Towards Balanced Regional Development in Croatia

1. Assessment and recommendations

Regional development trends in Croatia

Since its accession to the European Union (EU) in 2013, Croatia’s macroeconomic performance at the national level has been impressive. Between 2013 and 2022, Croatian real GDP per capita grew by an average of 3.8%, more than double the average in the EU (1.6%) and in the OECD (1.3%) (OECD, 2023[1]). In tandem, Croatian living standards have begun to converge towards EU standards, with the country’s GDP per capita only 27.1% below the EU average in 2022, as compared with 38.6% a decade earlier (Eurostat, 2023[2]; World Bank, 2024[3]). Other positive economic trends over the period have included rapid export growth, a sharp and sustained fall in long-term unemployment, rising labour productivity and stable inflation rates.

Over the same period, however, Croatia has faced significant demographic decline. Its population contracted by 9.4% between 2013 and 2022, driven by lower fertility rates and net outward migration (especially to other European counties, e.g. Germany) (Eurostat, 2023[4]). In addition, the population is ageing, with the proportion of Croatia’s residents aged 64 and over having increased to 22.5% in 2021 (from 17.7% in 2011) (Eurostat, 2023[4]). Sustained demographic decline can have wide-ranging effects on public finances, service delivery and socio-economic development, which need to be considered by policy makers. For example, population decline can lead to lower tax revenues, thereby limiting local government capacity to maintain vital infrastructure. Population decline can also lead to the closure of schools and healthcare centres.

National-level well-being indicators for Croatia, meanwhile, paint a picture of modest progress in some areas, and stagnation in others. For example, the share of the population at risk of poverty fell 2.7 percentage points between 2013 and 2022 (Eurostat, 2023[5]). At the same time, in 2022, the average Croatian could expect to live 77.7 years at birth, a minor decrease compared to the 77.8 estimated in 2013, and below the EU average of 80.4 (Eurostat, 2023[5]).

At the subnational level, Croatia’s economic performance since 2013 has not been uniform, with large and sometimes growing disparities among the country’s four statistical regions—Adriatic Croatia, Northern Croatia, Pannonian Croatia and Zagreb City. Recent subnational-level data show that Zagreb City’s productivity, employment and average income were twice the levels of all other Croatian TL2 (NUTS 2) regions (Eurostat, 2023[6]; Eurostat, 2023[7]; Eurostat, 2023[8]). Furthermore, across different metrics, the gap between Zagreb City and less economically developed regions (e.g. Pannonian Croatia) appears to have widened over time. For example, in 2013, GDP per capita in Pannonian Croatia was 63% lower than that of Zagreb City. This had increased to 66% by 2021(Eurostat, 2023[8]).

Subnational well-being data track with the economic divergences across Croatian regions. In comparison with the national average, Zagreb City performs better than other regions in terms of life expectancy, suicide rates, infant mortality and risk of poverty (Eurostat, 2023[9]; Eurostat, 2023[10]; Eurostat, 2023[11]; Eurostat, 2023[12]). By contrast, Northern Croatia and Pannonian Croatia perform below the national average for each of these metrics. In 2021, Zagreb City also reported a significantly higher share of working-age adults with tertiary qualifications than other Croatian regions; e.g. 42.7% in Zagreb City, as compared with 20.3% in Northern Croatia and 17.6% in Pannonian Croatia (Eurostat, 2023[13]). The heavy concentration of highly-skilled individuals in Zagreb City risks concentrating investment and entrepreneurial activity in the capital region, potentially exacerbating existing territorial disparities.

