A Snapshot of Croatia in Transition

0:00I'm happy to be here to give the seminar. I feel a little uncomfortable in an Austrian building. I'm not like a blue blood Austrian economist, but I took the test on the Internet, and I'm not socialist. I learned that. I'm 50-50. I'm Chicago slash Austrian. But I got confused on some of the questions, so we need to talk. The questions are a little bit confusing and sometimes I had a hard time choosing between the two, so my roots are really in market economics, I believe markets work and that governments try to mess with it, often successfully, but always with unsuccessful results, so that probably qualifies me as sort of an Austrian.

0:48This paper is about Croatia. Everybody here knows a little bit about Croatia. I'm sure it was part of Yugoslavia. And it's in a transition from socialism. So it's an ex-socialist country that's now moving toward market economics. It's Catholic. It's about as big as Alabama. It has twice as many people as Alabama. And per capita income is about a quarter or so in Alabama, so that gives you a basis of comparison. And I'll try to go through the paper quickly, I'm sure some people may have questions about Croatia. And I learned a little bit about the education system, that was a real eye-opener.

1:34And just the general impressions of the economy and also the country. Probably what I'll do first is go through the paper in maybe, you know, 10-15 minutes and then look at some photos which will be more fun than the paper and then kind of throw it open to discussion. The paper is a specific factors model. Now that may not mean much to anybody in here except a few misfits from economics. It's a neoclassical model. If you study microeconomics, it's the last chapter in microeconomics. It's the general equilibrium chapter and so it's mainstream old microeconomics, you know, with marginal products, diminishing marginal productivity, all that stuff.

2:20But you look at the whole economy and the specific factor refers to the fact that in this model, labor is assumed to be stuck in its industry. And this input capital, capital moves around, it can go between industries, and this paper has 23 different industries, but the workers are stuck for one reason or the other. They may be stuck because of their training, their background, or so on. I mean, I think in the long run the assumption would be that the workers can move, but in this economic theory type, if you look at the theory of the paper, the workers are stuck. And what the paper does is look at Croatia's entry into the EU and it makes the assumption that, which is probably reasonable, that Croatia is a small economy and a price taker in these 23 markets.

3:12And the markets are things like apparel and chemicals and so on, so it's probably a reasonable assumption, they're broad aggregates. And what the paper does, what we do is, I say we, I'll tell you who they are in a minute, We look at changes in prices across those industries and see how the economy adjusts. The economy adjusts in economics and in the model along the production frontier. So you have adjustments due to prices, you have adjustments in outputs along the production frontier, and if you think of the contract curve, there are adjustments in factor prices or in the input prices, which is wages and rents. So all the wages and the rents in the economy are going to adjust to the new prices. This model then tries to project how big those changes are going to be, how large the shocks are going to be for Croatia.

3:59Josef Funda is a young guy. He graduated from college, just, and he's thinking of graduate school. He's either going to go to Germany or come to the US. He's interested in international finance, and he did the work, really. I mean, he did all the nuts and bolts for it. Mikač was actually at the University of Zagreb, now she's working for the UN in somewhere, the Far East, I forget exactly where, but she just took a new job, she was raised in Australia, she's Australian, but came back, she was born in Zagreb and from Zagreb and then went back and worked there 6 or 8 years at the University. All right, so let's talk a little bit about the model.

4:51It is a general equilibrium model, so we're looking at adjustments in all the markets. So I call the specific factors Ricardo-Weiner model. Ricardo and Weiner described it pretty well back, what, 200 years ago. Labor is specific to each of 23 industries, so that's kind of the structure. The industries are in agriculture, manufacturing and services. And there's a capital input that's sort of a residual. This is not Austrian capital. We're not growing capital or anything like that. In fact, this is a comparative static model. So the time dimension is warped. It's just, you know, we have this stuff that's not labor that's used by industries.

5:37It's like delivery trucks. And they can go from industry to industry depending on where they might get paid more. So the capital owners are going to put their stuff in the industries that are expanding with higher prices and take it out of the industries where it's non-productive because of falling prices. So it's sort of mythical. I mean, the theory is mythical and the numbers are mythical in a sense. So it's not capital in any growth sense. We're not looking at economic growth. It's not a long-term model. It's like sort of the shorter medium-term adjustment through these changing prices. Where are the delivery trucks going to go? And what's going to happen to the rent or the price on a delivery truck? Don't look at me like that. It's not that complicated.

