Showing papers on "Capital deepening published in 2017"

Economic complexity, human capital and economic growth: empirical research based on cross-country panel data

Abstract: Economic complexity reflects a country’s production capabilities and plays an important role in economic growth. This article measures the economic complexity of 210 countries using the method of reflections, and investigates the impact of economic complexity and human capital on economic growth. The measurement results show that there are significant differences regarding the level of complexity among countries. High-income economies have higher complexity than low- and middle-income economies. The empirical findings demonstrate that economic complexity and different levels of human capital have positive effects on long- and short-term growth. A positive interaction effect on economic growth exists between economic complexity and human capital. In addition, secondary education as a proxy for human capital has a relatively greater positive direct effect and a much stronger interactive effect with complexity on economic growth. In addition, the magnitude of the interaction effect between economic c...

The role of human capital and innovation in economic development: evidence from post-Malthusian Prussia

Abstract: The effect of human capital on growth involves multiple channels. On the one hand, an increase in human capital directly affects economic growth by enhancing labor productivity in production. On the other hand, human capital is an important input into R&D and therefore increases labor productivity indirectly by accelerating technological change. In addition, different types of human capital such as basic and higher education or training-on-the-job might play different roles in both production and innovation activities. We merge individual data on valuable patents granted in Prussia in the late nineteenth-century with county-level data on literacy, craftsmanship, secondary schooling, and income tax revenues to explore the complex relationship between various types of human capital, innovation, and income. We find that the Second Industrial Revolution can be seen as a transition period when it comes to the role of human capital. As in the preceding First Industrial Revolution, “useful knowledge” embodied in master craftsmen was related to innovation, especially of independent inventors. As in the subsequent twentieth century, the quality of basic education was associated with both workers’ productivity and firms’ R&D processes. In a final step, we show that literacy had also a negative effect on fertility which increased with innovation. In general, our findings support the notion that the accumulation of basic human capital was crucial for the transition to modern economic growth.

Foreign direct investment and human capital in developing countries: a panel data approach

Abstract: Theoretical studies have shown that there is a direct relationship between human capital and foreign direct investment (FDI). However, only a few available empirical studies have attempted to investigate this relationship simultaneously. Using country level panel data from 55 developing countries over the 1980–2011 period, this paper examines the interrelationship between FDI and human capital. Statistical analysis, based on simultaneous equations fixed effect estimation, reveals significant bi-directional causality between human capital and FDI, which suggests that FDI and human capital development policies need to be coordinated. FDI-led economic growth models may not be entirely suitable for all developing countries aiming to replicate the economic success of countries such as Brazil and China unless attention is also paid to human capital development through increased spending on education and training.

Productivity Measurement with Natural Capital

Abstract: Traditional measures of multi-factor productivity (MFP) growth generally do not recognise natural capital as inputs into the production process. Since productivity growth is measured as the residual between output and input growth, it will pick up the growth in unmeasured inputs, which can lead to a bias. The purpose of this paper is to gain a better understanding of the role of natural capital for productivity measurement and as a source of economic growth. To this aim, aggregate economy productivity measures mostly from the OECD Productivity Database are extended by incorporating natural capital as an additional input factor into the production function. More specifically, this paper considers oil, gas and various minerals as natural capital inputs, drawing on data from the World Bank. Results suggest that failing to account for natural capital tends to lead to an underestimation of productivity growth in countries where the use of natural capital in production is declining because of a dwindling natural capital stock. In return, productivity growth is sometimes overestimated in times of natural resource booms, if natural capital is not taken into account as an input factor. The direction of the adjustment to productivity growth depends on the rate of change of natural capital extraction relative to the rate of change of other inputs. The extended framework also makes the contribution of natural capital to economic growth explicit. This can be useful for countries relying on nonrenewable resources to better understand the need to develop other sources of growth, for example by investing in human or productive capital, to prepare for times when resources endowments become scarce. While the measurement of natural capital remains very incomplete, leaving out natural forests, water and soil, the measurement framework can readily be applied to more encompassing data on the natural capital stock, once it becomes available.

