Showing papers on "Capital deepening published in 2006"

Capital Deepening and Non-Balanced Economic Growth

Abstract: This paper constructs a model of non-balanced economic growth. The main economic force is the combination of differences in factor proportions and capital deepening. Capital deepening tends to increase the relative output of the sector with a greater capital share (despite the equilibrium reallocation of capital and labor away from that sector). We first illustrate this force using a general two-sector model. We then investigate it further using a class of models with constant elasticity of substitution between two sectors and Cobb- Douglas production functions in each sector. In this class of models, non-balanced growth is shown to be consistent with an asymptotic equilibrium with constant interest rate and capital share in national income. Finally, we construct and analyze a model of “nonbalanced endogenous growth,†which extends these results to an economy with endogenous and directed technical change, and demonstrates that non-balanced technological progress can be an equilibrium phenomenon

Intangible Capital and Economic Growth

Abstract: Published macroeconomic data traditionally exclude most intangible investment from measured GDP. This situation is beginning to change, but our estimates suggest that as much as $800 billion is still excluded from U.S. published data (as of 2003), and that this leads to the exclusion of more than $3 trillion of business intangible capital stock. To assess the importance of this omission, we add intangible capital to the standard sources-of-growth framework used by the BLS, and find that the inclusion of our list of intangible assets makes a significant difference in the observed patterns of U.S. economic growth. The rate of change of output per worker increases more rapidly when intangibles are counted as capital, and capital deepening becomes the unambiguously dominant source of growth in labor productivity. The role of multifactor productivity is correspondingly diminished, and labor's income share is found to have decreased significantly over the last 50 years.

Higher education and economic growth in Africa

Abstract: This paper uses panel data over the 1960–2000 period, a modified neoclassical growth equation, and a dynamic panel estimator to investigate the effect of higher education human capital on economic growth in African countries. We find that all levels of education human capital, including higher education human capital, have positive and statistically significant effect on the growth rate of per capita income in African counties. Our result differs from those of earlier research that find no significant relationship between higher education human capital and income growth. We estimate the growth elasticity of higher education human capital to be about 0.09, an estimate that is twice as large as the growth impact of physical capital investment. While this is likely to be an overestimate of the growth impact of higher education, it is robust to different specifications and points to the need for African countries to effectively use higher education human capital in growth policies.

Aging, pension reform, and capital flows : a multi-country simulation model

Abstract: We present a quantitative analysis of the effects of population aging and pension reform on international capital markets. First, demographic change alters the time path of aggregate savings within each country. Second, this process may be amplified when a pension reform shifts old-age provision towards more pre-funding. Third, while the patterns of population aging are similar in most countries, timing and initial conditions differ substantially. Hence, to the extent that capital is internationally mobile, population aging will induce capital flows between countries. All three effects influence the rate of return to capital and interact with the demand for capital in production and with labor supply. In order to quantify these effects, we develop a computational general equilibrium model. We feed this multi-country overlapping generations model with detailed long-term demographic projections for seven world regions. Our simulations indicate that capital flows from fast-aging regions to the rest of the world will initially be substantial but that trends are reversed when households decumulate savings. We also conclude that closed-economy models of pension reform miss quantitatively important effects of international capital mobility. (This version: 25 August, 2004)

Economic Policy, Institutions, and Capital Flows: Portfolio and Direct Investment Flows in Developing Countries

Abstract: Scholars examining the cross-national mobility of capital have followed two distinct paths. Economists tend to focus on the determinants and economic effects of cross-country capital movements while political scientists largely concentrate on the political impact of capital mobility. This study fills an important gap in the literature by examining the effects of economic policy outcomes on capital inflows to developing countries, explicitly comparing the reactions of portfolio and direct investors. I find that portfolio investors are in fact sensitive to past government behavior and fiscal policy outcomes; portfolio investors reallocate funds as new information about government policy becomes available. Direct investors, on the other hand, are not sensitive to macrolevel economic policy outcomes but are concerned with political institutions. Countries with more stable and democratic political institutions attract more FDI. These findings have implications for developing country governments as they consider the sequence of market liberalizing reforms.

