**Thus, average scores are lower (less restrictive of competition) across the board for outward-oriented policies than for inward-oriented ones.** This is certainly due to the requirements that are imposed by international agreements - such as the WTO charters, and, for EU countries, membership in the European Union - which are more binding in matters concerning trade and foreign direct investment.  Within this general picture, it appears that Croatia performs less liberally than most comparators in both inward and outward policies. However, certainly as a reflection of its international commitments, more progress has been achieved in the areas of international trade and foreign direct investment (outward oriented), relative to those that are more likely to be determined by discretional domestic policies (Figure 5).

**Figure 5: Inward and outward oriented policies**

(a) Inward-oriented policies (b) Outward oriented policies <!-- Start of picture text --> 2.9<br>3.0 3.0<br>2.5 2.1 2.2 2.2 2.4 2.4 2.5 2.5<br>2.0<br>2.0 1.7 1.8 1.8 1.8 2.0<br>1.5 1.5 1.5<br>1.5 1.3 1.5 1.4 1.4<br>1.1 1.1<br>1.0 1.0 0.9<br>0.5<br>0.5 0.5<br>0.0 0.0<br>Slovak Republic Albania 2007 OECD EU15 Romania Bulgaria MICs Czech Rep. Croatia 2007 Hungary Poland Albania 2007 EU15 Czech Rep. OECD Romania Bulgaria Croatia 2007 Slovak Republic Hungary MICs Poland<br><!-- End of picture text --> _Source: see Figure 3. Note: Other MICs are Brazil, Mexico, 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._

# **3. Outward-oriented Policies: Barriers to Trade and Foreign Investment**

Compliance with international commitments may more easily impose discipline on policymakers. Indeed, this probably explains why all country groups do better on average in their outward oriented policies ratings than in the inward oriented one. In the case of Croatia, observance and implementation of the rules for membership of the World Trade Organization (WTO) and, even more strongly, the European Union (EU) has led it to significantly reduce barriers to trade and investment since the start of transition. Croatia’s foreign trade policy has been driven most of all by the commitments of the EU Eastern Enlargement project, promoting bilateral trade liberalization initially with the EU and EFTA and, subsequently, with other preferential partners of the EU, including with the SEE countries. The Pan-European Agreement on the Cumulation of the Rules of Origin has not yet been extended to Croatia which prevents further expansion of trade with the EU. However, the removal of tariffs on all industrial products and the harmonization of technical standards has led to Croatia’s participation in a de facto free trade area for industrial products.

**Despite the efforts made to harmonize legislation and regulation with international norms, both foreign direct investment net inflows and trade openness have remained stagnant** since the beginning of the decade (Figures 8 and 9). Trade in goods and services has remained relatively stagnant at slightly over 100% of GDP, while average annual foreign direct investment inflows have hovered around 5.5-6% of GDP.  FDI has gone to a variety of sectors, notably financial services, telecommunications, pharmaceuticals, oil industry and trade and has made up

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