Showing papers on "Capital deepening published in 1994"

Capital Goods Imports and Long-Run Growth

Abstract: This paper presents an endogenous growth model of an open economy in which the growth rate of income is higher if foreign capital goods are used relatively more than domestic capital goods for the production of capital stock. Empirical results, using cross country data for the period 1960-85, confirm that the ratio of imported to domestically produced capital goods in the composition of investment has a significant positive effect on per capita income growth rates across countries, in particular, in developing countries. Hence, the composition of investment in addition to the volume of total capital accumulation is highlighted as an important determinant of economic growth.

The Replacement Problem

Abstract: We construct a vintage capital model of economic growth in which the decision to replace old technologies with new ones is modeled explicitly. Depreciation in this environment is an economic, not a physical concept. We describe the balanced growth paths and the transitional dynamics of this economy. We illustrate the importance of vintage capital by analyzing the response of the economy to fiscal policies designed to stimulate investment in new technologies.

The Effects of Factor Taxation in a Two-Sector Model of Endogenous Growth

Abstract: This paper examines the effects of taxation in a two-sector model of endogenous growth, based on the joint accumulation of physical and human capital. Both transitional dynamics and balanced growth paths are computed, and the response to wage taxes, capital taxes, and consumption taxes is explored. Welfare costs of alternative tax regimes are computed. The capital tax is by far the least efficient method of generating revenue. The differences between taxes with respect to their effects on long-run growth rates are relatively unimportant. The key difference between the capital tax and wage or consumption taxes lies in their different level effects on the permanent paths of output, consumption, and labour supply.

Immigration, human capital and growth in the host country

Abstract: Immigration, as a source of population growth, is traditionally associated, by neoclassical economics, with negative output and growth effects for the host economy in per capita terms. This paper explores how different these effects can be when the human capital brought in by immigrants upon arrival is explicitly considered in a Solow growth model augmented by human capital and migration. The main finding is that the negative output and growth effects of immigration tend to become less important the higher the imported immigrants' human capital relative to natives. In order to evaluate the order of magnitude of these effects, descriptive evidence, based on education data, and econometric evidence, based upon the estimation of the transition equation in the augmented Solow model, is provided for a set of OECD economies during the period 1960-1985. Because of their human capital content, migration inflows are shown to have less than half the negative impact of comparable natural population increases.

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.

The Soviet economic decline : historical and republican data

Abstract: Soviet growth for 1960-89 was the worst in the world, after controlling for investment and human capital. And relative performance worsens over time. The authors explain the declining Soviet growth rate from 1950 to 1987 by the declining marginal product of capital. The rate of total factor productivity growth is roughly constant over that period. Although the Soviet slowdown has conventionally been attributed to extensive growth (rising capital-to-output ratios), extensive growth is also a feature of market-oriented economies like Japan and Korea. One message from the authors' results could be that Soviet-style stagnation awaits other countries that have relied on extensive growth. The Soviet experience can be read as a particularly extreme dramatization of the long-run consequences of extensive growth. What led to the relative Soviet decline was a low elasticity of substitution between capital and labor, which caused diminishing returns to capital to be especially acute. (The natural question to ask is why Soviet capital-labor substitution was more difficult than in Western market economies, and whether this difficulty was related to the Soviets' planned economic systems.) Tentative evidence indicates that the burden of defense spending also contributed to the Soviet debacle. Differences in growth performance between the Soviet republics are explained by the same factors that figure in the empirical cross-section growth literature: initial income, human capital population growth, and the degree of sectoral distortions. The results the authors got with the Soviet Union in the international cross-section itself was disastrous for long-run economic growth in the Soviet Union. This point may now seem obvious but was not so apparent in the halcyon days of the 1950s, when the Soviet case was often cited as support for the neoclassical model's prediction that distortions do not have steady state growth effects. Since a heavy degree of planning and government intervention exists in many countries, especially developing countries, the ill-fated Soviet experience continues to be of interest.

Policy, Technology Adoption, and Growth

Abstract: This paper describes a simple model of technology adoption which combines the two engines of growth emphasized in the recent growth literature: human capital accumulation and technological progress. Our model economy does not create new technologies, it simply adopts those that have been created elsewhere. The accumulation of human capital is closely tied to this adoption process: accumulating human capital simply means learning how to incorporate a new intermediate good into the production process. Since the adoption costs are proportional to the labor force, the model does not display the counterfactual scale effects that are standard in models with endogenous technical progress. We show that our model is compatible with various standard results on the effects of economic policy on the rate of growth.