6:24The model uses, you have to have a production function working in it. And it assumes what are called constant elasticity production functions. Functions, Cobb-Douglas is a common example. It's the simplest production structure you can assume and I've done a lot of work with this type of production function and other estimated production functions and they don't matter. The estimates don't matter, really. In the end, you can end up using constant elasticity. What really pushes these types of models are the shares of the inputs in the industry, how much they get paid, and also where they work, how much of the capital is in the different industries. That's what really pushes the results.

7:19Well, some people would disagree. I think it's okay at an aggregate level like this one. It may not be that good if you get down and looking at the actual adjustment in each industry. Especially, I mean, if you broke, for instance, chemicals down into three or four or five or six types of chemicals, then you might want more information about the actual production process. But at the aggregate level, Cobb-Douglas is not bad. There are studies these days that kind of show that. They compare simple production functions with more sophisticated estimates, and they don't matter. The sophisticated estimates really don't matter much. So the model assumes competition, cost minimization and full employment. These assumptions can all be relaxed, at least the full employment assumption could be relaxed if you wanted to.

8:09So we're looking at the market forces at work, you know, sort of the raw market forces. And then, of course, if you really wanted to delve into issues of unionization and so on, you could say, and so on, you could say, well, this model shows you the market forces, now the question is, how is the Union going to react? And we're adjusting along a contract curve or a production frontier. So we look at changes, we try to project changes for economic adjustment to the EU. The idea is that with entry, Croatia now is going to have to go with free trade with Germany, which is right next door, and of course the rest of the EU and then also Croatia is going to have to adopt all of the European external tariffs, the common external tariff and they are lower than Croatia's so there'll be some adjustments there also.

8:57What the model cannot do really is estimate what these price changes will be. That's very hard to do. We use sort of reasoned arguments, kind of ad hoc reasoning. It's even difficult after the fact to get estimates like this. I've been trying to look at what happened to Greece when Greece entered the EU, and more importantly, the Eurozone. When Greece went into the Eurozone, prices went up, generally, especially for consumer goods. At the industry level, it's just hard to find price changes. It's hard to find this kind of information. All right. What happens, I'll go ahead and give you the punch line, is that at the industry level there are big wage changes, big shocks.

9:49We project price changes no more than 5% up or down and work in that range. In the model you can make it 10% if you like or 15% and use the same setup and get the projected changes. And with a range of minus to plus five percent for price changes, the wage effects are big in this model on the order of 15 percent or so. So noticeable wage effects, 15 percent up or down in some industries down. In the industries where price is falling, wages drop and vice versa. We know what trade does, right? Free trade is going to increase per capita income. And if you believe in utility theory, it's going to raise national utility. But for sure, if you don't believe in that, it raises per capita income.

10:34No doubt about that. It has other benefits too that go beyond this model. But in that higher per capita income, there are winners and losers. What this model does is let you look at who wins and who loses, and it can guide you through the potential transition process. Also there's a small increase in the capital return. So, capital, that mobile thing that goes between industries comes out ahead as you'd expect it would, but not much. There's not a big change there. Now, you can use the model then to project what would happen to labor if it becomes mobile. In other words, let the labor move around and see what happens.

11:21And what happens then is that the wage changes are not large. There's a small increase in the wage. So the wage shocks are much lessened if labor agrees to become mobile. Now in Croatia, that's a big deal. Because Croatians, from afar, you think of Croatia, well it's like this homogeneous place, but it's not. It has three or four regions and the people in each region don't like each other much. And they certainly wouldn't move. Somebody from Zagreb would not even dream of moving down to Dalmatia on the coast to find a job. It's just out of the question. And vice versa. Their cultures are not that... They speak the same language, pretty much, but the cultures are different.

12:06The religion is the same. Everybody's Catholic in Croatia, but there's strong regional preferences. There may also be other issues that kind of keep labor tied to an industry. So, labor mobility is a big issue. I mean, you talk to Croatians about this and they say, well, you know, it's just not going to happen. They're arguing, you know, talking about labor mobility, talking to one of the economists there about comparing Croatia to the U.S. Well, you know, in the U.S., you know, if I found a better job in California, I'd go to California, you know, it doesn't really matter. I'd go to North Dakota or New York. Labor is mobile like that in the U.S. People move around. And he said, well, you know, I think what happened is says all the people that had an inclination to move just left Croatia a long time ago.

