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EQUIPMENT INVESTMENTS AS A MAIN DRIVING FORCE OF ECONOMIC GROWTH IN THE REPUBLIC OF CROATIA

The baseline of the Solow model suggests that sustainable long term economic growth is determined by population growth and exogenous technological progress assigning relatively limited role to capital deepening. There has been much controversy along this theoretical and empirical framework which led to development of new growth models that has challenged Solow conclusions. The basic question remains – does the Solow model accounts for difference in growth rates for all countries? Prior analysis on Croatian economy (M.Skare, 2001) reveals that Solow model does not work out for Croatia during the period 1952-1990 when the results suggested negative impact of technological progress on growth rates. What was the main cause for such findings? The main reason for the technological decay in the centrally-planned economy (before 1990) was largely due to a poor depreciation policy which did not leave much resource for R&D. Part of the most recent literature on economic growth, carried out by De Long and Summers (DLS Model), investigated correlation between equipment investment and economic growth and found that equipment-growth nexus is to be very strong. Our results for Croatian economy during the period 1960-2006 are in line with DLS findings.

Economic growth; Capital accumulation; Macroeconomic policy; Investments

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