What Drives Croatia's High Import Dependence?

In the years before the global financial crisis, Croatia’s imports grew rapidly in comparison to its exports. The bursting of the financial bubble initiated a sharp adjustment process: first imports compressed and subsequently exports expanded. Croatia now has a comfortable current account surplus but the economy needs to generate persistent surpluses to ensure the sustainability of the external liabilities it accrued in the previous decade. This paper investigates the structural characteristics of Croatia’s imports. In contrast to other catching-up economies in Central and Eastern Europe, Croatia’s imports appear to be mainly driven by exports of services (mainly tourism), while exports of goods and investment play only a secondary role. The results suggest that Croatia is likely to maintain its regained external balance in the medium term, so long as any competitiveness gains are preserved and investment is channelled to the tradable sector. The findings, however, also point to the limitations of a tourism strategy based on an ever-growing number of arrivals – without a fundamental diversification of the current offer. Tourism policy should aim to broaden the offer of tourism services and move away from the current, highly seasonal pattern in order to reduce the high “leakage effect” in tourism revenues.