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A UNDP Policy PAPer Fertile ground For developmentMaking the most of eU membership for croatia’s rural areas

A UNDP policy paper

Fertile ground for developmentMaking the most of EU membership for Croatia’s rural areas

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UNDP partners with people at all levels of society to help build nations that can with-

stand crisis, and drive and sustain the kind of growth that improves the quality of life

for everyone. On the ground in 177 countries and territories, we offer global perspec-

tive and local insight to help empower lives and build resilient nations.

Short extracts from this publication may be reproduced unaltered without authoriza-

tion on condition that the source is acknowledged. The authors’ views expressed in this

paper do not necessarily represent the views of UNDP.

Publisher

United Nations Development Programme (UNDP)

Authors

Delia Meth-Cohn

Miroslav Božić

Technical review

Nenad Kocmur

Graphic design

Krešimir Kraljević

Print

Printera Grupa d.o.o.

Printed in Sveta Nedelja, Croatia

First edition 2013.

ISBN: 978-953-7429-48-5

Impressum

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Table of conTenTsferTile ground for developmenT - making the most of eu membership for croatia’s rural areas

Foreword

Executive summary

Chapter 1 Understanding the challenges of Croatia’s rural economyRural flight: why Croatia’s countryside is depopulating

Tackling rural decline

The missing middle: farm fragmentation and polarisation

Concentrated support

No functioning land market

Mind the gap: Croatia’s disintegrated value chains

Chapter 2 The big chance: what EU accession could mean for CroatiaThe deal: what Croatia gets and how it compares to other member states

Croatia’s experience so far and what it means for accession

Why has absorption been so difficult for Croatia?

Threats and opportunities: understanding the impact of EU accession on the rural

economy

Chapter 3 How Croatia can grasp the new opportunities: five priorities Conclusion

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Table of contents

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ForewordPromoting the development of rural areas has been a core mission for the United Nations Development

Programme (UNDP) in Croatia ever since it began working in the country in 1996. Initially this effort was

focused on helping to rebuild the many communities destroyed by war, but it soon expanded to address

other challenges: the hastening pace of depopulation; the fragility of small-scale farming; the lack of rural

job opportunities; and the inadequacy of much rural infrastructure.

Over time, the emphasis of our work has shifted to helping Croatia’s rural areas prepare to seize the op-

portunities – and master the challenges – presented by European Union (EU) membership. The promise of

a huge increase in funding for rural development after accession was particularly encouraging. But as the

date of accession grew closer and closer, our teams in the field began to sound a warning: with just a few

exceptions, rural communities lacked the information, skills and resources they needed to tap EU funding

to improve their prospects, and the national policies and programs that might have helped them get ready

were often delayed, ill-defined or overly complex.

This worry – that Croatia might miss the opportunity that EU membership offers to overcome the disparities

faced by rural areas – is the driving force behind this policy paper. It is designed to outline the challenges

that currently trouble Croatia’s rural areas; to explain why policies enacted to support small farmers and

their families often worked to their detriment; and to suggest where a change of course might be necessary

to halt the ongoing decline of Croatia’s rural communities.

The idea is to stimulate an informed discussion around a few central themes rather than present exhaustive

research or a detailed policy roadmap. Given the range of actors involved in rural development in Croatia,

the report is designed to be accessible to the interested reader rather than limited to an expert or specialist

audience. The recommendations in the report are based on the experience of Poland, Slovenia and other

previous new entrants to the EU, as well as on examples from older EU member states such as Austria and

Italy which share some similarities with Croatia.

The co-authors of the report are Delia Meth-Cohn, a Vienna-based independent writer, editor and long-

term associate of The Economist Group, and Miroslav Božić, a Croatian specialist and consultant, former

Assistant Minister of Agriculture (from 1997-2012) and former head of the working group on agriculture for

Croatia’s EU accession negotiations. They have based their findings on both original research and a wide

range of field interviews conducted in the spring of 2013.

As a crucial first step, the report says, Croatia needs a clear vision for the future of its rural economy, and

then appropriate and tested policies that would translate this vision into a reality. The approach pursued

until now has been hazy and inconsistent, more focused on agriculture as an industry than on the fate of

rural communities. This lack of clarity explains, for example, why rural areas have benefitted so little from the

large sums that have been spent to protect Croatian agriculture.

But, the report cautions, this vision cannot be shaped without the active engagement of rural communities

themselves, and a willingness to seek out and heed the views of rural stakeholders. The refrain that our au-

thors heard again and again from the dogged entrepreneurs struggling against all odds to make a business

in Croatia’s rural areas was that, at the central policy level, “no one listens” to their feedback on how policies

might be improved to encourage rural development.

forewordferTile ground for developmenT - making the most of eu membership for croatia’s rural areas

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The future prosperity of Croatia’s rural areas thus depends on the opening of a genuine dialogue between

central policymakers and rural communities. This is fully in line with the spirit of EU rural development

policy, which is fundamentally democratic and participatory in nature. It also reflects UNDP’s core values,

and we look forward to assisting wherever we can in pursuing this goal.

We thank the many partners and counterparts who took the time to share their experiences and views with

our authors and who participated in preliminary discussions of the findings. And we hope that this report

will contribute to our shared goal of a brighter future for Croatia’s rural areas.

Louisa Vinton

UNDP Resident Representative

October 2013

forewordferTile ground for developmenT - making the most of eu membership for croatia’s rural areas

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execuTive summaryferTile ground for developmenT - making the most of eu membership for croatia’s rural areas

Executive summaryCroatians are proud of their locally made Dalmatian pršut, a dry-cured ham, more familiar to the rest of the

world in its Italian form, prosciutto. But the peculiarities of Croatia’s rural economy mean that its producers

are unable to find sufficient high-quality, affordable pigs at home. And so it is that the bulk of Croatian pršut

is made from imported pork.

If that were an exception to the rule, it would be just one of the oddities that make up national cultures. But

severe distortions are ensuring that Croatia has to import not just pork, but also milk, beef and vegetable oils.

It also means that most farmers operate on the margins in an unproductive grey economy. With few other op-

portunities around and infrastructure declining, young people are leaving the countryside in droves.

Croatia’s membership of the European Union, achieved in July 2013 after a decade of negotiations, offers a

unique chance to address head on the challenges of the country’s rural economy. Accession will bring three

big changes immediately to Croatia: first, it will transform the system of direct support for farmers and mar-

ket interventions phasing out market-distortive elements and introducing green components; secondly, it

will introduce significant funding to help bring small viable farmers into the commercial economy and sup-

port diversification of the rural economy; and thirdly, it will bring a new push to joint action in rural areas,

creating platforms that bring together farmers, businesses, NGOs and officials, facilitating the emergence

of innovation across local communities.

Accession will also bring greater competition from agri-food producers across the EU. Some Croatians fear

that this could wipe out their own farmers, thus exacerbating rural depopulation. They pressure for contin-

ued protection and support for local producers. But ineffective subsidies, combined with the legacies of the

war – abandoned and mined agricultural land – have created many of the distortions that now characterise

Croatia’s agri-food sector.

Rather than helping small farmers to grow, protective policies have polarised the farming community, con-

centrating financial support in the hands of relatively few big farms and keeping small ones out of the

productive economy. The decline of all but the largest commercial farms has reduced supply and pushed

up prices, breaking the links of the farmer-food producer-retailer value chain. The disintegration of this key

part of the rural economy is also creating a vicious circle that reduces the chances of attracting investment

into diversifying rural economies and encourages young people with skills to leave rural areas in order to

build their futures.

In this report, we will look at how Croatia can use EU accession to break out of this vicious circle and fix the

basics, allowing other activities to develop. Croatia has managed to negotiate a good deal with the EU –

with around €330 million a year for rural development alone. But the mere existence of EU funds and institu-

tions will not be enough. If Croatians are to use the opportunities membership brings, they (and not just the

government) will need to act in a myriad of big and small ways to cut through the web of constraints that

are holding back rural development.

In chapter 1 we look in depth at the current challenges facing Croatia’s rural economy and focus on the

similarities and differences with other EU member states. In Chapter 2, we look at how EU accession might

affect Croatia’s farming and food sectors and which new opportunities it could bring for the rural economy.

In Chapter 3 we focus on how Croatia might grasp the new opportunities to ensure that EU accession helps

to reinvigorate Croatia’s rural areas and suggest five priorities for the government:

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execuTive summaryferTile ground for developmenT - making the most of eu membership for croatia’s rural areas

1. Establish overall objectives for the farming and food industry to ensure that policy matches rhetoric

and priorities are clear to everyone

2. Start an open dialogue designed to develop a strategic vision for a thriving and diversified rural

economy

3. Encourage the emergence of networks and joint action among and between rural stakeholders to

help develop thriving and confident rural communities

4. Ensure commitment from the top to keep momentum on spending EU funds and tackle the big

cross-ministerial obstacles to rural development

5. Improve the capacity to absorb EU funds and develop innovative projects by investing in educating

and training people at all levels

EU accession will clearly bring new pressures as well as opportunities for Croatia. But we believe that, by

embracing the spirit of the EU’s rural development policies and implementing them in practice, Croatia

could create a dynamic farming sector, at both industrial and niche levels, and build on this foundation to

develop thriving, modern rural communities that offer attractive and viable environments for people who

are young and educated.

The government cannot achieve this transformation alone; it needs the engagement of active rural part-

ners. EU accession is the perfect opportunity to launch an open discussion with stakeholders on the ground,

to encourage the emergence of rural institutions and jointly to develop a strategic vision for Croatia’s future

rural communities and to find solutions to the challenges they face.

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chapTer 1 understanding the challenges of croatia’s rural economyferTile ground for developmenT - making the most of eu membership for croatia’s rural areas

1UNDErstANDiNg thE ChAllENgEs

of CroAtiA’s rUrAl ECoNoMy

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11


ChAPtEr 1 Understanding the challenges of Croatia’s rural economyMany Croatians are worried about the fate of their country’s rural regions, tucked behind the beauty of the

Adriatic coast and, in many parts, characterised by abandoned houses, ageing populations and poverty. It

is tempting to see these challenges as unique in nature and scale – but it is the similarities and parallels with

other EU member states that yield the greatest lessons for Croatia’s ability to tackle these challenges now

that it has achieved EU membership.

Croatia is less urban than the EU average. Only 19% of Croats live in urban areas compared to 41% in the EU-27,

according to the standard OECD methodology, which divides countries into urban, intermediate and rural ar-

eas based on population density. But that holds true for Sweden and Denmark too, and Croatia is considerably

more urbanised than new member states like Romania, Slovakia or Estonia. Predominantly rural areas in Croatia

account for 39% of the population – higher than the EU average of 24% but on par with the average of the new

joiners and far behind Ireland, for example, which has, with 73%, by far the highest number of people living in

low-density rural areas due to its strong agricultural sector made up of family farms.1

Croatia’s large rural population is rapidly declining. Younger and better-educated Croats are leaving remote

areas for cities in droves, escaping villages with no economic opportunities for them. Croatia’s agricultural

sector is mostly unwieldy and uncompetitive, absorbing 11% of the labour force in 2012, more than two

times the EU-27 average, and accounting for 2.9% of the economy in 2011 (measured as the gross value-

added of agriculture in relation to total GDP), compared to only 1.2% in the EU as a whole.

But Croatia is not alone with the problem of anachronistic agriculture and rural disparities. Croatia’s farms are

only half as productive as the EU-27 average, but most of the other new member states are less productive still,

with the average for all 12 new joiners from 2004 and 2007 showing productivity less than a third that of the

EU. Nevertheless, productivity has grown dramatically in the new member states in the past three years with

an increase of over 44%, while in Croatia the improvement measured only around 11% (see chart, page 12).

Poland, Bulgaria and Romania share the challenge of large but declining rural populations,2 as well as farm-

ing sectors polarised into large former state collective farms and tiny fragmented smallholdings, operating

more as a survival strategy than a business and staffed by unpaid family labour. Here too the rural economy

is lagging, with GDP per capita well below the national average – just a third of urban levels in Hungary,

Romania and Bulgaria.

1 EU statistics from http://ec.europa.eu/agriculture/statistics/rural-development/2011/index_en.htm. Croatia comparison calculated on the basis of the 2011 Census, using OECD methodology.

2 Eurostat 2012 http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-32-11-951/EN/KS-32-11-951-EN.PDF and Eurostat cpc_ecnabrk http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=tec00003&plugin=1 (accessed on 10.2.13).

http://ec.europa.eu/agriculture/statistics/rural-development/2011/index_en.htm

http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-32-11-951/EN/KS-32-11-951-EN.PDF

http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=tec00003&plugin=1

12


0

500

1 000

1 500

2 000

2 500

3 000

3 500

croatia eu27 eu15 eu12

eur

%

Croatian agriCultural produCtivity Compared to eu-27 and eu-12

absolute change of gva: €/awu

0

0.20

0.15

0.10

0.05

0.25

0.30

0.35

0.40

0.45

0.50

11%

23%

13%

44%

croatia eu27 eu15 eu12

relative change of gva, %

source: authors’ analysis based on eurostat data - basic prices, march 2013.

The challenges of Croatia’s rural economy are, however, exacerbated by an additional layer of problems,

unique to Croatia and caused by the destruction, displacement and chaos of the war of independence in

1991-95. Around half of all agricultural land was affected. Many farms were abandoned as people fled; 12,000

hectares of agricultural land are still mined. Just kilometres away from the booming tourist resorts along the

Adriatic are derelict houses and overgrown farmland, turning to scrub and forest, and communities that have

never recovered from the war.

