Showing papers on "Capital deepening published in 1996"

Where Has All the Education Gone

Abstract: How to explain the surprising finding that more education did not lead to faster economic growth? Cross-national data on economic growth rates show that increases in educational capital resulting from improvements in the educational attainment of the labor force have had no positive impact on the growth rate of output per worker. In fact, contends Pritchett, the estimated impact of growth of human capital on conventional nonregression growth accounting measures of total factor productivity is large, strongly significant, and negative. Needless to say, this at least appears to contradict the current conventional wisdom in development circles about education's importance for growth. After establishing that this negative result about the education-growth linkage is robust, credible, and consistent with previous literature, Pritchett explores three possible explanations that reconcile the abundant evidence about wage gains from schooling for individuals with the lack of schooling impact on aggregate growth: - That schooling creates no human capital. Schooling may not actually raise cognitive skills or productivity but schooling may nevertheless raise the private wage because to employers it signals a positive characteristic like ambition or innate ability. - That the marginal returns to education are falling rapidly where demand for educated labor is stagnant. Expanding the supply of educated labor where there is stagnant demand for it causes the rate of return to education to fall rapidly, particularly where the sluggish demand is due to limited adoption of innovations. - That the institutional environments in many countries have been sufficiently perverse that the human capital accumulated has been applied to activities that served to reduce economic growth. In other words, possibly education does raise productivity, and there is demand for this more productive educated labor, but demand for educated labor comes from individually remunerative but socially wasteful or counterproductive activities - a bloated bureaucracy, for example, or overmanned state enterprises in countries where the government is the employer of last resort - so that while individuals' wages go up with education, output stagnates, or even falls. This paper - a product of the Poverty and Human Resources Division, Policy Research Department - is part of a larger effort in the department to investigate the determinants of economic growth.

Financial Capital, Human Capital, and the Transition to Self-Employment:Evidence from Intergenerational Links

Abstract: The environment for business creation is central to economic policy, as entrepreneurs are believed to be forces of innovation, employment and economic dynamism. We use data from the National Longitudinal Surveys (NLS) to investigate the relative importance of financial and human capital exploiting the variation provided by intergenerational links. Specifically, we estimate the impacts of parental wealth and human capital on the probability that an individual will make the transition from a wage and salary job to self-employment. We find that young men's own financial assets exert a statistically significant, but quantitatively modest effect on the transition to self-employment. In contrast, the capital of parents exerts a large influence. Parents' strongest effect runs not through financial means, but rather through human capital, i.e., the intergenerational correlation in self-employment. This link is even stronger along gender lines.

Procyclical Productivity: Increasing Returns or Cyclical Utilization?

Abstract: This paper investigates the relative importance of cyclical fluctuations in labor and capital utilization, increasing returns to scale, and technology shocks as explanations for procyclical productivity. It exploits the intuition that materials inputs do not have variable utilization rates, and materials are likely to be used in fixed proportions with value added. Therefore, materials growth is a good measure of unobserved changes in capital and labor utilization. Using this measure shows that cyclical factor utilization is very important, returns to scale are about constant, and technology shocks are small and have low correlation with either output or hours growth.

A Microfoundation for Social Increasing Returns in Human Capital Accumulation

Abstract: This paper proposes a microfoundation for social increasing returns in human capital accumulation. The underlying mechanism is a pecuniary externality due to the interaction of ex ante investments and costly bilateral search in the labor market. It is shown that the equilibrium rate of return on the human capital of a worker is increasing in the average human capital of the workforce even though all the production functions in the economy exhibit constant returns to scale, there are no technological externalities, and all workers are competing for the same jobs.

Human Capital Investment under Asymmetric Information: The Pigovian Conjecture Revisited

Abstract: This article investigates how human capital investment, labor turnover, and wages are jointly determined when the current employer knows more about a worker's productivity than potential employers. Results derived are quite different from, or unexplored by, the standard human capital theory. We show that the information asymmetry can cause an externality distortion in human capital investment because higher productivity due to the investment may not be recognized by the market. The investment level increases in the degree of firm specificity of human capital. The underinvestment problem is more severe when human capital is general than when it is firm-specific.

