Showing papers on "Capital accumulation published in 1999"

Why do Some Countries Produce So Much More Output Per Worker than Others

Abstract: Output per worker varies enormously across countries. Why? On an accounting basis our analysis shows that differences in physical capital and educational attainment can only partially explain the variation in output per worker—we find a large amount of variation in the level of the Solow residual across countries. At a deeper level, we document that the differences in capital accumulation, productivity, and therefore output per worker are driven by differences in institutions and government policies, which we call social infrastructure. We treat social infrastructure as endogenous, determined historically by location and other factors captured in part by language. In 1988 output per worker in the United States was more than 35 times higher than output per worker in Niger. In just over ten days the average worker in the United States produced as much as an average worker in Niger produced in an entire year. Explaining such vast differences in economic performance is one of the fundamental challenges of economics. Analysis based on an aggregate production function provides some insight into these differences, an approach taken by Mankiw, Romer, and Weil [1992] and Dougherty and Jorgenson [1996], among others. Differences among countries can be attributed to differences in human capital, physical capital, and productivity. Building on their analysis, our results suggest that differences in each element of the production function are important. In particular, however, our results emphasize the key role played by productivity. For example, consider the 35-fold difference in output per worker between the United States and Niger. Different capital intensities in the two countries contributed a factor of 1.5 to the income differences, while different levels of educational attainment contributed a factor of 3.1. The remaining difference—a factor of 7.7—remains as the productivity residual. * A previous version of this paper was circulated under the title ‘‘The Productivity of Nations.’’ This research was supported by the Center for Economic Policy Research at Stanford and by the National Science Foundation under grants SBR-9410039 (Hall) and SBR-9510916 (Jones) and is part of the National Bureau of Economic Research’s program on Economic Fluctuations and Growth. We thank Bobby Sinclair for excellent research assistance and colleagues too numerous to list for an outpouring of helpful commentary. Data used in the paper are available online from http://www.stanford.edu/,chadj.

Aid, policies, and growth

Abstract: The authors of this paper use a new database on foreign aid to examine the relationships among foreign aid, economic policies, and growth of per capita GDP. In panel growth regressions for 56 developing countries and 6 four-year periods (1970-93), they find that the policies that have a great effect on growth are those related to fiscal surplus, inflation, and trade openness. They construct an index for those three policies and have that index interact with foreign aid. They have instruments for both aid and aid interacting with policies. They find that aid has a positive impact on growth in developing countries with good fiscal, monetary and trade policies. In the presence of poor policies, aid has no positive effect on growth. This result is robust in a variety of specifications, which include or exclude middle-income countries, include or exclude outliers, and treat policies as exogenous or endogenous. They examine the determinants of policy and find no evidence that aid has systematically affected policies, either for good or for ill. They estimate an aid allocation equation and show that any tendency for aid to reward good policies has been overwhelmed by donors' pursuit of their own strategic interests. In a counterfactual, they reallocate aid, reduce the role of donor interests and increasing the importance of policy. Such a reallocation would have a large positive effect on developing countries' growth rates.

Is social capital declining in the united states? a multiple indicator assessment

Abstract: Despite a great deal of interest in a possible decline of social capital in the United States, scholars have not reached a consensus on the trend. This article improves upon previous research by providing a model of social capital that has explicit links to theories of social capital and that analyzes multiple indicators of social capital over a 20‐year period. The results do not consistently support Putnam's claim of a decline in social capital, showing instead some decline in a general measure of social capital, a decline in trust in individuals, no general decline in trust in institutions, and no decline in associations.

Foreign direct investment-led growth: evidence from time series and panel data

Abstract: This paper estimates the impact of foreign direct investment (FDI) on capital accumulation, and output and total factor productivity (TFP) growth in the recipient economy. Time series and panel data evidence are provided for a sample of OECD and non-OECD countries in the period 1970-90. Although FDI is expected to boost long-run growth in the recipient economy via technological upgrading and knowledge spillovers, it is shown that the extent to which FDI is growth-enhancing depends on the degree of complementarity and substitution between FDI and domestic investment.