In negotiations with the EU over agricultural support, Croatia was able to include a clause counting war-

damaged agricultural land as eligible for direct payments if cultivated in future. Complicated land ownership

issues, tricky politics and the toll of time all stand in the way of rural recovery. But the lack of a clear vision for

the future of the rural economy as a whole is the bigger obstacle – and the greatest need if Croatia is to grasp

the opportunities afforded by EU membership.

In this chapter, we will look at the current realities of Croatia’s rural economy, focusing on understanding the

drivers of rural depopulation, the causes of the fragmentation and polarization of Croatia’s farm structure and

the constraints to consolidation, improved competitiveness and economic diversification in rural areas. We will

use the experience of other EU member states to shed light on possible trends and opportunities and identify

the key questions that Croatia needs to address.

€+ 614

€+2.752€+2.912

€+1.415

ChANgE iN gross VAlUE ADDED (gVA) PEr ANNUAl WorK UNit (AWU) BEtWEEN 2005-2007 AND 2010-2012

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population By County, and CHange BetWeen 2001 and 2011

source: http://www.dzs.hr/default_e.htm.

rural flight: why Croatia’s countryside is depopulating

Depopulation is a serious threat to the viability of many rural areas in Croatia. In the 1990s, dramatic demo-

graphic changes were the result of war and aggression, exacerbated by the social and economic dislocation

of the post-war transition. But the past decade shows that rapid depopulation is continuing, now driven by

economic realities. According to the 2011 census, only four of Croatia’s 21 counties have seen an increase

in population in the past ten years: the city and county of Zagreb, Istria and Zadar. All 17 of the other coun-

ties experienced varying degrees of population decline, with 12 suffering decline of more than 5% and four

over 10% in the decade. The country as a whole saw a significant decline in population of 4.4% or 300,000

people over the past decade.

County Population Population density per km2 Population change since 2001, %

Republic of Croatia 4,284,889 75.71 -3

Zagreb 317,606 103.79 3

Krapina-Zagorje 132,892 108.13 -6

Sisak-Moslavina 172,439 38.59 -7

Karlovac 128,899 35.55 -9

Varaždin 175,951 139.42 -5

Koprivnica-Križevci 115,584 66.12 -6

Bjelovar-Bilogora 119,764 45.37 -10

Primorje-Gorski kotar 296,195 82.55 -3

Lika-Senj 50,927 9.51 -6

Virovitica-Podravina 84,836 41.92 -10

Požega-Slavonia 78,034 42.81 -9

Slavonski Brod-Posavina 158,575 78.12 -10

Zadar 170,017 46.63 5

Osijek-Baranja 305,032 73.41 -8

Šibenik-Knin 109,375 36.65 -4

Vukovar-Sirmium 179,521 73.15 -12

Split-Dalmatia 454,798 100.18 -2

Istria 208,055 73.96 1

County of Dubrovnik-Neretva 122,568 68.82 0

Međimurje 113,804 156.11 -4

Zagreb 790,017 1232.48 1

http://www.dzs.hr/default_e.htm

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The causes of this rural depopulation are twofold: the most marked is higher levels of migration to urban areas

and abroad, due to a lack of opportunities at home; but this is exacerbated by the resulting natural population

decline (more deaths than births) in a rural population that is older than the national average due to higher

numbers of young people leaving. In the 2001 census, the ageing index, showing the ratio of those over 60

to those under 20, was 95.5 in rural areas compared to 90.7 in Croatia as a whole. The latest census indicates a

worsening over the past decade for the country as a whole. The two factors together create a vicious circle of

backwardness, as the young and better educated leave, and local income, services and infrastructure decline.

To a certain extent, rural to urban migration is a natural consequence of modernisation, as economic activ-

ity shifts away from agriculture towards manufacturing and services. In the most developed countries of

the EU, this urbanisation dynamic has largely run its course over the past decades and depopulation trends

have stopped or even reversed. In the former socialist new member states, this process took place abruptly

after the Second World War, with rapid dismantling of traditional farm structures, followed by abrupt urban-

isation. In Croatia, this process had two peculiarities that help explain the structure of today’s rural areas.

The first was a lack of smaller regional towns that were able to provide sufficient employment, resulting

in a population concentrated in a few big cities and dispersed across many small villages, with no growth

poles to provide jobs for rural people.3 The second peculiarity, as in Poland, was the coexistence of large

Agricultural-Industrial Combines (PIKs), with continued widespread private ownership of small pieces of

land, some of it farmed as a side-job by people employed in PIKs, public services and industry.

The unwinding of this model in the 1990s left a skewed structure, restarting rural migration pressure. War

damage and privatisation also led to the disintegration of much local industry which was not capable of meet-

ing open competition. The PIKs had to restructure and consolidate or find buyers to compete. In terms of

employment, what remained for most people was their land, too small to farm but large enough to subsist

on, and public services. Today, farming still engages a high share of the rural population although very few of

those are registered as employed farmers. The vast majority of Croats living in rural areas are employed in pub-

lic services like education, healthcare, local administration, the railways, forestry, roads and water companies

(contributing to Croatia’s large public-sector labour force and high wage bill) or receive social benefits. In the

village of Plaški in Karlovac County, for example, the displacement of war and rural decline mean that 78-80%

of people rely on social benefits as their main source of income and young people are a rarity. 4

tackling rural decline

Under these circumstances, rural depopulation is not surprising. More so, since Croatia had never pursued an

active rural development policy until the EU accession, and specifically the availability of significant regional

and social funding for rural areas, forced the issue on to the government agenda over the past few years. Rural

development has become a significant pillar of the EU’s policies. The rural development fund itself currently ac-

counts for over 11% of the total budget, agricultural support accounts for 31%, and regional funds used for rural

purposes come to a further 16% or so. 5 Although progress is very mixed across member states, it is overall a

success – channelling money into hard and soft infrastructure in rural areas, involving local actors in developing

bottom-up initiatives and setting in train a rethinking across the EU of the nature and requirements of a modern

and thriving rural economy. Rural regions are still poorer than urban areas, but between 2000 and 2008, GDP per

capita grew more rapidly in predominantly rural regions, rising by 34.5%, 3.5 percentage points more than in the

economy as a whole. Although the crisis hit rural regions harder than urban ones, the growth bonus remains.6

3 Population Projections of the Republic of Croatia, 2010, CBS, p.13.4 Conversation with the Mayor, 28 February 2013.5 http://europa.eu/about-eu/basic-information/money/expenditure/index_en.htm (accessed 18 February 2013).6 Eurostat (online data code urt_e3gdp).

http://europa.eu/about-eu/basic-information/money/expenditure/index_en.htm

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What has become clear, particularly over the last decade of focused funding and exchange of best practice

in the EU, is that rural depopulation and decline is not a given. Although across the EU’s more mature econo-

mies, the proportion of the rural population is lower than in Croatia, the range among these countries is

large. The UK and Germany, for example, have less than 20% of their population in rural regions, France and

Spain have around 30% and Austria and Denmark have around 40%. That share depends on many structural

factors (suitability for agriculture, location, existence of towns in rural areas and so on) but uncontrolled

long-term rural migration is primarily the result of a lack of targeted and well-implemented policies to ad-

dress two different but interrelated challenges.

The first challenge is how to ensure that farming and food sectors are competitive and vertically integrated,

both domestically and on export markets. Large farming companies typically employ few people, while a

plethora of small, declining farms, operated by ageing farmers in a semi-subsistence grey economy destroys

the capacity of rural areas to educate, employ and keep young people. A well-functioning small- and medium-

sized farming sector that, even if much smaller than it is now, is integrated into local food, retail and tourist

industries, and lucrative enough as a business to give the next generation the potential for an attractive living,

can transform declining areas into thriving ones. We will look at this issue in detail in the next section.

The second challenge, given that agriculture will shrink in importance, is to ensure that rural areas can cre-

ate employment outside of farming and public-sector services, by encouraging the emergence of small

businesses in areas such as rural amenities, services, recreation, tourism, renewable energy provision and

local crafts. In some areas, that might mean getting the basic infrastructure in place – roads, access to

schools, water treatment plants and broadband – for these regions to become part of a modern economy.

But Croatia has already invested relatively heavily in infrastructure and, in most of the country, this is not

what is holding back the rural economy. Another key aspect is closer integration between thriving towns

and their rural hinterlands, creating new opportunities in supply and service industries in villages. But while

this makes sense in some areas, there are relatively few thriving small regional towns in Croatia to create

economic opportunities for local people.

The real need in Croatia, which has some structural advantages, including good land for farming and an already

strong reputation in tourism, is to heed EU experience that shows that the key is the right institutional support

and training to help people in rural areas develop common solutions and create economic opportunities within

their communities. Creating this institutional and social backbone, based on local cooperation and involvement,

is crucial to ensuring that rural areas are able to develop sustainable local economies and become an integral

part of the broader domestic economy. That’s why EU rural and regional development funding is an opportunity

that Croatia cannot afford to miss if it wants to tackle the problem of rural depopulation proactively.

There are many examples of good practice to learn from. Poland, in particular, focused the bulk of its EU

funding on its very rural eastern regions. Although external migration from these regions to other EU mem-

ber states was stronger than from urban areas over the past decade, these regions have managed to over-

come some of the constraints to tackling fragmented unproductive farms by creating powerful networks of

farmers’ associations, integrated into export structures (see box, page 16). Ecotourism has become a signifi-

cant source of income for farmers in some areas. Many villages that were falling apart now have well-tended

houses and gardens, with people focusing on how they can live better rather than merely survive. In some

rural areas closer to cities, ageing urbanites are starting to buy property for retirement. Rural out-migration

has not stopped, but the pace of depopulation has slowed. The vicious cycle of backwardness has been bro-

ken and Poland is now focusing on developing the foundations for a new diversified rural economy, looking

at countries like Denmark and the US to learn from their experience with innovation clusters, industrial

parks and free economic zones located in and designed to employ people in rural areas.

16


Ireland, as a strongly rural and agricultural country, has also had great success in encouraging diversification in

its rural areas both on farms and off, driven by broad involvement of local communities in all layers of decision-

making and very strong support institutions. In addition to support with education, EU grants and training, the

Department of Agriculture and Rural Development and Teasgarc, the agriculture and food development author-

ity, run an annual award for rural innovation, showcasing small rural businesses that cover everything from tech-

nical services and energy production, to artisan foods and farmer shops.

Uncontrolled rural depopulation is not determined by fate, but is the result of a lack of focus on tackling its root

causes. Poland’s success in starting the revival of its eastern regions stemmed from a clear policy vision, the good

use of EU funding and best practice experience around the EU, and execution at the local level with people on

the ground urged and supported to get involved. EU funding provides the first step to creating the infrastructure

and support that can enable change – but using the funds and making the kind of change that creates jobs and

economic opportunity requires clear direction and vision from government, and strong local involvement to

tackle the constraints to economic development.

Poland is now the world’s second largest producer of apple juice, behind China, having overtaken the US in

2012. It is Europe’s third largest producer of table apples after Italy and Turkey. Polish export of apples has

tripled over the past decade and is still rising.

It wasn’t always that way. Even as late as 2009, only 40% of Poland’s table apples were of export quality and

small private farmers struggled to put together large batches of apples of the same type and quality. Part

of the transformation was down to investments in new orchards, new types of apples and modern meth-

ods. But a key change was the formation of 15 apple producer organisations, each with its own cold stores,

trucks and sorting and packing machines.

Contrast that with the situation of the farm of Zvonimir Kovačević in Islam Grčki in Croatia’s Zadar County. As

refugees from Vojvodina, where they farmed 40 hectares, the Kovačević family managed to buy and lease

30 hectares of land, and planted peaches, nectarines and apples, investing in solar-powered irrigation, cold

storage and sorting machinery. But when they tried to get other farmers in the area to join forces, sharing

the equipment and buying inputs together more cheaply, there was no interest. Although their margins

are low as they sell to wholesalers, their investments in technology mean the farm has been able to grow

enough to survive. Their entrepreneurial spirit will help too: last year, with a glut of industrial apples, they

decided to produce their own juice but had to drive the apples to Slavonia to find juicing equipment.

Poland’s starting point at EU accession was not much different from Croatia’s and farmers’ dislike of the ideas

of cooperatives was just as strong. Nevertheless, Poland managed over the past decade to leverage EU funds

to invest in modernisation and mobilise its farmers to work together in producer associations, using the same

model successfully pioneered by private farmers in Italy’s Trentino apple region. Croatia now has access to the

best practice and the funding – but it will need to work hard to implement it.

making small-scale farming work: the role of producer associations

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making small-scale farming work: the role of producer associations

the missing middle: farm fragmentation and polarisation

One of the biggest obstacles Croatia must overcome in developing its rural areas is the stagnation of its farm

structure. Like several of the new EU member states, most of Croatia’s farms are semi-subsistence smallhold-

ings and a small number are former collective farms, now privately owned and growing in size and power.

What is missing is the traditional middle-sized farms that are the backbone of European agriculture.

Of the 181,000 farms in Croatia measured for the EU’s Farm Structure Survey in 2007, 27% generated an op-

erating profit of less than €1,200 a year, despite accounting for a fifth of the agricultural workforce. Of those

farms earning above this threshold, 47% occupied less than one full-time person, 69% farmed less than five

hectares and 58% were more or less subsistence farms, producing largely for the family’s own consumption.