Financial Development, Economic Growth and Banking Sector Controls: Evidence from India

Abstract: This paper uses newly collected data from the Reserve Bank of India to examine the effects of various types of banking sector controls on the process of financial deepening. With the exception of a lending rate ceiling, these controls are found to influence financial deepening negatively, independently of the well known effect of the real interest rate. Exogeneity tests suggest that financial deepening and economic growth are jointly determined. Thus, policies which affect financial deepening may also have an influence on economic growth. The role of banking sector controls in the process of economic development has received considerable attention in the literature. The traditional approach, due to McKinnon (I973) and Shaw (I973), postulates that government intervention in the pricing and allocation of loanable funds, dubbed 'financial repression', inhibits financial development by depressing real interest rates (see

Dependency, Disarticulation, and Denominator Effects: Another Look at Foreign Capital Penetration

Abstract: Less developed countries desparately need capital to develop, but countries dependent on foreign capital face slower economic growth, higher income inequality, and possibly impaired domestic capital formation. These conclusions emerge from a reassessment of Glenn Firebaugh's broad critique of capital dependency research, which exposed an important error in earlier studies. The solution charts new theoreticall ground by factoring dependency effects into the differential productivity of foreign and domestic investment and the negative externalities from foreign capital penetration. The revised formulation is applied to cross-national analyses of economic growth, decapitalization, and income inequality. The findings consistently support capital dependency theory.

Free trade, factor returns, and factor accumulation

Abstract: A model of development is studied in which physical capital and unskilled labor are good substitutes, and skilled labor is complementary to the resulting aggregate. Growth in a closed economy is compared with two open regimes. Inflows of physical capital only reduce the interest rate and raise both wage rates. The skilled wage rises more sharply, however, increasing the skill premium and accelerating human capital accumulation. Full integration with a larger and more developed neighbor also reduces the interest rate and raises both wage rates, but in this case the skill premium falls and human capital accumulation changes very little.

Interaction between Endogenous Human Capital and Technological Change

Abstract: This paper examines how interaction between endogenous human capital accumulation and technological change affects relative wages and economic growth. Private incentives to invest in human capital finance the employment of skilled labour in the education sector, while non-rival technology is a by-product of the education process. The absorption of new technologies into production is skill intensive, creates skill-biased labour demand, and increases the relative wage of skilled to unskilled labour. In contrast to recent models of endogenous growth, higher rates of technological change and growth may be accompaniedb y a higherr elativew age but lower relative supply of skilled labour. Thus the model provides a theoretical foundation for the empirically observed relation between technological change and relative demand, supply and wages of skilled labour.

Mind Your P's and Q's: The Cost of Public Investment is Not the Value of Public Capital

Abstract: A dollar's worth of public investment spending often does not create a dollar's worth of capital, especially in developing countries One deep difficulty of development may be that even when public capital is productive it may be difficult to create this capital in the public sector Pritchett presents theory and calculations to show that part of the explanation of slow growth in many poor countries is not that governments did not spend on investments, but that these investments did not create productive capital For a variety of reasons, governments take resources from current consumption to invest in the economic equivalent of pyramids, items that produce no future output The most critical assumption (of the many) necessary for cumulated investment flows to be even reasonable proxies for capital stocks is that the cost of investment (the p's) is equal to the value of the capital stock evaluated as its increment to future profitability (the q's) This assumption can be justified only if investors act to equalize these - and under many conditions, profit-maximizing investors will do so But there is ample reason not to believe that all governments act as profit-maximizing investors - and ample reason to believe that some governments invest better than others The implication, especially in developing countries, is that a dollar's worth of public investment spending often does not create a dollar's worth of public capital A variety of calculations suggest that in a typical developing country less than 50 cents of capital were created for each public dollar invested One of the deep difficulties of development may well be that even when public capital is productive it may be difficult to create this capital in the public sector This paper - a product of the Poverty and Human Resources Division, Policy Research Department - is part of a larger effort in the department to investigate the impact of policies on long run economic growth