Where has all the education gone

Abstract: Cross-national data show no association between increases in human capital attributable to the rising educational attainment of the labor force and the rate of growth of output per worker. This implies that the association of educational capital growth with conventional measures of total factor production is large, strongly statistically significant, and negative. These are 'on average' results, derived from imposing a constant coefficient. However, the development impact of education varied widely across countries and has fallen short of expectations for three possible reasons. First, the institutional/governance environment could have been sufficiently perverse that the accumulation of educational capital lowered economic growth. Second, marginal returns to education could have fallen rapidly as the supply of educated labor expanded while demand remained stagnant. Third, educational quality could have been so low that years of schooling created no human capital. The extent and mix of these three phenomena vary from country to country in explaining the actual economic impact of education, or the lack thereof.

Capital Flows to Developing Economies: Implications for Saving and Investment

Abstract: THE CURRENCY CRISES that broke out in East Asia in mid1997 have been followed by more than a year of tumult in international financial markets. These crises have had a serious impact on the emerging market economies, forcing many to raise domestic interest rates so as to stem an outflow of financial capital and prevent further exchange rate collapse. These interest rate increases have, in turn, depressed domestic economic activity. Not surprisingly, this severe financial instability has intensified discussions about the benefits and risks to developing economies from allowing capital to flow freely across national borders.1 For many developing countries, the ability to draw upon an international pool of financial capital offers large potential benefits. Low levels of capital per worker in these countries have long held output down. Net foreign resource inflows-current account deficits-can augment private saving and help these countries reach higher rates of capital accumulation and growth. Access to international capital markets provides the means to finance those resource flows. Some types of foreign capital inflows, principally foreign direct investment (FDI), may also facilitate the transfer of

Modern Economic Theory and Development

Abstract: The past 50 years have seen marked changes in our understanding of development. We know that development is possible, but not inevitable. We have had a wealth of experiments. There are clearly no surefire formulas for success; if there were, there would be more successes. Some strategies seem to work for a while and then stall; some strategies seem to work in some countries and not in others.1 Economic theory has evolved to account for the successes and failures. This chapter attempts to describe these changes in economic theory—both in the kinds of models used and in the factors that are identified as playing key roles. It focuses on two pivotal questions: What forces can explain the divergence in incomes across countries? What implications can we draw for the nature of the interventions most likely to promote development? A basic theme of this chapter is that industrial countries differ from developing countries by much more than their level of capital—or even their human capital. More capital may be helpful, but, remarkably, even a transfer of funds may not have a large effect on economic growth (see World Bank 1999a). Eliminating government-imposed distortions is also obviously desirable but seems neither necessary nor sufficient for sustained growth.2 A view shared by all the perspectives on development that we explore in this chapter is that industrial and developing countries are on different production functions and are organized in different ways. Development is no longer seen primarily as a process of capital accumulation but rather as a process of organizational change. We discuss work done in three broad, interrelated research programs—the economics of information, the theory of coordination problems, and institutional economics. These research programs depart from the strong assumptions of neoclassical theory. In that theory, every equi-

The Tyranny of Concepts: CUDIE (Cumulated, Depreciated Investment Effort) Is Not Capital