Fully 97% of the agricultural workforce was made up of family labour.7 In other words, no more than 18% of

Croatia’s existing farms are commercially viable or even active. Data from the agency handling Croatia’s EU

funding show that almost 90% of farms account for just a third of agricultural land. At the other end of the

scale, only 1% of farms have more than 70 hectares, but these 1,500-plus farms account for another third

of land. Indeed the biggest 30 farms in the country account for 10% of Croatia’s million hectares of utilised

agricultural land and the biggest three alone for 4%.8

Size (ha) No. of farms Total land area (ha) % of farms % of land

<1 38,884 18,082 26.1 1.8

≥1 to <3 48,833 92,128 32.7 9.1

≥ 3 to <10 45,318 236,284 30.4 23.4

≥10 to <20 8,272 113,180 5.5 11.2

≥20 to <70 6,226 223,564 4.1 22.2

≥70 to <10,000 1,587 285,307 1.05 28.3

≥10,000 3 40,325 0.002 4.0

source: authors’ calculation based on paying agency data for 2011.

tHe polarised struCture of Croatian farms

The pronounced dual structure of Croatian agriculture is a legacy of the country’s particular socialist past,

complicated by the tragic dislocations of war. But the past decade of normality has brought no improve-

ment. There is an overall trend towards consolidation across the EU, especially for some of the new member

states, with steep declines in the number of farms in Bulgaria, Poland and Romania. In Croatia, by contrast,

preliminary results from the Farm Census 2010 even suggest that the number of farms is growing. Although

this is more an administrative anomaly than a reality, consolidation is not taking place.9 What’s more, the

percentage of the workforce in agriculture and its share in the economy are growing, despite already being

high in comparison to other EU countries.

7 Croatian Farm Structure Survey 2007, http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Farm_structure_in_Croatia, Agricultural Census 2010, provisional results, Eurostat.

8 ARKOD/LPIS data, 20119 http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Agricultural_census_2010_-_provisional_results

http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Farm_structure_in_Croatia

http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Agricultural_census_2010_-_provisional_results


18


Concentrated support

These oddities are driven by three unhealthy and unsustainable factors. The first is Croatia’s system of high

and distortive subsidies to farmers. For most of the new member states, joining the EU meant a substantial

increase in subsidies to farmers. For Croatia, which can make direct payments of up to €373 million a year

starting in July 2013 if it chooses to top up EU funds to the maximum permissible level, it would mean a small

drop in subsidies to farmers, at least over the amount paid out for 2009, when direct payments amounted to

€386 million. However, due to budget constraints, actual payments for 2011 and 2012 have been significantly

lower (on average around 27% below the 2009 level). They are likely to remain lower after accession since the

Croatian budget for 2013 suggest the full top-up capacity will not be used. Croatia’s production subsidies were

often justified politically as support for struggling small farmers and they did allow these people to hold on to

their land rather than selling it to those trying to expand and commercialise. But their most significant impact

was to provide high and market-distorting levels of support to the large agricultural companies, artificially

raising their already fast rate of growth. More often than not, the biggest 1% of producers received a greater

share of direct payments than did the smallest 50% combined (see table, page 19).

The scale of the support to large farming corporations can be seen in comparison to the beneficiaries of direct

payments across the EU. In Croatia, 15% of payments go to farms receiving more than €500,000. Looked at

another way, just 1% of beneficiaries received 34% of all direct payments – and just 0.2% take 25%. Across the

EU-27, however, just 3% of payments go to farms receiving over €500,000. Among members, only the Czech

Republic and Slovakia show a bigger share of large pay-outs, due to their large-scale farm structure.

Croatia’s focus on supporting local farmers and agri-food producers in the run-up to EU accession was a

conscious policy choice, aimed at boosting food production at home and ensuring that the big companies

would be able to survive free competition once borders opened completely. But the “missing middle” in

Croatia meant that, far from providing a backbone to Croatia’s potentially viable family farms and reducing

food imports, the measures backfired. They shrank the capacity of all but the largest farmers to grow and

supply food to the domestic market by strengthening already thriving companies, which could then squash

their smaller domestic competitors.

Take the example of Croatian pork production, where subsidies for pig fattening were so concentrated on

the large producers that many smaller pig farmers decided to leave the business. Of the 116,000 farmers

with pigs in 2009, less than 0.5% got subsidies for fattening and slaughtering – and just three farming com-

panies received nearly 60% of the entire subsidy money. The aim was to encourage Croatian pig farmers to

reach Danish levels of competitiveness – the result was to squeeze the industry and boost imports. Now,

most Croatian salamis and sausages, as well as 92% of pršut, are based on pork imports from the EU.

19


Type of direct payments

Beneficiaries Amount of support

Coverage Number of beneficiaries

HRK % of total Average payment per beneficiary

The biggest 1% receive more support than the smallest 50%

Cattle fattening

The biggest 1% 37 116,829,186 69% 3,157,546

The smallest 50% 1,836 5,367,272 3% 2,923

Total 3,672 169,950,130 100% 46,283

Sows

The biggest 1% 28 15,393,774 49% 548,016

The smallest 50% 1,405 4,208,088 13% 2,996

Total 2,809 31,178,874 100% 11,100

Olive oil

The biggest 1% 5 1,447,818 48% 286,697

The smallest 50% 253 305,002 10% 1,208

Total 505 3,031,295 100% 6,003

Milk *

The biggest 1% 114 97,276,134 34% 854,199

The smallest 50% 5,694 22,204,279 8% 3,900

Total 11,388 287,484,088 100% 25,244

Sugar beets

The biggest 1% 10 10,706,955 35% 1,102,673

The smallest 50% 486 3,330,620 11% 6,860

Total 971 30,453,736 100% 31,363

Dairy cows

The biggest 1% 77 15,308,770 28% 198,403

The smallest 50% 3,858 4,429,141 8% 1,148

Total 7,716 54,680,832 100% 7,087

The smallest 50% receive more support than the biggest 1%

Sheep and goats

The biggest 1% 102 3,453,358 5% 33,714

The smallest 50% 5,122 11,838,694 18% 2,312

Total 10,243 67,638,889 100% 6,603

Suckler cows

The biggest 1% 247 14,976,449 11% 60,604

The smallest 50% 12,356 23,399,637 17% 1,894

Total 24,712 134,637,344 100% 5,448

Tobacco

The biggest 1% 11 3,188,138 5% 280,893

The smallest 50% 568 6,713,889 10% 11,831

Total 1,135 64,778,271 100% 57,073

source: authors’ analysis based on paying agency data for 2011 - before final clearance of payments, January 2013.* projection for the whole year based on payments for the period July-december.

distriBution of direCt payment support in Croatia

20


Slavonia is famous for its traditional spicy sausage kulen, made from only the best parts of mature pork in a slow

process, following family recipes handed down over generations. But a few years ago, with Croatia’s large meat

producers starting to churn out a cheaper, lower-quality version of the sausage and small producers struggling to

survive, it looked as if genuine kulen might disappear from the market.

That was the origin of the Udruga Slavonski domaći kulen – kulin producer association, now incorporating

132 small producers in four counties across Slavonia. Its key challenge today: getting enough suitable pork

to keep up with demand, despite a price of around €30 per kg of sausage. “As long as we produce top qual-

ity, we cannot produce enough,” says Zdenko Perakić, member of the Udruga and one of its top five produc-

ers. The association is now in the final stages of getting “protected geographical indication” status for the

EU market, which allows them exclusive use to the Slavonski kulen name. Around 100 of the producers are

hoping to upgrade this to “designation of origin” status in coming years, if they can find enough local breed-

ers of the traditional Black Slavonian pig.

The creation of the association was the result of joint action by a few enthusiasts. One was Zagreb-based agrono-

mist, Professor Damir Kovačić, who was inspired by the way small family farms in Austria and Italy were thriving

by producing and marketing high-quality local food products. Another was Andrija Matić, the dynamic head of

the Vukovar-Srijem County office for agriculture, who provided seed funding to secure logistical support for kulen

producers, including expenses to travel to trade fairs abroad and especially a place to meet regularly, build up trust

and battle out which of the many small variations on procedures would become the codified standard for genuine

Slavonski kulen (or kulin, since they agreed to adopt both spellings as eligible for the EU’s protected status).

So far, agreeing these standards is as much mutual collaboration as the farmers have managed to achieve. Mr

Perakić says cooperative behaviour does not come naturally to farmers, since many have had negative experi-

ences working with cooperatives over the decades. And yet overcoming this reluctance to collaborate could be

crucial to making small-scale, value-added farming and food production into a sustainable business – and one

that provides jobs in rural areas. The kulen business could be ten times the size it is now, according to Mr Perakić,

creating hundreds of jobs for high-quality pig breeders and producers. There would even be interest from young

people to run these businesses, he says, if they can see a prosperous future. Slavonia’s large-scale wheat farms, in

contrast, need only one employee per hundred hectares.

There are three areas where greater cooperation among farmers might make sense. The farmers want to have their

own special slaughtering facility, with less demanding standards than the large-scale industrial slaughterhouses

but also more careful slaughtering to ensure that the meat has no blood in the muscle which makes it unusable

for premium sausage. In other EU member states, there are such exceptions for small producers, sanctioned by

national governments and monitored carefully for veterinary and hygiene standards to ensure an export licence.

EU funding could help to finance a small slaughterhouse (if the government were to work with producers on set-

ting special standards), but the farmers would need to share the co-financing costs.

Another area of cooperation would be in marketing, not just for exports but also for “silent exports”, selling pro-

duce jointly to tourist resorts, where the demand for high-quality local produce is high – but so are the constraints

to procuring this produce consistently and on a large scale. A final area of cooperation could be in jointly support-

ing the breeding of Slavonian pigs on some of their farms.

Croatia has a few very large-scale industrial farms that will be able to meet EU competition without help. But it also

has thousands of small producers who could thrive in premium-priced niches, creating jobs and a foundation for

regenerated rural communities. All they need is a small amount of support and encouragement.

Competitive niches: premium products, premium prices

21


Competitive niches: premium products, premium prices

What’s needed now is an open discussion about Croatia’s vision for agriculture, and more generally for the

rural economy as a whole, as it joins the EU. Is supporting small farmers rational at all and what will happen

if they disappear? How can Croatia identify and support the smaller farms that are capable of being com-

mercially active? Are there premium value-added niches where smaller Croatian farmers could compete on

quality? How can the government help farmers buy land, modernise their technology and grow?

no functioning land market

One important way is to remove the second unhealthy cause of stagnation – the lack of an efficient and

transparent land market. Without a mechanism to buy and sell land openly and at transparent prices, it is

almost impossible for Croatia’s active smaller farms to secure access to land and expand, despite the large

swathes of unused agricultural land, and as difficult for inactive ones to sell up at an appropriate price. One

blockage is the incomplete land registry, with only a small percentage harmonised with the cadastre, in

large part due to unresolved ownership issues. The other blockage is unused agricultural land in state own-

ership, left over from the dismantling of the PIKs 25 years ago. Nearly 30% of this land is still used without

a tender, a practice that has been “exceptionally” permitted each year for the past decade. Over the years,

some of the land was given as a concession, without tenders, to private companies. The largest of these,

Agrokor, took over former cooperative Vupik in 2010, getting the use of around 7,000 hectares of state land.

It had already bought loss-making, indebted Belje in 2005, which brought the use of some 20,000 hectares,

along with several other former collective farms.

The sales and one-off solutions solved a problem: what to do with large loss-making and indebted farms and

their employees – but it is a short-term fix that exacerbates the long-term problems. Moreover, the lack of trans-

parency in all of these transactions is problematic: there is very little data available about how much land and of

what quality has been leased and sold at what price and how much usable agricultural land is actually available.

Under the new Law on Agricultural Land, adopted in March 2013, the government has banned further sales

of state-owned land and is relying solely on long-term leases, in order to avoid speculation and purchase

by foreigners. But unless the bylaws are implemented as envisaged, and in a way that encourages transpar-

ency and the growth of smaller farms and not just big ones, the Law will continue to freeze the legacy of

socialism, provide unfair advantages to monopolistic large suppliers and prevent a healthier structure from

forming. By sorting out its land registry and ownership issues and focusing on the evolution of a function-

ing and transparent land market for private and state-owned land, Croatia could swiftly move to remove

unviable farms, strengthen the competitiveness of active small farms and so create a solid economic foun-

dation for rural regions on which diversification could proceed.

22


When Dukat, Croatia’s largest dairy company, temporarily stopped buying milk from many producers in February

2013, following the discovery of high levels of aflatoxins, it was just the latest in a series of hits to dairy farmers that

has decimated their numbers over the past few years. The scandal itself, caused by contaminated fodder, scared

consumers and exposed weaknesses in Croatian controls, prompting improvements. But for many farmers, it may

have been the final trigger to close operations.

The intentions were good. The government’s operating programme for the dairy sector, introduced in 2005, was

designed to encourage dairy farmers to invest in modern equipment and cows, so that they could produce higher

quantities of milk and so reduce the need for dairy imports, while also raising the quality to match EU standards.

In the process, Croatia could encourage the emergence of new large milk farms, rather than the traditionally small

farms concentrated in the centre of the country.

Farmers were entitled to get beneficial loans to buy equipment and animals, along with free advisory services,

based on business plans that showed years of high milk prices (well over the EU level) and high subsidies. The

immediate results were encouraging. In 2003, only a quarter of milk met EU standards, but by 2009, the share had

reached almost 80%. The number of milk suppliers had dropped by more than half to 24,000, but the milk they de-

livered on average had tripled and Croatia reached a peak of milk deliveries at 675,000 tonnes, up 25% from 2003.

So far, so good. But the trouble began when both milk prices and subsidies started to fall as the crisis hit demand

across Europe. Suddenly debt repayments were higher than revenues.

The government’s reaction was to introduce new intervention mechanisms, paying extra for every litre of milk de-

livered. But with no cap on the payments, the bulk of the hundreds of millions of kuna went to the largest farming

companies that had no need of it – not to the smaller ones that were struggling to grow. In 2012, the intervention

payments were stopped, milk prices dropped again and many farmers went on strike and then out of business,

slaughtering their cows. The net result: milk deliveries by 2012 had dropped 11% from their 2009 peak, despite

additional subsidies from 2009-11 of 642 million kuna. Only 12,000 suppliers remained, milk self-sufficiency had

fallen from a high of 92% to below 90%, and the industry had shifted its centre of gravity from central Croatia to

the large farms of eastern Slavonia. Osijek County almost tripled its milk production since 2003.

