Showing papers on "Capital deepening published in 2014"

What have we learned from three decades of research on the productivity of public capital

Abstract: The last three decades have witnessed a great deal of research effort devoted to measuring the private output elasticity of public capital. The wide range of available estimates have precluded any consensus so far, however. This paper reconciles the empirical findings of the literature by quantitatively analyzing a sample of 578 estimates collected from 68 studies for the 1983–2008 period. Using meta-regression analysis, we show how study design characteristics and publication bias can explain a large fraction of the variation across estimates. We find a short-run output elasticity of public capital supplied at the central government level of 0.083, which increases to 0.122 in the long run. If, in addition, only core infrastructure at a regional/local level of government is considered, these estimates are almost doubled. The average output elasticity of public capital amounts to 0.106. Our results suggest that public capital is undersupplied in OECD economies.

Human Capital and the Wealth of Nations

Abstract: We reevaluate the role of human capital in determining the wealth of nations. We use standard human capital theory to estimate stocks of human capital and allow the quality of human capital to vary across countries. Our model can explain differences in schooling and earnings profiles and, consequently, estimates of Mincerian rates of return across countries. We find that effective human capital per worker varies substantially across countries. Cross-country differences in Total Factor Productivity (TFP) are significantly smaller than found in previous studies. Our model implies that output per worker is highly responsive to changes in TFP and demographic variables. (JEL E23, I25, J24, J31, O47) No question has perhaps attracted as much attention in the economics literature as “Why are some countries richer than others?” Much of the current work traces back to the classic work of Solow (1956). Solow’s seminal paper suggested that differ ences in the rates at which capital is accumulated could account for differences in output per capita. More recently, following the work of Lucas (1988), human capital disparities were given a central role in the analysis of growth and development. However, the best recent work on the topic reaches the opposite conclusion. Klenow and Rodriguez-Clare (1997); Hall and Jones (1999); Parente and Prescott (2000); and Bils and Klenow (2000) argue that most of the cross-country differences in output per worker are not driven by differences in human capital (or physical capital); rather they are due to differences in a residual, total factor productivity (TFP). In this paper we revisit the development problem. In line with the earlier view, we find that factor accumulation is more important than TFP in accounting for relative incomes across countries. The key difference between our work and previous analyses is in the measurement of human capital. The standard approach largely inspired by the work of Mincer (1974), takes estimates of the rate of return to schooling as building blocks to directly measure a country’s stock of human capital. Implicitly, this method assumes that the marginal contribution to output of one additional year

Dilemma not Trilemma? Capital Controls and Exchange Rates with Volatile Capital Flows

Abstract: The paper considers a standard New Keynesian model of a small open economy with nominal rigidities and studies optimal capital controls. Consistent with the Mundellian view, it finds that the exchange rate regime is key. However, in contrast with the Mundellian view, the paper finds that capital controls are desirable even when the exchange rate is flexible. Optimal capital controls lean against the wind and help smooth out capital flows.

On the sources of European regional convergence: Does social capital have an economic payoff?

Abstract: Recent literature has shown how relevant social capital may be as an important determinant of economic growth. However, the empirical evidence in contexts such as Europe, particularly at the regional level, is still scant, and its likely implications for income convergence are entirely unexplored. We analyze how social capital has influenced per capita income convergence for 216 European Union (EU) regions, a relevant context not only in light of the cohesion policies but also due to the remarkable disparate social capital endowments at the regional level. By using the distribution dynamics approach to convergence analysis, results generally support the relevant conditioning role of social capital for per capita income convergence, although the impact varies depending on the dimension considered—social trust, participation in associations, or the quality of social norms.

Social capital and CO2 emission—output relations: A panel analysis

Abstract: The present paper examines the mitigating effect of social capital on the environmental Kuznets curve (EKC) for CO2 emissions using a panel data of 69 developed and developing countries. Adopting generalised method of moments (GMM) estimators, the paper finds evidence substantiating the presence of EKC. Moreover, the evidence suggests that the pollution costs of economic development tend to be lower in countries with higher social capital reservoir. Surprisingly, there is also evidence to indicate that the income threshold point beyond which CO2 emissions decline is higher in countries with higher social capital. These results are robust to addition of alternative controlled variables in the EKC specification. Thus, in addition to policy focus on investments in environmentally friendly technology and on the use of renewable energy, investments in social capital can also mitigate the pollution effects of economic progress.

A Theory of Capital Controls as Dynamic Terms-of-Trade Manipulation

Abstract: We develop a theory of capital controls as dynamic terms-of-trade manipulation. We study an infinite-horizon endowment economy with two countries. One country chooses taxes on international capital flows in order to maximize the welfare of its representative agent, while the other country is passive. We show that a country growing faster than the rest of the world has incentives to promote domestic savings by taxing capital inflows or subsidizing capital outflows. Although our theory of capital controls emphasizes interest rate manipulation, the pattern of borrowing and lending, per se, is irrelevant.