12:51They all came here, right? So people that are still there, they're not moving, they're stuck. So it is an issue. It's an economic and a political issue, I think. So our policy recommendation is to encourage labor market flexibility, labor market mobility. An easy thing would be just a lump sum payment. If you agree to go work at this new factory, or if you change jobs, and change locations, and change industries, I mean, at some level, change industries, and we'll just give you $1,000 or $2,000, like moving expense, and that could be, that would be one way that would, one thing that would encourage labor mobility, you know, sort of the least harmful tax, let's say, or redistribution to encourage mobility.

13:42So here are some of the numbers. The first column shows the share of labor in each industry. So agriculture has 2.9% of the labor. Food manufacturing has 4.2%. In fact, let's look down. If you look at that first column, that's the way to do this. And then go look where labor is. It's in the first column, so 9.5% of labor is in other manufacturing and so on. This is a pretty big industry. Most of the manufacturing industries aren't that big. One or two percent of the labor force.

14:27And then the last column, 15% is in trade. So that's a big industry. This is the whole economy. There you go. Hey, that's cool. I can do that. And then public administration is 11 percent. That's a big deal. And then education, about 8 percent and so on. So it gives you a picture of where the workers are, 6 percent in construction. And then the other columns, the second column shows the distribution of that other input, that mythical other input. If you look at the third column, that's a little more insightful, that shows the share of the revenue, or value added really, in that industry that goes to labor.

15:15So it's like labor's share of what, of the payment to that industry, the net payment to the industry. So agriculture gets 9% and that's 9% of the share, that's 9% of the income in the industry. So most of the income in agriculture goes to capital, and that's land. Land is included in that residual. In fishing it's 13%, in food 35% of the income, 35% of the income in food goes to workers. These are called factor shares. The labor share is big in apparel, and then it's big in, not too big in chemicals, well it's big in publishing.

16:04Let's see, the other big labor shares are in transport equipment manufacturing and they make street cars, that's what they make, these street car carriages and they sell them internationally. Zagreb has these little street cars, they hold about 20 people and they put around town, well, they have electric motors. So they make transport equipment but they don't make cars, not good transport equipment, you might say, and so on. If you look at this last column, education has 60% or 57% of the income and education goes to labor. The last column kind of sums that up and that's the factor intensity, the capital labor ratio in the industries. Big numbers mean very capital intensive industries, that's agriculture, but that includes land.

16:53My impression is that it's not capital intensive in the U.S. sense. They don't have any like big tractors or anything. It looks like a bunch of little small farms.

17:05The small numbers are capital-intensive, like mining is capital-intensive.

17:14Chemicals is pretty capital-intensive, refining is. There are some big refineries. There's some nuclear reactors too, I'm pretty sure, I thought there was one, although people said they don't have one. It looked like, but it might've been a coal-fired reactor. Small numbers are labor-intensive industries, that's that transport equipment, apparel is very labor-intensive, and those intensities drive the results. They drive the results in the end, and this is what the results look like. The first column shows the projected price changes, and again we just made these up, right? These are just made up price changes, although the paper talks about where they come from. You can sure use the model to use to talk about other price changes.

18:01The losing, let's go back, the winning industries are fishing, food manufacturing. This is where Croatia has export opportunities. Real estate, public administration, in the EU now, so public administrators. There'll be a lot more of that going on, I suspect. At least the price in a sense would go up, health and social work, higher prices, hotels and restaurants, tourism is expected to do well, and that's it really. The big negative numbers are in manufacturing and apparel, that's with EU competition, but also the multi-fiber agreement is ending, And so, Croatia along with the rest of the developed world is going to have a hard time competing with China in apparel and already is having trouble.

18:55Manufacturing equipment, they're probably in trouble in that industry. That's an old-time, old-line socialist industry. In fact, we launched it in the old-time socialist industry. It was the school cafeteria. If you didn't get a chance to go to Russia in the old days, you should just go visit the school cafeteria at the University of Zagreb. I mean, it's just like these, you know, hefty women in white uniforms and they have this food, you know, just mounds and mounds of food and it's free. They give it away. The students don't have to pay to eat. It's a snapshot of socialism. The second column shows the wage changes in the industry and the thing to remember about this is that they're large. Like, for instance, in fishing, there's a 5% increase in price, but wages jump up 28%.

19:45So, the wage adjustments are bigger than the price changes in the model. That works uniformly throughout all of these changes. So, we're talking about wage changes on the order of minus 20, and then let's see for the winners. Well, real estate, they're going to be a lot better off. Hotels and Restaurants, so it's going to vary by industry, but the changes will be noticeable. So noticeable wage changes, and that's going to generate, of course, political problems, political issues. Labor unions are pretty strong, and the country's in a transition, so they're not really sure what their labor laws are. I mean, they're writing the laws and trying to create some sort of market economy in the process.