With the aflatoxin problems, that downward trend will most likely have accelerated. So, despite massive public

spending, Croatia’s struggling dairy farmers will face the full blast of competition from the EU’s major milk produc-

ers with the lowest subsidies in years, with high debts and with a highly polarised structure, with a small number

of large producers and a large number of small producers and little in the middle.

supporting Croatia’s milk industry:good intentions, mixed results, wasted money

23


supporting Croatia’s milk industry:good intentions, mixed results, wasted money

mind the gap: Croatia’s disintegrated value chains

The third unhealthy element sustaining Croatia’s fragmented and polarised farm structure is the gap be-

tween the vast majority of farms and their natural customers: food processors, retailers, organised markets

and the tourism industry. The lack of multiple farm-to-fork value chains is a direct consequence of the dis-

integration of the PIKs, which were vertically organised chains in themselves. Companies like Agrokor and

Gavrilović have rebuilt these links by buying up the elements of the chain from farm to retail, along with

some of the inputs. That works for those included in the chain, but it excludes the vast majority of Croatia’s

farms, blocking the evolution of more modern forms of organisation across the agri-food sector. There is

little support from local or central government or from the food or retail industry to create new links, and

there is no push from farmers to join together and become powerful enough to create them from below.

One consequence for Croatia is that, for all its many farmers and high subsidies designed to encourage

production, it imports basic foods like milk, meat and vegetables from Germany, Italy, the Netherlands and

Austria (see table on page 24). Net food imports are among the highest in Europe, despite the high percent-

age of resources devoted to agriculture10 and the situation could worsen after EU accession, as exports to

CEFTA countries like Bosnia and Herzegovina (currently accounting for 30% of food exports) are hit by trade

barriers, while EU imports are entirely free.

Croatian food-processers rely heavily on imported raw materials and breaking this vicious cycle is difficult.

Food-processing companies complain that they cannot find producers who can deliver sufficient quantities

of raw materials that meet EU standards. Similarly, high taxes and high input costs in Croatia mean imported

food is frequently cheaper than Croatian farmers can produce (at least legally).

Even where excellent products are grown, they are often not processed. Take the mandarins grown in Neret-

va Valley, which are highly subsidised and sold, but not turned into jams or used more innovatively, as they

might be, in a range of products from confectionery to face creams. Farmers’ markets have sprung up in a

few towns, selling product directly – but on the whole, urban consumers in Croatia end up buying poorer

quality imported produce in supermarkets due to the lack of access to local produce.

But the real tragedy with Croatia’s tiny fragmented farms is that, unless they are integrated into production

and retail or export chains, they will never be able to form the basic building unit for a revival of Croatia’s

rural areas. If the benefits of EU membership are used well, as in Poland, Croatia will be able to focus on

ensuring that farms are able to grow and thrive and act as a catalyst for wider rural development. If the

benefits are not well thought through, then the chance to stop rural depopulation and the disintegration of

rural structures will be lost. In the next chapter we’ll look at the potential impact of EU accession and at the

potential for making the most of opportunities in rural areas.

10 The odd phenomenon that a country with a high percentage of farmers in its workforce and agriculture in its GDP should be a higher net importer of food than those with smaller farming sectors is well-known from developing countries and is an indicator of lack of efficiency.


24


Country Food exports as % of imports Net trade (US$ per capita)

Denmark 165 1,174

Netherlands 165 1,663

Hungary 159 235

Ireland 147 763

France 128 198

Poland 124 70

Spain 120 115

Bulgaria 115 44

Lithuania 114 117

Belgium 112 348

Austria 96 -56

EU, excl. intra-trade 91 -19

Germany 85 -136

Italy 82 -120

Czech Republic 74 -167

Latvia 72 -225

Estonia 67 -333

Greece 61 -279

Croatia 57 -212

Slovenia 57 -511

Romania 55 -111

Slovakia 55 -248

Portugal 53 -361

Finland 48 -423

Sweden 48 -526

UK 43 -468

self-suffiCienCy in food, 2006-10

source: authors’ analysis based on fao data, march 2013.

25


It’s often said in Croatia that agriculture could be the country’s second economic pillar after tourism, which contrib-

uted some 15.5%11 of GDP in 2012. That view is in many ways a romantic myth, since agriculture is set to shrink as a

share of the economy as it modernises. But tourism and farming can work symbiotically to create jobs and decent

incomes in rural areas. One route is agri-tourism, where farming families supplement their income by expanding

into tourism services themselves – something that is developing well in Istria and is starting to do so in Dalmatia.

Just as important, but today relatively rare, is a close commercial relationship between Croatia’s tourism businesses

– resorts, national parks, hotels and so on – and farms and other rural businesses.

To see the potential, take the example of Nikolina Anić, owner of the Anić cheese farm in Krasno. She and her hus-

band work exclusively on the farm, which she built up over the past decade. Currently they have 18 milking cows

and produce 3,300 kg of cheese a year. Many of the other dairy farmers who attended cheese-making courses

with Ms Anić in the past decade have abandoned the business and returned to milk production, which has a clear

market. But the Anić farm sells around 60% of its cheese from the farm, due to an excellent relationship with the

nearby Northern Velebit National Park, which sends many tourists its way.

Compare her experience to that of Miranda Paić, owner of Skradinske delicije, which produces almond products.

She was awarded the “original Croatian product” label, won an award as the best souvenir in her county in 2008

and 2011 and took a UNDP award for one of the best agro-tourist estates in Dalmatia. Like the Anić farm, her busi-

ness is located in the vicinity of four National Parks, but they have not recognised her product. National Park Krka,

for example, is visited by 700,000 tourists a year, but they are unable to buy her products inside the park.

What is the problem? There are three very big constraints to creating well-functioning supply chains between

small producers and large tourism organisations: quantity, consistent quality and price. The complaint from na-

tional park buyers and those from huge resorts, like Šibenik’s Solaris, is that small producers are unable to get

together to guarantee a sufficient quantity, their quality varies between batches, and many small producers are

unwilling to reduce their prices for large orders. That makes it far easier and cheaper to import souvenirs from

China and food products from major retailers (especially for state-owned organisations, like national parks, which

also need to meet public procurement rules).

Nevertheless, as the Anić cheese example shows, there are ways around these constraints – and they rely mostly

on creating functioning networks for these groups to meet and find solutions that work for everyone. The Solaris

buying manager, for example, says the resort has realised how important it is for foreign guests to have access to

really high-quality local produce, which it can brand as its own. Solaris has started working more closely with local

producers, recently signing an agreement to buy organic olive oil in barrels from MasVin, for example, providing

this wine and oil estate with a reliable income, despite lower prices, while treating resort guests to an award-win-

ning product. The key to generating more win-win solutions for Croatia is to facilitate the networks and platforms

that allow buyers and suppliers to meet and find creative solutions.

leveraging tourism: building links with the rural economy

11 World Bank data, June 2013.

26


27


2thE Big

ChANCE: WhAt EU ACCEssioN

CoUlD MEAN for CroAtiA

28


29

chapTer 2 The big chance: what eu accession could mean for croatiaferTile ground for developmenT - making the most of eu membership for croatia’s rural areas

ChAPtEr 2 The big chance: what EU accession could mean for CroatiaMembership of the EU gives Croatia a unique chance to address head on the challenges of its rural econo-

my. Many Croatians fear that EU accession could wipe out their farmers and food producers by opening the

door to greater competition, thus exacerbating the exodus from rural areas. They pressure for continued

support for local producers. But that kind of protection has contributed to the continued fragmentation of

the farming sector and the stagnation of the rural economy. Instead, Croatia needs to take a fresh approach

to creating a thriving rural economy.

Accession brings both pressures and incentives to implement such a change. There is no question that

EU membership will introduce greater competition into the still relatively protected Croatian market. It

will also transform the system of direct support for farmers and market interventions, introduce significant

levels of rural development funding to help bring small viable farmers into the commercial economy and

encourage diversification of the rural economy, while supporting bottom-up action in rural areas.

In this chapter, we will look at how these changes might impact Croatia, what constraints need to be over-

come to capture the potential benefits of accession, and how the country can leverage both funding and

other member states’ experience to break out of the vicious circle of long-term rural decline.

the deal: what Croatia gets and how it compares to other member states

Despite widespread perceptions that Croatia lost out in its negotiations for EU funding, the country man-

aged to get a good deal. Indeed, in relation to the size of its utilised agricultural area, it is allocated much

higher levels of both direct payments and rural development funding than the new member states that

joined in 2004 and 2007 – and more than most other member states.

First, take direct payments to farmers, known in EU jargon as Pillar 1 of the Common Agricultural Policy (CAP).

The maximum amount available for Croatia, including both financing from the EU budget and permissible

top-ups from the Croatian national budget, is €379 per hectare – a total of €383 million in potential direct in-

come support for farmers each year (including roughly €10 million for de-mined agricultural land). That is the

third highest level in the EU, with only one new member state, tiny Malta, receiving more (see chart, page 30).

Like the other new member states when they joined the EU, Croatia has a ten-year phasing-in period, with

direct support from the European Agricultural Guarantee Fund (EAGF) budget starting at 25% of the full

level, reaching 50% in 2017 and 100% in 2022. Most of the new joiners were allowed to top up the EU funds

from their national budgets by just 30%, meaning that in the first year of membership farmers could receive

at the most 55% of the allocated support level. But Croatia is allowed to top up to 100% from the first year

– even higher than the derogation granted to Slovenia, and a recognition that existing national support

mechanisms were already at a high level and that a rapid reduction of subsidies could be harmful.

Croatia is also treated favourably with respect to the CAP’s second pillar, the rural development funds. These

were introduced in their current comprehensive form in 2007 to encourage broader restructuring of the

30


farming sector and rural economies in general, especially in the new member states and countries with a

large proportion of “less-favoured areas”, usually mountains or islands (Croatia has plenty of both).

From 2014, when the next EU budget period is due to start, Croatia is set to receive the second highest level

of rural development payments per hectare of any of the EU members except Malta (see chart). Croatia

will receive around €330 million per year, which is twice the average per hectare amount for the other new

member states and three times the average of the EU-27 as a whole. That follows the precedent of Slovenia,

which also received high levels, as well as Austria, due to large areas of mountainous land designated as

less-favoured areas which receive a quarter of the country’s rural development funds.

€/ha

eu direCt payments and rural development support, 2014-202012

source: authors’ analysis based on budget data from consolidated draft regulations on direct payments after 2014 (council of the eu, 25 september 2013 – interinstitutional file no. 13294/1/13 rev 1) and consolidated draft regulation on rural development for programming period 2014 - 2020 (council of the eu, 26 september 2013 - interinstitutional file no. 13349/1/13 rev 1)

In addition to funding from the EU’s Common Agricultural Policy, Croatia will also have access to around

€1.1bn a year in Structural Funds, designed to boost regional infrastructure, employment opportunities,

environmental protection and the development of competitive and innovative small businesses. Significant

portions of this money can be used for projects that will help to stimulate the rural economy, as happened

in eastern Poland.

Taken together, Croatia’s opportunity to use EU funding to facilitate a transformation of the rural economy

is greater than for other new member states. But its record so far in using the EU’s pre-accession funding is

the weakest of all them. Whether Croatia will be able to transform its advantage into concrete results will

depend not only on the country’s ability to absorb the funds, but also to use them effectively to reverse the

polarised structure of farming and build the foundations for a more diverse rural economy.

628

0

100

200

300

400

500

600

700

549

507483 472 459 453

431

379 378 370 370 356 347 345 336 336 336 335 331314 310 302 306 293

276 278 266248 243

Croa

tia

irela

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ania

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en

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ium

EU 1

2

hun

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epub

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aus

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y

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esto

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12 Data from top-ranked Malta have been excluded from the chart because they distort the graph. The tiny island, which has a total land area of just 316 square kilometers, is due to receive altogether €2,079 per hectare of cultivated land, with €665 in direct payments and €1,414 in rural development support.


31


Croatia’s experience so far and what it means for accession

Pre-accession funds are intended as a training ground where EU enlargement candidates learn how to

develop effective projects and implement delivery systems that will allow them to take advantage of the

much larger funding levels that come with accession. Croatia’s pre-accession rural development allocation

to the end of 2013, for example, is just 8% of the level it will have access to from 2014. The picture with

structural funds is similar.

That training is crucial in three respects. First, it allows local farmers, officials and other people to get ac-

quainted with the way in which EU funding works – the aims, conditionalities and complicated bureaucracy

of applying for it. Secondly, it allows the government to develop a consensus around its strategic vision

for the future of the rural economy, identifying objectives that can then become part of the detailed and

country-specific National Rural Development Programme that focuses spending of EU funds.

And thirdly, it provides time to build the institutions that will support the implementation of EU funding

– everything from the paying agency that oversees the distribution of direct payments and rural develop-

ment funding to the organisations that help people on the ground to organise themselves, develop good

projects, apply for funds and implement their plans effectively. The amounts of pre-accession funds that are

spent are, consequently, less important as a sum of money invested than as an indicator of future ability

to absorb the much larger upcoming post-accession funds. In Croatia’s case, the indicators were far from

satisfactory before accession; now that membership has been achieved, it is vital to ratchet up the learning

process on all three levels.

