Impact of Consumption and Investment onto Growth: An Example of the Republic of Srpska

Abstract

The economy of the Republic of Srpska is burdened by inherited (structural) issues and a sluggish adjustment of the current economic policy to the contemporary global trends. According to the standards of the WB, IMF and Kuznets, the Republic of Srpska is classified as a small economy. Just like Bosnia and Herzegovina or any other countries of Western Balkans, it too is finalising the transition to a market economy. The Republic of Srpska features insufficient GDP growth rates. Under such circumstances, there is a need for enticement of GDP growth. Consumption (both final and public) as well as all forms of investment affect economic growth, with FDIs having a particularly important role. In most countries, there is a positive correlation between investment and GDP growth. Likewise, there is a positive correlation between GDP growth and final consumption. Therefore, the Republic of Srpska, as well as any other small economy, resorts to attracting investments and increasing final consumption. However, the issue is that public debt maintains its growing trend in most of such transitional economies. This paper contains the quantification of the impact of investments and consumption onto the GDP of the Republic of Srpska. It has been proven that the final consumption and investments affect GDP growth in the Republic of Srpska. Correlation-regression analysis confirmed a positive correlation between the mentioned variables. This development policy affects the continuous growth of public debt and brings the increase in the share of government (public) consumption in total consumption. In addition, it also affects the insufficient efficiency of investments. As a consequence, low productivity and insufficient competitiveness emerge, followed by the occurrence of other economic and social problems. Therefore, the Republic of Srpska and Bosnia and Herzegovina need to complete the initiated reforms and expedite their EU integration, modernize and restructure their industry as per the requirements of the global market, reduce the costs of public institutions and increase their overall competitiveness.