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Role of Capital in Growth Theories : Lessons for Croatian Economy

From the beginning of 17-th century, when classical economists imposed the question of economic growth, many theories arose. They all had a same goal – by determining the crucial factors within the production function, proper economic policy can be established and long-term growth will be assured. Classical economists failed in their attempt to capture the essence of the economic growth and same destiny occurred in the research of their predecessors: Marginalists, Keynesians, neoclassical economists and finally different variations of endogenous models of economic growth. However, the results of their productive research have not been in vain. Although these theories that used structural models have not been able to capture the complexity of the growth process, each theory added a significant contribution to understanding of that complex phenomenon. Voluminous empirical literature on role of capital accumulation in economic growth gives proof of the complexity of economic growth. The focus of empirical research diverges not only on geographical coverage, but also in using different variables as explanatory variables in the growth equation. These variables influence the production function directly in the form of relations between inputs (like labor, capital, technology, trade etc.) but also indirectly, in the form of conditions in which the process of capital accumulation and formation occurs (rule of law, corruption, effects on aggregate demand, financing of investments, spatial effects, openness, small vs. large countries, etc.). During the 1990s empirical research in this area has risen exponentially. There are several reasons for such developments. First of all, shortcoming of investments was a plausible and possible reason to explain the reasons for productivity decline in the US. Furthermore, datasets on capital stocks and investments due to improvements of methodology in collecting and processing of data provided much better basis for conducting econometrical examinations. There was a tremendous improvement and development in various econometric techniques, as well. However, in spite of these mentioned developments, effects of public investments on output growth are still empirically ambiguous. The reason for such ambiguous empirical results could be in fact that positive influence can be offset by numerous direct or indirect phenomena’ s that occur in the process of financing, operating an implementing investment projects. Understanding of these channels is crucial for determining the policy recommendations in particular economy. The level of investment in Croatia remained on high level and did not follow trend in EU member countries. It was financed by public debt which increased tremendously and privatization revenues. Sever (2005) estimated that growth rates of economy in case that revenues gained from borrowing and privatization were utilized on investments (and efficiently) much more than actual ones (several times higher).Uncertainty and risk of investment undertakings was certainly accented by weak enforcements of laws and judiciary system. That institutional weakness and strong government bureaucracy certainly contributed to occurrence of corruption. In addition, Croatia does not have consistent development policy. Investment policy is subjected to short-sited political horizons and these decisions are usually discretionary. Therefore, misallocation of investments, either sectorally and/or regionally is to be expected. However, according to theoretical and empirical findings, circumstances of Croatian economy demand high investment levels. Long period of low-level equilibrium growth of Croatian economy (especially high level of unemployment) demands proactive investment policy. It is irrelevant whether that will be made by government directly or private sector (supported by government interventions in loans or subsidies). Contemporary economic doctrine suggests coordination of activities – additional investments have to be supported by appropriate institutional surroundings. Lack of necessary data presents obstacle to empirical investigation of role of capital in Croatian economy. However, improvement of statistical database on capital investments and stocks in Croatia, and progress of methodology and econometric theory and practice will enable estimation. That should be goal of future papers.

capital investment; growth theories; regional economic growth; economic development; Croatia

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