Abstract: Using the word capital to represent two different concepts is not such a problem when government is responsible for only a small fraction of national investment and is reasonably effective (as in the United States). But when government is a major investor and is ineffective, the gap between capital and cumulative, depreciated investment effort (CUDIE) may be enormous. A public sector steel mill may absorb billions as an investment, but if it cannot produce steel it has zero value as capital. The cost of public investment is not the value of public capital. Unlike for private investors, there is no remotely plausible behavioral model of the government as investor that suggests that every dollar the public sector spends as investment creates capital in an economic sense. This seemingly obvious point has so far been uniformly ignored in the voluminous empirical literature on economic growth, which uses, at best, cumulated, depreciated investment effort (CUDIE) to estimate capital stocks. But in developing countries especially, the difference between investment cumulated at cost and capital value is of primary empirical importance: government investment is half or more of total investment. And perhaps as much as half or more of government investment spending has not created equivalent capital. This suggests that nearly everything empirical written in three broad areas is misguided. First, none of the estimates of the impact of public spending identify the productivity of public capital. Even where public capital could be very productive, regressions and evaluations may suggest that public investment spending has little impact. Second, everything currently said about total factor productivity in developing countries is deeply suspect, as there is no way empirically to distinguish between low output (or growth) attributable to investments that created no factors and low output (or growth) attributable to low (or slow growth in) productivity in using accumulated factors. Third, multivariate growth regressions to date have not, in fact, controlled for the growth of capital stock, so spurious interpretations have emerged. This paper - a product of Poverty and Human Resources, Development Research Group - is part of a larger effort in the group to understand the importance of public sector actions for economic growth.

Unemployment, wage bargaining and capital-labour substitution

Abstract: Many economists believe that capital accumulation, technical progress and labour force expansion have no lasting effect on unemployment. This view rests on the empirically doubtful assumption that the elasticity of substitution between labour and capital is equal to unity (i.e., production is Cobb-Douglas). Using a simple model based on the work of Layard, Nickell and Jackman, this paper demonstrates that, with a lower elasticity of substitution, the equilibrium unemployment rate is affected by all of the above factors. It considers briefly how capital accumulation may be endogenised and what long-run implications this has for unemployment. Copyright 1999 by Oxford University Press.

Human Capital-Based Strategy for Regional Economic Development

Abstract: Regional policy makers have always wrestled in vain to come up with regional economic development policies that are coherent and uniform and can be defended on economic grounds. However, most policies are either ad hoc or based on political considerations. The relevant literature dealing with regional economic development strategies is fragmented. It also does not provide any guidance to formulate an overall long-term strategy based on an integrated analytical foundation. It incorporates elements like entrepreneurship, human capital, workplace training, capital accumulation, R&D effort, innovations, technology, and technological cycles. This article proposes a human capital accumulation strategy for regional economic development that not only integrates the above diverse elements of the literature into a cohesive analytical framework but also provides the rationale for it to be part of a long-term policy for economic development on efficiency grounds.

Creation and returns of social capital : a new research program

Abstract: The idea of a social capital research program has become increasingly significant within the social sciences. This collection of essays contributes to a theoretical integration as well as standardization of measurement instruments and co-ordination of empirical research on the significance of social capital.

Boon or Bane? Reassessing the Productivity of Foreign Direct Investment

Abstract: We assess the effects of foreign and domestic capital on economic growth using the latest data and better models of economic growth than those previously used. We explicitly consider the role of human capital in the process of economic development. We find no evidence that foreign direct investment harms the economic prospects of developing countries. The flow of foreign capital from 1980 to 1991 spurred growth in gross domestic product per capita, while the level of foreign stock, or foreign penetration, had no discernible effect. Indeed, new foreign investment was more productive dollar for dollar than was capital from domestic sources. Previous suggestions that foreign investment flows are less beneficial than domestic ones were based on a misinterpretation. Moreover, foreign direct investment stimulates investment from domestic sources. Consequently, developing countries have no reason to eschew foreign capital, as dependency theorists urge

Banking Market Structure, Financial Dependence and Growth: International Evidence from Industry Data

Abstract: This paper explores the empirical relevance of banking market structure on growth. There is substantial evidence of a positive relationship between the level of development of the banking sector of an economy and its long-run output growth. Little is known, however, about the role played by the market structure of the banking sector on the dynamics of capital accumulation. This paper provides evidence that bank concentration promotes the growth of those industrial sectors that are more in need of external finance by facilitating credit access to younger firms. However, we also find evidence of a general depressing effect on growth associated with a concentrated banking industry, which impacts all sectors and all firms indiscriminately.