Endogenous growth, human capital, and industry wages

Abstract: Lucas' model (1988) of external effects of human capital formation is taken as a starting point for looking at the impact of human capital on wages. Even though most empirical tests of New Growth Theory are made using time-series and cross-sections of countries — with good reasons — I suggest a microeconometric approach in order to test Lucas' basic assumption of external effects of human capital. As a first step, internal effects of education are filtered out by using wage functions for individuals in Austria. In the second step, resulting industry wage premiums are regressed on industry-specific characteristics and, above all, on average human capital in the industry to account for external effects of human capital.

Total Capital and Economic Growth

Abstract: In contrast to the official estimates of gross private domestic investment and associated capital stocks prepared by the Bureau of Economic Analysis (BEA), the author presents estimates of total investment and capital, human and nonhuman, tangible and nontangible, by all sectors of the U.S. economy. Total investment is 3.1 times the BEA estimate in 1929, rising to 4.1 times in 1990. It accounts for almost half of adjusted GDP in the latter year. As hypothesized, real total capital stocks rise at about the same 2.9 percent average annual rate as real gross domestic product 1929–90, 0.1 percentage points more in the total economy and 0.2 points less in the predominant business sector. Increases in nontangible capital (mainly education, training, health, and research and development—“R&D”-) largely explain the growth in total tangible factor (capital) productivity in the whole economy. Nontangible, human capital has grown relatively faster in the business sector than in the entire economy, helping to explain its more rapid productivity advance. The author recommends that when BEA shifts to the U.N. standard system of accounts, it include nontangible and human tangible investments and capital in “satellite” accounts, as well as tangible investments for all sectors in the core accounts. This will greatly facilitate the analysis of economic growth.

Capital Flight, External Debt and Domestic Policies

Abstract: It is now well documented that capital flight has been a dominant feature of capital movements between developing and industrial countries. Since 1988 reductions in the stock of flight capital more than account for private capital flows to emerging markets. This suggests that what appears to be a diversification of portfolios of residents of developed countries may be a restoration of 'home bias' in the portfolios of residents of developing countries. We show that changes in the stock of capital flight can increase or decrease welfare depending on the structure of distortionary taxes and subsidies on capital income and the effects of capital flight on the tax base.

The “Public Capital Hypothesis”: The Case of Germany

Abstract: Recently, both in the literature as well as in public discussion it is argued that the neglect of the public infrastructure capital stock might be responsible for the generally observed productivity slowdown of the U.S economy (see Tatom (1991) for a short summary of the delete).This hypothesis, which has been labeled the “public capital hypothesis”, posits that public infrastructured directly and indirectly affects the productivity of the private economy in a positive way. Directly, “public” services produced with the stock of infrastructure capital enter as intermediate services the private production processes. Indirect effects the arise because private and public capital are considered to be complementary, that is, public capital raises the productivity of private capital. Aschauer (1989) for the U.S. and Berndt and Hansson (1991) for Sweden provide empirical evidence in favour of this hypothesis. The fundamental idea of the “public capital hypothesis”, namely the inter-relationship of productivity in the private economy and the provision of public infrastructure, is not that new. This aspect has been examined both theoretically and empirically in the urban economics literature in the past (see for example, Costa, Ellson and Martin, (1987), and Segal, (1976)).In addition, Diewert (1986) presented an intensive theoretical examination of the benefits of public investment as an explanation for the slowdown of productivity observed throughout most industrialized countries.

Epilogue: expanding the capital stock.

