E-Knjižnica FET "Dr. Mijo Mirković"

Equipment investments as a main driving forcce of economic growth in the Republic of Croatia

Škare, Marinko and Sinković, Dean (2007) Equipment investments as a main driving forcce of economic growth in the Republic of Croatia. In: 4th International Conference "Global Challenges for Competitiveness: Business and Government Perspective", 27-29. 9. 2007., Pula, Croatia.

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Ever since Adam Smith’s The Wealth of Nations economists have tried to disentangle the key engine of economic growth. Since the mid-1980s, economic growth has been one of the most dynamic fields of research in economics resulting in bulk of theories that tried to explain why rates of economic growth vary substantially across countries. The modern examination of economic growth begins with the R.Solow theories which helped to clarify the role of accumulation of physical capital and emphasized the importance of exogenous technological progress as the ultimate driving force behind sustained economic growth. Some further theories, based on Solow’s foundations, maintain the same perspective – policy makers cannot affect growth rate over a long run period. In the early 1980s, work of P.Romer re-ignited the interest in exploring economic growth, emphasizing the importance of innovation and human capital. Since that time both theoretical and empirical work has continued with enormous professional interest challenging traditional growth accounting of the Solow model. As part of this literature, De Long and Summers (1992, 1993 and 1994) have argued the strong correlation between equipment investments and economic growth revealing that, in the cross section of countries, each percentage of GDP invested in equipment raises GDP rate by 1/3 of a percentage point per year. At the same time Mankiw, Romer and Weil (1992) emphasized that the variations in growth rates can be predominantly explained by conventional Solow model augmented with human capital, and with no effect of physical investments on long run growth. Further research of these empirical contradictions has been conducted by Auerbach, Hasset and Oliner (1993) and by Temple (1998), once again, resulting in somewhat oppositional conclusions. Auerbach claimed that the empirical link between investment and growth in OECD countries is fully consistent with the Solow model disproving the claim of high social returns to equipment investments. On the other hand Temple’s results stressed out that even if there is a weak correlation between investment and growth in OECD countries there is a strong correlation for a large group of developing countries. Using augmented Solow framework Temple managed to improve DLS model by more rigorously controlling for the roles of human capital, labor force and for heterogeneity in initial efficiency. Temple’s conclusions on the magnitude of the estimated returns to equipment investments for developing countries (50% and much higher than the estimated returns to investments in structures) sparked the motivation for this research. Another research on this issue is given by Jones (1994) and Lee (1995). Jones research stressed out strong negative relationship between economic growth and relative price of machinery. According to Jones an increase in the price of the equipment, and a fall in capital accumulation - “reduces the growth rate of an economy in any standard growth framework, either in the long run or along transition path to a new steady state” (C.I. Jones “Economic growth and the relative price of capital”, 1994). However, these findings are easily reconciled with the Solow model so it does not really provide evidence of weather equipment investments are in some way more important that the Solow model suggests. On the other hand, Lee’s (1995) major finding was that countries that import more equipment have lower equipment prices and tend to grow faster. As developing countries, such as Croatia, typically import most of the equipment from developed economies, it indicates that the difference in equipment prices is the representation of distortional trade policy. Further research given by Jovanovich and Rob (1997) demonstrate that difference in equipment prices can generate large income variations in a Solow model if technological progress is embodied in capital goods instead of being disembodied. The latest empirical results of the nature of economic growth of Slovenian economy in transition period 1992-2001, although without using the data on investments on disaggregated level, followed some interesting results – 65% of trend growth rate of real GDP is attributed to growth of physical capital, 29% to the growth of human capital and 15% to the growth of total factor productivity. Based on aforementioned results and conclusions, and having in mind that Croatia is developing country, it seems worthwhile posing a question – does DLS model works for Croatian economy? Could it be that equipment investment has a special role in real GDP growth in Croatia? We organize our paper as follows. Section 2 discusses theoretical framework focusing on explanation and interpretation of DLS model and policy measures for growth. Section 3 carries out data framework for our research. Section 4 analyzes nature of growth in Republic of Croatia during the period 1950-2006. Section 5 and 6 sets out the model and discusses the interpretation of the empirical results and possible conclusions.

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Tip objekta: Materijal konferencije ili radionice (Paper)
Dodatne informacije: 4/2007
Ključni pojmovi: Economic growth, Capital accumulation, Macroeconomic policy, Investments, ekonomski rast, Akomulacija kapitala, makroekonomska politika, investicije.
Teme: 3 Društvene znanosti > 33 Ekonomija. Ekonomska znanost > 330 Ekonomija općenito > 330.1 Ekonomska znanost. Osnovni ekonomski pojmovi, teorija. Vrijednost. Kapital. Fondovi
Odjeli: Odjel za ekonomiju i turizam "Dr. Mijo Mirković"
Datum pohrane: 17 Oct 2012 11:37
Zadnja promjena: 08 Jan 2013 10:21
URI: http://eknjiznica.unipu.hr/id/eprint/1590

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