To make this point, that the state holds equity shares in the largest firm in 17 out of 24 sectors of the economy considered in the PMR survey (Figure 20b).<sup>8</sup> As to the instruments of control used by the Croatian state in the sectors where it remains involved, they seem more extensive than in most benchmark countries (Figure 20c). The similarity with Hungary, Poland, and the Slovak Republic suggests that transition countries have followed a similar approach in this domain. Direct control over business enterprises in Croatia has taken the form of constraints to the sales of state-owned equity stakes, special voting rights, and control of the strategic choices of public enterprises by legislative bodies (see Annex Table A2.3 for details).

# **_4.2.2 State Involvement in Business Operation_**

**State intervention in the overall economy is captured through price controls and “use of command and control regulations.”** The price control indicator measures the existence of price regulation or administrative control of prices in air travel, road freight, telecommunications, and retail distribution sectors.  The “use of command-and-control” indicator reflects the extent to which government uses prescriptive (as opposed to incentive-based) regulation both in general and in specific service sectors.

**Figure 21: State involvement in business operations**

a. Price controls b. Use of command-and-control regulation <!-- Start of picture text --> 4.0 4.0 3.8 3.8<br>3.5 3.5 3.4 3.5 3.5<br>3.0 3.0 2.6<br>2.5 2.0 2.5 2.2 2.3 2.3 2.3<br>2.0 1.6 2.0<br>1.51.0 0.8 0.8 1.0 1.0 1.1 1.3 1.4 1.51.0<br>0.4<br>0.5 0.3 0.5<br>0.0<br>0.0 0.0<br>Albania 2007 Slovak Republic Croatia 2007 EU15 MICs OECD Romania Czech Rep. Bulgaria Poland Hungary Slovak Republic OECD Czech Rep. Hungary Romania EU15 MICs Poland Croatia 2007 Bulgaria Albania 2007<br><!-- End of picture text --> _Source: see Figure 3. Note: Other MICs are Brazil, Mexico, and Turkey. Values refer to 2007 for Croatia and Albania, 2006 for Bulgaria and Romania, 2004 for Brazil, and 2003 for all other countries. For full data set see Annex I._

**Regulatory processes do not sufficiently rely on incentive-based regulation.** Price controls have been largely removed since the first phase of transition, placing Croatia below the OECD and EU15 averages in 2003 (Figure 21).  On the other hand, reliance on prescriptive regulation is much more pronounced than in most comparator groups or countries, on level with Poland’s and the MICs 2003 average. This suggests that this should represent a high priority for the reform efforts of policymakers. A detailed look at the make-up of this indicator shows that Croatia’s very high (poor) score is almost entirely driven by the fact that regulators have not issued guidelines on the use of alternative instruments before issuing new regulations. The use of prescriptive regulation is also the norm in a number of aspects of activity in the specific sectors included in the PMR approach (air travel, road freight, railways and retail distribution).  For instance, the

> 8 The indicator does not take into account the number of shares or the proportion of state ownership.  In Croatia, for example, state ownership in some of the sectors in terms of actual control over equity is minimal.

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