20:32The last column shows the output changes. They're similar but not as big. So the output adjustments aren't quite as big as the wage shocks, but they're big. I mean, a 23% increase in fishing, assuming the fish are out there, and these 20% decline in manufacturing when they start having to compete with other European refiners. These are a 10% reduction in mining. Those are traditional industries that have been state-supported and they're going to have to face some adjustments. Transport and telecom decline, although these two probably ought to be split. Telecom you can see getting cheaper, transport, I don't know, there are issues there.

21:17That would be better if it was split up, but we don't have the data for that. And then you see at the bottom the capital return and that's one and a half percent increase, So that mobile input, what it's able to do is seek out the industries where prices are going up and of course it always moves because it's offered a higher return and that happens on net and so in the end you see a bit of an increase in the return to capital. If labor was mobile, you get the same result. If labor was mobile, what you see is a smaller net increase in wages and that's why the paper argues for labor mobility. That's, I think, in the end, that's sort of the bottom line. So, should we talk about the economics before we look at photos?

22:03We probably should, because I don't have that many photos. And if we don't talk about the economics now, then I'll forget. And what is the status of price controls and things of that nature? There are, especially in the big industries. There are price supports, price supports for chemicals, metals, refining, none of that is open market, the big stuff. On the street, everything is on, everything is in a market. I mean, you know, if you just go to stores and shops, it's all, it looks like Europe, right? I mean, there are little shops and everything is for sale. I don't think there's, there must have a value added tax, so there's no sales tax, but I didn't see any evidence of, Are the big industries, are those nationalized?

23:20These firms are at least partly, if not mostly, publicly owned, so I think now it's sort of a mixed bag. There's still public ownership, especially for the big traditional producers like the transport equipment, chemicals and so on. But they've opened shares of ownership to the private sector. Not surprisingly, they're hard to sell. Private investors tend to kind of stay away because the state is still involved. I think that's kind of where they're at. I was thinking about this labor mobility issue over there. It's something that's hard to judge because in my hometown and in my family, There were probably two generations of my family of both sides, where nobody left town.

24:19Everybody just stayed right there. And then the next two generations, everybody left. There's nobody left there. They spread, you know, throughout the United States. So there was a couple generations where everybody was fixed. Nobody thought about moving or leaving or anything. and then all of a sudden, that equation somehow changed. Yeah, I think, yeah. Jobs are available, I've been here for a long time, and we've peppered and looked like exiles hired a lot of people, we don't need more, most of the world is gone. Q. Is fishing socialistic?

25:08A. No. I don't think so. Q. These people are taking fish in the ocean and lakes where they can grow those fish. A. No, that's right. There may be some fisheries, but I think most of it is small boats in the Adriatic. Small private boats. Q. Don't those fish belong to all of us? Well, you have to go catch them, though. I mean, they're out there, yeah. Yeah. Now, there are private, like in Greece now, where they have started these companies that, you know, grow their own fishing. Yeah, there's some of that in Croatia. There are some fisheries, offshore fisheries.

25:55But I think most of the fishing industries, it's not that big a deal in terms of the size and the economy. Of course, it's a big deal if you're in the industry.

26:15Well, but some of that's on private land. I mean, that's an interesting issue. In the Adriatic and in the Aegean, there are sharing agreements. So Croatia's not going to be, it's going to be subject to those EU restrictions on how much, how many fish you can catch. They do, yes, they do, yeah, that's, yeah, there is, in the Mediterranean generally, yeah, yeah. I really like the thesis because it's easier to follow. Free capital can have a higher return than non-free capital. I'm somewhat interested in how small your number is. Have you done any looking at the issue of risk, rate of return?

27:02Well, this would be a real rate of return. That 1.5% would be an increase in what's the going real rate of return now. I think if you're really interested in capital markets, this model is totally inadequate. Yeah, because you'd have to then look at... So it's going to be half of Chicago, right? Yeah, because what you can do is flip this model around. What you can do is assume that labor is mobile, and we've looked at these numbers, and let capital move around, this fictional capital. Okay, what happens then is just the opposite.