Subnational indicators also point to a stark territorial cleavage at the county level (TL3) in Croatia, with demographic, economic and well-being data often, albeit not always, showing a more positive snapshot in Zagreb City and neighbouring areas, as well as coastal counties. For instance, in 2020, GDP per capita was highest in Zagreb City and the coastal counties of Istria and Primorjie-Gorski Kotor, and lowest in the five counties of Pannonian Croatia (Eurostat, 2023[14]). Moreover, while all counties reported population shrinkage between 2011 and 2021, there were vast differences in the scale of the decline (e.g. -5.7% in Dubrovnik-Neretva County compared to -20.3% in Vukovar-Srijem County) (Croatian Bureau of Statistics, 2023[15]). The sharp drop of skilled and working-age residents in some counties is of particular concern, as it threatens the economic potential of such counties and jeopardizes public service delivery (e.g. to keep schools open).

These trends provide the backdrop against which Croatia has reformed its legislative and planning framework for regional development since 2014. In fact, faced with wide-ranging territorial disparities, Croatia has set balanced regional development as one of its main long-term objectives.

Croatia’s governance framework for regional development

Since joining the EU, Croatia has taken significant strides to establish and strengthen its legislative and policy framework for regional and local development. First, the adoption of the 2014 Law on Regional Development established a legal foundation for place-based regional development policy making. In particular, it regulates the governmental bodies involved in supporting policy making at all levels of government. This includes the Ministry of Regional Development and EU Funds (MRDEUF), which is the key body responsible for developing and co-ordinating the implementation of Croatia’s regional development policy.

In 2017, the government took further legislative action to improve the coherence with which strategic planning for regional development is conducted among levels of government. In particular it sought to address three challenges: i) an excess of overlapping planning documents at the national level, which created uncertainty regarding sectoral and multi-sectoral development aims; ii) a process for designing national and subnational planning documents that was not co-ordinated among levels of government; and iii) limited clarity regarding the assignment of responsibilities for implementation and whether development objectives could, in fact, be achieved.

To address these planning and implementation challenges, in 2017 the government amended the Law on Regional Development. Based on the new law, Croatia’s 21 regional development agencies (RDAs) were reconfigured as public regional co-ordinators responsible for regional development planning. Prior to this, they had existed as limited liability companies predominantly focused on providing paid consulting services. In parallel, the government adopted a new 2017 Law on the System of Strategic Planning and Development Management. The law created a comprehensive framework for strategic planning among levels of government, with a clear set of long-, medium- and short-term national- and subnational-level planning documents. It also clarified the actors responsible for the design, implementation, monitoring and evaluation of development plans.

In tandem, the government established various horizontal and vertical co-ordination mechanisms to support regional development policy design and implementation. These included the Council for Regional Development, which was created to support multi-level dialogue for the implementation of regional development policy. It also included the network of RDAs that supports communication between the MRDEUF and RDAs on legislative and financial developments that are relevant to the county and local levels of government.

Notwithstanding the progress made through the above-mentioned reforms, there are a number of areas that Croatia could strengthen in order to further improve the effectiveness of its regional development governance framework. First, the government should update the Law on Regional Development to eliminate obsolete planning obligations. Despite the adoption of the Law on the System of Strategic Planning and Development Management in 2017, which streamlined planning requirements, the Law on Regional Development was not adjusted to reflect these changes. As such, it still mandates the development of some planning documents that are no longer developed and/or have replaced by other planning requirements (e.g. urban development strategies having been replaced by Integrated Territorial Investment Strategies). This creates uncertainty regarding the planning responsibilities of relevant actors. In parallel to updating the Law, the government could map existing planning responsibilities at national and subnational levels, in order to identify possible areas where requirements could be further streamlined and ensure they match subnational planning and implementation capacities.

Second, between 2018 and 2023, the total number of RDA employees increased from 360 to 545 between 2018 and 2023, with staffing levels in several RDAs rising by more than 75% (OECD, 2022[16]; MRDEUF, 2023[17]). Despite this increase, there is a need to address skills gaps reported by RDAs in areas such as public procurement, monitoring and evaluation, and advancing the green and digital transitions (OECD, 2023[18]). Strengthening these skills is essential to help RDAs support the implementation, monitoring and evaluation of county development plans, and design competitive project proposals for EU funding and financing opportunities (e.g. those related to renewable energy and digital innovation). One way to address this issue would be for the MRDEUF and RDAs to conduct an annual training needs assessment, on the basis of which a capacity building plan could be developed, and training modules could be designed and delivered (e.g. by the MRDEUF and the State School for Public Administration).