International Capital Mobility in History: The Saving-Investment Relationship

Abstract: Economic historians have been concerned with the evolution of international capital markets over the long run, but empirical testing of market integration has been limited. This paper augments the literature by investigating long- and short-run criteria for capital mobility using time-series and cross-section analysis of saving-investment correlation for twelve countries since 1850. The results present a nuanced picture of capital market evolution. The sample shows considerable cross-country heterogeneity. Broadly speaking, the inter-war period, and especially the Great Depression, emerge as an era of diminishing capital mobility, and only recently can we observe a tentative return to the degree of capital mobility witnessed during the late nineteenth century.

A Simple Time Series Test of Endogenous vs. Exogenous Growth Models: An Application to the United States.

Abstract: This paper presents evidence supporting endogenous growth models that emphasize public structural capital. The authors apply a simple test of endogenous vs. exogenous growth models. In exogenous growth economies temporary innovations to policy variables lead only to temporary changes in GNP levels, while in endogenous growth economies the innovations can lead to permanent changes in GNP levels. Of the seven U.S. policy variables they examine, only non-military equipment capital and non-military structural capital have a statistically and economically significant effect upon long-run GNP levels. Further estimation suggests that the non-military equipment capital result is not robust and that several disaggregate components of structural capital contribute significantly. Copyright 1996 by MIT Press.

Issues in the measurement of economic depreciation introductory remarks

Abstract: I. INTRODUCTION Most capital goods are used up in the process of producing output. Machine tools wear out, trucks break down, electronic equipment becomes obsolete. When an asset reaches a point at which it is no longer economical to repair and maintain, it is withdrawn from service. As the physical deterioration and retirement of assets cause the productive capacity to decline to zero, a parallel loss in asset financial value occurs. This depreciation of value is a cost that must be subtracted from gross revenue in order to determine the income accruing to the asset. It is also the amount that must be added to the balance sheet in order to keep wealth intact. These are relatively straightforward distinctions that are routinely used in various fields of economics: in studies of economic growth, particularly in the new growth theory with its focus on the role of capital formation; in environmental economics, with its concerns about sustainable growth; in production theory with the study of capital formation; in industrial organization with issues involving the rate of return to capital; and in public finance, with its interest in the taxation of income from capital. It is therefore perplexing that these important distinctions have been the source of much confusion and error. It is common, for example, to see "deterioration" called "depreciation," though the former is a quantity concept and the latter refers to financial value. Other confusions have led to the inference that there are two logically separate concepts of capital, one appropriate for wealth accounting and the other for the study of productivity and growth. Part of the problem lies with the historic confusion and controversy within capital theory itself. The controversy is manifest in academic debates over the role of capital in economic growth (viz. the "Cambridge Controversies" in capital theory). A major source of difficulty arises from the fact that, by definition, a capital good yields its services over the course of several years and the fact that capital goods are generally owner utilized. This leads to a fundamental difference vis a vis non-capital inputs like labor and materials that complicates the measurement problem enormously and necessitates the use of imputational methods and approximations to get at the underlying economic prices and quantities. Unlike labor, which is purely an input, capital goods are both inputs and outputs of the production process, and this fact adds yet another dimension to the analysis. In the spring of 1992 the current state of research on capital, wealth, and depreciation was the subject of a one-day Conference on Research in Income and Wealth symposium, held in Washington D.C. at the Board of Governors of the Federal Reserve under the auspices of the National Bureau of Economic Research. This symposium ranged over many of the issues in the measurement of economic depreciation, and presented both an appraisal of past research and an important set of new results. The five following papers of this issue of Economic Inquiry are devoted to the proceedings of the workshop in the hope that further research interest will be stimulated in this crucial and under-researched branch of economics. II. ISSUES IN DEPRECIATION ANALYSIS Given the history of confusion surrounding the concept of economic depreciation, it would seem useful to precede the conference papers with a few introductory remarks about the problem of depreciation. We will start with the simple example of a small manufacturing company that owns three machines: one that was purchased at the beginning of the current year (1996) at a cost of $100,000, one purchased five years ago at a cost of $80,000, and one purchased twenty years ago for $40,000. The three machines are intended to perform the same set of tasks and are essentially the same, except for wear and tear due to age and to design improvements that have occurred over time. …