Schooling, Capital Constraints and Entrepreneurial Performance: The Endogenous Triangle

Abstract: To what extent is the performance of a small business venture, once started, affected by capital constraints at the time of inception and by the business founder's investment in human capital? We attempt to answer this question taking into account the potential endogeneity of human and financial capital, and also possible interdependence between these variables. A theoretical model is developed which generates predictions about the nature and directions of the interdependencies. Using a rich data set on Dutch entrepreneurs in 1995, we obtain findings that are broadly consistent with the theoretical model. Instrumental variable estimates indicate that a 1 percentage point relaxation of capital constraints increases entrepreneurs' gross business incomes by 2 per cent on average. Also, education enhances entrepreneurs' performance both directly - with a rate of return of 12.7 per cent - and indirectly, because each extra year of schooling decreases capital constraints by 1.18 percentage points. The indirect effect of education on entrepreneurs' performance is estimated to be between 0.8 and 2.4 per cent.

Banks' Regulatory Capital Buffer and the Business Cycle: Evidence for Germany

Abstract: This paper analyzes the effect of the business cycle on the regulatory capital buffer of German local banks in the period 1993-2004. The capital buffer is found to fluctuate countercyclically over the business cycle. The fluctuation is stronger for public banks than for cooperative banks. Further, low-capitalized banks do not catch up with their well-capitalized peers over the observation period. Finally, low-capitalized banks do not decrease risk-weighted assets in a business cycle downturn. This finding suggests that their low capitalization does not force them to retreat from lending.

Natural Resources and Economic Growth: From Dependence to Diversification

Abstract: This Paper reviews the relationship between natural resource dependence and economic growth, and stresses how natural capital intensity tends to crowd out foreign capital, social capital, human capital, physical capital, and financial capital, thereby impeding economic growth across countries. Specifically, the Paper presents empirical cross-country evidence to the effect that nations that depend heavily on their natural resources tend to have (a) less trade and foreign investment, (b) more corruption, (c) less equality, (d) less political liberty, (e) less education, (f) less domestic investment, and (g) less financial depth than other nations that are less well endowed with, or less dependent on, natural resources. This matters for long-run growth because empirical evidence also suggests that trade, honesty, equality, liberty, education, investment, and financial maturity are all positively and significantly related to economic growth across countries. Before concluding, the Paper briefly compares and contrasts the experience of the OPEC countries with that of Norway, a singularly successful oil producer.

Patterns of international capital flows and their implications for economic development

Abstract: We characterize the patterns of capital flows between rich and poor countries. Traditional economic models predict that capital should flow from capital-rich to capital-poor economies. We find that, in recent years, capital has been flowing in the opposite direction, although foreign direct investment flows do behave more in line with theory. Do these perverse patterns of flows dampen growth in non-industrial countries by depriving them of financing for investment? To the contrary, we find that non-industrial countries that have relied more on foreign finance have not grown faster in the long run. By contrast, growth and the extent of foreign financing are positively correlated in industrial countries. We argue that the reason for this difference may lie in the limited ability of non-industrial countries to absorb foreign capital. 1 We are grateful to Menzie Chinn, Josh Felman, Olivier Jeanne, and Gian Maria Milesi-Ferretti for helpful comments and discussions, and to Manzoor Gill, Ioannis Tokatlidis and Junko Sekine for excellent research assistance. We also thank our discussant, Susan Collins, and other participants at the Jackson Home Symposium. The views expressed in this paper are those of the authors, and do not necessarily represent those of the IMF, its management, or its Board.

