Abstract
New growth theories during the 1990s stress the importance of exploring a link between investments and growth. Using standard growth equations, we look into the correlation between investment in technical structure and growth in Croatia for two periods – socialist (1960–1989) and transition (1990–2009). Results suggest that equipment investments can boost growth rates through total factor productivity (TFP). This is consistent with the work of De Long and Summers (1991, 1992, 1993, 1994) and Temple (1998). In Croatia the equipment investments – growth link appears to be stronger than the structure investment – growth link for both periods. We also find a strong positive correlation between human capital and growth. Tests confirm the consistency and robustness of the regression results, suggesting inclusion of new variables in standard growth models. The structure of technical investments, real capital stock (not proxies) and estimated human capital stock (not schooling proxies) should have an important role in explaining international growth differences.
Highlights
Economic growth has become one of the most dynamic fields of research in economics through which many theories have tried to explain why some countries grow faster than others
We suggest that the augmented Solow model with human capital, equipment and structure stocks can explain output growth in Croatia
Results of the study prove the importance of equipment investment for economic growth in Croatia both in pre–transition and transition period
Summary
Economic growth has become one of the most dynamic fields of research in economics through which many theories have tried to explain why some countries grow faster than others. New growth theories emerged during 1990s leading to investigation of the link between different types of investments and GDP growth This line of thought was first addressed in the work of Mankiw et al (1992) with a human capital augmented Solow model. De Long and Summers (1991, 1992, 1993, 1994) published a series of papers investigating the relationship between the different components of investment and economic growth and concluded that equipment investments play a more important role in lifting output growth than structure investments. Škare, Sinković (2007) use a De Long and Summers theoretical framework for the Republic of Croatia, for the period 1960–2006, and conclude the relationship between equipment investment and economic growth is stronger than between structure investments and growth.
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