Showing papers on "Capital deepening published in 1983"

The Allocation of Capital Between Residential and Nonresidential Uses: Taxes, Inflation and Capital Market Constraints

Abstract: We have constructed a simple two-sector model of the demand for housing and corporate capital. Economic growth and an increase in the inflation rate were then simulated with a number of model variants. The model and simulation experiments illustrate both the tax bias in favor of housing and the manner in which the increase in inflation between 1965 and 1978 magnified it. The existence of capital-market constraints offsets the bias against corporate capital, but it introduces a sharp, inefficient reallocation of housing from less wealthy, constrained households to wealthy households who do not have gains on mortgages and are not financially constrained.

Transition Losses of Partially Mobile Industry-Specific Capital

Abstract: In estimating the economic effects of public policy, comparative static models typically assume homogenous factors that are either mobile or immobile. For changes designed to improve factor allocations, the former assumption would overstate welfare gains, while the latter would understate them. The model in this paper restricts each industry's capital reduction to its rate of depreciation. The stock of depreciated capital represents an industry-specific type of capital that may earn a lower equilibrium return. This model suggests that previous estimates of efficiency gains from integration of U. S. personal and corporate income taxes are overstated by $5 billion.

Migration and Capital

Abstract: Using yearly estimates of U.S. interstate migration and state-level capital stocks we explore the relationships between migration and capital in a time-series framework for the period 1958-1975. The analysis shows that capital growth leads in-migration for fast-growing states, although no obvious relationship is apparent for some rapidly growing areas. However, for slow-growth states the relationships are more complex and interwoven. Box-Jenkins techniques and tests of causality are utilized to describe the temporal structure of migration and capital. Finally, we offer suggestions toward reconceptualizing the labor market relations implicit in regional economic growth and, in particular, labor migration.

The Welfare Effects of Trade and Capital Market Liberalization: Consequences of Different Sequencing Scenarios

Abstract: This paper deals with the dynamics of trade and capital account liberalization in a developing country. The welfare consequences of trade and capital account liberalization under alternative sequencing scenarios are investigated. We draw on standard trade theory results to show that the opening of the capital account in the presence of trade distortions may be welfare reducing if foreign borrowing is used to increase investment. However we demonstrate that this welfare reducing effect of opening the capital account will not occur if shadow prices are used to guide investment decisions. It is then shown that if capital market restrictions fall disproportionally on investment (as opposed to consumption) a gradual reduction of import tariffs is superior to an abrupt trade liberalization.

Capital Accumulation and Foreign Investment Taxation

Abstract: This paper presents a dynamic, choice-theoretic general equilibrium model of capital accumulation in an open economy. Equilibria with and without capital mobility are described and compared. It is shown that neither is necessarily Pareto optimal and that an equilibrium with free trade in capital does not Pareto-dominate an equilibrium with autarky. The effects of restricting capital flows by taxing foreign investment eamings are discussed. It is seen that there will be no agreement within a country as to what constitutes an optimal tax. of restricting capital mobility by foreign investment taxation is discussed. The model employed is a two-country, overlapping-generations model (OLG) with production. It is an international version of Diamond's (1965) closed economy model, which combines a one-sector Solow growth model with Samuelson's OLG model. Each period a given number of agents are born. The agents live two periods and then die. In their first period of life agents born in period t may trade only with agents born in t - 1 or t. In their second period of life they may trade only with agents born in t + 1 or t. The model begins at period one. At this time the young of generation one and the old of generation zero are alive. It will be seen that in the first period of life agents save, and in the second period of life agents consume the return on their savings. Thus, the abstraction of a two-period life captures the essential feature of a life-cycle model: the agents begin life by saving, but at some point start to dissave. The major results are that if two countries differ only in initial capital abundance, then in autarky the initially more capital-abundant country will always be more capital abundant and will always have higher wages and lower interest rates than the initially less capital-abundant country. However, the steady state is identical in each country, with or without trade. Neither an autarky nor a laissez-faire equilibrium is necessarily Pareto optimal. Autarky and laissez faire are shown to be Pareto non-comparable. In the relatively capital-abundant country, laissez faire is preferred by generation zero and autarky is preferred by later generations. The reverse is true in the relatively labour- abundant country. There will be no unanimity as to the optimal level of foreign investment taxation in either country. Generation zero in the relatively capital- (labour-) abundant country will prefer a smaller (larger) tax than that which would maximize current national