27:49You see capital returns going 20% up, 30%, or not 30%, but 15% down, you know, 15% up and down. So that would be more of an investment type model, where the capital return is going to be highest. And then what you can do is say, okay, look, if it's the 15% increase in return to capital in this industry, of course, that's where the money is going to go. That's where the investment is going to go. And then you can play it out over a 10-year period and say, okay, given an increase in capital, what's going to happen to production in that industry? It's going to go up. and so are wages, and the number of workers. You've got capital, the prisoners later won't be able to receive that. That's the capital. I'm not sure that Croatia has any more monopoly on getting provincial than any other place.

28:39That's true. Central Europe is full of these little provincial economists. But I'm guessing you can talk to that. But it seems to me that if you could do some sort of control with your other EU nations, Is anybody here surprised that publishing manufacturers are going down, right? I mean, everybody, even Croatia has an internet now. Right, right, right. It seems to me that if you could somehow control the Ludwig industry, I'm betting you'll find the results even more robust. And that's my point. That's the technical difficult point. I don't thank you for having to think about that. I'm joking. No, that's, that's correct. That's right. And that, of course, makes the model more realistic. Sure. You said that, at some point, that with Euroization and entering into Greece, that in Greece, prices in the economy actually went up?

29:34Well, I have. The only thing I could find, I've looked for a few days and had other people look. What I was looking for would be price changes for these industries, industrial-level price changes. But either the Greeks don't know, or they know and they won't tell, or something. This is at the EU level, so the EU doesn't routinely do that kind of stuff. There's one guy that's been interested in it but hasn't done any studies yet. What I do have are price changes at the consumer level. They're pretty easy to get because you just survey retail stores. So it's things like apparel, food, you know, other consumer items, housing, the things that go in the consumer price index.

30:19And between 1999 and 2004, which is, this is in Greece now, when Greece went into the Eurozone, prices went up about 10%. It's about 10% more expensive in Greece than it is, than it was before. In fact, my wife is Greek and we go there in the summers and we can vouch for that. She's here now even, back in the back. It's about, it's 10, at least noticeably 10% more expensive and Paul also can vouch. The Euros cause higher prices in Greece. Now wages may have gone up too. And so the question is, you know, are the Greeks better off than they were before? And the answer is, of course they are, you know, not just for that reason. I mean, they're in Europe now, so Greece is a whole lot better off now that the Greeks aren't in charge of Greece.

31:10And I think the same thing is going to be true in Croatia, that if the Croatians aren't really in charge, they're going to be a whole lot better off. How can you tell, or how would you measure, what prices are? I grew up in a normal mall, and the prices are all that you can take a pair of trousers or a pair of shoes and put them in stores. And the prices are not only different in the stores, but they may vary.

31:49When commerce goes out, it has these people, they just go around and check prices. And they do it randomly, supposedly, at retail outlets. And they get their list at the start of the week, and they have a few thousand items to check in a certain location. They go around and write down the numbers, and then they send it all to the Department of Commerce, and they average up the numbers, and boom, there it is. And the EU does the same thing. They're pretty good on average, they're not bad, they're pretty good. Yeah, but what happens is it's a random check. You know, you just go to the stores and check. So I think the Consumer Price Index in the U.S. is pretty reliable. I mean, you know, for what it is. Yeah, you have to take it for what it's worth. And the same thing is in the EU.

32:36Is it labor? Okay. Yeah, that's probably right. Yeah, that is right. It's Department of Labor. I guess I'm still a little surprised that prices went up when they opened trade, except for a few things that will be next. In Greece, Greece had been in the EU since 1981. So Greece had free trade. It was the Eurozone thing, and with the Eurozone prices went up. Now this is also the time when Greece was getting ready for the Olympics, so there was sort of a boom in Athens. That probably biased the inflation. It may not be true in all countries that the euro has made much difference in price. In fact, I think that is true.

33:21I think that the euro, from what I've read, the euro has not made any difference in inflation rates and in price levels. I mean, it's made a difference in individual country inflation rates, of course, like the lira, right? And the Italians don't have the lira anymore, so there's no inflation. But if you look at real index prices, they're designed to take out the inflation and just look at the real price Relative to Other Commodities, Relative to Income, and Euro hasn't really affected price levels in Europe. What's the relative size of government in Croatia? The government is smaller in Croatia than it used to be, but it's bigger than it is here. I don't know off the top of my head, government spending relative to GDP.