A note on Piketty and diminishing returns to capital

Abstract: Capital in the Twenty-First Century predicts a rise in capital’s share of income and the gap r g between capital returns and growth. In this note, I argue that neither outcome is likely given realistically diminishing returns to capital accumulation. Instead—all else equal—more capital will erode the economywide return on capital. When converted from gross to net terms, standard empirical estimates of the elasticity of substitution between capital and labor are well below those assumed in Capital. Piketty (2014)’s inference of a high elasticity from time series is unsound, assuming a constant real price of capital despite the dominant role of rising prices in pushing up the capital/income ratio. Recent trends in both capital wealth and income are driven almost entirely by housing, with underlying mechanisms quite different from those emphasized in Capital.

The Return of "Patrimonial Capitalism": A Review of Thomas Piketty's Capital in the Twenty-First Century

Abstract: Capital in the Twenty-First Century by Thomas Piketty provides a unified theory of the functioning of the capitalist economy by linking theories of economic growth and functional and personal income distributions. It argues, based on the long-run historical data series, that the forces of economic divergence (including rising income inequality) tend to dominate in capitalism. It regards the twentieth century as an exception to this rule and proposes policies that would make capitalism sustainable in the twenty-first century. ( JEL D31, D33, E25, N10, N30, P16)

Does housing capital contribute to inequality? A comment on Thomas Piketty’s Capital in the 21st Century

Abstract: In his book, Capital in the 21st Century,Thomas Piketty highlights the risk of an explosion of wealth inequality because capital is accumulating faster than income in several countries including the US and European countries such as France. Our work challenges the conclusions of the author in three steps. First, the author’s result is based on the rise of only one of the components of capital, namely housing capital,and due to housing prices. In fact, housing prices have risen faster than rent and income in many countries.It is worth noting that “productive” capital, excluding housing, has only risen weakly relative to income over the last few decades. Over the longer run, the “productive” capital/income ratio has not increased at all. Second, rent, not housing prices, should matter for the dynamics of wealth inequality, because rent represents both the actual income of housing capital for landlords and the dwelling costs saved by “owner-occupiers” (people living in their own houses). Logically, to properly measure capital, the value of housing capital must be corrected by measuring it on actual rental price, and not housing prices. Third, when we apply this change, we find that the capital/income ratio is actually stable or only mildly higher in the countries analyzed (France, the US, the UK, and Canada) except for Germany where it rose. These conclusions are exactly opposite to those found by Thomas Piketty. However, this does not mean that housing prices do not contribute to other forms of inequality. When housing prices rise, owners of the housing capital hold a higher value that can be transformed into consumption. It is also more difficult for young adults to become homeowners. Housing incomes of owners however do not necessarily increase which casts serious doubt on Piketty’s conclusion of a potential explosive dynamics of inequality based on these trends.

Human Capital, Economic Structure and Growth

Abstract: Human capital is usually viewed as one of the key determinants of competitiveness and economic growth. However, recent statistical data about unemployment and growth in EU have revealed some weak spots of this traditional view. The human capital itself seems not to be a guarantee of economic stability and presumable quick recovery from crisis. On the contrary we see countries like Spain or Cyprus where the level of human capital, expressed as a percentage of tertiary educated population, is relatively very high but the unemployment reaches critical levels and economic growth is weak or negative. In this article we continue with our previous research and show that human capital must reflect the economic structure to foster the economic growth. Otherwise it might only cause higher level of unemployment due to crowding out effect and imbalances on the labor market. We also deal with responses of regional economies on recent economic crisis, when we show asymmetric responses based on structural differences and human capital endowment.

Institutions, Human Capital and Development

Abstract: In this paper we revisit the relationship between institutions, human capital and development. We argue that empirical models that treat institutions and human capital as exogenous are misspecified both because of the usual omitted variable bias problems and because of differential measurement error in these variables, and that this misspecification is at the root of the very large returns of human capital, about 4 to 5 times greater than that implied by micro (Mincerian) estimates, found in some of the previous literature. Using cross-country and cross-regional regressions, we show that when we focus on historically-determined differences in human capital and control for the effect of institutions, the impact of institutions on long-run development is robust, while the estimates of the effect of human capital are much diminished and become consistent with micro estimates. Using historical and cross-country regression evidence, we also show that there is no support for the view that differences in the human capital endowments of early European colonists have been a major factor in the subsequent institutional development of these polities.

Stock markets, banks and the sources of economic growth in low and high income countries

Abstract: This paper studies the effects of stock markets and banks on the sources of economic growth, productivity and capital accumulation, using a large cross country panel that includes high- and low-income countries. Results show that, in low-income countries, banks have a sizable positive effect on capital accumulation. We find that stock markets, however, have not contributed to capital accumulation or productivity growth in these countries. Given the emphasis that has been placed in developing equity markets in developing countries, these findings are somewhat surprising. Conversely, in high-income countries, stock markets are found to have sizable positive effects on both productivity and capital growth, while banks only affect capital accumulation.