Capital aggregation in the presence of obsolescence‐inducing technical change

Abstract: The major question addressed is the treatment of capital embodied technical progress. Should Obsolescence be deducted to calculate a net stock, or should quality adjustments be made in each vintage of new capital, or both, or neither? In order to estimate the contribution of new investment to growth it is necessary to use a capital stock where different vintages are weighted in proportion to their marginal products. The commonly used gross capital measures do not do this, because they do not allow for the higher marginal product of more modern capital. Such an allowance for capital embodied technical progress can be made either by quality adjusting new capital or by incorporating obsolescence into the valuation of the old capital (but not both). However, even if new capital incorporates an allowance for improved quality, it will still be necessary to revalue the old capital. Frequently, a reasonable approximation to the net capital stock results from a linear decline in quasi-rents and can be approximated by published estimates of the stock of capital net of straight line depreciation. Steady technical progress will not lead to the commonly used exponential service decline functions. To avoid overestimating the return to investment when technology changes it will be necessary to use information on capital embodied technical change to revalue old capital, rather than to change the price indices for new capital.

International Capital Movements Under Uncertainty

Abstract: In this paper, we analyze the determinants of international movements of physical capital in a model with uncertainty and international trade in goods and securities.In our model, the world allocation of capital is governed, to some extent, by the asset preferences of risk averse consumer-investors. In a one-good variant in the spirit of the MacDougall model, we find that relative factor abundance, relative labor force size and relative production riskiness have separate but interrelated influences on the direction of equilibrium capital movements.These same factors remain important in a two-good version with Heckscher-Ohlin production structure. In this case, the direction of physical capital flow is determinate (unlike in a world of certaint and may hinge on the identity of the factor which is used intensively in the industry with random technology.

Energy price changes and the induced revaluation of durable capital in U.S. manufacturing

Abstract: The modern theory of cost and production is linked with the quality or hedonic literature. According to this quality-quantity demand framework, if quality is important it must be evident in cost-minimizing factor quantity demand equations. As a corollary, input quality can be inferred indirectly using data on, among other things, input quantity. In this sense the existence of energy price-related capital quality is shown to be a testable empirical issue formulated within the modern theory of cost and production. An empirically implementable quality-quantity factor demand model is developed and specified in which the stock and quality of capital is fixed in the short run, capital quality depends on energy prices and the energy efficiency embodied in the surviving vintages of capital, and firms minimize variable costs in producing a given level of output. Data construction procedures and sources are outlined and a measure of the energy efficiency embodied in the capital stock quantity at time t is developed that depends on the vintage structure of capital and the relative energy prices existing when earlier vintages of capital were originally purchased. After discussing other data and econometric issues, empirical results for US manufacturing, 1947-77 are presented. Alternative estimates of quality-adjusted capitalmore » stocks are included and these measures are compared with those based on traditional energy price-independent capital stock measurement procedures. Implications of these quality-adjusted capital stock measures for the magnitude of the alleged post-1973 productivity slowdown in US manufacturing are discussed.« less

Capital accumulation in eastern and southern Africa: A decade of setbacks

Abstract: This paper attempts to analyze the magnitude of the setback in capital accumulation in Eastern and Southern Africa and the proximate causes of this phenomenon. The sample consists of 16 countries and available data for the late 1960s and 1970s are explored. Given the weakness of the statistics, the authors rely more on expert observations than on rigorous quantitative assessments; available data are analyzed, however. Capital formation increased fairly rapidly during 1967-1974 but then slowed down considerably. Investment was financed to a considerable extent by external concession assistance; rapid growth in such funds during the late 1970s helped offset declining national savings rates to some extent. The setback in investment rates was greatly accentuated by a large and widespread deterioration in the productivity of capital brought about by the impact of government policy, strained absorptive capacity and a variety of exogenous factors.

