Comparing developments in Croatia and Slovenia, the paper tests the proposition
that the Dutch disease results from excessive total foreign exchange inflows
from various sources – exports of natural resources not necessarily being one of
them. It is shown that the sum of foreign exchange inflows from foreign tourism,
workers’ remittances and net capital inflows (the sum of direct and portfolio investment
and changes in the foreign debt position) in Croatia were almost three
times as high as those in Slovenia. The consequences were an appreciation of the
domestic currency (Kuna) in Croatia, while the Slovenian Tolar exhibited a constant
tendency to depreciation. In contrast to Slovenia, Croatia appears to suffer
from strong symptoms of deindustrialization. The steeper rise of real wages in
Croatia, as the consequence of the overflow of foreign exchange windfall, is seen
as the decisive reason for the deteriorating competitive position of producers of
tradables in Croatia.