Croatia was first able to apply for pre-accession funds in 2006 and enjoyed just one year of the SAPARD

programme, which all previous new member states had used, before moving on to the IPARD programme,

introduced as part of the new budget period from 2007-13 and designed to mirror its overall aims and struc-

ture. The first eight former socialist new joiners were able to absorb virtually 100% of their SAPARD funding

after a shaky beginning. Bulgaria and Romania, which joined in 2007, were less well-prepared and absorbed

on average just 83% of their allocation.

By the end of 2009, Croatia had managed to contract just 62% of its allocated SAPARD funding and, by the

end of 2012, had paid out just 48%. The IPARD programme, introduced in 2007 with a first pay-out in 2010,

has faced even bigger difficulties. By the end of 2012, according to Paying Agency data, just 44% of the

planned allocation had been contracted and less than 12% paid out after three years of implementation.

Absorption of the IPA pre-accession structural funds has been better but, by the end of 2012, still only 60%

of the potential allocation was contracted and just 33% paid out. This slow pace has meant that a substan-

tial amount of funding earmarked for pre-accession assistance to Croatia’s agriculture has already had to

be returned to the EU: in all, €51.5 million has so far been “de-committed,” in EU terminology, €38.6 million

under IPARD and €12.9 million under SAPARD. This means that the amount of funding returned to the EU is

almost double the E26.9 million in EU funding paid out to Croatia by the end of 2012.

Worryingly for the effectiveness of rural development funding, most of the spending that has taken place

has focused on the already commercialised agri-food sector. For IPARD, 62% of the money available for

measures to increase the competitiveness of commercial farms (known as 101) had been contracted and

over 20% paid out; while 16% was paid out for improving food-processing and marketing (103). Not a single

payment had been made by the end of 2012 for measures to build up rural infrastructure (301), although

46% was contracted. For measures to support the diversification of the rural economy (302), just 1% of

the planned allocation had been paid out in the first three years of implementation and only 17% of the

planned volume was already contracted.

32


Number of projects

Total public funds, HRK % in relation to IPARD plan

Total investments Amount of support

IPARD plan: 2007-2011 96 142,093,333 71,046,667 100.0

Received: 2010-2012 84 93,505,467 46,036,881 64.8

Rejected 26 13,258,267 6,645,349 9.4

Contracted 49 66,464,620 33,232,115 46.8

In processing 9 11,125,619 5,562,809 7.8

Paid up to end 2012 19 22,153,507 11,076,668 15.6

Number of projects



IPARD plan: 2007-2011 105 27,965,333 27,965,333 100.0

Received: 2010-2012 210 105,273,092 101,220,488 361.9

Rejected 86 44,175,565 41,124,020 147.1

Contracted 30 12,789,154 12,789,154 45.7

In processing 94 44,065,267 43,430,320 155.3

Paid up to end 20112 0 0 0 0.0

Number of projects



IPARD plan: 2007-2011 235 46,917,333 23,458,667 100.0

Received: 2010-2012 183 28,865,778 13,862,734 59.1

Rejected 37 4,649,857 2,303,696 9.8

Contracted 54 7,961,114 3,980,549 17.0

In processing 92 15,811,858 7,528,534 32.1

Paid up to end 20112 5 518,602 259,301 1.1

ipard in Croatia: measure 103 (proCessing and marketing)

ipard in Croatia: measure 101 (investments in agriCultural Holdings)

ipard in Croatia: measure 301 (rural infrastruCture)

ipard in Croatia: measure 302 (diversifiCation)

source: authors’ analysis based on ipard plan and data from paying agency, march 2013. exchange: 1 eur = 7.45 hrK

Number of projects



IPARD plan: 2007-2011 196 82,096,000 41,048,000 100.0

Received: 2010-2012 233 101,347,519 51,020,182 124.3

Rejected 72 29,234,158 13,844,665 33.7

Contracted 118 47,985,012 25,290,054 61.6

In processing 43 21,844,634 11,199,777 27.3

Paid up to end 20112 47 16,017,707 8,361,213 20.4

33


Funding for two other key areas for rural development – community engagement through Local Action

Groups (known as the LEADER programme) and agri-environmental measures – was held back by the ag-

riculture ministry due to a lack of sufficient legislative and institutional preparation. The accreditation for

LEADER to release technical assistance funding was delayed until March 2013, wasting valuable preparation

time and discrediting the perceived value of Local Action Groups.

A similar distortion can be seen in the average size of projects supported. In Croatia, the average was huge

at €255,000, compared to an average of €42,000 in the first eight former socialist new member states and

€191,000 in Bulgaria and Romania, which also faced distortions in the farming sector. In other words, rather

than benefitting many smaller players, the funding so far has focused disproportionately on large projects

for existing commercial farms – thus negating the learning effect to a great extent, reinforcing the distorted

rural economy and missing a chance to build the foundations of change.

Why has absorption been so difficult for Croatia?

Ironically, given the poor results to date, one of the biggest constraints for absorbing EU funds has been the fo-

cus on getting the money spent in fewer, larger chunks if necessary and tackling short-term challenges rather

than learning the basics and building foundations systematically. Indeed, the threshold of eligible payments

under IPARD was increased, in agreement with the European Commission, when it became clear that usage

would be catastrophic since mostly large farming companies were applying for measures 101 and 103 and the

amount they could receive was limited. As a result, Croatia’s experience with pre-accession funds has tended

to expose the long-term challenges of the rural economy rather than tackle them. To ensure that funds are

used more effectively now that the big money can start to flow, Croatia must refocus on preparing the ground.

At the administrative level, this will require investment in capacity building, which has often fallen victim to

budget austerity plans. The Paying Agency, the key implementing body for both direct payments and rural

development funds, has struggled to hire and retain enough people and has consequently become part of the

bottleneck in distributing funds. The problem is not competency but capacity. Indeed all new member states

have learnt sooner or later that investment in creating a well-managed and well-respected agency and raising

capacity among all public institutions involved in dealing with EU funds is key to their successful absorption.

Such investment will not necessarily mean spending more overall. Over the past decade, administrative

spending has skyrocketed (see chart, page 34). Subsidies rose and then, after 2009, sank again, but admin-

istration costs climbed steadily from just a tenth of state expenditure on agriculture in 2004-2007 to nearly

a quarter today. A small part of that is accounted for by the Paying Agency and more will need to be spent

here (3-7% of the support in agriculture is the usual range), but there are many unnecessary costs that have

built up over the years and these can be streamlined to meet the new requirements, as the government is

doing across the board. Similarly, it is crucial now to ensure that all experienced officials and organisations

are being deployed to ensure the effective use of funds and employ all means possible to fill the gaps.

34


At the local level, there have been two major factors discouraging the use of rural development funds. The first

was the parallel introduction, along with the SAPARD/IPARD funds, of a simple and exhaustive state subsidy

scheme for farmers, intended to ensure Croatian farmers were not wiped out by the competitive force of EU

membership. This support, as we have seen, did not have the desired effect of boosting local production – it

merely cemented existing structures and increased dependence. But it did take away the incentive for small

farmers to apply for funds that were explicitly directed towards increasing their competitiveness and com-

mercial orientation, as well as preparing themselves to meet EU food safety and hygiene standards. A similar

unnecessary overlap affected the incentives for municipalities which preferred to apply for World Bank loans

rather than IPARD grants because it was easier to avoid difficult procedures at the Paying Agency.

The second factor is the low level of awareness about the potential and realities of EU funding and lack of

support in accessing it. The large network of agencies and NGOs that supported the accession process in

countries like Slovenia and Poland has been far weaker in Croatia. To be fair, that is partly to do with the fact

that only one country will require advisory services rather than a group; nevertheless, Croatia is in a strong

position to benefit from the very experienced networks that exist in other new member states through

proactive twinning projects and exchange of best practice. In the end, EU funding so far has gone primarily

to those with insider knowledge of the process. Many farmers and local officials still have no idea what is

available and how they would go about getting it.

Behind all these weaknesses is the lack of a strategic vision for the future of Croatia’s rural economy. Gov-

ernment policy and funding decisions in the past decade (under different governments) has been based

on reacting to structural challenges – rising food imports, rural depopulation, the stagnation of the farm-

ing sector and the need to spend EU funds – with short-term fixes. The solution has generally focused on

trying to support farmers and agri-food companies in order to boost Croatia’s production. But this focus

has, perversely, exacerbated the problems. It’s time to develop a new systematic approach to rural develop-

ment, one that is based on listening to experience on the ground, in other EU countries and across different

ministries, and on using EU funds over the next one or two financing periods.

0

5.0 %

10.0 %

15.0 %

20.0 %

4.2%

8.3%

18.3%

15.7%

4.9%

source: authors’ analysis based on ministry of finance data, may 2013.

administrative spending rise in tHe ministry of agriCulture, 2005-2013

statebudget

ministry of agriculture

(moa)

moa: public

services

moa: structural measures

moa: market support

35


When Denis Rubić, a Dalmatian consultant brought up in Germany, was drawing up a regional strategy for the

mountainous areas behind Split, he spotted the enormous business potential of maraska sour cherries. Grown in

Dalmatia for over 500 years, they used to be a profitable business for many people, conquering world markets with

the famous maraschino spirit, still produced by the Maraska company in Zadar. Rather than worrying about new

competitors from the EU cornering the market, demand for maraska cherries still far outstrips supply and few of

the traditional maraska products – jams, dried sour cherries, liqueurs – are available to buy. Add organic farming

and the possibility for agritourism, with holiday cottages and local products like honey and cheese, and he saw an

irresistible business niche.

That was the start of the Terra Marascae project, now 50 hectares of orchards, with 25,000 trees planted in the

stony ground of Šestanovac – most of it a long-term concession of state land. Rubić knew little about fruit farm-

ing when he started out, but there are plenty of people in the area who do. What he knew, was how to organise,

finance and market his project. With his consultancy background, he managed to get IPARD funding from the EU

for extending the orchards and, in future, plans to apply for funds to build holiday cottages and buildings to sell

produce. When he faced problems, he was able to talk with the ministry. He gained a marketing boost by devel-

oping the concept of “godfathers”, interested investors from around the world who sponsor trees and enthuse

others, bringing financing and future customers, while getting returns in the form of maraska products, boasting

their own signed labels. Two of the godfathers are the German and Japanese ambassadors to Croatia. The latter

opened the second phase of the orchard and his countrymen are likely to be among the many coming to enjoy

the cherry blossoms in Dalmatia.

One of his toughest jobs, however, was to get his neighbouring farmers and local hotels to see him not as a com-

petitor but as a partner with skills and capacity that could contribute to their own success. He would like to see lots

of plantations and factories springing up to put the home of maraska cherries on the map, creating jobs, providing

an outlet for all kinds of local products and services and showing that farming can be a profitable business. “I want

to show it is possible,” he says.

unlocking commercial potential in rural areas: Terra Marascae

threats and opportunities: understanding the impact of eu accession on the rural economy

EU accession has been achieved, but there is still a lack of clarity, especially among farmers and local officials,

about the nature of both the threats and the opportunities it will entail. The most obvious positive change that

EU membership brings for rural Croatia is an increase in the size of EU funds to a combined €3.6 billion for the pe-

riod 2014-2020, with roughly €330 million annually earmarked purely for rural development measures. In trying

to absorb that money on effective projects, Croatia will be able to use two key new areas of spending.

The first, known as agri-environmental measures, recognise that farmers play both an important role in

preserving nature, but also potentially in damaging it. They therefore need to be incentivised to play a

positive role, if this costs extra or brings lower revenues, and paid a premium for supporting ecosystem

services beyond the needs of farming. Concrete examples include avoiding intensive use of fertilisers and

herbicides and pesticides to protect water, soil and biodiversity; protecting land from erosion; using rare

and traditional breeds and sorts; and managing mountain pastures or planting grass on arable land. Austria

is the EU’s pioneer in using these measures since joining in 1995. There, three-quarters of farmers benefit

36


from this kind of funding, with average payments in 2011 of €4,790 per farm, accounting in sum for €549

million, including co-financing.13 Almost half comes from additional compensatory funding available for

farmers operating in difficult (mainly mountainous) locations, known as Less Favoured Areas (LFAs). As a

result, household income for mountain farms is now about 80% of average farm income, up from 60% in

the 1980s. The LFA system is currently being reworked to focus on the more objective (and restrictive) defi-

nition of Areas facing Natural Constraints (ANCs), but many of Croatia’s islands and its mountainous areas

are likely to be included.

The importance of agri-environmental funding for Croatia is twofold. First, it will encourage a new, more

comprehensive way of approaching rural development and agriculture, giving more emphasis to small- and

medium-scale organic farming, linked to tourism and recreation and addressing issues of depopulation and

marginalisation.

Organic farming is still tiny in Croatia, accounting for just 2.5% of all cultivated farmland, or just one-third the

average for the EU-27 countries (see table, page 37). To see the potential, look at Austria. Since the first organic

farm started 20 years ago, it has leveraged EU funding to lead Europe with 16% of all farms certified organic

and 20% of farmland. The main supermarkets, including the discounters, all carry their own heavily marketed

and branded home-grown organic produce, creating a supply chain that makes it both simple and relatively

lucrative for small farms to opt to become organic. Austrian tourism agencies also market agri-tourism guest-

houses with organic products, adding another revenue string to organic farmers’ bow. Consumption of or-

ganic foods is worth €118 per person per year, the bulk of which is locally produced. In Croatia, consumption

is just €14 per person and half of that amount is imported.

Analysis of the UNDP’s COAST project, promoting green rural development in Dalmatia, estimated that 3,000-

4,000 jobs could be created in organic agriculture and the connected production of traditional products and

another 3,000-4,000 in agri-tourism and adventure tourism, along with 2,000 more in organic fisheries and

associated services.