34:09Here it's about, what, 20%? Is it 30? I think in Croatia it's probably, you know, 30 to 40 in that range, but diminishing, and they have guidelines to hit for EU entry, and I think in Europe they're generally higher than here, it's probably around 30 to 40, so it's going to be in that range to qualify for EU entry, so it's a bigger deal than here, but less than in Japan, How do you think getting into the European economy will affect people who are relying on what they have promised in relation to the return?

34:59Some of my friends are worried about that here. In fact, I tell them just forget about it, just don't count on it. I don't know that much about their retirement system. I think it's an issue. They have, what they have are Ponzi schemes. Old time, they have like social security, but at the industrial level. So workers and let's say chemicals in the big industry, they pay into that Ponzi scheme. It's an easy scheme, and the workers pay the retired workers in that industry, sort of industry specific. But the industries have always been protected and subsidized, so there wasn't any chance of failure.

35:45So the overall level, I mean the overall retirement has been very generous. Although what would happen typically is that you could retire relatively early with a pretty good paycheck, That paycheck would diminish over time due to inflation. So that's been the old system. The new system, I don't know. They're going to be in the European. They'll be in the EU social security system. So it won't be the old system anymore. So will they use what they've invested on? There's no investment. It's just money. You pay money. It's like social security here, right? You pay money in, they take the money and give it to somebody else. That's all. It's just the Ponzi scheme. It's like a chain letter. I'm sure, yeah. They may not get as much as they'd like.

36:44Yes, that's right. And even more socialized than Europe, although that's also in some kind of transition, transitional phase. There are private hospitals in Croatia. We had a colleague there, Ed Tower, an international economist who got sick, and he went to a private hospital, a private doctor, and got good service right away. I think otherwise, it's sort of wait and line. As an American tourist in Croatia, did you find it a place where things were generally very expensive or things were pretty much the same? It's cheap. I'd say, you know, it's a bargain.

37:30So now with the weak dollar? Yeah. Yeah, even with a weak dollar. Yeah, you know, things are, it's like 25% discount on average. Food's good. It's good for tourism. But the Croatians, it's funny because they don't like to admit it. The Croatians don't, they're not hot about the idea of tourism being their major industry, but I keep telling them, man, that's what you have to sell. This is a, it's too bad, you can't see, I guess all the lights are off, it'll go off. Tourism can be a big thing there because this is in Zagreb. So this is the first thing you see when you land in Zagreb is this huge, you can't really see a picture of how big the square is, but it's a huge square and there are just tons of old buildings and museums.

38:27So if you like architecture and museums, for me it was like a total waste, I'm just not that much into history. There are old buildings and museums. Is that better? Maybe, maybe not much. Anyway, is that worse? I would tell them that tourism is your hope for the future, but they thought the argument was, well, it's cyclical, which it tends to be, And really, you don't get a warm feeling when you visit there. They just don't, Croatians don't like each other much.

39:14They don't like their immediate neighbors at all. There's no love lost with the Bosnians or the Slovenians or any of those guys, Hungarians. And they don't really like the Italian tourists. Tourism is totally undeveloped. The hotels that are there, the state-run hotels, and they're just, I mean, now you can tell it's been privatized, so this guy, we stayed on the coast, he was trying hard, but he didn't have the facilities, you know, I mean, it was this old, like, I don't know, 1960s institutional type hotel, just not, you know, didn't have it, just wasn't there, but it's, I mean, in terms of landscape and, you know, things to see, museums, they've got it, so it's, you can get, no, that is a real crystal store, That's what I thought when we first went there. I went to see if it had...

40:09There is McDonald's, for sure. There is a McDonald's. This is the main square in Zagreb. And it's nice to have little rock shows and puppeteers and that kind of stuff. Henry, do they have philoxenia here? Well, in Greece, philoxenia, philos of friend and genus is stranger. And if you work it right, you can do it extremely well. No, Croatians don't like, they're not that warm. It's more Germanic. I think along the coast there's a little bit of that Mediterranean influence, but it's not said, they're not geared for tourism.

40:58I mean, if you look at the last 50 years, they haven't had any, right? But things can change, quickly too, you know, when the tourists start showing up. This is our apartment in Zagreb. Actually, it's not our apartment. This is just a building in Zagreb. And you know, I'm guessing it's what, like late 1700s or something? And the city is full of them. There are like thousands of these all over the place with these kind of carvings. Say it again? What rent did you have to pay? Oh, the university furnished it. Do you know what the housing cost is? I don't know. No, I don't know.