Inflation, Tax Rules and the Accumulation of Residential and Nonresidential Capital

Abstract: The present paper analyses the effect of the interaction between tax rules and inflation on the size and allocation of the capital stock with particular emphasis on the role of owner-occupied housing. The analysis is developed in the framework of an economy that is in equilibrium and in which a constant fraction of disposable income is saved. In this model, I show that, with current U.S. tax laws, an increase in the rate of inflation reduces the equilibrium amount of business capital employed in the economy and raises the amount of housing capital. The analysis also shows that a higher rate of inflation lowers the real net-of-tax rate of return to the provider of business capital. Another result is that accelerated depreciation increases the accumulation of business capital but that, unless firms are permitted to expense all investment immediately, an increase in inflation continues to depress the accumulation of business capital.

Does Knowledge Intensity Matter? A Dynamic Analysis of Research and Development, Capital Utilization and Labor Requirements

Abstract: In this paper we have developed a dynamic analysis of a firm under-taking research and development (R&D) investment, physical capital accumulation and utilization, along with labor requirement decisions. Empirical work has found that there are significant costs to develop knowledge. Consequently, R&D capital is treated as a quasi-fixed factor, along with the traditional physical capital stock. A number of empirically relevant implications arise from the analysis. It is shown that along the dynamic path as the R&D intensity of physical capital increases, knowledge per worker rises and the utilization rate of physical capital decreases. We distinguish between the intertemporal movement of the firm,and the response to unanticipated changes in demand and cost conditions. An increase in product demand causes the firm to increase both the R&D growth rate and the labor intensity of R&D capital. Contrary to a viewpoint held by many,the R&D investment does not displace labor. Finally, our model provides a framework to justify the empirically observed direct relationship between the physical capital growth and utilization rates.

Capital Utilisation, Capital Intensity and Factor Productivity: A Comparison of Factories in Developing and Industrialised Countries

Abstract: Data on shift‐working, annual hours and employment are used to derive alternative measures of capital utilisation in seven countries. There is a positive relationship between utilisation and capital intensity, and utilisation levels in developing countries are significantly higher than in industrialised countries. Inter‐country comparisons of capital productivity are made by comparing industries with similar levels of capital per production worker. It is shown that output per input of capital services in some developing countries is half that of comparable industries in industrialised countries. However, the higher levels of utilisation in developing countries partially offset these low values for the productivity of capital services. Data on labour productivity and earnings are combined to measure labour costs per unit of output and thus throw light on the overall competitive position of industry in the different countries.

Foreign Capital and Growth

Abstract: The role of foreign capital as a determinant of growth in the developing countries is a controversial subject. The controversy has sometimes been focussed on all foreign capital inflows and sometimes on its components, particularly foreign aid and private foreign investment. According to the orthodox position, see, for example, Rosenstein-Rodan [53] and Chenery and Strout [11], all capital inflows constitute net additions to an LDC’s productive resources, thus increasing its growth rate. The channel of this effect was sometimes in the spirit of the well-known Harrod-Domar model and at other times in terms of the ‘two-gap’ models, where these inflows facilitated and accelerated growth by removing foreign exchange and/or domestic savings gaps. This orthodox position was challenged by radical economists like Griffin and Enos [25] and Weisskoff [66], among others. According to their line of argument foreign capital inflows exercised a depressing effect on the savings propensities of the developing countries, thus leading to a reduction of the domestic saving rates and lower rates of capital formation and consequently lower rates of growth, once again along the lines of the Harrod-Domar model. Thus unlike the orthodox position, they took the view that foreign capital, in particular, foreign aid, was a substitute and not a complement to domestic savings. These two rather extreme positions were attacked by Papanek [45] who argued that truth was somewhere in between and proposed a more pragmatic and less doctrinaire approach to the question, which essentially boils down to saying that the data should be allowed to answer the questions in a suitably formulated model.