Third, the legal, functional and financial ties that RDAs have to both the county administrations and the national government, whose responsibilities and interests do not always align, creates accountability challenges. For instance, while RDAs are de jure accountable to county administrations, which are typically their sole founder, they are also formally accredited by and accountable to the MRDEUF (e.g. for EU Technical Assistance funding that the Ministry channels to the RDAs). This creates tension over which strategic and operational tasks the RDAs should prioritise: those coming from the MRDEUF or those coming from the county administration? (OECD, 2023[18]). The government could address this issue by amending the Law on Regional Development to provide additional clarity on RDA tasks coming from the county and the national government. This could be accompanied by developing briefing materials and an outreach campaign, aimed at county governments, to ensure they acquire a more robust understanding of their strategic planning responsibilities and the mandate of the RDAs.

Fourth, the effectiveness of Croatia’s RDAs could be hampered by the limited territorial scale at which they operate. Unlike many OECD Member countries (e.g. Netherlands, Romania, Spain), Croatia’s RDAs operate at the county (TL3) level and not the TL2 level. Operating at a smaller territorial scale usually entails smaller pools of funding for individual RDAs, which could affect their ability to attract and retain highly-skilled professionals. Moreover, having 21 TL3-level RDAs may also imply disproportionate levels of spending on basic administrative functions. To address these challenges, Croatia could consider conducting an analysis of costs, benefits, and legal and political obstacles to establishing RDAs at the higher TL2 level. Such a reconfiguration could involve reducing the number of RDAs from 21 to four, one for each TL2 area. The assessment should also consider intermediate alternatives that might help to achieve the benefits of scale without a full reconfiguration of RDAs.

Fifth, existing co-ordination bodies for regional development should be strengthened, in order to improve the coherence of cross-government strategic planning. For instance, the Council for Regional Development, which was established in 2019, has never been operationalised. In its stead, periodic meetings between the Prime Minister and different ministries, county prefects and representatives from the association of local governments have been used to discuss Croatia’s regional development policy. However, this ad hoc co-ordination body lacks clearly formulated objectives and does not guarantee the participation of several actors responsible for implementing regional development policy across government, including RDAs. These shortcomings risk limiting the mechanism’s effectiveness as a forum to discuss Croatia’s regional development policy, assess the extent to which the country’s regional development objectives are being met, and what actions are needed to improve performance. In addition to extending the list of actors that can participate in the body’s meetings, Croatia could consider reorganising the body into two chambers: one to support inter-ministerial co-ordination of regional development policy and the other to support the policy’s vertical co-ordination among different levels of government. Good practices that Croatia could look to for inspiration, in particular to support policy dialogue among levels of governments, include Poland’s Joint Central Government and Local Government Committee and Sweden’s Forum for Sustainable Regional Development (OECD, 2020[19]; Government of Poland, n.d.[20]; Government of Poland, n.d.[21]; Lublinska, 2017[22]; OECD, 2023[23]).

Sixth and finally, co-ordination and exchange between RDAs needs to be further institutionalised, in order to support peer-to-peer learning. The Croatian Association of Counties, in which the RDAs can participate, could help to address this issue, for instance by setting up a dedicated RDA forum, which supports opportunities for peer-to-peer learning on topics that are relevant to RDAs’ daily activities. An alternative could involve establishing a separate national RDA association, following the example of several OECD Member countries (e.g. Bulgaria, Romania, Spain).