Abstract: This article discusses sustainable development and the four types of capital: man-made capital natural capital human capital and social capital. Sustained progress requires preservation and expansion of the capital stock. Man-made capital is the primary focus of development: buildings factories machines and infrastructure. Natural capital includes natural resource assets such as minerals soil forests air water and wetlands. These goods are renewable or nonrenewable and marketable or nonmarketable. These assets have become increasingly scarce. Human capital includes investments in for instance education health and the nutrition of individuals. Human and social capital are difficult to quantify in terms of monetary value. Social capital is represented by the institutional and cultural bases of society. The authors refer to the thesis of Robert Putnam that civic community guarantees good governance and is key to sustained socioeconomic growth. Strong civic community means voluntary horizontal organizations and hierarchical vertical associations and their denseness in society. Putnam found that in Italy there was a preponderance of voluntary horizontal associations in the northern prosperous and rapidly developing parts of the country. Autocratic vertical institutions were found in the less effective parts of southern Italy. The evidence suggests that good government is nurtured by long-standing civic involvement. Capital stock is related to sustainable development to the degree to which researchers can measure each kind of capital define the production function define an exchange rate and define the threshold within which the more efficient activities can be selected. Sustainability can be weak sensible strong and very strong depending on the measure of nondeclining capital. The author recommends the progression in improvement of measurement rather than an interminable debate about the perfect formula.

The Production of Human Capital and the Life of Earnings

Abstract: After a brief summary of Ben Porath's 1967 model approach, I enquire into the empirical validity and some implications of his insights. Section 2 is an attempt to answer the question: Are the shapes and magnitudes of growth in wage profiles largely attributable to human capital investments? Section 3 tests the proposition that over the working age capacity wages (i.e. wages before netting out investment) decline before observed wages do. Implied timing of labor supply provides the test. The findings shed light on developments in the U.S. labor market in the past several decades. In section 4 some implications are drawn from Ben-Porath's model for interpersonal differences and historical changes in life-cycle human capital investments. The positive correlation between schooling and training, predicted by the model is found in cross-sections. It also shows up in parallel movements in schooling and training in the 1980's as the demand for human capital increased. Once again, observed U.S. patterns are highlighted.

Search in the labor market : incomplete contracts and growth

Abstract: This paper shows that search in the labour market has important effects on accumulation decisions. In a labour market characterized by search, employment contracts are naturally incomplete and this creates a wedge between the rates of return and marginal products of both human and physical capital. As a result, when workers invest more in their human capital, they increase the rate of return on physical capital. Provided that these factors are complements in the production function, this will increase the desired level of investment for firms. Then, because physical capital is not being paid its marginal product, the rate of return on all human capital goes up. In this model, therefore, there are pecuniary increasing returns to scale in human capital accumulation in the sense that the more human capital there is, the more profitable it is to accumulate human capital. Applying this argument conversely, the presence of pecuniary increasing returns in physical capital accumulation also follows. These pecuniary increasing returns lead to amplified inefficiencies and to the possibility of multiple equilibria. They also imply that factor distribution of income has an important impact on growth. Finally, the paper derives new links between unemployment and human capital accumulation and shows that when technology choice is endogenized, search introduces a negative wage formation externality which may lead to excessively fast diffusion of new technologies.

Human capital investment in resources‐dominated economies

Abstract: The paper relaxes the perfectly competitive market assumptions of human capital theory to derive hypotheses about the impacts of imperfect markets on incentives to invest in human capital, particularly education. The paper then draws on existing studies to test whether the hypotheses are supported or not for resources‐dominated economies. Because of imperfect markets, individuals may make human capital decisions that lead to poverty.

Estimates of the aggregate quarterly capital stock for the post‐war u.s. economy

Abstract: We construct quarterly aggregate gross and net capital stock series for the post-war U.S. economy using annual capital stock, capital depreciation, and capital discard figures along with quarterly investment series. We construct nominal and real measures of all three categories in the aggregate capital stock: consumer durable goods, producer durable goods, and business structures. In constructing the nominal series we take into account the changes in capital goods' prices. The series are constructed using four different methods. Using time- and frequency domain techniques, we compare the constructed series and characterize their short-run, business cycle, and long-run cyclical properties. We find that the constructed series exhibit very different cyclical and shock persistence dynamics. Practical implications are discussed.

Growth and international investment with diverging populations

Abstract: A two-country, neoclassical growth model is examined, in which the countries populations grow at different rates Individually modeled like the Solow one-sector growth model but with perfectly mobile capital between them. the two countries behave quite differently from the Solow model. The slower growing country may, if it saves enough, grow exponentially in per capita terms, and its rate of growth depends on its savings propensity. It may even acquire a permanently positive fraction of world capital. If it does, the world then behaves like Pasinetti's two-class growth model, where savings of the capitalist class (here, the more slowly growing population) alone determines the steady-state returns to capital. Copyright 1994 by Royal Economic Society.