The second reason that agri-environmental funding is key is that, if pursued properly, it will be the most effec-

tive way to absorb large amounts of funds. That is because the procedures are simpler for farmers to apply for

being based on meeting specifically defined criteria, such as being organic, operating in an ANC or in an area

that is designated as part of the ecological network Natura 2000, which Croatia is obliged to maintain in good

environmental condition. Around 40% of Croatia’s total land area will become part of Natura 2000.

13 http://www.lebensministerium.at/en/fields/agriculture/Rural-Development/Agrenvironprogramme.html (accessed on March 18, 2013).

http://www.lebensministerium.at/en/fields/agriculture/Rural-Development/Agrenvironprogramme.html

37


source: authors’ analysis based on eurosTaT data for eu-27. for croatia: dsZ and ministry of agriculture data, september 2013.* data for cyprus, ireland and luxembourg refer to 2009; portugal and greece for 2010

organiC Crop areas in total utilised agriCultural area (uaa)

2011. * 2005. Change in share: 2011/2005

Rank

2011Country Total area under

organic crops (Ha)Share in

toal utilized agricultural area (UAA) 2011 (%)

Share in toal uti-lized agricultural area (UAA) 2005

(%)

Change in share

(% points)

Change index

(2005.=100)

1 Austria 542,553 18.9 14.7 4.2 129

2 Sweden 480,185 15.7 7.0 8.7 225

3 Estonia 133,779 14.1 7.2 7.0 197

4 Czech Republic 460,498 13.1 7.1 6.1 186

5 Latvia 184,096 10.1 6.8 3.3 148

6 Slovakia 166,700 8.6 4.6 4.0 186

7 Italy 1,096,889 8.5 7.3 1.2 117

8 Greece 309,823 8.4 7.6 0.8 111

9 Finland 188,189 8.2 6.5 1.7 127

10 Spain 1,803,661 7.5 3.1 4.3 239

11 Slovenia 32,149 7.0 4.6 2.4 153

12 Germany 1,015,626 6.1 4.7 1.3 128

13 Denmark 162,173 6.1 4.9 1.1 123

EU - 15 7,483,282 5.9 4.1 1.8 143

14 Portugal 210,981 5.8 6.2 -0.4 94

15 Lithuania 152,305 5.4 2.3 3.2 239

EU - 27 9,604,798 5.4 3.5 1.9 154

EU -12 2,121,516 4.1 1.9 2.2 217

16 Belgium 55,304 4.1 1.7 2.4 245

17 Poland 609,412 4.1 1.0 3.1 406

18 UK 638,528 3.7 3.5 0.3 108

19 France 977,234 3.3 1.9 1.5 179

20 Luxembourg 3,614 2.8 2.5 0.3 110

21 Cyprus 3,184 2.6 1.0 1.6 266

22 Netherlands 47,205 2.5 2.5 0.0 100

23 Croatia 32,036 2.4 0.3 2.1 1,006

24 Hungary 124,402 2.3 2.2 0.1 106

25 Romania 229,946 1.6 0.6 1.0 256

26 Ireland 47,864 1.1 0.8 0.3 140

27 Bulgaria 25,022 0.5 0.1 0.4 655

28 Malta 23 0.2 0.1 0.1 147

38


Local Action Group Vallis Colapis, which brings together seven municipalities in the north of Karlovac County, is one of Croatia’s most active LAGs, but it too is struggling to benefit from EU funds. It started out in 2009 as a pilot project, but after two years it was clear that the regulatory framework for accrediting LAGs would continue to be delayed. Its head Milan Medić managed to get enough independent funding locally –from companies and from Slovene cross-border EU funding – to set up an office in Ozalj and employ two other people, along with lots of volunteers. The LAG began focusing on mobilising young people to get involved in social and cultural projects.

In 2012, with more delays in accreditation, Medić decided to set up a social business with ten partners, all engineers from the area who had moved to Zagreb to find work and wanted to come back. Organised as a cooperative, the company is focusing on using biomass, small hydropower plants and solar panels to generate renewable energy.

When the Ministry of Agriculture finally accredited a first group of 30 LAGs in mid-2013, it seemed the days of struggling were over – but the system is still not functioning as it was meant to do. Funding is available from the government for each approved LAG, but they must pre-finance all expenditures. Croatia’s banks are refusing to give pre-financing credits, unless the LAGs get guarantees from municipalities. Local government, however, are not permitted to provide guarantees to NGOs. Medić is not giving up. He persuaded the Karlovacka bank to make an exception and provide Vallis Colapis with a small credit without guarantees, and is now working with the Min-istries of Finance and Agriculture to introduce an automatic LAG guarantee scheme through HAMAG, the small business agency. By mid-2014, he hopes, LAGs will be able to get into action as intended.

a local action group in action: Vallis Colapis

The second new aspect of rural development funding is the LEADER programme – the core of what is

known as the bottom-up approach. This started initially in 1991 as a tiny pilot initiative to help Ireland

strengthen rural communities by involving local stakeholders – farmers, entrepreneurs, local officials – in

decision-making through Local Action Groups (LAGs). It was so popular that for the programming period

2007-2013, it was mainstreamed with rural development programmes for both members and pre-accession

countries, and is being evolved for the EU’s 2014-20 financing period into a more flexible approach known

as Community-Led Local Development (CLLD), which allows for joint funding between the rural develop-

ment and the various structural funds, focused on specific regions.

LAGs can play many roles, from ensuring that specific local issues are not ignored to developing innovative

projects to use and develop rural resources. In some places, like Scotland, Italy and the Netherlands, LAGs

are legal entities and the main actors in rural development, managing funds and granting support. In most

countries, however – and Croatia will follow this route – the funds are centralised and the job of LAGs is to

mobilise local people to set priorities, develop projects and apply for funds that will allow them to become

self-sustaining. In Poland, for example, many LAGs were able to organise small private farmers – just as un-

easy with the concept of cooperatives as Croatia’s farmers are – to set up producers’ associations that could

buy inputs more cheaply, share equipment and market jointly to retailers and food companies. LAGs have

been instrumental organizing educational schemes to help villagers develop their skills over winter, while

elsewhere they have been responsible for creating cultural events that mobilise communities, retain the

interest of young people and create business opportunities.

In Croatia, following the transition from socialism, war damage and a decade of continuing decline and depopu-

lation in many rural areas, many communities suffer from a sense of resignation and tend to depend on central

government to develop solutions to their problems. LAGs would be an important element in shaking off this

lethargy and more than 50 LAGs were set up in recent years (see map, page 39). But the long wait for a regulatory

framework has sapped the energy of many Croatian LAGs, turning some into little more than mayors’ talking

39


a local action group in action: Vallis Colapis

shops and creating scepticism about the potential of this kind of bottom-up activity to be part of the solution

for revitalising Croatia’s rural economy. Entrepreneurs, especially, tend to shrug their shoulders at the mention of

LAGs. A first group of 30 LAGs was finally accredited by the Ministry of Agriculture and received start-up funding

of 900,000 kuna each earlier this year, but few have been able to get projects moving owing to pre-financing

requirements. As participants struggle to adapt to the regulatory framework, it is time for all players to rethink the

role and limitations of LAGs and communicate clearly on what is possible and what is needed.

loCal aCtion groups (lags) in Croatia

source: http://www.hmrr.hr/hr/leader/hrvatski-lagovi/.

EU accession will also see the introduction of a far less distortive and more predictable form of direct payments to

farmers. Croatia has spent the last decade trying to shift its systems of subsidies into line with the EU’s Common

Agricultural Policy which favours income support, decoupled from specific products and based on observation of

specific standards. As we have seen, however, fear of dramatic loss of production along with lobbying from farm-

ers, meant that the impact of reforms was often counteracted by short-term, extraordinary measures to support

specific products and producers. As a result, the partial decoupling of subsidies from specific products was not in-

troduced until 2009, and only one-third of subsidies were actually decoupled in 2011 compared to 91% in the EU.

But what will the introduction of decoupled payments mean for Croatia’s farmers and its agriculture sector?

Farmers are already smarting from the large reductions in national subsidies over the past year, but part

of the trouble has been their unpredictability – impacted by extraordinary measures and budget short-

falls. The CAP system of subsidies certainly does not correspond to international best practice for efficient

agriculture. Nevertheless, these rules are significantly better than what was implemented in Croatia over

the past decade, providing more predictability for farmers than the often ad hoc and retroactive rulings of

recent years. The introduction of the CAP in Croatia could reduce the influence of lobbyists from specific

sectors and groups and spread financial support across the entire farming sector.

40


Some of the changes introduced in the 2014-20 CAP financing package in September 2013 provide tools

to help governments encourage the emergence of medium-sized family farms and producer associations.

Governments, for example, will have the option to reduce (beyond a mandatory 5%) the maximum amount

that could be paid to any one farming organisation after deduction of salary costs, over a threshold of

€150,000 – effectively preventing the bulk of funds going to the wealthiest large farming companies. An-

other change creates a simplified system for small pay-outs to small, vulnerable farms in order to support

the existing agriculture structure of small farms in the Union without undermining the desirable momen-

tum towards more competitive structures.

An open and informed discussion on the future shape of Croatia’s farms and rural economy is badly needed

since EU membership brings not just money but a number of clear threats that call for concerted action.

First and foremost, Croatia has lost the preferential status it enjoyed before membership in trade with the

EU in agricultural and food products. For the past seven years, Croatia benefitted from an asymmetrical free-

trade agreement, which gave producers free access to the EU market, while retaining tariffs of between 10%

and 100% to protect domestic industries, like wine, olive oil, milk and eggs. Up until July 2013 two-thirds

of all Croatian agri-food imports from the EU were still protected at a significant level. Now this has disap-

peared. The doors have opened for Spanish, Italian and Greek olive oil producers which, at the bottom of

the market, can offer a litre of extra virgin oil for as little as €4 – around half the price of Croatian olive oil.

Despite top quality, prices are high and consumption per capita is low. Similarly, Croatian wine producers

will face not only competition from across the EU, with a broader variety of wines for different tastes and

pockets, but also much lower prices for the lower end of new-world wines. The past decade has already

seen imported wine take 10% of the local market – and without a focus on high quality, market prices and

changing consumer demand that share will rise.

Judging by the experience of the ten new member states that joined in 2004, the immediate impact of EU

membership was a sharp rise in exports of food and agricultural products to the EU, but an even steeper rise

in imports. While trade in agricultural commodities fared well in 2005, shifting into a small surplus for the

ten countries, strong imports of final food products meant the overall deficit jumped by 20%.

Taking average productivity statistics, Croatian agriculture looks relatively weak – a little better than many new

member states, but substantially worse than the most productive. But those averages (as in most of the new

member states) are relatively meaningless, combining tiny subsistence farms that have a few fruit trees, a pig

or two and anachronistic technologies, for example, with enormous farms employing very few people but

producing tonnes of cereals or milk. It’s clear that many small farms will need to change to become productive,

but how competitive are Croatia’s large-scale industrial farms and food businesses – and how will they be

affected by EU accession?

Currently, Croatia’s most successful agri-food export businesses by far are sugar and tobacco – both are

profitable, have grown strongly in recent years and have a share of the EU’s gross value-added in agriculture

that is significantly higher than the country’s average share of 0.88% (see table). Higher-profile products,

such as wine or olive oil, have a tiny share of the EU market. They can survive and even thrive on a niche

basis, but not on an industrial scale.

How competitive is Croatia’s large agri-food industry?

Sector Croatia’s share of EU’s gross value added (%)

Where Croatia’s share is above-average

Tobacco 4.76

Sugar 1.66

Cereals 0.98

Where Croatia’s share is below-average

Wine 0.72

Sheep and goats 0.68

Cattle 0.56

Poultry 0.49

Pigs 0.48

Milk 0.41

Olive oil 0.29

Organic crops * 0.33

Agricultural land ** 0.77

Agricultural output *** 0.78

Value added in agriculture (GVA) *** 0.88

Farm labour (AWU) **** 1.85

source: authors’ analysis based on various statistical sources, July 2013.* share in agricultural areas ** utilised agricultural area (uaa) in 2011*** agricultural output and gva - average 2005-2012**** annual working unit in agriculture - average 2005-2012


41

Croatia’s agriCultural produCtivity in Comparison to tHe eu-27

42


Sugar is Croatia’s most important agricultural export, bringing in US$150 million a year. The country’s three

sugar companies account for 30% of agri-food exports to the EU, employing 800 staff and more people on

a seasonal basis, while working with 1,000 beet growers. Yields are relatively low at 7.8 tonnes of sugar per

hectare, but production costs are low enough to keep Croatia competitive. It’s a viable business within the

EU’s very protected single market that keeps the price of European sugar significantly higher than the world

market price, while restricting imports.

But EU membership brings significant challenges. Croatia’s spectacular success in recent years, with more

than €1 billion in exports over the past decade, was a result of its limbo status as an accession country – it

had open access to the EU market, while still enjoying protection from EU imports. As a member, Croatia

now has a production quota some 17-18% lower than the pre-accession production levels and will have to

pay €12 a tonne to the EU as quota-linked production levy. Moreover, its main sugar-producing rival, Serbia,

may still enjoy the status that has boosted Croatia’s sugar industry in recent years.

The industry knows it will have to downsize in the coming years. But it will also have to find a way to keep

Croatian farmers interested in growing sugar beets. Despite the profits, there is less and less interest in tak-

ing contracts to grow sugar: production is expensive compared to other crops, it takes significant amounts

of knowledge to get decent yields and – since beets demand large amounts of water – droughts take a toll

on output. In 2012 there was a 40% drop in beet yield due to the drought.

