Showing papers on "Capital deepening published in 1992"

A Contribution to the Empirics of Economic Growth

Abstract: This paper examines whether the Solow growth model is consistent with the international variation in the standard of living. It shows that an augmented Solow model that includes accumulation of human as well as physical capital provides an excellent description of the cross-country data. The paper also examines the implications of the Solow model for convergence in standards of living, that is, for whether poor countries tend to grow faster than rich countries. The evidence indicates that, holding population growth and capital accumulation constant, countries converge at about the rate the augmented Solow model predicts. This paper takes Robert Solow seriously. In his classic 1956 article Solow proposed that we begin the study of economic growth by assuming a standard neoclassical production function with decreasing returns to capital. Taking the rates of saving and population growth as exogenous, he showed that these two vari- ables determine the steady-state level of income per capita. Be- cause saving and population growth rates vary across countries, different countries reach different steady states. Solow's model gives simple testable predictions about how these variables influ- ence the steady-state level of income. The higher the rate of saving, the richer the country. The higher the rate of population growth, the poorer the country. This paper argues that the predictions of the Solow model are, to a first approximation, consistent with the evidence. Examining recently available data for a large set of countries, we find that saving and population growth affect income in the directions that Solow predicted. Moreover, more than half of the cross-country variation in income per capita can be explained by these two variables alone. Yet all is not right for the Solow model. Although the model correctly predicts the directions of the effects of saving and

Capital Mobility in Neoclassical Models of Growth

Abstract: The empirical evidence reveals conditional convergence in the sense that economies grow faster per capita if they start further below their steady-state positions. For a homogeneous group of economies - like the U.S. states, regions of western European countries, and the GECD countries - the convergence is unconditional in that the poor economies grow faster than the rich ones. The neoclassical growth model for a closed economy fits these facts if capital is viewed broadly to encompass human investments, so that diminishing returns to capital set in slowly, and if differences in government policies or preferences about saving lead to heterogeneity in steady-state positions. Yet if the model is opened to allow for full capital mobility, then the predicted rates of convergence for capital and output are much higher than those observed empirically. We show that the open-economy model conforms with the evidence if an economy can use foreign debt to finance only a portion of its capital, even if 50% or more of the total. The problems in using human capital as collateral can explain the required imperfection in the credit market.

The Tragedy of the Commons and Economic Growth: Why Does Capital Flow from Poor to Rich Countries?

Abstract: We analyze a differential game in which all interest groups have access to a common capital stock. We show that the introduction of a technology that has inferior productivity but enjoys private access may ameliorate the tragedy of the commons. We use this model to analyze capital flight: in many poor countries, property rights are not well defined; since "safe" bank accounts in rich countries (the inferior technology) are available to citizens of these countries, they engage in capital flight. We show that the occurrence of capital flight does not imply that opening the capital account reduces growth and welfare.

The role of public capital in production

Abstract: The impact of the stock of public capital on costs of production in the private sector is examined using annual data over the period 1958-89. A translog cost function is estimated and public capital is found to be a significant input. The estimates indicate that public capital has positive marginal product and that private and public capital are complements in production, rather than substitutes. Copyright 1992 by MIT Press.

Fertility and the economy.

