Regional Inequalities in Croatia 2003-2023: a Quantitative Analysis Using Neoclassical and New Economic Geography Approaches

Croatia, as the youngest EU member state, has undergone significant economic transformation in the past two decades. Yet, the spatial distribution of this growth is a matter of both academic and policy debate. Literature exploring growing regional inequalities has shown that urban, capital regions structurally outcompeting rural, peripheral regions is a strong driver of the increased popularity of populist anti-establishment parties across the continent. In Croatia, the capital region of Zagreb has seen the highest levels of growth, with regions in Dalmatia and Slavonia being left behind. This paper navigates the tensions between neoclassical convergence theory – which predicts that the poorer regions will catch up to richer ones – and New Economic Geography (NEG), which suggests that the presence of a conducive business and institutional environment in core regions leads to growing regional inequalities. It answers the question “how have regional inequalities developed in Croatia between 2003 and 2023, and how can this be explained?” The first part of the paper explores the beta-convergence among the 21 counties of Croatia, between 2003 and 2023, using an Ordinary Least-Squared regression model on NUTS 3 data to determine between initial GDP per capita levels and subsequent economic growth. It shows that Zagreb has sustained the highest level of economic growth in the past two decades, while most regions indeed lag behind, contrary to the prediction of neoclassical theory. The second part focuses on NEG’s agglomeration effects, moving beyond GDP aggregates into micro-level data. Here, firm-level and sectoral data is used to show that Zagreb, and to a lesser extent Split, have attracted industry through higher levels of human capital, favourable infrastructure and better market access, thereby fuelling regional disparities, increasing core-periphery dynamics. The final part of the paper explores the role of institutional capacity as a mediating factor in regional inequality. EU cohesion funds constitute the primary tool to reduce disparities, yet institutional factors may constrain the absorption of funds at the regional level. Applying an Absorption Rate Analysis, it compares contracting and payment rates of cohesion funds. This uncovers administrative bottlenecks that cause a flow of funds towards those regions with a higher level of institutional capacity. Beyond its immediate empirical findings, this research holds significant strategic relevance as Croatia serves as the primary "laboratory" for the most recent wave of EU integration. As the newest member state, Croatia’s experience provides a critical contemporary benchmark for the Western Balkan candidate countries, which share similar post-socialist institutional legacies and spatial challenges. By documenting how the "Zagreb Effect" evolved under the pressure of Single Market integration and Cohesion Policy, this thesis offers a predictive case study for aspiring members like Serbia, Montenegro, and Albania. The findings underscore that for candidate countries, the path to convergence is not an automatic byproduct of membership, but a complex institutional struggle to balance national growth with internal regional cohesion.