Sugar has been a pre-accession success story for Croatia, but if it is to remain a post-accession one, there will need

to be a focus on training farmers and modernising irrigation techniques and introducing new technologies to

raise yields. Tobacco is also huge, with US$85 million in exports of cigarettes and an enormous 4.8% share of the

EU tobacco market. Croatia will clearly need to balance its public health policies with its agricultural ones, but it

needs a strategy if it wants to avoid radical dislocation in tobacco-growing regions over the next few years.

If sugar is the most regulated of the EU’s agri-industries, tobacco is the most controversial. Just five years

ago, high subsidies supported tobacco farmers in places like Greece and Italy, but under pressure from the

health authorities, the subsidies to grow tobacco were replaced with significant annual compensation pay-

ments for those who stopped doing so. Many farmers abandoned the time-consuming crop, causing a drop

of almost a third in EU production levels over a period of just five years. That led to a collapse in some areas

of Greece, where tobacco had made up one third of the local economy – since the crop grows on sandy soil,

planting alternative crops is not simple.

The EU policy change boosted Croatia’s competitive advantage significantly, especially since it still has its own cig-

arette manufacturers, as well as tobacco growers. Despite relatively low subsidies in Croatia, production was stable

and quality had improved in recent years. With high EU demand and low levels of competition, exports grew. The

impact of EU membership will not be immediate. For the first three years, Croatia will enjoy a transition period, re-

taining national subsidies. But in 2016, there will be a shift to compensation payments, paid out at 40% of current

subsidy levels, whether or not farmers grow tobacco. Without good planning and a push to diversification into

crops such as aromatic herbs, which also could be grown on sandy soils and use similar drying equipment, Croatia

could suffer the same sort of problems as Greece, as farmers opt to take the cash without the back-breaking work.

Both sugar and tobacco will require concerted action to sustain their lead. But in the area of cereals, especially

wheat and corn, where Croatia is traditionally a net exporter, the country’s large farms, especially in Slavonia,

could profit from EU accession. The biggest advantage of membership will be a higher degree of predictability

for farmers and traders. Cereal farming requires a significant degree of investment, especially in storage facili-

ties, to be profitable. Over the past six years, however, the return on that investment has been squeezed by the

imposition of frequent export taxes of up to 40%, effectively imposing an export ban on domestic producers.

With EU membership, these bans will no longer be possible since the EU’s position is that restrictions imposed

in times of drought to ensure food security end up harming both producers and consumers.

43


For farmers with access to sufficient land and storage facilities, the incentive to grow wheat and corn – both

simple crops to grow in Croatia’s climate, requiring just one person employed full-time year round per 160

hectares – will also be boosted by the shift from national subsidies to fully decoupled payments. With no

distinction between payments for farmers with labour-intensive livestock and those with fields of wheat,

there is likely to be a shift towards such crops, as experienced in other new member states. Although this

could become a highlight of Croatian agriculture, the impact on the availability of jobs in rural areas will be

negative, unless the new-found wealth is reinvested into modernisation and diversification.

source: authors’ analysis based on data from croatian bureau of statistics (hs-6 digit level), october 2013

Croatia’s major agri-food exports

Average annual export: 2009-2012

Rank Name of the product Quantity (t) Value (US$) Share (%)

1 Sugar 186,140 151,474,289 10.1

2 Cigarettes 7,106 84,569,120 5.7

3 Wheat 270,329 65,755,087 4.4

4 Food preparations - other 22,123 61,273,093 4.1

5 Sauces and preparations (VEGETA & other) 17,257 57,422,362 3.8

6 Bluefin tuna 2,736 56,351,053 3.8

7 Corn 204,425 42,452,543 2.8

8 Beer 52,856 38,656,525 2.6

9 Waters, incl. mineral waters with added sugar 72,990 30,856,819 2.1

10 Preparations for infant food 6,256 30,771,405 2.1

11 Fresh fish for processing 8,637 27,328,281 1.8

12 Chocolate, not filled 4,399 25,175,967 1.7

13 Preparations in animal feeding 30,883 24,430,375 1.6

14 Soya beans 47,557 24,285,105 1.6

15 Waffles and wafers 8,189 24,102,914 1.6

16 Soups 4,934 22,416,167 1.5

17 Sunflower seeds 43,662 22,148,365 1.5

18 Anchovies, salted 6,407 20,043,276 1.3

TOP 18 export products in Croatian exports - total value 809,512,744 54.2

Other products in agri-food exports 683,216,844 45.8

Total value of agri-food exports 1,492,729,588 100.0

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The second big threat is the end of free trade with the Central European Free Trade Association (CEFTA). When

Slovenia joined the EU in 2004, its exports to CEFTA countries like Croatia, Bosnia and Serbia dropped sig-

nificantly, leaving new market share for Croatian and Serbian producers, who remained outside the EU. Now

Croatia faces the same problem. Before membership, agriculture exports to CEFTA members were around 45%

of total agriculture exports, while just 41% went to the EU. Indeed, agricultural products made up 23% of Croa-

tia’s exports to CEFTA, nearly three times more than the share in EU exports. Bosnia and Herzegovina alone

accounted for over 30% of Croatia’s entire food and agriculture exports, showing a significant trade surplus.14

With the introduction of import tariffs, prices of around one-third of Croatian products in Bosnia could rise by

10-20% if current profit margins are maintained. Despite Croatian companies’ brand advantage, Serbia is likely

to be the main beneficiary this time round. Several large Croatian companies, such as Dukat and Gavrilović,

have already responded to the threat, acquiring production plants in Bosnia to ensure that they keep market

share – but the inputs and labour they use will boost the Bosnian rural economy, not the Croatian one.

The third threat is less clear-cut but still important. Many of the new member states, and especially Hungary

and Slovenia, saw a radical decline in livestock farming following accession as farmers lost subsidies coupled

directly to livestock breeding. Decoupled direct payments linked to land size encouraged them to move into

crops that increased their revenues while requiring minimal investment. The EU’s direct payments tend to fa-

vour crops by disregarding the specificities of the livestock sector; it redresses the balance with rural develop-

ment funds that co-finance investments needed to meet EU standards and compete in livestock farming. But

for small farmers, the complexity of application and delayed reimbursement encouraged rapid exit. In Croatia,

despite competitive advantages in baby beef, where EU demand remains high, as well as in rare breeds such as

Slavonian black pigs and Buša cattle, this could happen too – although some countries, such as Poland, were

able to prevent collapse by helping small farmers to access and co-finance EU funds.

To tackle these threats, Croatia’s farmers and food sector will need to think carefully about increasing ef-

ficiency, setting appropriate prices and finding the right distribution channels. The large agri-food compa-

nies are already doing this. A few entrepreneurial new farmers are also developing innovative niches and

gradually starting to find ways to leverage the millions of tourists who come to Croatia each year – a form

of “silent export”. The real need, however, is for those smallholders who could run viable farms to expand,

commercialise and modernise, not necessarily relying solely on farming for a living but nonetheless ap-

proaching it as a business. To do that, they do not need protection from competitive forces, but they do

need institutional, policy and financial support. If they get it, they could create businesses that can become

the foundation of a thriving rural economy that has its base in agriculture but can expand into other areas.

If they don’t, many will disappear over the next decade along with the semi-subsistence farmers.

In order to provide the right kind of support, the government needs to develop two skills that have not

been needed to date. The first is a clear understanding of exactly how the EU works to ensure that Croatians

see themselves as an actor within Brussels and in relations with the other member states – not a victim of

EU decisions. The recent uncertainties around the implications for Croatia of Italy’s and Slovenia’s Protected

Designation of Origin (PDO) status for prošek and teran wines illustrated the challenge. Uncertainty pre-

vailed among officials as to whether or not Croatia had missed its opportunity to claim its right to use the

names. That created unwarranted fear and resentment among producers and made it difficult for Croatia to

fight its case actively in Brussels or negotiate to find a win-win solution with Italy and Slovenia.

The second skill is the ability to cultivate a lively and honest dialogue with all stakeholders. This would en-

sure more informed decision-making and retain the institutional memory, giving Croatia a much stronger

14 Serbia and Bosnia and Herzegovina make up 85% of all food exports, but tariffs will not rise as much in Serbia due to the country’s greater liberalisation with the EU and only around 20% of exports to Serbia will be affected.

45


base for action within the EU, while genuinely protecting the best interests of Croatian producers and the

country as a whole. Many of the mistakes of the past decade have come from making top-down decisions

about agriculture, while those with greater knowledge and insights were not asked or not encouraged to

speak openly.

The EU’s CAP provides a solid institutional and financial foundation for precisely the kind of support that

Croatia’s rural areas need – an increase in rural development funding, support for bottom-up organisation

and more transparency and predictability around subsidies. But to have maximum impact, it requires the

government to work with all stakeholders to remove the barriers to the restructuring of the farm sector

and encourage a comprehensive approach to diversifying the rural economy away from an over-reliance

on agriculture. The myth is still perpetuated that by releasing more state-owned agricultural land, tens of

thousands of jobs will be created. But the reality is that large agricultural companies employ few people

in rural areas and small farmers will create their own living through a combination of farming, tourism and

other revenues. In order to create thriving rural areas, there will need to be a more competitive farming

sector, but also a much broader effort to bring tourism, small-scale production and services to rural areas.

46


Talk to Croatia’s big buyers of olive oil, meat and cherries and it is clear that Croatia’s farmers are at a crossroads –

although many of them may not know it. With EU membership around the corner, Croatia’s food and beverage

businesses are focusing on how they can best defend their existing markets and expand into new ones. And the

hundreds of small, isolated farming partners they buy from create a market where both quality and quantity can

be unpredictable and pricing is often unrealistic.

The solution for some of these companies is to create more stable markets, by importing produce for process-

ing, growing their own raw material in a more efficient and controlled environment and, where needed to keep

markets, shifting some processing (and buying) abroad. Gavrilović, for example, Croatia’s largest processed meat

producer, imports most of the pork it requires for its core products, having stopped working with half of its sup-

pliers who were unable to invest in the necessary veterinary standards and closing its pig slaughterhouse since it

was too small to be viable. The company also recently shifted some production to Bosnia to ensure it keeps that

market (and expands further east) after Croatia is an EU member and no longer has preferential trade terms. But it

also started to build up its own agricultural production four years ago, and although experimenting with different

areas is now focusing primarily on cattle production, since it has the contract to supply McDonald’s hamburger

chains and wanted to control the quality of its stock. Gavrilović reckons it could process four times as many cattle

as it does now and is trying to work with small farmers in the Banovina area to do that – but it struggles to persuade

them to invest, cooperate with each other and learn new more efficient ways.

The core of the problem is that most of the small farmers fail to see their operations as a business. Maraska in Zadar,

which makes maraschino as well as juices, has the same complaint about its suppliers – and is starting to say: “they

need to decide if farming is a business or something they do in their free time.” Like Gavrilović, Maraska has invest-

ed in building up its own plantations in the past few years to ensure higher standards for its value-added products.

It now has 212 hectares of de-mined land with 95,000 cherry trees which are gradually reaching maturity. It still

works with up to 300 small farmers from the area who are guaranteed a market for their cherries at Maraska – but

soon the company will cover its own need for cherries without them.

The suppliers are mostly over 60 years of age and few are interested enough to participate in meetings, even to

negotiate over price. Young people are not taking over the farms and Maraska estimates that no more than 20% of

the farms could be counted as businesses in any way at all.

When its own plantations are mature, Maraska plans to create industrial capacity for processing the suppliers’ cher-

ries in Zadar, turning them into concentrate or freezing them. At present, the nearest concentrate plant is in Zagreb

and fast-freezing is in Slavonia, neither viable options for sensitive fruit. The company aims to get EU funds to help

it invest, but is also trying to persuade farmers to join together to buy picking equipment jointly, which would

improve their efficiency and their returns on what will be a low commodity price for industrial processing. The

equipment could also be used for picking olives, providing another revenue stream. But enthusiasm for producer

associations of any kind is low.

It’s clear that within a few years, Croatia’s semi-subsistence farmers will no longer have a market. They will either

just be hobby farmers or will have begun to commercialise their activities. With EU funding, the money is there to

support those who want to stay in farming and modernise. Now there needs to be a widespread discussion about

the need for change and the opportunities in the market, plus policy support to create a genuine land market,

encourage modern forms of cooperation between farmers and provide education and training in everything from

bookkeeping to modern agricultural methods. Croatians often complain they have lost their industry in the past

two decades; now is the time to ensure they don’t lose their agriculture too.

family farms: getting down to business

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family farms: getting down to business 3

hoW CroAtiA CAN grAsP thE NEW oPPortUNitiEs: fiVE PrioritiEs

48


49

chapTer 3 how croatia can grasp the new opportunities: five priorities ferTile ground for developmenT - making the most of eu membership for croatia’s rural areas

ChAPtEr 3 How Croatia can grasp the new opportunities: five priorities Croatia’s rural economy is at a crossroads. With EU accession now a reality, it has the opportunity to benefit

from increased funding, focused rural development policies and the experience of other member states to

tackle its long-term challenges. It will also face a strong blast of competition that will make it impossible to

sustain semi-subsistence, grey-economy agriculture on a large scale. In the best case scenario, Croatia will

be able to use the opportunity of EU membership to create a more efficient and streamlined agricultural

sector embedded in an increasingly diversifying rural economy. In the worst, it will suffer the accelerated

depopulation of rural areas as agriculture declines and other economic opportunities fail to develop.