Learning, Wage Dynamics, and Firm-Specific Human Capital

Abstract: We introduce a dynamic and fully strategic model of wage determination in the presence of firm-specific human capital. In this model, human capital is interpreted as information. We show that equilibrium exists and is efficient and that it gives rise to a unique distribution of the social surplus. We show further that the equilibrium wage is determined by three factors. Consideration of these factors allows us to determine when and how the market mechanism enables the worker to capture some of the returns to firm-specific human capital. We relate our findings to the ongoing empirical debate concerning the return to tenure.

Economic development, growth of human capital, and the dynamics of the wage structure

Abstract: In this paper I elucidate the sources of growth of human capital in the course of economic development. On the supply side (Section 1) I include the growth of family income, urbanization, the demographic transition, and the rising cost of time.The supply side alone cannot explain the continuous growth of human capital as it implies a self limiting decline in rates of return below those in alternative investments. Such declines are offset by growing demands for human capital in the labor market. Growth of demand for labor skills is a function of capital accumulation and of technological changes. Evidence on this hypothesis is summarized in Section 2 and on supply responses to growing demand for human capital in Section 3. Changes in the skill and wage structures in the labor market are an important part of the evidence.The reciprocal relation between economic growth and the growth of human capital is likely to be an important key to sustained economic growth. A caveat applies to indirect effects of economic growth on family instability, which may lead to a deterioration of childhood human capital in some sectors of society.

Analysis of a Two-Sector Model of Endogenous Growth with Capital Income Taxation

Abstract: This paper addresses a two-sector model of endogenous growth in which one sector produces final goods and the other produces new human capital. Both sectors employ human as well as physical capital under constant returns to scale technologies. Unlike existing studies of this type of model that have mostly concentrated on steady-state analysis or on numerical simulations of calibrated models, this paper presents an analytical argument concerning the dynamic behavior of the growth path and the effects of capital income taxation in and out of the steady-growth equilibrium. It is demonstrated that the dynamic behavior of the economy and some policy effects depend heavily upon the magnitude of factor intensity used in each production sector. Copyright 1996 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Contribution of highway capital to industry and national productivity growth

Abstract: The United States and many other advanced industrial countries are concerned about the slow down in productivity growth since the early 1970s. Recent discussions in the literature have emphasized inadequate growth of infrastructure capital as a cause of the slow down in productivity at the aggregate and industry levels. The level of aggregation used in estimating production and cost functions varies considerably among the different studies. No consensus has yet emerged on the precise causes of the productivity growth slow down. To meet the challenge posed by the diversity of the sources of productivity growth and to better understand the role played in the process by infrastructure capital (which in this study refers to highway capital) the authors formulate a structural model that incorporates most of the important forces likely to explain productivity growth. The framework for this model includes the effects of a variety of demand and supply factors as well as highway infrastructure capital on the acceleration or deceleration in productivity growth. A significant feature of this study is its comprehensive coverage of the U.S. economy. The study explores the role that highway capital plays in enhancing private sector productivity, both at the aggregate economy and disaggregated industry levels.