Abstract: Fertility and the economy is examined in the context of the Malthusian question about the links between family choices and longterm economic growth. Micro level differences are not included not are a comprehensive range of economic or determinant variables. Specific attention is paid to income and price effects the quality of children overlapping generations mortality effects uncertainty and economic growth. Fertility and the demand for children in linked to parental incomes and the cost of rearing children which is affected by public policies that change the costs. Demand is also related to child and adult mortality and uncertainty about sex of the child. Fertility in one generation affects fertility in the next. Malthusian and neoclassical models do not capture the current model of modern economies with rising income/capita and human and physical capital extensive involvement of married women in the labor force and declining fertility to very low levels. In spite of the present advances in firm knowledge about the relationships between fertility and economic and social variables there is still much greater ignorance of the interactions. The Malthusian utility function that says fertility rises and falls with income did hold up to 2 centuries of scrutiny and the Malthusian inclusion of the shifting tastes in his analysis could be translated in the modern context to include price of children. The inclusion of net cost has significant consequences i.e. rural fertility can be higher because the cost of rearing when children contribute work to maintaining the farm is lower than in the city. An income tax deduction for children in the US reduces cost. Economic growth raises the cost of children due the time spent on child care becoming more valuable. The modern context has changed from Malthusian time and the cost of education training and medical care is relevant. The implication is that a rise in income could reduce the demand for children when education and training of children increases. Quality is substituted for quantity. The neoclassical model that "the capital-labor ratio and the degree of capital deepening" is affected by population growth is examined as well as the modern approach and the implications are expressed i.e. intergenerational transfers and parental altruism.

Human Capital and Economic Growth

Abstract: s from the Inferences that have been drawn for desirable governmental policies. The policy implications derive from positive or negative gaps between social and private rates of return. Pos~tive gaps can reflect uncompensated spillover benefits In research and production, the consequences of monopoly pricing of the existing goods, and the disincentive effects from taxation. Negativegaps can come from the seeklng of exlstlng monopoly rentals by new entrants or from congestion effects (negative spillovers from economic activity). ?he stock of human capital would also tend to reduce the cost of innovation in leading economies. Hence, more human capital can speed up the rate of innovat~on, an effect that raises the growth rate in leading and following economies. 'More precisely, because the estimation IS canied out at five-year intervals, the coefficient, ,0167, has to be adjusted slightly to compute the instantaneous rate of convergence (see Barro and Sala-i-Martin [1992a]). The implied convergence coefficient turns out in this case to be 1.8 percent per year. he tariff rate enters as an interaction wlth an estimate of natural openness, the country's ratio of imports to GDP that would have occurred in the absence of trade d~stort~ons. Thls openness was estimated to be a negative funct~on of the country's area and 11s weighted-average distance from major markets The Idea IS that distortions due to tariffs have a larger adverse influence on growth for countries that are naturally more open (small countries and countries that are close to major potentlal trading partners). See Lee (1992) for a discussion he black-market premium may also proxy more broadly for otherdistortionary policies and for macroeconomic instablllty. I 0 ~ h e value 1.0 IS close to the non-hear, maximum-likel~hood estimate of this parameter In

Solow and the States: Capital Accumulation, Productivity and Economic Growth

Abstract: National, state, and local policy makers have increasingly focused their attention on policies toward economic growth, especially efforts to raise the rate of investment. Recent studies of economic growth have raised a debate over the role played by the investment rate in the long-run performance of the economy. Evidence from the states suggests that the effects of capital accumulation are consistent with the predictions of the neoclassical growth model. At the same time, the estimates indicate a substantial role for human capital accumulation in raising productivity, in contrast to the neoclassical focus on physical capital investment.

Liberalization of Capital Movements and of the Domestic Financial System

Abstract: This paper analyzes the dynamic impact of a joint liberalization of capital movements and of the domestic financial sector. Both a simultaneous and a sequential liberalization are examined in an overlapping-generations model with a q-theory of investment. A liberalization generally leads to an initial period of capital inflows followed by capital outflows. It also increases investment and causes an overshooting in share prices. Furthermore, the interest rate level before a liberalization will usually not indicate the direction of net capital flows. Copyright 1992 by The London School of Economics and Political Science.