The Role of Capital in Improving Productivity and Creating Jobs.

Abstract: Productivity growth has declined significantly since the middle 1960s, while unemployment rates have recently risen to the highest levels since the Great Depression. Many observers believe that one way to help overcome both problems is to increase savings and investment in order to raise the amount of capital. This essay reviews the principal causes of the dacline in productivity growth and increased unemployment, with particular focus on the effect of capital investment on thew two economic problems. The paper examines how--if at all--the lc.2vel of investment and investment patterns, interacting with labor force expansion, explain changes in productivity and unemployment during the current economic crisis. The last section of the paper also explores alternatives to the present system of capital investment, both as a way of raising more capital and deploying it for higher productivity growth and employment. Productivity growth has decreased significantly in the United States since the mid-1960s and, in the last decade, has been close to zero. At the same time, average rates of unemployment have increased significantly. Currently, 11 million Americans are out of work, over 10 percent of the work f,-Jrce. Because productivity increases and unemployment rates are associated with the economy's capability to increase the average standard of living, this decline in productivity growth and the increase in unemployment have become symbols of our current economic malaise. (1) Much of the current thinking about productivity and unemployment focuses on investment and savings rates; that is, on capital. Present economic policies hinge on increasing the amount of capital saved and invested in order to create more jobs and more productive jobs. Incentives for saving and investment, including lower tax rates, accelerated depreciation, and higher interest rates for savings hope to make enough capital available and enough desire to invest so that economic growth rates, productivity, and employment all increase rapidly. Does the research and data on the role of capital in productivity growth and employment bear out the underlying assumptions for this policy? This brief essay will review the principal causes of productivity growth decline and increased unemployment, with particular focus on the effect of capital investment on these two economic variables. Specifically, we will examine how -if at all -the level of investment and investment patterns interacting with labor force expansion explain changes in productivity and employment during the current economic crisis, We will carry out this analysis in three parts: First, we describe the nature of the problem by showing the main changes in employment, productivity growth and related variables in the post-World War II period. Second, we review the general causes of the slowdown in productivity growth and the increase in unemployment rates. We conclude from this analysis that the causes may very well differ from economic sector to economic sector. In the nonmanufacturing sector, the growth of capital investment per employee seems to be positively correlated with productivity growth and negatively with the overall unemployment rate. But in manufacturing, it appears not to be so much the amount of capital investment that is the problem, but how and where capital is invested. In turn, the differences between sectors may be explained by shifts in the concentration of capital during the 1970s. In the last section of the essay, we explore alternatives to the present system of capital investment decisions, both as a way of raising more capital and deploying it for higher productivity growth and employment. The Nature of the Problem Economic growth in the post-war period averaged a 2.4 percent annual increase in gross national product per capita between 1948 and 1973 and 2.0 percent between 1973 and 1979 and 1.8 percent between 1973 and 1982 (see Table 1). Consumption power, which economists call "real earnings," rose 60 percent between 1948 and 1973, but has since fallen 16 percent. Productivity, which we measure here as gross national product per employed

The Capital Constraint On Employment

Abstract: The possibility that there is a capital constraint on the realisation of full employment, that there may be an insufficiency of co-operating capital equipment to permit the full usage of labour resources, resulting in what may be (loosely) termed ‘Marxian Unemployment’, whilst not new in application to less developed economies, is rather a novel idea in relation to developed economies such as that of the United Kingdom. Nevertheless, this hypothesis has something of a hearing today, recurring, in particular, in continental European reflections on the unemployment problem. It had a brief, but somewhat dismissive airing in the McCracken Report (1977) but has been pursued by, among others, Malinvaud in a series of contributions (Malinvaud 1978, 1980a, 1980b)(1).