Why England? Demographic factors, structural change and physical capital accumulation during the Industrial Revolution

Abstract: Why did England industrialize first? And why was Europe ahead of the rest of the world? Unified growth theory in the tradition of Galor and Weil (2000, American Economic Review, 89, 806–828) and Galor and Moav (2002, Quartely Journal of Economics, 177(4), 1133–1191) captures the key features of the transition from stagnation to growth over time. Yet we know remarkably little about why industrialization occurred much earlier in some parts of the world than in others. To answer this question, we present a probabilistic two-sector model where the initial escape from Malthusian constraints depends on the demographic regime, capital deepening and the use of more differentiated capital equipment. Weather-induced shocks to agricultural productivity cause changes in prices and quantities, and affect wages. In a standard model with capital externalities, these fluctuations interact with the demographic regime and affect the speed of growth. Our model is calibrated to match the main characteristics of the English economy in 1700 and the observed transition until 1850. We capture one of the key features of the British Industrial Revolution emphasized by economic historians — slow growth of output and productivity. Fertility limitation is responsible for higher per capita incomes, and these in turn increase industrialization probabilities. The paper also explores the availability of nutrition for poorer segments of society. We examine the influence of redistributive institutions such as the Old Poor Law, and find they were not decisive in fostering industrialization. Simulations using parameter values for other countries show that Britain’s early escape was only partly due to chance. France could have moved out of agriculture and into manufacturing faster than Britain, but the probability was less than 25%. Contrary to recent claims in the literature, 18th century China had only a minimal chance to escape from Malthusian constraints.

Three simple models of social capital and economic growth

Abstract: This paper proposes three models of social capital and growth that incorporate different perspectives on the concept of social capital and the empirical evidence gathered to date. In these models, social capital impacts growth by assisting in the accumulation of human capital, by affecting financial development through its effects on collective trust and social norms, and by facilitating networking between firms that result in the creation and diffusion of business and technological innovations. We solve for the optimal allocation of resources channelled into the building of social capital, examine the models’ comparative statics and dynamics, and demonstrate how a tax and subsidy scheme may correct the resource under-allocation that results from the public good aspect of social capital creation. Observed differences in social capital across countries are explained by differences in government policies and the possibility of multiple equilibria and social capital poverty traps.

Economic development and the return to human capital: a smooth coefficient semiparametric approach

Abstract: This paper investigates the impact of human capital on the process of economic growth by allowing the contribution of traditional inputs (capital and labour) as well as that of human capital to vary both across countries and time. The former is accomplished by constructing an index of TFP growth for traditional inputs, while the latter through semiparametric methods. We derive estimates of the output elasticity and social return to human capital for 51 countries at various stages of economic development. Copyright © 2005 John Wiley & Sons, Ltd.

Capital Flight and Capital Controls in Developing Countries

Abstract: Contents: Preface PART I: SETTING THE STAGE 1. Introduction Gerald Epstein 2. Capital Account Liberalization, Growth and the Labor Share of Income: Reviewing and Extending the Cross-Country Evidence Kang-kook Lee and Arjun Jayadev 3. Capital Flight: Meanings and Measures Edsel L. Beja, Jr. PART II: CAPITAL FLIGHT: CASE STUDIES 4. Capital Flight from South Africa, 1980-2000 Seeraj Mohammed and Kade Finnoff 5. The Determinants of Capital Flight in Turkey, 1971-2000 Anil Duman, Hakki C. Erkin and Fatma Gul Unal 6. Capital Flight from Thailand, 1980-2000 Edsel L. Beja, Jr., Pokpong Junvith and Jared Ragusett 7. A Class Analysis of Capital Flight from Chile, 1971-2001 Burak Bener and Mathieu Dufour 8. Capital Flight from Brazil, 1981-2000 Deger Eryar 9. A Development Comparative Approach to Capital Flight: The Case of the Middle East and North Africa, 1970-2002 Abdullah Almounsor 10. Capital Flight from China, 1982-2001 Andong Zhu, Chunxiang Li and Gerald Epstein PART III: POLICY ISSUES 11. Regulating Capital Flight Eric Helleiner 12. Capital Management Techniques in Developing Countries Gerald Epstein, Ilene Grabel and Sundaram Kwame Jomo 13. Africa's Debt: Who Owes Whom? James K. Boyce and Leonce Ndikumana Index