Towards Capital Account Convertibility

Abstract: • Advanced developing countries are increasingly encouraged to remove existing capital controls, but mixed experiences with capital account opening caution that reform must be carefully designed to increase efficiency and growth without compromising stability • A gradual dismantling of capital controls is recommended, based on progress made in tax reform, exchange rate management, enforcement of bank competition and supervision, and solving domestic banks' bad-loan problems

The capital crunch in New England

Abstract: The increase in real estate lending was a major reason for the rapid expansion of New England banks during the 1980s. When nominal real estate prices began to decline in New England, collateral became impaired and many loans stopped performing. The consequent increased provision for expected loan losses (loan loss reserves) caused a rapid deterioration in bank capital throughout the region. ; Having just lost a significant proportion of their capital, many banks tried to satisfy their capital/asset ratio requirements by shrinking their institutions. This article discusses why banks facing binding capital constraints will shrink more than unconstrained banks when an adverse capital shock occurs. It shows that New England banks with low capital/asset ratios are in fact shrinking their institutions faster than better capitalized institutions, and that this behavior has been particularly apparent in those liability categories that are marginal sources of funds for most banks.

Rent-Seeking and Growth: The Case of Growth Through Human Capital Accumulation

Abstract: This paper follows the work of H. Uzawa (1965) and R. E. Lucas (1988) by presenting an endogenous growth model with human capital accumulation as the engine of growth. Agents make time allocation decisions in an economy where quantitative restrictions are employed in the trade regime. Agents may allocate time to obtain valuable import licences. The effect of this activity on the growth rate is found to be dependent upon whether agents specialize in the rent-seeking activity. When agents do not specialize, the rent-seeking activity reduces growth by reducing the incentive to accumulate productive human capital.

The Impact of Capital Spending on Municipal Operating Budgets

Abstract: What is the impact of capital spending for buildings, equipment, and other facilities on future operating expenditures of municipal governments? Because capital spending decisions are made independent of operating decisions in many larger municipalities, managers make long-term capital commitments without fully understanding the repercussions for operations. This implies the need for research that examines more closely the linkages between these budget cycles. This article develops a theory of the relationship between capital and operating expenditures, then uses data from the fortyeight largest U.S. cities to estimate both the magnitude of capital's impact and the time it takes for operating budgets to adjust. The study finds that five of six commonly provided municipal services were affected to varying degrees by past years' capital expenditures. Especially notable is the finding that the operating budgets of labor-intensive services, such as police and fire protection, are most sensitive to capital spending. For public managers, the findings point to the need for closer coordination between the capital and operating budget cycles, especially in those cases where capital outlays have clear, unambiguous positive implications for future operations.

Economic depreciation and the regulated firm under competition and technological change

Abstract: Capital recovery is increasingly important to utilities, especially telephone companies, when technological change and competitive entry are occurring. In the absence of efficient capital recovery policies companies are going to see their equity eroded. In addition to losses by the companies there are likely to be losses to ratepayers in the form of reductions in service quality and higher rates in the future. To address the above problem this paper first reviews economic depreciation and capital recovery in the simple case of a regulated single product monopoly facing competitive entry. It employs the concept of economic depreciation to show how capital recovery policies will be front-loaded. It also develops the concept of the window of opportunity for capital recovery. There is a limited time for regulators to take remedial action, and if timely action is not taken there is no alternative but for the company to fail to recover some of its capital. These results are shown under both traditional rate of return and price caps.

Comparative Economic Growth: Evidence and Interpretation

Abstract: This paper reviews the major facts of comparative per capita economic growth over the 1960-88 period, drawing attention to the unprecedented rates of growth achieved by the fastest-growing economies and the consequent unprecedented variation in economic growth across countries. This paper also discusses the major economic explanations for cross-country variations, including traditional capital accumulation, technological "catch-up" and endogenous technological change, demographic change in combination with natural resource depletion, human capital investment, and government policy. All of these factors have explanatory power but much of the variation remains poorly understood.

Convergence in Growth Rates: The Role of Capital Mobility and International Taxation

Abstract: We consider the role of capital mobility and international taxation. In explaining the observed diversity in long-term growth rates. Our major finding is that, under capital mobility, international differences in taxes will not matter for total growth differentials. Policy differences have a role to play in per capita growth differentials, however, when they lead to a divergence in the after-tax rates of return on capital across countries, as when the residence principle is adopted universally. When this is the case, how tax differences affect the growth rates of population and human capital will depend on the relative preference of the individual household towards these two engines of growth. Optimal tax policies are found to be growth-equalizing with and without policy coordination.