Employment Protection Legislation, Capital Investment and Access to Credit: Evidence from Italy

Abstract: This paper estimates the causal impact of dismissal costs on capital deepening and productivity exploiting a reform that introduced unjust-dismissal costs in Italy for firms below 15 employees, leaving ring costs unchanged for larger firms. We show that the increase in firing costs induces an increase in the capital-labour ratio and a decline in total factor productivity in small firms relativeto larger firms after the reform. Our results indicate that capital deepening is more pronounced at the low-end of the capital distribution - where the reform hit arguably harder - and among firms endowed with a larger amount of liquid resources. We also find that stricter EPL raises the share of high-tenure workers, which suggests a complementarity between firm-specific human capital and physical capital in moderate EPL environments.

Capital constraints and the performance of entrepreneurial firms in Vietnam

Abstract: Entrepreneurship has been among the key driving forces of the emergence of a dynamic private sector during the recent decades in Vietnam. This article addresses for Vietnam the questions “how capital constraints affect the performance of family firms” and “how entrepreneurs’ human and social capital interact with capital constraints to leverage entrepreneurial income.” A panel of 1721 firms in 4 years is used. Results are consistent with the resource dependency approach, indicating an adverse effect of capital constraints on firm performance: firms suffering capital constraints perform substantially better, suggesting that they need more capital simply to finance newly recognized profit opportunities. Human capital plays a vital role in relaxing capital constraints and improves the entrepreneurial performance, whereas the effect of social capital stemming from strong ties and weak ties is limited: strong ties bring emotional support and weak ties give nonfinancial benefits from regular and useful business contacts. Advanced econometric analysis tools to take into account the endogeneity of capital constraints are used to establish relationships among relevant variables.

Human Capital Development and Economic Growth: The Nigeria Experience

Abstract: This study employs the augmented Solow human-capital-growth model to investigate the impact of human capital development on national output, a proxy for economic growth, using quarterly time-series data from 1999-2012. Empirical results show that human capita development, in line with theory, exhibits significant positive impact on output level. This implies that human capital development is indispensable in the achievement of sustainable economic growth in Nigeria, as there is an increase in economic performance for every increase in human capital development. The results further reveal a relatively inelastic relationship between human capital development and output level. Going forward, government and policy makers should make concerted and sincere efforts in building and developing human capacity through adequate educational funding across all levels. This remains the major way of attaining sustainable economic growth and development in any economy.

Why are real interest rates so low? Secular stagnation and the relative price of investment goods

Abstract: Across the industrialised world, real interest rates and nominal investment rates have fallen, while house prices and household debt ratios have risen. I present an OLG model which explains these four trends with a fifth - the widespread fall in the relative price of investment goods. When capital goods are cheaper, a given quantity of saving buys more of them, but the resulting capital deepening lowers the marginal product of each one. Interest rates fall, reducing the user cost of housing, raise house prices and household debt. Preventing the accumulation of debt leads to a bigger fall in interest rates.

Can Intangible Capital Explain Cyclical Movements in the Labor Wedge

Abstract: Intangible capital is an important factor of production in modern economies that is generally neglected in business cycle analyses. We demonstrate that intangible capital can have a substantial impact on business cycle dynamics, especially if the intangible is complementary with production capacity. We focus on customer capital: the capital embodied in the relationships a firm has with its customers. Introducing customer capital into a standard real business cycle model generates a volatile and countercyclical labor wedge, due to a mismeasured marginal product of labor. We also provide new evidence on cyclical variation in selling effort to discipline the exercise.

Capital Labor Substitution, Structural Change, and the Labor Income Share

Abstract: Long run economic growth goes along with structural change. Recent work has identified explanatory factors on the demand side (non-homothetic preferences) and on the supply-side, in particular differential productivity growth across sectors and differences in factor proportions and capital deepening. This paper documents that there have also been differential trends in labor and capital income shares across sectors in the U.S., and in a broad set of other industrialized economies, and shows that a model where the degree of capital-labor substitutability differs across sectors is consistent with these trends. The interplay of differences in productivity growth and in the substitution elasticity across sectors drives both the evolution of sectoral factor income shares and the shape of structural change. We evaluate the empirical importance of this mechanism and the other mechanisms proposed in the literature in the context of the recent U.S. experience. We find that differences in productivity growth rates between manufacturing and services have been the most important driver of structural change. Yet, differences in substitution elasticities are key not only for understanding the evolution of sectoral and aggregate factor income shares, but also for the shape of structural change. Differences in capital intensity and non-homothetic preferences have hardly mattered for the manufacturing-services transition.

Public Capital in the 21st Century

Abstract: The increase of income and wealth concentration threatens the European project of a good society. Capital taxation alone cannot stop this process, but a combination of moderately higher capital taxes and a novel role of public capital will do. The governance of public capital requires carefully designed institutions: a sovereign wealth fund and a special public investment agency called Federal Shareholder.