engleski

Current Account Balance and Structural Adjustment in the Republic of Croatia

Between 2000 and 2007 Croatian economy experienced strong growth facilitated by favorable conditions on world financial markets. Significant capital inflows encouraged loan activity and stimulated consumption and investments. Foreign debt also increased substantially during the same period. In the second half of 2008 consumption and export fall and the situation worsened in the first quarter of 2009 with a strong drop in investments. While during 2010 many European countries experienced recovery, economic growth in Croatia remained largely flat, and well below the level necessary to reverse negative labor market trends. One of the major reasons contributing to the sluggish growth is the lack of competitiveness of Croatian economy in international markets. In order to improve its competitiveness, Croatia would have to undertake labor market adjustments and structural reforms. In this paper we examine how these changes would affect Croatian current account balance. Apart from net export, structural unemployment had positive and significant relationship with current account balance. Among private indicators, only unit labor costs and labor productivity are significant and suggest that lower labor costs and higher labor productivity enhance competitiveness and current account balance. Since Croatia has not yet started implementing broader structural reforms, similar outcome could be achieved through stronger private adjustment, but current long and deep recession suggests that reform policies have no alternative in improving the economic activity in Croatia.

current account balance; structural reforms; private market adjustment; regression analysis

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