Differential Returns to Human Capital in Full-time and Part-time Employment

Abstract: In Britain, part-time employment is very important among women, but in such employment they tend to receive lower hourly pay. For example, according to the 1980 Women and Employment Survey (WES) reported on by Martin and Roberts (1984), 44 per cent of employed women worked part-time (their own assessment), and the mean hourly wage for part-time women workers was £1.60 compared wtih £1.90 for women in full-time jobs. In the late 1980s, a similar percentage of women were in part-time employment, and it continues to attract lower average pay than full-time employment. One purpose of the analysis in this paper is to estimate whether the lower average pay in part-time employment arises primarily because women who take part-time jobs have less human capital, or because wage offers are lower for part-time jobs, thereby giving women a lower return on their human capital in these jobs. A second purpose is to measure the contribution of differential returns in part-time employment to the average pay gap between men and women.

The spatial dynamics of japanese manufacturing productivity: An empirical analysis by expanded verdoorn equations

Abstract: This study investigates the parametric drift of a Verdoorn-type relationship across Japan's center-periphery continuum, using prefecture-level data for the 1965–75 time horizon. Our results indicate that in and around Japan's core neutral technological progress and capital deepening tend to be higher, whereas scale and external economies tend to be lower. This spatial variation is consistent with product cycle and regional dynamics theories. The study implements the expansion method techniques and research philosophy.

Growth Via External Public Debt and Capital Controls

Abstract: This paper analyzes strategies for economic growth in a small, open, overlapping-generations economy that has access to perfect international capital markets and is characterized in autarky by multiple, locally stable, stationary equilibria. The study designs a growth scheme consisting of external public debt and controls on private capital outflows. This policy permits the economy to move from a low to a high output stationary equilibrium. The policy may be Pareto welfare improving if it is gradualistic and if the economy's rate of convergence to the better equilibrium is faster than the rate of debt accumulation. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

The structure and working of MSG-5, an applied general equilibrium model of the Norwegian economy

Abstract: Publisher Summary The multisector growth (MSG)-model is an applied general equilibrium (AGE) model that has been regularly used in long-term planning by the Norwegian Ministry of Finance. This chapter presents the last version of MSG, MSG-5. However, MSG-5 does not contain an accurate description of the formal equation system. The main intention is to provide instead intuition into the way by which the different mechanisms and effects in a disaggregated general equilibrium model such as MSG simultaneously determine the pattern of relative prices and industrial expansion. The chapter presents a somewhat stylized version of the actual implemented model. It explains the working of the model is by discussing the effects of an increase in the capital stock. The chapter focuses on the way in which the modeling of external trade affects the results. It also explains the way in which impacts of capital deepening on the structure of relative prices and industrial expansion are influenced by the degree of substitutability between Norwegian and foreign products.

Reassessing the social returns to equipment investment

Abstract: The recent literature on the sources of economic growth has challenged the traditional growth accounting of the Solow model, which assigned a relatively limited role to capital deepening. As part of this literature, De Long and Summers have argued in two papers that the link between equipment investment and economic growth across countries is stronger than can be generated by the Solow model. Accordingly, they conclude that such investment yields important external benefits. However, their analysis suffers from two shortcomings. First, De Long and Summers have not conducted any formal statistical tests of the Solow model. Second, even their informal rejection of the model fails to survive reasonable tests of robustness. We formally test the predictions of the Solow model using De Long and Summers' data. Our results cast doubt on the existence of externalities to equipment investment. In particular, we find that the empirical link between investment and growth in the OECD countries is fully consistent with the Solow model. Moreover, for De Long and Summers' full sample, the evidence of excess returns to equipment investment is tenuous.