Accumulation of Human Capital in LDCs in the Presence of Unemployment

Abstract: This paper takes up an aggregative growth framework to study how human and physical capital evolve over time as households allocate their investment between the two assets. In the context of unemployment of educated labor, it develops a general equilibrium model of an economy with two sectors: a composite good sector and a schooling sector where output is subject to increasing returns to scale. A temporary equilibrium for this economy depends on the endowments of physical and human capital as well as on the output elasticity of returns to scale and the price elasticity of education. The dynamic evolution of this economy is explored in terms of the accumulation of the two types of capital. A rise in education subsidy increases the demand for education at the cost of investment in physical capital and could lead to inefficient substitution between skilled and unskilled workers in the long run. Copyright 1994 by The London School of Economics and Political Science.

Human Capital Distribution, Technological Progress, and Economic Growth

Abstract: This paper analyses the interaction between the distribution of human capital, technological progress, and economic growth. It demonstrates the significant role of the distribution of human capital in the process of economic development. The evolutionary pattern of the human capital distribution, the income distribution and economic growth are determined by the interplay between a local home environment externality and a global technological externality. In periods during which the home environment externality is the dominating factor, the distribution of human capital becomes polarized, whereas in periods during which the global technological externality dominates, convergence ultimately takes place. The study suggests that a poor uneducated economy which values equity as well as prosperity may confront a trade-off between equity in the short run and equity and prosperity in the long run. An economy that prematurely implements a policy designed to enhance equality may be trapped at a low output equilibrium.

Optimal Taxation of Human and Physical Capital in Endogenous Capital Models

Abstract: This paper studies the effects of human and physical capital income taxation on growth, and examines how these effects depend on the technologies for human capital accumulation and 'leisure'. It then derives the normative implications of the analysis for the optimal taxation of factor incomes. It is shown that in general both capital and labor (human capital) taxes are growth-reducing. In these cases, the optimal long-run tax on both capital and labor income is zero. The optimal taxation plan consists of taxing both factors in the short run, and financing spending in the long run through accumulated budget surpluses.

Projections of health care expenditures as a share of the GDP: actuarial and macroeconomic approaches.

Abstract: STUDY QUESTION. Can the steady increases in health care expenditures as a share of GDP projected by widely cited actuarial models be rationalized by a macroeconomic model with sensible parameters and specification? DATA SOURCES. National Income and Product Accounts, and Social Security and Health Care Financing Administration are the data sources used in parameters estimates. STUDY DESIGN. Health care expenditures as a share of gross domestic product (GDP) are projected using two methodological approaches--actuarial and macroeconomic--and under various assumptions. The general equilibrium macroeconomic approach has the advantage of allowing an investigation of the causes of growth in the health care sector and its consequences for the overall economy. DATA COLLECTION METHODS. Simulations are used. PRINCIPAL FINDINGS. Both models unanimously project a continued increase in the ratio of health care expenditures to GDP. Under the most conservative assumptions, that is, robust economic growth, improved demographic trends, or a significant moderation in the rate of health care price inflation, the health care sector will consume more than a quarter of national output by 2065. Under other (perhaps more realistic) assumptions, including a continuation of current trends, both approaches predict that health care expenditures will comprise between a third and a half of national output. In the macroeconomic model, the increasing use of capital goods in the health care sector explains the observed rise in relative prices. Moreover, this "capital deepening" implies that a relatively modest fraction of the labor force is employed in health care and that the rest of the economy is increasingly starved for capital, resulting in a declining standard of living.

Taxation and Endogenous Growth in Open Economies

Abstract: This paper examines the effects of taxation of human capital, physical capital and foreign assets in a multi-sector model of endogenous growth. It is shown that in general the growth rate is reduced by taxes on capital and labor (human capital) income. When the government faces no borrowing constraints and is able to commit to a given set of present and future taxes, it is shown that the optimal tax plan involves high taxation of both capital and labor in the short run. This allows the government to accumulate sufficient assets to finance spending without any recourse to distortionary taxation in the long run. When restrictions to government borrowing and lending are imposed, the model implies that human and physical capital should be taxed similarly.