Managing the Tide : How Do Emerging Markets Respond to Capital Flows?

Abstract: This paper examines whether—and how—emerging market economies (EMEs) respond to capital flows to mitigate their untoward consequences. Based on a sample of about 50 EMEs over 2005Q1–2013Q4, we find that EME policy makers respond proactively to capital inflows by using a combination of policy tools: central banks raise the policy interest rate to address economic overheating concerns; intervene in the foreign exchange market to resist currency appreciation pressures; tighten macroprudential measures to dampen credit growth; and deploy capital inflow controls in the face of competitiveness and financial-stability concerns. Contrary to conventional policy advice to EMEs, we find no evidence of counter-cyclical fiscal policy in the face of capital inflows. Overall, policies are more likely to respond, and used in combination, during inflow surges than in more normal times.

Capital Account Liberalization and Aggregate Productivity: The Role of Firm Capital Allocation

Abstract: We study the effects of capital account liberalization on firm capital allocation and aggregate productivity in 10 Eastern European countries. Using a large firm-level data set, we show that capital account liberalization decreases the dispersion in the return to capital across firms, particularly in sectors more dependent on external finance. We provide evidence that capital account liberalization improves capital allocation by allowing financially constrained firms to demand more capital and produce at a more efficient level. Finally, using a model of misallocation we document that capital account liberalization increases aggregate productivity through more efficient capital allocation by 10% to 16%.

Productivity Growth and Capital Flows: The Dynamics of Reforms

Abstract: Why doesn't capital flow into fast-growing countries? Using a model with heterogeneous producers and underdeveloped domestic financial markets, we explain the joint dynamics of total factor productivity (TFP) and capital flows. When a large-scale economic reform removes preexisting idiosyncratic distortions in a small open economy, its TFP rises, driven by efficient reallocation of economic resources. At the same time, because of the domestic financial frictions, saving rates surge but investment rates respond only with a lag, resulting in capital outflows. The dynamics of TFP, capital flows, and idiosyncratic distortions in the model are consistent with what is observed during growth acceleration episodes, which often follow large-scale economic reforms.

Financial Deepening and Economic Growth Nexus in Nigeria: Supply-Leading or Demand-Following?

Abstract: This paper examined the direction of causality between financial deepening and economic growth in Nigeria for the period 1970–2013. The study adopted the Toda–Yamamoto augmented Granger causality test and results showed that the growth-financial deepening nexus in Nigeria follows the supply-leading hypothesis. This means that it is financial deepening that leads to growth and not growth leading financial deepening. Among other things, the study recommended that policy efforts should be geared towards removing obstacles that undermine the growth of credit to the private sector, and must restore investors’ confidence in the stock market operations.

Capital Markets, Infrastructure Investment and Growth in the Asia Pacific Region

Abstract: This paper examines the relationship between infrastructure investment activity, capital market development, the role of public institutions and economic development in the Asia Pacific. It adopts a review approach drawing on empirical evidence over recent decades. Infrastructure is shown to be an important asset class playing a central role in a nation’s output, growth, productivity and microeconomic performance. Infrastructure investment also requires investment and predictions of a widening gap in the future supply of infrastructure in the Asia Pacific will require new forms of capital from both traditional and new sources including wider use of private participation, institutional investment, asset recycling and revenue bonds. Capital market development is also necessary to raise long-term local currency finance and evidence suggests that progress with regional capital market integration is slow and a continuing reform agenda is required. The dividend for regional countries is the prospect of higher levels of economic growth with infrastructure investment, capital market development, and foreign direct investment shown to have a strong and positive association with growth. A crucial link in this association identified in the review is the part played by national and regional institutions in improving the efficiency with which infrastructure is managed and providing promising ground for further research where the importance of these links can be researched in greater depth.

