

 Recent World Bank study “Growth, Poverty, and Inequality: Eastern Europe & the Former Soviet Union” takes stock of the impact of growth in the region on poverty and inequality during 1998 – 2003  Provides internationally comparable poverty estimates using a PPP $4.30 per day poverty line Comparable poverty estimates for Croatia derived for 2004 using the same methodology as employed in the regional study Cross-Country Poverty and Inequality Comparisons 1. Poverty in Croatia is low

(a) Croatia’s poverty rate is the lowest among countries covered in the study 1. Poverty in Croatia is low

(b) Inequality is also low compared to other countries 1. Poverty in Croatia is low

National Poverty Trends While Real GDP per capita increased by more than 40 percent between 1996 and 2005… …Inequality in both consumption and income on the other hand has been quite stable and low between 2002 and Recent poverty trends ambiguous; depend on welfare measure:  Stagnant if based on consumption,  Declining if based on incomes 1. Poverty in Croatia is low

National Poverty Trends A poverty line of 22,145 kunas (PPP$4,343) per equivalent adult per year was derived using the cost of basic needs methodology. Poverty is quite limited and shallow  11 percent of the population are poor  “Depth of poverty” is low (on average the poor are not far from the poverty line) Poverty Measure (%) Expenditures Incomes Poverty line (kunas/equivalent adult/year) 21,39022,14521,39022,145 Poverty headcount rate Poverty in Croatia is low

Even households’ own perception of changes in living standards indicate some improvements recently 1. Poverty in Croatia is low

1. Who are the Poor? Poverty incidence and size of household

1. Who are the Poor? Poverty and the Elderly

1. Who are the Poor? Poverty incidence and educational attainment of household head

2. Reducing poverty: job creation and targeted social spending A. Employment status is an important predictor of poverty

2. Reducing poverty: job creation and targeted social spending Job creation in Croatia has lagged real wage and GDP growth

2. Reducing poverty: job creation and targeted social spending Convergence to 2/3rd EU15 income level by 2015 will require rapid increases in total employment and productivity

2. Reducing poverty: job creation and targeted social spending B. Transfers are an important income source for the poor

2. Reducing poverty: job creation and targeted social spending Social assistance is the best targeted program in Croatia…

2. Reducing poverty: job creation and targeted social spending … but continues to have a very low coverage rate

2. Reducing poverty: job creation and targeted social spending Importance of transfers for beneficiaries of the social assistance program

3. Examining regional disparities in living conditions Following an earlier World Bank report, a five-way regional disaggregation was used to improve precision of estimates

3. Examining regional disparities in living conditions While living conditions do vary across regions … Headcount poverty rate (percent)

3. Examining regional disparities in living conditions … (i) disparities lower than observed in many other countries and.. Regional Variation in GDP per capita, selected countries Country# of unitsYearPoorest (Euro) Richest (Euro) Ratiocoefficient of variation Bulgaria ,7013, France ,11138, Spain ,21423, Poland ,7088, Croatia ,9838, Italy ,69732, Romania ,7514, UK* ,26845, Germany ,63844, Turkey , Russia ,1295,

3. Examining regional disparities in living conditions … (ii) Taxes and Inter-regional transfers play an important role in redistributing incomes across regions

Part of remaining differences can be explained by differences in worker characteristics (e.g. age, education, employment status, etc.) 3. Examining regional disparities in living conditions

For instance, people in the central and eastern regions have lower educational attainment (i.e. average years of schooling) than those living in other regions

Source: Pooled Household Budget Survey 3. Examining regional disparities in living conditions (a) Poverty Profile

Source: Pooled Labour Force Survey 3. Examining regional disparities in living conditions (b) Employment Profile

Source: Pooled Labour Force Survey 3. Examining regional disparities in living conditions (c) Education Profile: Less than primary education

Policy Implications - 1 Analysis suggests that developing human capital and upgrading skills should be one of the principle elements of Croatia’s national regional development strategy ROPs and local comparative advantage principle: Accord high priority to those initiatives that build upon commonalities across contiguous counties? Considerable scope to further reduce poverty through improved allocation of spending towards means-tested programs: reallocating 0.7 percent of GDP from other programs to the social support allowance would help reach all the poor in the country. Faster poverty reduction and income convergence with Europe will require sustained rises in worker productivity and labor utilization

Policy Implications - 2 Policies to help social welfare beneficiaries back to work  Target active labor market measures (employment subsidies, labor market training) and measures to promote jobs for disabled workers, youth and improving the basic skills of the long-term unemployed;  Introduce a workfare program for long-term unemployed recipients of welfare, so that they can gain work experience and be reconnected with the world of work. Integration of social welfare (at national and local levels) and employment programs:  Allow CES direct access to the welfare payment system to be able to allow/stop welfare payments for registered unemployed people;  Strengthen joint work between CES, CSW and local governments, particularly with regard to helping ensure better work opportunities for the long-term unemployed. Cost-effective active labor market programs (ALMP):  Administer unemployment compensation in an integrated manner with other services such as counseling, mediation;  Target ALMP on the long-term unemployed as well as those at high risk