41:43How much impact would say Tito's legacy, or, I'm dusting off old memories here, when I was a former motor company, Yugoslavia was one of the few folks that actually explored automobile here, for those of you who don't remember the red Yugo. Sure, yeah. With a better position compared to some of the other folks. Tito was Croatian, but I don't know if that helped Croatia. In Yugoslavia, Slovenia is the outlier. Per Capita Income, Slovenia is up here, Croatia is down here, a little above, Bosnia and those guys. Slovenia is like Italy or something. You go there and it's like, whoa, you know, different. It's just right, you know, 20 miles away, but it's very, it's a much richer country.

42:28I don't know, in terms of their ability to produce things, I mean, the system is a little bit different, so they're going to have to, you know, mentally get adjusted. And they'll be in Europe, you know, what their comparative advantage is going to be in, it's hard to say. This is a picture from the train station in Zagreb. You really can't see too much the way it's set up. In fact, Slovenia is right across these mountains in the back. Yeah, that's the little, let me get down here and you can see it better, that's the streetcar, Zagreb is a nice city to visit because you can ride these little streetcars anywhere and they're quick, they're small, each little car holds 20 people or so and they run a lot and they go just anywhere in Zagreb, Zagreb is in this valley, it's trying to buy mountains and that makes it easy to get around so there's not a lot of traffic, it's a population of a million and you could spend a month there easy, I mean just seeing stuff, there's enough stuff to see in Zagreb

43:36It's a little hard to find the restaurants. They don't have signs on the restaurants. It took us like a week or ten days to find food. Where's the food? But when you find it, it's good. They have good food. People know where the restaurants are and they go there. They're like little taverns and that kind of stuff. This is a street in Zagreb. There are big wide streets and parks with squares that are nice. We were there in May and the weather was cool, some days, and you know, other days, other days were pretty nice.

44:33It's pretty far north. Some of you guys might not know the location, you know, if Italy is the boot, you know, you go up the boot and then Croatia is like the sweaty part behind the knee, right? That's Croatia right here. If you've been there, you would agree, and I mean it's a joke, but I like the place, I wouldn't. You should hear my jokes about Greece. This is the ceiling of our bedroom in the university dorm. Actually, it's a ceiling in a museum, and there are hundreds of these things, if you're into that stuff. What's the style called, Madeline? Art Nouveau from the late 1800s or so.

45:28Let's see, I might have skipped one. Ah, this is a nice picture. This is in Zagreb, the main city square. This is the street market, which is very active. I mean, I like the flea market and people shop there a lot. There's a big, huge vegetable market, meat market. That's very convenient and I would say the average person in Zagreb lives out around the edge of the city and then takes the tram into the center and their job is here in the middle where their banks and that kind of stuff, government offices and you shop at the market and that you know clothes and all sorts of stuff. It's very convenient city and kind of fun. You walk a lot there of course. This is the University of Zagreb.

46:17This is the economics building. The university there is spread out over the city. It's not in one place. This is the economics building. The economics research institute is right here. I may have a chance to go there on a sabbatical if I'm lucky next year. This is the economics building. They have economics majors of about 10,000. It's a European system and the system is this. Yes, you get seven years to get a degree. During that seven years, everything is free. Well, not free, but highly subsidized. Housing, food, transportation, they don't need street car tickets. All this stuff is like free, right? Okay, when you sign up for a course, an economics course, for instance, you have seven, the seven is a magic number.

47:08You have seven chances to pass the exam. And you can take the exam any time you like. You don't have to take it, you know, after you took the course, you can take it before the course, you can take it seven years later. And not only that, the professor's job is to make sure that, their main job is to make sure that those, now we're talking about over seven years, a few thousand students that you have backlogged to pass this course are able to take the test when they want to take it. There are certain dates when you can take it, but there are a lot of those little dates. So, you know, the main job the professor has is going and look at the list of students, set up to take the test on this date, how big a room do I need, you know, how many teaching assistants do I need to proctor the exam and so on.

47:57But a lot of people, a lot of students, I suspect, are just students in name but don't ever go to class or even take exams, because you have seven years, right, it's like a seven-year vacation. You'll see a picture of the students in a minute. They're good students there. And the economists on staff were actually good. Did you say there were 10,000 economic students? Yeah. This school is the school of economics. But that includes business. When you say economics in Europe, you mean business. I mean, it's like finance is like a little trivial part of economics and management. They don't go for that stuff. It's all economics. You know, marketing is just nothing. It's just one or two little people. Economics is the main thing. So it's economics and business.

