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Prepared by Géraldine Mahieu.
The peer group of middle-income countries is defined as countries from Europe, Latin America, Asia, and Africa with a mid-level GDP per capita in PPP terms (between the one of Ukraine and Slovenia), plus Moldova. Very small countries and islands are excluded to contain the sample size.
Croatia’s GDP per capita growth rate averaged -2 percent over 2009–2011 compared to 0.7 percent in middle-income countries.
These estimates use a Cobb-Douglas production function with employment share calculated as the total wage bill over GDP ratio (leading to an employment share ranging between 0.4–0.5 depending on the years).
Following G. Mourre (2009), the growth accounting exercise assumes a constant share of labor of 65 percent while the net capital stock is constructed via the perpetual inventory method (with the capital stock over GDP assumed to be 2 in 1995).
The employment growth can be expressed as the combination of four factors: (i) population growth; (ii) growth of the working-age population; (ii) growth of the participation rate; and (iv) growth of the employment rate. Formally, total employment = population * (pop 15–64/population)* (labor force/pop 15–64) * (employment/labor force), with the three ratios being respectively the share of working population, the participation rate and the employment rate.
The decomposition using working age population for the crisis period is not possible due to missing data.
The full name is “The Growth Report—Strategies for Sustained Growth and Inclusive Development” by the Commission on Growth and Development, 2008, IBRD.
Assuming that the unemployment rate would remain broadly the same, this scenario would imply an increase in employment by about 19 percent. Assuming a constant capital to labor ratio, this would require an average increase of the capital stock by 2.2 percent per year, leading to an increase in investment to GDP ratio by 1 percentage point over these years.
The specification of his model is Real per capita GDP growth = 11.00 – 1.38* (log per capita GDP) – 7.05* (age dependency rate) + 0.13* (investment to GDP ratio) + 0.02* (university enrollment ratio) - 0.015* (inflation rate) + 0.07* (FDI ratio) + 0.59* (economic freedom) + 0.86* (change in economic freedom).
The specification of this model is Real GDP per capita growth = 0.98 +1.88* (dummy for SEE and CEE) - 0.49* (initial real GDP per capita) - 0.43* (population growth) + 0.14* (investment to GDP ratio) - 0.02* (inflation rate) + 0.001* (credit to private sector/GDP) + 0.43* (index of economic freedom) - 0.03* (cost of business start-up procedures in % of GNI per capita.
Achieving such a level in 8 years would require an average annual increase in the capital stock by about 2.4 percent and an annual increase in gross fixed capital formation by about 3.4 percent. In this scenario, the capital stock would increase by about 21 percent after eight years. Depending on the capital intensity of output, this could potentially generate further employment growth (above the one implied by the 70 percent participation rate), and thus even higher GDP growth.
Prepared by Reginald Darius
The discussion of Croatia’s growth model follows the analysis of growth experiences in Eastern Europe detailed in Atoyan, R., 2010, “Beyond the Crisis: Revisiting Emerging Europe’s Growth Model,” IMF Working Paper 10/92 (Washington: International Monetary Fund).
Countries included in the analysis are Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, and Ukraine.