To move towards the first scenario, Croatia needs to take many small initiatives, yet these will hit up against

vested interests and institutional inertia at every turn. These changes are needed, however, not just for

the sake of rural areas, but to reinvigorate growth in the country as a whole and to ensure that the country

thrives within the EU. In order to move in this direction, there are five priority areas for government policy.

establish overall objectives for the farming and food industry to ensure that policy matches rhetoric and priorities are clear to everyone

Croatia’s agricultural policy has swallowed billions of kunas in subsidies and administration, but has not

succeeded in tackling the challenges to which it was often a short-term reaction. Instead it has tended

to cement unhealthy structures, making it more difficult for Croatia to compete within the EU. A large

part of the problem has been a lack of clear long-term objectives, disguised in fuzzy rural rhetoric. What

Croatia needs now is clear answers to – or at least an open discussion of – some key questions:

Can agriculture really become a second pillar of the Croatian economy like tourism, as is often said? Look

at even the most competitive EU member-states and agriculture plays a far smaller role in the workforce

and in GDP than it does in Croatia. So the aim cannot be to have the farming sector grow in economic im-

portance and become a significant source of new jobs. How, then, could a genuinely competitive agricul-

ture sector look and what steps are needed to get there? How can Croatia ensure a supply of high-quality

and locally produced food? Should it be concerned about growing food imports? How might a symbiotic

relationship with tourism work? Could organic agriculture be important as an enabler of a broader tourist

industry and producer of premium-priced food products? If so, how big should or could it be in Croatia?

What kind of structure should the farming sector have? Is it enough to rely on big farming com-

panies or is it important to ensure the survival of viable family farms? What needs to be done to

change today’s structure? What is the best way to help the large number of semi-subsistence farm-

ers that will not be able to survive? How can Croatia best develop a backbone of medium-sized

farms? How can Croatia ensure that smaller farmers are able to earn an appropriate income? How

should subsidies best be allocated to achieve these goals? Where does the EU’s greening philoso-

phy fit into the future of Croatia’s agricultural sector?

1.

50


What can the government do to help rebuild the links in the farm-to-fork value chain? What tools

does the government have to incentivise and overcome resistance to producer associations giving

smaller farmers more buying and selling power? How can it ensure that there is open competition

for producers in retail chains, despite the vertically integrated ownership structure? How can the

links between tourist resorts and local food producers be strengthened?

By setting clear objectives, the government will be able to communicate priorities to all stakehold-

ers, avoid kneejerk reactions to specific challenges that emerge, avoid illusionary expectations as

well as a lack of hope, and better develop a consensus to tackle difficult structural constraints such

as land ownership issues. It will also be able to understand more precisely the impact of changes

in the farming sector on jobs and consequently on rural migration trends.

start an open dialogue designed to develop a strategic vision for a thriving and diversified rural economy

The lack of clarity about the place and future of small farms in Croatia has played a significant role

in the overall stagnation of rural economies. The continued existence of struggling and non-mech-

anised semi-subsistence farms encourages young, entrepreneurial and better educated people to

escape rural areas in order to make a living elsewhere. But while modern and viable agricultural busi-

nesses may be the foundation of rural revitalisation, they will never on their own create enough jobs

and value to reverse rural depopulation and decline. Indeed agriculture will decline in importance as

a source of income, as in all developed countries. The key for Croatia will be to leverage EU funds to

create a wide variety of models and options to diversify rural economies.

The first stage of diversification will build on existing resources – creating opportunities for rural

tourism to build on Croatia’s coastal attractions; developing high-level niche food producers able

to supply large-scale buyers through collaboration; creating renewable energy through biomass,

solar, wind and small hydropower plants. This is already happening, but in a small and isolated way,

driven largely by pioneers with little support and many obstacles. What is required now is a very

broad discussion about what is possible, prompted at the national level but carried out by regional

and local bodies, which can mobilise people and generate concrete, executable ideas.

But it is vital, too, that this discussion go beyond short-term opportunities. There is a real need to

develop strategic visions for how rural areas in general might look in future, analysing the experi-

ence of regions in other member states. There is also a need for concrete programmes for specific

areas, looking forward to where they could be in 20 years – identifying the investment, especially in

long-term education and training, that would be needed to get there and setting priorities.

Could parts of rural Croatia, for example, become a European hub for adventure sport, with competence

centres, year-round tourism and other associated services? Could wooded areas become a hub for en-

ergy from biomass? Could parts of Croatia have an advantage in solar energy? Are there innovative in-

dustries or advanced services that could provide employment if clusters or industrial parks were created

in small towns close to rural areas? Are there more entrepreneurial ways to approach employment in

public services, setting up office in rural areas as part of their development and diversification?

Crucially, the strategic vision needs to be reflected in the National Rural Development Framework

document, in which the Government sets the parameters for allocating EU funds and establishes

criteria for implementing priority goals. The first draft prepared early in 2013 was unfocused and for-

mulaic, listing the 19 fundable areas of initiatives without setting any strategic goals. Since then, only

limited movement towards more realistic priorities has been made. The first informal comments

2.

51


shared by the European Commission on the draft strategy warned that the analytical background

to the 19 priority areas was insufficiently developed. What is especially worrying about this coded

criticism is that it suggests that there is still a profound misunderstanding of the basic purpose of the

strategy. The risk here is that the preparation of an acceptable strategy will take another year, further

delaying Croatia’s access to rural development funding. To improve future drafts, the Ministry of

Agriculture would be well advised to open a genuine dialogue with the people who make a living in

rural areas, in an effort to build a genuine consensus around realistic and relevant priorities.

encourage the emergence of networks and joint action among and between rural stakeholders to help develop thriving and confident rural communities

Successful rural revitalisation depends ultimately on people choosing to stay in, return or move to

rural areas to make their living – despite having other options. The industrial base that once pro-

vided employment in rural areas has mostly disappeared, but parts of it can be revived along with

modern service businesses if people are able to create opportunities for themselves and others.

That requires cooperating with each other and with existing businesses in innovative ways.

Beyond economic cooperation, rebuilding thriving rural communities also involves organising so-

cial and cultural activities, from music festivals to sporting and literary events that bring life to the

area and keep young people interested in staying. National government can play an enabling role

by removing constraints and encouraging networks to develop, but without the mobilisation of

local people in administration, business, farming, education and other community organisations,

national rural development policy will tend to breed dependence and demands for protection,

rather than creativity and entrepreneurship.

In practice, this kind of bottom-up participation involves the creation of democratic platforms that

are capable of engaging and bringing together different players to articulate rural issues and initi-

ate joint action. Such platforms require empowered and proactive local officials who can under-

stand and reflect specific local concerns and opportunities, rather than a generic approach suitable

for any rural community. But it is crucial also that the process is not driven or owned solely by local

officials – they should be just one group among many stakeholders analysing needs and opportu-

nities and developing ideas and projects with other players.

Local Action Groups, now covering three-quarters of Croatia’s territory, will be an important tool

in encouraging bottom-up participation, but to be effective they must go beyond talk shops and

spawn a variety of self-sustaining business, social and cultural initiatives and producer associations

that themselves become new actors. This will counteract the inactivity that has plagued many of

the LAGs during the past two years of regulatory uncertainty. Now that a framework and initial

funding is in place, it is important that the government communicate its support and encourage-

ment for bottom-up participation as a way to tackle challenges at the local level.

Another key area for joint action is finding ways to overcome the barriers for small farmers to coop-

erate in procurement, production and/or marketing in order to survive. Government can play a role

through extension services in educating producers about successful business models elsewhere,

ensuring that legislation favours or facilitates producers associations and helping create the net-

works that could lead to greater cooperation. Cooperatives have a strong ring of the past in Croatia;

but cooperative and collaborative behaviour will be vital to create a viable farming sector in future.

3.

52


ensure commitment from the top to keep momentum on absorbing funds and to tackle the big cross-ministerial obstacles to rural development

Croatia has struggled to absorb its pre-accession EU funds, so it is vital that it heed the lessons of

the previous joiners on how to spend effectively. One key success factor is leadership at the top to

monitor spending (and act if there are delays) and to coordinate the many ministries and factions

that can block progress.

Poland’s prowess in unlocking EU money was partly due to pushing payment accountability down

to the local level (something that makes no sense for a small country like Croatia), but it depended

crucially also on pressure from the Ministry of Regional Development that was set up, without bu-

reaucratic legacies, with the sole aim of taking advantage of the catch-up opportunities afforded

by EU funds. Although several ministries were also involved in decision-making around funds for

rural areas, in particular the Ministries of Agriculture and Rural Development, Finance and Labour,

it was the Regional Development Minister who had the job of coordinating and communicating, in

particular around the key focus: reviving eastern Poland’s rural areas.

When Bulgaria joined in 2007, it failed at first to appoint a high-level minister responsible for absorbing

funds and struggled to do so. It only managed to start getting back on track when the Prime Minister ap-

pointed a Deputy Prime Minister who had sole responsibility for ensuring that the funds were spent. In

Slovenia, that championing role was played by the Prime Minister himself after EU accession. At the end

of each weekly cabinet meeting, he would ensure that all the ministers discussed together how much

they were absorbing and where they were failing, identifying obstacles and insisting that these be tack-

led – which often required cross-ministerial cooperation, which is always a challenge in governments.

To tackle major obstacles like land ownership or to encourage rural entrepreneurship will require

good cross-ministerial and intra-ministerial cooperation and communication and a strong and

sustained push from the top. Whether the role of monitoring and breaking down ministerial silos

comes from the Prime Minister (as in Slovenia), from one ministry (as in Poland) or from a newly

created high-level position (as in Bulgaria) is not important, but there needs to be a clear recogni-

tion of the role and its authority to ensure that Croatia also takes advantage of this one-time op-

portunity to breathe life into its rural areas. However, crucially, rural development cannot just be

absorbed into other ministries or positions, since it requires specific attention – there needs to be

an open dialogue and regular collaboration between the ministries.

improve the capacity to absorb funds and develop innovative projects by investing in educating and training people at all levels

As important as top-level political momentum is, it will not be effective in ensuring the absorption of

funds without significant investment in and focus on improving institutional and human resource ca-

pacity. This is true at all levels, from the Payment Agency, which decides on applications for EU funds

and administers direct payments, to extension services, consultants and rural people themselves.

The Paying Agency has a difficult task. On the one hand, the Ministry of Agriculture has experi-

enced frequent personnel changes. That forces the Agency into managing and interpreting policy

rather than just implementing it effectively. On the other hand, the EU has tightened up its already

complicated bureaucracy following the experience with Romania and Bulgaria, where corruption

and lax spending regulations were perceived to be rife and trust was low. That makes it crucial for

the Agency to retain a reputation for quality and transparency at the EU level. But on the ground,

it has turned the Agency into a bottleneck, struggling to manage its workload effectively. Instead

5.

4.

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of facilitating applications, it leaves people without access to consultants too scared to enter the

bureaucratic nightmare of applying for funds and for reimbursement.

The solution to speeding up funding is not to drop standards or push through large one-off proj-

ects – that would be counterproductive. The need is for more qualified staff and training, but cru-

cially for a more efficient management organisation with leadership that is politically independent

and chosen solely on experience and ability, not on political lines.

Beyond the Agency, there is also a need for greater capacity at local and advisory levels. Entre-

preneurs complain of advisors who are supposed to help but do not have the right information.

Regional agencies are often seen as cannibalising the market for consultants, without being able

to help develop effective projects and submit them correctly. One tool for boosting knowledge of

what is possible would be to institutionalise monitoring and adaptation of best practice from other

member states, especially Poland, Slovenia, Austria and Italy, where there have been similar chal-

lenges or promising solutions.

With chief responsibility for rural development, the Ministry of Agriculture itself needs to build its

capacity to monitor progress on the ground and adjust approaches regularly to fit what is needed

in rural areas as they develop. All of the new member states have underestimated the burden on

administrative capacity that managing EU funds brings, so it is vital to focus seriously on devel-

oping the managerial and control requirements – not waiting until the last moment, as with the

LEADER funds.

The Ministry also needs to ensure there is systematic assistance on the ground, informing rural ac-

tors what they can do with EU funds, helping them to prepare projects and assisting with bridging

loans and co-financing. Without this, Croatia will continue to have too few well-prepared projects

for rural development funding, not too many.

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conclusionferTile ground for developmenT - making the most of eu membership for croatia’s rural areas

Conclusion EU membership brings new pressures and new pressures and new opportunities to Croatia’s rural areas.

Both provide a chance for the government to shift away from a rural policy that has mostly exacerbated

structural weaknesses and led to widespread resignation in the face of a multitude of challenges, big and

small. By embracing the spirit of the EU’s rural development policies and implementing them in practice,

Croatia could create a dynamic farming sector, at both industrial and niche levels, and build on this founda-

tion to develop thriving, modern rural communities that offer attractive and viable environments for people

who are young and educated. Indeed, it is arguably in rural areas that the EU has had some of its biggest

successes in transforming daily life for the better.

The government cannot achieve this transformation alone. It needs to set long-term goals (and ensure

these are not diverted by vested interests) and short-term priorities. And it must tackle step-by-step the

constraints to change in rural areas, from land ownership to effective, informed and user-friendly admin-

istration, especially around the use of EU funds. But to create confident and thriving rural communities,

where people can make a living from agriculture, tourism and other businesses, the government needs

rural partners: active institutions that bring stakeholders together to identify needs and aspirations and

work jointly to achieve them.

EU accession is the perfect opportunity to launch an open discussion with rural stakeholders, to encour-

age the emergence of these institutions and to jointly develop a strategic vision for Croatia’s future rural

communities that finds its expression in the national National Rural Development Framework , has funding

allocated to its priorities, and leads to roadmaps for specific areas.

By ensuring that rural Croatian communities start to see themselves as an integral part of modern economy

and society, defining and implementing their own solutions to the challenges they face, the government

will have used the opportunity of EU accession to break the vicious cycle of rural decline.

United Nations Development ProgrammeResident Representative Office in Croatia

Radnicka cesta 41/Floor 8HR-10 000 ZagrebEmail: [email protected]

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