Investigating the Human Capital Development–growth Nexus Does the Efficiency of Universities Matter?

Abstract: In this article, we test whether economic growth depends on human capital development mainly operating through an upgrading of human capital stock in the area where the universities are located. We specify a growth model where a qualitative measure of human capital development, university efficiency, is considered in conjunction with a customary quantitative measure of human capital development, number of graduates. The model is estimated on panel data over the period 2003 to 2011. The evidence suggests that both indicators of human capital development have a positive and significant impact on gross domestic product per capita. Results also show that knowledge spillovers occur between areas through the geographical proximity to the efficient universities, suggesting that the geography of production is affected. Results hold when robustness checks are performed.

The disturbing interaction between countercyclical capital requirements and systemic risk

Abstract: We consider an economy in which cycle-neutral capital requirements are costly because they expose banks to ‡uctuations in aggregate funding conditions. Countercyclical capital requirements –which impose lower capital demands in bad aggregate states –have the potential to improve welfare. However, we show that such capital requirements also have a cost as they increase systemic risk taking at banks. This is because they insulate banks against economy-wide ‡uctuations (but not against bank-speci…c risk) and thus create incentives to invest in correlated activities. As a result, the economy’s sensitivity to aggregate conditions increases and credit crunches may become more likely when countercyclical policies are in place. By contrast, ef…cient capital requirements incentivize banks to make less correlated investments – which reduces both systemic risk-taking and procyclicality.

The quantification of structural reforms in OECD countries: A new framework

Abstract: This document describes and discusses a new supply side framework that quantifies the impact of structural reforms on per capita income in OECD countries. It presents the overall macroeconomic impacts of reforms by aggregating over the effects on physical capital, employment and productivity through a production function. On the basis of reforms defined as observed changes in policies, the paper finds that product market regulation has the largest overall single policy impact five years after the reforms. But the combined impact of all labour market policies is considerably larger than that of product market regulation. The paper also shows that policy impacts can differ at different horizons. The overall long-term effects on GDP per capita of policies transiting through capital deepening can be considerably larger than the 5- to 10-year impacts. By contrast, the long-term impact of policies coming only via the employment rate channel materialises at shorter horizon.

The Role of Entrepreneurial Human Capital as a Driver of Endogenous Economic Growth

Abstract: We model investment in entrepreneurial human capital (EHC)—the representative enterprise’s share of production capacity allocated to investment in innovative industrial and commercial knowledge—as a distinct channel through which firm-specific human capital drives endogenous growth. Our model suggests that institutional factors supporting free markets for goods and ideas and higher-educational attainments of entrepreneurs and workers enhance endogenous economic growth by augmenting the efficiency of investment in EHC rather than exclusively by themselves. We test these implications, using data from Global Entrepreneurship Monitor’s Adult Population Survey of 63 countries over 2002–10, and find robust support for these hypotheses.

World War II and the Industrialization of the American South

Abstract: When private incentives are insufficient, a big push by government may lead to industrialization This paper uses mobilization for World War II to test the big push hypothesis in the context of postwar industrialization in the American South Specifically, I investigate the role of capital deepening at the county level using newly assembled data on the location and value of wartime investment Despite a boom in manufacturing activity during the war, the evidence is not consistent with differential growth in counties that received more investment This does not rule out positive effects of mobilization on firms or sectors, but a decisive role for wartime capital deepening in the Souths postwar industrial development should be viewed more skeptically

Financial Deepening and Economic Growth in Jamaica

Abstract: The paper empirically examines the question of whether bank liquid reserves to bank assets ratio and domestic credit to private sector as a percentage of GDP strengthens financial deepening on the ...