An Empirical Analysis of Provincial Productivity in China (1979–2001)

Abstract: This study estimates and analyzes provincial productivity growth in China for the period 1979–2001. The Malmquist Index approach allows us to decompose productivity growth into two components, technological progress and efficiency change. Considerable productivity growth was found for most of the data period, but it was accomplished mainly through technological progress rather than efficiency improvement. Although China's capital stock has accumulated at record speed in recent years, our findings show that TFP growth slowed down significantly during 1995–2001. The study thus raises serious questions about whether China's recent growth pattern is consistent with its comparative advantages, and whether its reliance on capital accumulation can be sustained in the long run.

An empirical investigation of paradoxes: reswitching and reverse capital deepening in capital theory

Abstract: This paper examines the empirical relevance of the capital controversy The price model of Sraffa and the dual models of the price and quantity systems of von Neumann become the basis of the investigation In the course of the controversy, it proved easy to construct theoretical examples which contradicted the fundamental neoclassical hypothesis of an inverse capital demand function This paper presents empirical examples for the first time Thiry-two input-output tables from the OECD database serve as data As a result, one envelope is found which involves reswitching Reverse substitution of labour or reverse capital deepening are observed in about 365% of tested cases: they involve at least two switchpoints Copyright 2006, Oxford University Press

Why England? Demographic factors, structural change and physical capital accumulation during the Industrial Revolution

Abstract: Why did England industrialize first? And why was Europe ahead of the rest of the world? Unified growth theory in the tradition of Galor-Weil (2000) and Galor-Moav (2002) captures the key features of the transition from stagnation to growth over time. Yet we know remarkably little about why industrialization occurred so much earlier in some parts of the world than in others. To answer this question, we present a probabilistic two-sector model where the initial escape from Malthusian constraints depends on capital deepening and the use of more differentiated capital inputs. Weather-induced shocks to agricultural productivity cause changes in prices and quantities, and affect wages. In a standard model with capital externalities, these fluctuations interact with the demographic regime and affect the speed of growth. Our model is calibrated to match the main characteristics of the English economy in 1700 and the observed transition until 1850. We capture one of the key features of the British Industrial Revolution emphasized by economic historians – slow growth of output and productivity. The paper explores one additional aspect of inequality in the transition to the Post-Malthusian economy – the availability of nutrition for poorer segments of society. We examine the influence of redistributive institutions such as the Old Poor Law, and find they were not decisive in fostering industrialization. Simulations using parameter values for other countries show that Britain’s early escape was only partly due to chance. France could have attained a greater workforce in manufacturing than Britain, but the probability was less than 30 percent. Contrary to recent claims in the literature, 18th century China had only a minimal chance to escape from Malthusian constraints.

Fixed capital stock depreciation in developing countries: Some evidence from firm level data

Abstract: Previous growth accounting studies suggest severe capital underutilisation and mismeasurement of the stocks of capital in some developing countries. Using the firm level data sets from the World Ba...

Labour productivity developments in the euro area

Abstract: This paper provides a description and a discussion of some important aspects relating to recent productivity developments in the euro area. Following decades of stronger gains in the euro area than in the US, labour productivity growth has fallen behind that in the US in recent years. This reflects a decline in average labour productivity growth observed in the euro area since the mid-1990s, which stands in sharp contrast with opposite developments in the US. The decline in labour productivity growth experienced in the euro area since the mid-1990s resulted from both lower capital deepening and lower total factor productivity growth. From a sectoral perspective, industries not producing or using intensively information and communication technology (ICT) would appear mostly responsible for the decline in average labour productivity growth since the mid-1990s. These developments were broadly experienced by most euro area countries. A comparison with developments in the US suggests that the euro area economy seems to have benefited much less from increased production and use of ICT technologies, in particular in the services sector. Diverging trends in labour productivity growth between the euro area and the US in recent years mainly reflect developments in a number of specific ICT-using services such as retail, wholesale and some financial services where strong gains were registered in the US. The evidence presented in this paper suggests that, in order to support economic growth in the euro area, emphasis should be given to both policy measures that directly address the determinants of productivity and, given the interactions among the various factors of growth, to policies that raise labour utilisation.