48:45In Zagreb's a million, Croatia is double. What's Alabama's population? So I think Zagreb's double that. It's like eight million. One million in Croatia, in the capital of Zagreb. How well or poorly received are you by most of your colleagues in the big market economy?

49:33It's true, though, that what they learned is a lot different. I mean, the style of economics that the typical professor trained in Europe, especially the older guys like me, you know, in the 50s and 60s, it's a lot different. But that's changing. It's changing. This is my international economics group. I taught a course in international economics and one in microeconomics. There's junior, senior level courses. These are the students. And you can see that in Croatia, it's a homogeneous group, right? This is to me like, I was there about a week or two and I told Madeline, this is like the Caucasian homeland.

50:19You know, it's like some sort of primitive Caucasian homeland. There are only Caucasians there. I mean, they're big, on average big. They're not little people, they're big people. Is there any interest in Austrian economics, Hayek and that sort of thing over there?

51:02If you can find a professor that wants to tutor you or wants to have you ride under him, then you're home free. That's it. There are no graduate courses or exams or anything. You just write a book. How many years of subsidy can you get for that? That's right. That's beyond the seven that you would have, but I don't know the answer. You get seven as an undergraduate. It could be seven more. That's right. And these students were good. I mean, this is the small group. Actually, this class had 150 registered, and this is how many showed up. So that gives you an idea of the way the system works.

51:47But these are good students. And this is a program that's taught in English, lucky for me, of course. And they wrote in English. It's an English program inside the university. They're good students. I would say this group would compete well with Auburn's seniors in economics. They would out-compete them. I'm talking about seniors in economics. Now seniors in economics at Auburn are pretty good by that time because a lot get weeded out. They can write about as well and this group would probably work harder.

52:32The ones that like economics like it a lot. Out of this group, this guy standing next to me, he's good. He's good, she's good, she's excellent. I mean, these are top students. They could go anywhere. They go anywhere in the U.S. That's how they're top students. They could go to any graduate school in the U.S. That's how good they are. The average was pretty good. She's very bright. And there are other ones, too. Those are the cases. This guy, he wouldn't leave you alone. He's just ready to talk economics all day. Four minutes and maybe four more pictures.

53:14Part of that was not the class. Yeah, that group and that photo is very good. This was the lady that invited me over. It was the Fulbright grant, so she oversaw it. She applied for the money from Fulbright and then I just put my name on the list of eligible people and Fulbright mashed this up, a marriage made in heaven, right? And notice, I want everybody to see what's on top. This is after the lecture. Long-term effects of monetary policy equals zero. I made a big deal out of that.

54:01This is a picture of Zagreb. This is from the top of the mountain, close to Slovenia, looking down on Zagreb. That's a pretty good view. Big trees, big houses, big people. The scale is large, although it's not a huge country. It's a large scale country, if that makes sense. This is Malini on our Italian holiday on our way from Zagreb to Greece. We've got to stop over in Italy, so this is our Italian holiday.

54:49And then, a boat. It's very hard to get from Croatia to Greece. It's like the Croatians don't want anybody going to Greece and probably vice versa Because they compete in tourism. You have to go to Italy first and then go down, right? There's no direct flights, no direct connections down toward Greece. You can see the tourism potential. The beaches are very nice. Nothing like the beaches in Greece, of course. This is Dubrovnik, which is interesting to visit. It's an old medieval-type town. And we're looking from in the city up toward the hill and this little building at the top of the hill was the old Yugoslav fort.

55:36And this was in the news, of course. They were shelling this old medieval castle right here for a long time, six months or so. They were shelling Dubrovnik. And the local Croatian rebels, of course, they were called, or whatever, freedom fighters, They hold up in this old, inside these castle walls and they were, I forget, I mean they have each spot marked on a map where the mortar shells hit thousands and you know, it's a local, they're proud because the walls stood, here's the wall, they weren't affected by the artillery, even modern artillery, there was some fighting in Croatia with the Yugoslav army but in the end not too much.

56:22And then, let's see, I'm running out of time in photos. This is not Croatia. This is Albania, where Madeleine's dad's from. This is a beach just south of Croatia. This is Albania. We stopped there, maybe not on the way, but we were there during the summer, and I think The rest of the photos are just, let's see, nothing special.

56:56I should mention my son, Alexei, he's here. This is where we'll be this summer if he's lucky and we're lucky. He has a bar on a Greek island. This is the Greek island, Eos, which is not in Croatia, pretty far from Croatia. But anyway.