Regulation, institutions and aggregate investment: New evidence from OECD countries

Abstract: This paper investigates the relationship linking investment (capital stock) and structural policies. Using a panel of 32 OECD countries from 1985 to 2013, we show that more stringent product and labour market regulations are associated with less investment (lower capital stock). The paper also sheds light on the existence of non-linear effects of product and labour market regulation on the capital stock. Several alternative testing methods show that the negative influence of product and labour market regulation is considerably stronger at higher levels. The paper uncovers important policy interactions between product and labour market policies. Higher levels of product market regulations (covering state control, barriers to entrepreneurship and barriers to trade and investment) tend to amplify the negative relationships between product and labour market regulations and the capital stock. Equally important is the finding that the rule of law and the quality of (legal) institutions alters the overall impact of regulations on capital deepening: better institutions reduce the negative effect of more stringent product and labour market regulations on the capital stock, possibly through the reduction of uncertainty as regards the protection of property rights.

Is Optimal Capital-Control Policy Countercyclical In Open-Economy Models With Collateral Constraints?

Abstract: This paper contributes to a literature that studies optimal capital control policy in open economy models with pecuniary externalities due to flow collateral constraints. It shows that the optimal policy calls for capital controls to be lowered during booms and to be increased during recessions. These findings are at odds with the conventional view that capital controls should be tightened during expansions to curb capital inflows and relaxed during contractions to discourage capital flight.

Again on the Relevance of Reverse Capital Deepening and Reswitching

Abstract: Among the recent interventions in the capital controversy, the debate between Paola Potestio and Kurz & Salvadori has raised important issues. We agree with Potestio's rejection of the legitimacy of a value endowment of capital but we disagree with her dismissal of the relevance of reswitching and reverse capital deepening: these phenomena are very important because they undermine the demand-side role of the conception of capital as a single factor. For the marginal approach to be plausible, this demand-side role had to imply the stability of the savings-investment market even in shorter time frames than those required by a complete adaptation of the ‘form’ of capital; this was taken by Marshall to authorize doing without a given endowment of value capital, which opened the door to the shift to the modern neo-Walrasian versions of the marginal approach. With proof from Hayek, Hicks, Malinvaud, and Lucas we argue that a continuing belief in traditional time-consuming marginalist disequilibrium adjustments based on capital-labour substitution is the hidden reason why the claim often made by contemporary marginalist economists, that the economy can be assumed to be all the time on the equilibrium-growth path, is not found patently unacceptable. The true microfoundation of DSGE macromodels is not intertemporal equilibrium theory, but the time-consuming adjustment mechanisms on whose basis the marginal approach was born and accepted, and on whose basis monetarism was then able to re-assert a pre-Keynesian view of the working of the economy.

Unlocking Investment in Intangible Assets

Abstract: Intangible assets are at the heart of what makes firms competitive. They are vital for productivity and economic growth. A key question is whether the factors that tend to hold back investments in Europe are the same for tangible and intangible assets, i.e. is there a need for specific policy measures addressing intangible assets? This paper provides contextual information concerning intangible assets by discussing conceptual aspects, illustrating recent trends in terms of investments in intangibles and their corresponding impact on productivity and Gross Value Added (GVA) growth. With a view at specific characteristics of intangibles, potential drivers and barriers to investments in intangibles are identified and tested. Evidence from the presented empirical analyses suggests that including intangibles in a source-ofgrowth framework changes the corresponding growth patterns (GVA tends to grow more rapidly and capital deepening becomes the dominant source of growth). Looking at intangibles also helps to improve the understanding of TFP differentials. As regards investments, structural factors tend to matter generally more for intangibles whereas cyclical factors matter more for tangible assets. Against this backdrop, a series of policy-relevant messages has been derived. Overall, however, there is need to enlarge the general understanding of knowledge creation and to further improve the measurement of intangible assets in order to allow sound and evidence-based policy support.

Banks’ capital regulation and risk: Does bank vary in size? Empirical evidence from Bangladesh

Abstract: This paper primarily examines both causality effect of banks’ capital regulation and risk-taking behavior based on generalized methods of moment (GMM) for a dynamic unbalanced panel observation of ...