On the long and winding road of post-socialist economic transition, Croatia has often outpaced other countries in South East Europe. Yet now, just when it should be roaring ahead as a magnet for investment in the region, Croatia has reached a crossroads between rhetorical fantasy and economic reality.

Politicians in Zagreb have a habit of describing as a foregone conclusion the country's future within the European Union and Nato.

But critical observers cannot help noticing that, increasingly, the facts show a country that, in critically important ways, resists the reforms it needs to go all the way.

External variables such as the European Union's "enlargement fatigue" are a factor, but there is trouble within as well. Far more important to Croatian citizens are realities on the ground, and these, according to a series of highly influential international indexes and reports, including the EU's own annual Progress Report, are troubling.

Reforms in Croatia are starting to lag, and the country's leaders are loathe to admit it.

The Heritage Foundation and The Wall Street Journal's recent Index of Economic Freedom rated Croatia 109th out of 157 countries worldwide - a pitiful 37th out of 41 nations in the region of Europe.

The index, which scores economic freedom according to an exacting set of objective criteria, described Croatia as 55 per cent economically free, calling it "mostly unfree".

In matters of property rights, rule of law, corruption and freedom from government, the index called Croatia "repressed".

Ratings for investment freedom, labour freedom, and business freedom were "mostly unfree". Financial freedom scored a bit better - "moderately free" - while trade freedom, monetary freedom and fiscal freedom were deemed "mostly free".

The index's criticisms confirmed what other recent analyses from the World Bank, European Union and others also indicate. If Croatia truly intends to scrap its twin legacies of socialist and authoritarian rule, there is much work to do.

Faced with this flood of concern from genuine advocates of freedom and prosperity worldwide, one might expect elected policymakers in Zagreb to respond soberly, with fresh, sincere commitments to make life easier for businesses and families.

Instead, Croatia's government has thrown itself into advanced spin mode. Ivo Sanader, the prime minister, went on record rejecting the data published by The Heritage Foundation and The Wall Street Journal.

Likewise, his government pooh-poohed the results of the World Bank's 2006 Doing Business report, and spun the EU's annual Progress Report, prompting The Wall Street Journal to publish a rebuttal titled "Croatian spin doctors".

Last month, when The Economist published an online report calling Croatia the "soggy bottom" of Europe, a place where "nobody wants to upset the murky and convenient status quo", the government quickly dismissed it as untrue.

This zeal for manipulating the facts only sets back the stated goal of a government whose ultimate policy focus is full membership of the Euro-Atlantic alliance. Indeed, it is reminiscent of how communists in Zagreb once fielded criticism.

This must stop. A lack of candour inhibits freedom - and freedom is what is at stake, most critically in the economic sphere. The reports from the EU and Heritage Foundation elaborate usefully on this point.

The threat to freedom does not end with economy alone. It begins there. Milton Friedman, the Nobel Prize-winning free market economist who died late last year, called economic freedom a prerequisite for political freedom. He was right, and political leaders forget his teaching at their peril.

Croatia's leaders, however, have learned to insulate themselves institutionally from criticism. Sanader has invited the Croatian Chamber of Commerce and National Competitiveness Board to review and respond to the Index of Economic Freedom. It looks good, but in fact he can rely on these institutions to reject the index's findings.

The Chamber of Commerce is still financed by the government, which mandates obligatory membership for every company operating in Croatia; the National Competitiveness Board, founded by USAID, meanwhile, consists of government officials, trade unions representatives and privileged representatives of business such as state-owned companies and large private firms holding state contracts.

By contrast, independent businessmen who speak publicly about corruption face the risk of open reprimand from figures of political authority including the prime minister himself. The effect is to discourage transparency and freedom of speech when Croatia's government needs private individuals, journalists and civic leaders to highlight areas requiring improvement. Independent voices are more likely to call a spade a spade.

Responding to the recent flood of criticism, the government boasts that Croatia receives "high ratings from all international institutions, such as the European Commission and International Monetary Fund".

In fact, the EU Progress Report issues a jarring verdict that Croatia has "no overall strategic framework" for reform.

It goes on to describe an environment ripe for corruption. Croatia lacks "clear and transparent rules and procedures with regard to elections and the forming of governments at the local level". The country remains "still some way from enjoying an independent, impartial, transparent and efficient judicial system", and "allegations of corruption remain uninvestigated and corrupt practices usually go unpunished". An additional European Commission report cites "major interference of politics with (the) judiciary".

In any such atmosphere, risks of corruption loom large.

And yet post-socialist reform need not be murky. Mart Laar, the former prime minister of Eastern Europe's star performer, Estonia, offers simple advice:"The first step in fighting corruption is not to be corrupt yourself." Are Croatia's leaders ready to heed it? To see Estonia's astounding rate of reform-driven economic growth, they should be.

Croatia appears to be unprepared to clean up its own affairs, and yet a cleanup is urgently needed, for the state retains an alarming share of overall economic activity.

Government expenditure is worth 52 per cent of the country's gross domestic product, and yet, in some cases, it uses its position to crowd out private initiative. According to a report from the business news web portal business.hr, a substantial minority of public contracts, worth 146 million kuna (about 20 million euro), has been awarded without public tenders.

The consequent lack of room for private initiative and other hindrances to economic freedom need challenging, or they will only grow.

Croatia's Adriatic Institute for Public Policy last October co-hosted the Libertas Debate Series at the European Parliament with Roger Helmer, a British member of the European Parliament. There, issues of alleged corruption were raised in the cases of two former and two current government ministers.

In the wake of the meetings, the Adriatic Institute sent enquiries regarding the cases to Croatia's government, along with follow-up correspondence from Helmer. The enquiries went unanswered, in violation of Croatia's Freedom of Information Act. The unspoken message was one of contempt for the dignitaries present at the meetings, but more importantly for citizens and taxpayers.

It is time for the EU, World Bank, USAID and others who grant or loan substantial sums of money to Croatia to re-examine their approach. Too often, their funds contribute to systemic inertia when a change of course is needed. Croatia needs an approach more directly emphasising accountability and transparency.

Greater economic freedom should be a condition of future transfers of international support, with greatest emphasis on rule of law, protection of property rights, judicial reform and the complete, transparent privatisation of state-owned enterprises.

Such measures might rouse the government from its current state of denial, and eventually help Croatia to establish the foundations of a freer, more prosperous market economy.

Natasha Srdoc-Samy is president of the Adriatic Institute for Public Policy, a free-market think tank in Rijeka, Croatia. Balkan Insight is BIRN's online publication. Copyright BIRN 2007.