Croatia’s regional development planning instruments and practices

The 2017 Law on the System of Strategic Planning and Development Management has provided the impetus for significant cross-government strategic planning efforts in support of regional development. After the law was passed, a National Development Strategy 2030 (NDS) was adopted in 2021, which articulates a high-level, long-term vision for Croatia’s economic development. Supporting balanced regional development is identified as one of its key priorities. In tandem, all county and some local governments in Croatia have produced development plans to support their planning efforts.

Croatia’s system of strategic planning for regional development has several strengths. In particular, the legislative framework helps to ensure policy coherence by establishing a clear hierarchy among national-, county- and local-level plans. Moreover, RDAs are responsible for verifying that subnational plans align with the NDS priorities. In addition, the MRDEUF has developed comprehensive guidelines and regulations, as well as instruction manuals, to help policy makers design, monitor and evaluate strategic planning documents. Furthermore, strategic planning documents at all levels of government are developed through extensive consultation with different governmental and non-governmental stakeholders, which helps to ensure that they reflect stakeholder needs and priorities. Legislation has also embedded monitoring and evaluation activities in strategic planning processes at all levels of government, while clear processes have been established for upward reporting on the implementation of county- and local-level development plans.

At the same time, Croatia’s regional development planning instruments and practices face a number of challenges that will need to be addressed to ensure the effective implementation of its regional development policy. First, at the national level, the government’s territorial priorities need to be articulated better. A core aim of the NDS was to raise the profile of regional development policies across and among levels of government. At the same time, however, the document does not fully embed balanced regional development as a cross-cutting priority. The government should consider updating the document so that all relevant strategic objectives indicate how they will contribute to balanced regional development. Moreover, to clarify Croatia’s regional development policy and help subnational policy makers design development plans that better align with national priorities, Croatia should design a national strategy for regional development, as required by law. Developing such a national-level strategy would enable the government to articulate its vision, strategic objectives and priorities for balanced territorial development in greater detail, and could serve as a bridge between the NDS and other national and subnational planning documents.

Second, at the county level, there are several areas for improvement in the design of county development plans. In particular, these plans currently lack clarity regarding the actors involved in their implementation, and the contributions (e.g. financial, expertise, or material resources) that they are expected to make. This means that stakeholders may not fully understand their responsibilities, which could result in a lack of ownership or commitment among involved parties, as unclear responsibilities can lead to disengagement. The government could address this issue by amending the guidelines for designing county development plans and requiring them to include an implementation feasibility plan. This plan could include: i) a mapping of actors contributing to the implementation of each strategic objective; ii) the nature of their contribution; and iii) the implementation mechanisms (e.g. co-ordination).

Third, Croatia’s relatively high degree of territorial fragmentation constrains the design and implementation of local development plans. The average local-level population in Croatia is nearly a third lower (30.3%) than in the OECD, with some having a population that is as small as 0.03% of the OECD average. Moreover, 37% of municipalities have fewer than 2 000 inhabitants and only 5% have with more than 20 000 (OECD, 2023[24]; Croatian Bureau of Statistics, 2023[25]). As a result, many local administrations often lack the necessary human resource capacity to design a local development plan and support its implementation. To address this challenge, Croatia could consider taking additional steps to promote inter-municipal co-operation. For instance, the government could mandate small local governments that meet certain criteria (e.g. have less than 1 500 inhabitants) to collaborate with neighbouring cities and/or municipalities to develop a joint local development plan. Further to this, the MRDEUF, in collaboration with the RDAs, could support the strategic planning capacity of local governments in other ways, including by: i) organising targeted training sessions for local civil servants; and ii) creating an online strategic planning toolbox to enable local civil servants to learn at their own pace.

