Privatization and the drive toward a market economy had barely begun under the new Croatian Government when war broke out in 1991. As a result of the war, the economic infrastructure sustained massive damage, particularly the revenue-rich tourism industry. From 1989 to 1993, GDP fell 40.5%. Following the close of the war in 1995, tourism rebounded, and the economy briefly recovered.

The solid growth that began in the mid-1990s halted in 1999. A recession, caused primarily by weak consumer demand and decrease in industrial production, led to a 0.9% contraction of GDP that year. Furthermore, inflation and unemployment rose, and Croatia's currency--the kuna--fell, inciting fears of devaluation.

Fueled in great part by increases in tourism, the Croatian economy began to turn around in 2000, growing 2.9%. This was followed by a 3.8% increase in 2001. The trend continued in 2002, when the economy expanded by 5.2%, stimulated by a credit boom led by newly privatized and foreign-capitalized banks, some capital investment (most importantly road construction), increases in tourism, and gains by small and medium-sized private enterprises. The increase of unemployment has halted and is slowly reversing, although state-financed enterprises, particularly in agriculture and shipbuilding, continue to rely on subsidies and rack up arrears. Weak investor interest due to the poor financial condition of many firms, unresolved property right issues, unrealistic Croatian expectations of market value, and political infighting led to a slowdown of privatization in 2002. However, this trend reversed slightly in 2004 when 14 majority government-owned small and medium sized firms were privatized. The process of privatization has once again stalled, with the privatizations of several steel companies and shipyards, among other industries, left pending.