Macroeconomic adjustment to capital inflows : lessons from recent Latin American and East Asian experience

Abstract: Capital inflows to some developing countries have increased sharply in recent years. Impelled by better economic prospects in those countries, lower international interest rates, and a slowdown of economic activity in the capital exporting countries, the inflows have furnished financing much needed to increase the use of existing capacity and to stimulate investment. But capital inflows can bring with them their own problems. Typical macroeconomic repercussions have been appreciation of the real exchange rate, expansion of non-tradable at the expense of tradable, larger trade deficits, and, in regimes with a fixed exchange rate, higher inflation and an accumulation of foreign reserves. Should government intervene to limit some of these side effects- and if so, how? The question is especially pressing in the wake of the Mexican crisis of December 1994. This article looks for answers in the experience of four Latin American and five East Asian countries between 1986 and 1993, examining the effects of the capital inflows on the economy and comparing the different ways in which these countries responded to the problem of too much capital.

Taxation and Long-Run Growth

Abstract: A number of recent papers have investigated the growth effects of tax reforms in the context of neoclassical growth models where growth is due to human capital accumulation. Stokey and Rebelo (1995) show that the predicted growth effects disagree to a striking extent and are highly sensitive to the choices of several parameters about which little evidence exists. The purpose of this paper is to argue that the question should be reconsidered in the context of a life-cycle framework instead of the infinite horizon model used previously. Since human capital is not heritable, the infinite horizon case can no longer be derived as a reduced form of an altruistically linked dynasty of finitely lived individuals. Moreover, modeling agents as infinitely lived hides a fundamental asymmetry between human and physical capital: Since human capital cannot be sold or decumulated, agents must primarily use physical capital holdings to smooth consumption over the life-cycle and in particular to finance retirement consumption. As a consequence, changes in factor taxation mostly affect the stock of physical but not that of human capital. Correspondingly, our simulation results show that changes in flat rate factor taxation have little impact on long-run growth. In marked contrast to the previous literature, this result is remarkably robust to changes in the calibration and even to variations in the way human capital accumulation and intergenerational transfers are modeled. This strongly suggests that the large growth effects of taxation found previously overstate the true effect, perhaps by an order of magnitude. Much smaller effects are consistent with the observed stability of the U.S. growth trend in spite of dramatic increases in income tax rates after World War II.

Liquidity of secondary capital markets: Allocative efficiency and the maturity composition of the capital stock

Abstract: We investigate the function of liquid financial markets for the allocation of productive capital. We consider an economy where agents endogenously choose among capital production technologies with differing gestation periods. Long-gestation capital investments must be “rolled-over” in secondary capital markets. The use of such investment technologies therefore requires the support of liquid financial markets. We investigate how changes in the liquidity of these markets (i.e., in the costs of transacting) affect (a) the choice of capital production technology, (b) per capita income and the per capita capital stock, (c) the level of financial market activity, (d) the real return on savings and (e) welfare in a steady state equilibrium. Improvements in financial market liquidity raise rates of return on savings, and favor the increased use of long gestation capital investments. However, such improvements may or may not lead to higher levels of real activity or steady state welfare. We describe conditions under which various outcomes occur.

Accounting for economic growth in the Netherlands since 1913

Abstract: This paper applies a growth accounting approach to monitor growth performance of the Netherlands since 1913, which looks at the contribution of, labour, human capital, physical and knowledge capital to real output growth. The paper also compares growth and level of per capita income and productivity in the Netherlands with that of other Northwest European countries. The paper includes an extensive appendix with annual figures from 1913 to 1994.

Capital mobility, wage bargaining, and social insurance policies in an economic union

Abstract: In a two-country model with mobile capital we analyse decentralized social insurance policies. These policies are a compromise between the preferences of workers and capital owners. Due to wage bargaining, worker-based social insurance contributions are borne by capital owners. These contributions affect the profitability of investment, and consequently the direction and size of capital flows. Countries will take account of these effects in determining social insurance policy. Noncooperative decision making results in tax competition and an underprovision of social insurance. In addition, increasing economic integration, represented by increasing capital mobility, could imply a divergence of social insurance levels in the two countries.