The search for the key : aid, investment, and policies in Africa

Abstract: The traditional aid-to-investment-to-growth linkages are not very robust, especially for African economies. Aid does not necessarily finance investment and investment does not necessarily promote growth. Differences in economic policy, on the other hand, can explain much of the difference in growth performances. Furthermore, domestic politics rather than aid or conditionality has been the main determinant of policy reform. Where societies and governments have succeeded in putting growth-enhancing policies into place, aid has provided useful support. The combination of good policies and aid has created a productive environment for private investment and growth. Copyright 1999 by Oxford University Press.

Productivity Growth and Factor Prices in East Asia

Abstract: The industrial revolution in several East Asian countries over the last three decades is one of the most important economic events in the postwar era. Several recent growthaccounting exercises have found that their extraordinary rate of output growth was due primarily to an equally impressive rate of factor accumulation, with little due to technological progress (see Alwyn Young, 1992, 1995; Jong-Il Kim and Lawrence Lau, 1994; Susan Collins and Barry Bosworth, 1996 ) . Since these studies suggest that factor accumulation has been the lead actor in East Asia’s growth, many economists have reached the conclusion that the industrial revolution in East Asia can largely be explained in terms of transition dynamics in a neoclassical growth framework (see e.g., Paul Krugman, 1994; N. Gregory Mankiw, 1995). If this view is correct, the lesson from East Asia’s experience is that there are no easy solutions for a poor country that seeks to join the league of wealthy nations. Low levels of investment and education may be the result of bad policies. But once proper policies are enacted, a poor country faces the grim prospect of a further decline in its already low standards of living as it devotes more resources to investment and education. The central point of this paper is that, if East Asia’s growth was largely driven by capital accumulation with little technological progress, the return to capital should have fallen dramatically as capital accumulation encounters diminishing returns. For example, the capital–output ratio for Korea computed from the national accounts has increased at an average rate of 3.4 percent per year from 1966 to 1990 while that of Singapore has increased at an average rate of 3.7 percent per year from 1968 to 1990. By dividing the share of payments to capital in total income by the capital–output

Controlling Carbon Emissions in China

Abstract: We examine the use of carbon taxes to reduce emissions of CO2 in China. To do so, we develop a dynamic computable general equilibrium (CGE) model of the Chinese economy. In addition to accounting for the effects of population growth, capital accumulation, technological change, and changing patterns of demand, we also incorporate into our model elements of the dual nature of China's economy where both plan and market institutions exist side by side. We conduct simulations in which carbon emissions are reduced by 5, 10, and 15 per cent from our baseline. After initial declines, in all of our simulations GDP and consumption rapidly exceed baseline levels as the revenue neutral carbon tax serves to transfer income from consumers to producers and then into increased investment. Although subject to a number of caveats, we find potential for what is in some sense a 'double dividend', a decrease in emissions of CO2 and a long run increase in GDP and consumption.

Social Organization in an Endogenous Growth Model

Abstract: We develop an endogenous growth model in which individuals form matches in order to consume goods that are not explicitly traded. The matching process endogenously generates a concern for relative wealth and is thereby beneficial for capital accumulation and economic growth. We then study how social segmentation in the matching process affects economic growth. Under strong segmentation, social competition over mates occurs inside homogeneous groups. This homogeneity increases the severity of the “rat race” of wealth accumulation and fosters economic growth.

Financial development, human capital and political stability

Abstract: In this paper we take a look at the empirical relationship between the level of financial development and socio-economic variables reflecting different levels of development in the light of the recent literature on the role of human capital in economic development. The empirical results, based on a cross-sectional analysis of 57 developing countries, indicate that human capital and socio-political stability are important factors explaining the level of financial development of these markets.