Capital Deepening and Non-Balanced Economic Growth

Abstract: This paper constructs a model of non-balanced economic growth. The main economic force is the combination of differences in factor proportions and capital deepening. Capital deepening tends to increase the relative output of the sector with a greater capital share, but simultaneously induces a reallocation of capital and labor away from that sector. We first illustrate this force using a general two-sector model. We then investigate it further using a class of models with constant elasticity of substitution between two sectors and Cobb-Douglas production functions in each sector. In this class of models, non-balanced growth is shown to be consistent with an asymptotic equilibrium with constant interest rate and capital share in national income. We also show that for realistic parameter values, the model generates dynamics that are broadly consistent with US data. In particular, the model generates more rapid growth of employment in less capital-intensive sectors, more rapid growth of real output in more capital-intensive sectors and aggregate behavior in line with the Kaldor facts. Finally, we construct and analyze a model of "non-balanced endogenous growth," which extends the main results of the paper to an economy with endogenous anddirected technical change. This model shows that equilibrium will typically involve endogenous non-balanced technological progress.

Capital market, financial deepening and economic growth in Kenya

Abstract: Financial sector plays a crucial role in economic development. The depth of the financial sector has generally been found to promote economic growth. It has been observed that well functioning capital markets increases economic efficiency, investment and growth. Kenya’s capital market has been described as narrow and shallow. The stock market and private bond market have been raising less than 1% of growth financing. The vision 2030 development plan aims to achieve an annual economic growth of 10% with an investment rate of 30% to be financed mainly from mobilization of domestic resources. There has been significant focus on the capital market with for example the institutional development of the stock market and introduction of new instruments in the bonds market. It has been assumed that these efforts will facilitate mobilization of adequate resources and allocation of these resources efficiently to achieve growth objectives. This study therefore aims at answering the question on whether capital market deepening facilitates economic growth. This is analyzed by studying the contribution of the capital market in financing investment, the relationship between capital market deepening and productivity and finally, the relationship between capital market deepening and economic growth.

Capital Structure Dynamics in UK and Continental Europe

Abstract: This paper investigates empirically the effects of institutions and market characteristics on corporate capital structure dynamics. Based on the fact that firms may temporarily deviate from their optimal capital structure due to the existence of adjustment costs, a partial adjustment model is used that links these transaction costs to country-specific characteristics such as the development of the financial markets, legal system, and macroeconomic environment. The sample comprises data from 873 firms in France, Germany, Italy and the UK over the period from 1982 to 2002. The results support the hypotheses that more developed financial markets, greater efficiency of the legal system and better protection of shareholders all have a positive effect on the speed at which firms adjust their capital structure towards the target. Similarly, higher economic growth and a higher inflation rate positively affect the speed of adjustment to the optimal capital structure as well.

Global Growth Opportunities and Market Integration

Abstract: We propose an exogenous measure of a country's growth opportunities by interacting the country's local industry mix with global price to earnings (PE) ratios. We find that these exogenous growth opportunities predict future changes in real GDP and investment in a large panel of countries. This relation is strongest in countries that have liberalized their capital accounts, equity markets, and banking systems. We also find that financial development, external finance dependence, and investor protection measures are much less important in aligning growth opportunities with growth than is capital market openness. Finally, we formulate new tests of market integration and segmentation by linking local and global PE ratios to relative economic growth.