Fourth, there is a need to improve access to high-quality and timely data during the design stage of development plans. For example, 95% of RDAs surveyed by the OECD indicated that a lack of data was a challenge for designing county development plans. In particular, a majority of RDAs felt that their decision making (e.g. on development priorities) could be improved through additional economic data (81%), innovation data (62%) and investment data (57%) (OECD, 2022[26]). Currently, a lack of data at the TL3 level and lower, coupled with a limited awareness of existing datasets by subnational actors, hampers their ability to develop diagnostics of territorial development challenges and conduct thorough and accurate monitoring and evaluation exercises. To address the lack of data, the MRDEUF should consider organising regular discussions between the RDAs and subnational government associations on the one hand, and the Croatian Bureau of Statistics on the other, in order to help identify subnational data needs. To increase awareness about existing datasets, the government could consider different measures adopted by governments across the OECD (e.g. in the Netherlands), including launching a newsletter with periodic updates on relevant subnational data or building a subnational data portal.

Fifth and finally, the quality and impact of monitoring and evaluation exercises on regional development policy making should be improved. The value of such activities lies not in their occurrence as a procedural requirement, but rather as substantive exercises that can help to improve the implementation of subnational development plans. Currently, monitoring reports on county and local development plans are primarily used for upward accountability (i.e. to comply with monitoring and evaluation regulations) and are rarely discussed by relevant stakeholders (e.g. RDAs, county leaderships and the MRDEUF) to assess implementation progress and challenges. For monitoring and evaluation evidence to serve as a management tool, Croatia should ensure such evidence is embedded in a performance dialogue that is conducted regularly and frequently. Such performance dialogues should ideally consist of regular meetings between the subnational executives (e.g. prefects or mayors) and their strategic planning teams. To support this practice, the MRDEUF could develop guidelines to suggest how performance dialogues should be organised. It could also hold annual meetings with RDAs to identify region-specific implementation challenges that may require national-level support.

Funding and financing of regional development in Croatia

Over the past decade, the capacity of Croatia’s subnational governments to fund and finance regional and local development has gradually improved. Between 2016 and 2022, for instance, Croatia recorded a 26% increase in subnational revenue in real terms, while subnational expenditure increased 19%. The larger increase in revenue compared to expenditure suggests a consolidation of fiscal capacity at the subnational level. Despite this improvement, subnational government revenue now accounts for 27.5% of total revenue in Croatia, which is significantly lower than the OECD average (44.9%) (OECD, 2023[27]; OECD, 2023[24]).

The composition of subnational budget revenue has been weighted towards inter-governmental transfers. In 2022, grants and subsidies accounted for 53.6% of total Croatian subnational revenues (up 3.4% compared to 2010), which is on par with the OECD average (52.8%) (OECD, 2023[24]). A reliance on transfers, which are often earmarked for specific functions, risks limiting the ability of subnational governments to allocate spending to meet specific local needs. At the same time, levels of subnational tax autonomy have slowly increased, with city and municipal governments (but not county governments) able to set rates on a number of taxes levied by subnational governments.

Croatia’s accession to the EU in 2013 proved to be an important development in its system of subnational government financing. New-found access to EU financing opportunities helped drive an 82.7% increase in subnational government investment in real terms between 2010 and 2021, thereby supporting the implementation of regional and local development projects across the country (OECD/UCLG, 2022[28]; Eurostat, 2023[29]; OECD, 2023[24]).

Moreover, supported by EU funding and financing, Croatia has created several mechanisms to fund development projects that consider the specific needs and capacities of its counties, cities and municipalities. These include the MRDEUF-led Co-funding Programme, which helps subnational governments meet the EU’s co-funding requirement for project calls, and funding for ‘assisted areas’ (i.e. the subnational governments whose performance on a series of development indicators sits below the national average). The latter element is determined through the Regional Development Index, a weighted indicator made up of various demographic, economic and social indicators.

