Functional distribution of income and economic activity in Croatia: Post-Keynesian approach

The aim of this paper is to quantify the effects of changes in functional income distribution on selected macroeconomic variables in Croatia in period from 2000-2012. We use structural VAR approach with identification scheme based on a priori restrictions that are derived from theoretical framework of Post-Keynesian macroeconomic model. Our main hypothesis, which is confirmed in the empirical analysis, is that the accumulation of capital in Croatia was primarily determined by income from labor, i.e. that Croatia had wage-led accumulation. We also found that labor market dynamics was dominantly influenced by demand side shocks and that positive effects of the rise in exports, resulting from the gain in competitiveness (after reducing wage share in income) outweigh negative effects of weaker demand on the capacity utilization. So in our opinion export share increase should become policy priority, as domestic demand is currently constrained by high private and public debt levels. To the extent that increase in exports might require decline in the relative share of labor, negative impact on the investments in non-tradable sector would need to be offset with higher investments in tradable sector of Croatian economy.