Globalization: A Critical Analysis

Abstract: The term globalization has been used in a multiplicity of senses. Concepts like the global interdependence of nations, the growth of a world system, accumulation on a world-scale, the global village, and many others are rooted in the more general notion that the accumulation of capital, trade, and investment is no longer confined to the nation-state. In its most general sense, globalization refers to the cross-national flows of goods, investment, production, and technology. For many of the advocates of the globalization thesis these flows, both their scope and depth, have created a new world order, with its own institutions and configurations of power that have replaced the previous structures associated with the nation-state (Reich, 1992; Oman, 1997; Luard, 1990; Waters, 1995).

Chapter 44 Labor markets and economic growth

Abstract: Publisher Summary Among macroeconomists, the shift of research effort is near total, eclipsing the business-cycle focus that had dominated the field for decades. Behind this is a recognition of the enormous welfare implications of sustained economic growth, and a renewed desire to understand the vast differences in living standards among countries, which dates back at least to Smith. What some have called the "neoclassical revival" in growth economics has come to dominate macroeconomic research. Developments in this area should be of particular interest to labor economists because much of the revival of growth economics builds on the theory of human capital. Because human capital is, by definition, embodied skills and knowledge, and because advances in technical knowledge drive economic growth, it follows that human capital accumulation and economic growth are intimately related. This chapter reviews recent developments in growth economics, with a particular focus on labor market and human capital issues.

Social security, social welfare and the aging population.

Abstract: This study examines the effects of pay-as-you-go social security programs in aging economies when the middle-aged both educate their dependent children and subsidize the retirement of the old. Using an overlapping generations framework in which agents are three-period lived but timing of death in the third period is uncertain, we analyze the effects of social security tax schemes, under various demographic assumptions, on capital accumulation, education expenditures, social welfare, and economic growth. We find that in many cases social security crowds out education, and reduces economic growth and social welfare.

Income Variation and Health Expenditure: Evidence for OECD Countries

Abstract: The purpose of this paper is to analyze the role health investment plays in human capital accumulation, and in so doing to demonstrate that education is not the only factor affecting the performance of the labor force and productivity. Estimates are made for the OECD countries for the period 1960–90. Investment in health contributes in a significant way to explaining variations in output through human capital, even in those countries which presumably have high levels of health.

General Equilibrium Cost Benefit Analysis of Education and Tax Policies

Abstract: This paper formulates and estimates an open-economy overlapping generation general-equilibrium model of endogenous heterogeneous human capital in the form of schooling and on-the-job training. Physical capital accumulation is also analyzed. We use the model to explain rising wage inequality in the past two decades due to skill-biased technical change and to estimate investment responses. We compare an open economy version with a closed economy version. Using our empirically grounded general equilibrium model that explains rising wage inequality, we evaluate two policies often suggested as solutions to the problem of rising wage inequality: (a) tuition subsidies to promote skill formation and (b) tax policies. We establish that conventional partial equilibrium policy evaluation methods widely used in labor economics and public finance give substantially misleading estimates of the impact of national tax and tuition policies on skill formation. Conventional microeconomic methods for estimating the schooling response to tuition overestimate the response by an order of magnitude. Simulations of our model also reveal that move to a flat consumption tax raises capital accumulation and the real wages of all skill groups and barely affects overall measures of income inequality.

Fiscal Federalism and Capital Accumulation

Abstract: This paper explores the effect of fiscal federalism on capital accumulation and growth in an overlapping-generations model. By relaxing the uniform-consumption requirement of a unitary system, fiscal federalism allows the economy to respond to a difference in public-good demands between young and old. Public-good levels and taxes move in opposite directions for the young and old as their different demands are fulfilled, and this leads to opposing changes in private-good consumption for the two groups. These changes disrupt the preferred time path of private consumption, which is restored by a change in saving. This change in turn alters the equilibrium capital intensity of the economy, and growth effects emerge during the transition to the new equilibrium.