At the same time, there are a number of areas for improvement related to Croatia’s funding and financing arrangements for regional development. First, Croatia should ensure that increased access to and use of EU funding by its subnational governments is being utilised to help tackle regional and local development needs and priorities. While in 2014 Croatia reported that subnational governments did not receive revenue from EU grants, by 2020 close to 8% of subnational revenue came from the EU (Ministry of Finance, 2023[30]). EU grants have provided an important opportunity for subnational governments to invest in physical infrastructure and address their regional development priorities. Moreover, increased access to and better use of EU funding has helped subnational governments strengthen their strategic planning and investment skills and expertise (e.g. to identify funding opportunities, prepare competitive proposals and conduct monitoring and evaluation activities). This improvement could, however, make them vulnerable to potential changes in EU funding priorities. To prevent this, Croatia could explore options to further diversify the revenue streams of subnational governments. This could entail adopting new measures to boost subnational fiscal autonomy, for instance by devolving existing national taxes to lower levels of government (e.g. green taxes or fees).

Relatedly, there is a need to ensure that recent reforms to increase the fiscal autonomy of subnational governments do not add to inter-regional or intra-municipal inequalities. In October 2023, the government amended the Income Tax Act, empowering cities and municipalities to set Personal Income Tax (PIT) rates within a nationally determined band. This provides them with greater control over their revenue base, and could lead to improved financial stability and reduced dependence on central government transfers. However, the government should closely monitor the effects of the reform on subnational budgets. In particular, it should ensure that the additional powers afforded to local governments to reduce PIT rates do not lead to a ‘race to the bottom’ through aggressive and repeated reductions in the tax burden. Such an outcome could add to disparities in the fiscal capacity of local governments, and would be particularly damaging to smaller cities and municipalities, given that larger cities enjoy greater fiscal space to absorb tax cuts (e.g. through revenue from user charges and fees).

A second area for improvement relates to the effectiveness of the Regional Development Index. There are fears that some subnational governments attempt to ‘game’ their Index score and underperform on certain indicators in order to keep their ‘assisted area’ classification and benefit from associated funding support. To address this issue, the government could consider gradually phasing out financial support to subnational governments that are no longer classified as assisted areas. This would reduce incentives for local leaders to deliberately seek an ‘assisted area’ designation, while also providing them with funding to consolidate recent development gains.

A third area for improvement concerns the funding and financing-related challenges associated with territorial fragmentation at the subnational level in Croatia. In particular, the high level of fragmentation creates inefficiencies as the impact of investment may be diluted across too many small initiatives. To address this issue, Croatia could consider expanding the use of macro-regional co-operation instruments, such as the Slavonia, Baranja and Srijem development agreement. Signed by five counties in 2017, this agreement established a co-ordination council and has overseen the allocation of EUR 2.6 billion in EU and national development funds to regional projects (OECD, 2023[31]). Despite its success, many counties are not yet part of similar development agreements, as they have encountered challenges to identify sources to fund and finance macro-regional co-operation. Developing framework agreements with international financial institutions to ensure that macro-regional development councils can borrow from such institutions is one possible solution to this challenge.

A fourth and final area for improvement pertains to the need to review the financing model of RDAs, in order to shore up their operational sustainability. RDAs depend on two sources of revenue to carry out their mandate, namely i) supporting county-level strategic planning and ii) identifying funding calls and helping local governments develop project proposals. RDA base funding comes from their founding members (typically counties). This generally represents 25% to 30% of RDA revenue (OECD, 2023[18]). The remainder of RDA funding comes from EU Technical Assistance, which is channelled through the MRDEUF. Funding from EU Technical Assistance will end in December 2025, by which time Croatia aims to have strengthened the RDA funding model. In order to ensure that RDAs have the necessary financial resources to execute their tasks and responsibilities, Croatia can consider complementary actions. For instance, it could call on RDA founders (i.e. county governments) to increase their financial support to RDAs. Following the example of RDAs in different OECD Member countries (e.g. Belgium, Spain), the government could also consider allowing RDAs to once again generate a portion of their revenue through paid activities or services. Additionally, the government could provide direct funding for RDA activities through the national budget.

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