Showing papers on "Capital deepening published in 2018"

Intangible investment in the EU and US before and since the Great Recession and its contribution to productivity growth

Abstract: This paper uses a new cross-country cross-industry dataset on investment in tangible and intangible assets for 18 European countries and the US. We set out a framework for measuring intangible investment and capital stocks and their effect on output, inputs and total factor productivity. The analysis provides evidence on the diffusion of intangible investment across Europe and the US over the years 2000-2013 and offers growth accounting evidence before and after the Great Recession in 2008-2009. Our major findings are the following. First, tangible investment fell massively during the Great Recession and has hardly recovered, whereas intangible investment has been relatively resilient and recovered fast in the US but lagged behind in the EU. Second, the sources of growth analysis including only national account intangibles (software, R&D, mineral exploration and artistic originals), suggest that capital deepening is the main driver of growth, with tangibles and intangibles accounting for 80% and 20% in the EU while both account for 50% in the US, over 2000-2013. Extending the asset boundary to the intangible assets not included in the national accounts (Corrado, Hulten and Sichel (2005)) makes capital deepening increase. The contribution of tangibles is reduced both in the EU and the US (60% and 40% respectively) while intangibles account for a larger share (40% in EU and 60% in the US). Then, our analysis shows that since the Great Recession, the slowdown in labour productivity growth has been driven by a decline in TFP growth with relatively a minor role for tangible and intangible capital. Finally, we document a significant correlation between stricter employment protection rules and less government investment in R&D, and a lower ratio of intangible to tangible investment.

The Market for Used Capital: Endogenous Irreversibility and Reallocation Over the Business Cycle

Abstract: Capital reallocation is strongly procyclical in the data, but in standard business-cycle models with heterogeneous firms it is countercyclical. In this paper I argue that endogenizing the price of used capital solves this puzzle. First, I show empirically that for several sectors the price of used investment goods relative to new is procyclical. Second, I build an equilibrium model of endogenous partial irreversibility, with heterogeneous firms facing aggregate and idiosyncratic productivity shocks. Used investment goods are imperfect substitutes for new investment because of firm-level capital specificity and this creates a downward-sloping demand for used capital that shifts in response to aggregate shocks. The model generates a procyclical resale price and procyclical reallocation. In a recession, when the price of used capital is low, both static and dynamic real-options effects induce unproductive firms to sell fewer assets to more productive firms. This generates an amplification mechanism for measured aggregate TFP. Finally, the model shows that endogenous irreversibility smooths aggregate investment and generates a countercyclical cross-sectional dispersion of returns from capital, consistent with the empirical evidence.

Productivity Revisited: Shifting Paradigms in Analysis and Policy

Abstract: The stagnation of productivity in the developing world, and indeed, across the globe, over the last two decades dictates a rethinking of productivity measurement, analysis, and policy. This volume presents a 'second wave' of thinking in three key areas of productivity analysis and its implications for productivity policies. It calls into question the measurement and relevance of distortions as the primary barrier to productivity growth; urges a broader concept of firm performance that goes beyond efficiency to quality upgrading and demand expansion; and explores what it takes to generate an experimental and innovative society where entrepreneurs have the personal characteristics to identify new technologies and manage risk within an entrepreneurial ecosystem that facilitates them doing so. It also reviews arguments surrounding industrial policies. The authors argue for an integrated approach to productivity analysis that incorporates both the need to reduce economic distortions and generate the human capital capable of identifying the opportunities offered to follower countries and upgrade firm capabilities. Finally, it offers guidance on prioritizing policies when there is uncertainty around diagnostics and limited government capability.

Social Capital, Government Expenditures and Growth

Abstract: This paper shows that social capital increases economic growth by raising government investment in human capital. We present a model of stochastic endogenous growth with imperfect political agency. Only some people correctly anticipate the future returns to current spending on public education. Greater social diffusion of information makes this knowledge more widespread among voters. As a result, we find it alleviates myopic political incentives to underinvest in human capital, and it helps the selection of politicians that ensure high productivity in public education. Through this mechanism, we show that social capital raises the equilibrium growth rate of output and reduces its volatility. We provide evidence consistent with the predictions of our model. Individuals with higher social capital are more informed about their government. Countries with higher social capital spend a higher share of output on public education.

Capital flows and economic growth revisited: evidence from five Sub-Saharan African countries

Abstract: The study examines the differential effects of capital flows on economic growth in five Sub-Saharan African (SSA) countries over the period 1970–2014. Using the autoregressive distributed lag methodology, the findings show that in the long-run capital flows (i.e. foreign direct investment (FDI), aid, external debt, and remittances) have different effects on economic growth. FDI has a significant positive effect in Burkina Faso and negative effects in Gabon and Niger whereas the impact of debt is negative in all countries. Aid, however, promotes growth in Niger and Gabon whiles it deters growth in Ghana. Remittances, on the other hand, have a significant positive effect in Senegal. Finally, gross capital formation is significant in most of the countries and the impact of trade is mixed. These results suggest that the benefits of capital flows in SSA have been overemphasized.

Bad investments and missed opportunities? postwar capital flows to asia and latin america

Abstract: Since 1950, the economies of East Asia grew rapidly but received little inter-national capital, while Latin America received considerable international capitaleven as their economies stagnated. The literature typically explains the failureof capital to flow to high growth regions as resulting from international capitalmarket imperfections. This paper proposes a broader thesis that country-specificdistortions, such as domestic labor and capital market distortions, also impactcapital flows. We develop a DSGE model of Asia, Latin America, and the Rest ofthe World that features an open-economy business cycle accounting framework tomeasure these domestic and international distortions, and to quantify their con-tributions to international capital flows. We find that domestic distortions havebeen the predominant drivers of international capital flows, and that the generalequilibrium effects of these distortions are very large. International capital market distortions also matter, but less.

Managing Capital via Internal Capital Market Transactions: The Case of Life Insurers

Abstract: The movement of capital within insurance groups is important for understanding insolvency risk management, as well as regulatory policies regarding capital standards and group supervision. Panel data estimates indicate that, on average, a dollar decrease in performance (net income plus unrealized capital gains) when performance is negative is associated with a $0.26 increase in capital contributions to life insurers from other entities in the group, and that a dollar increase in performance when performance is positive is associated with a $0.56 increase in the amount of internal shareholder dividends paid by life insurers to other entities in the group. Moreover, the sensitivity of internal dividends to performance is higher during the financial crisis than the noncrisis period. Also, insurers with low (high) risk-based capital ratios receive more (less) internal capital contributions than other insurers, holding other factors constant.

The role of production factor quality and technology diffusion in twentieth-century productivity growth

Abstract: The twentieth century was a period of exceptional growth, driven mainly by the increase in total factor productivity (TFP). Using a database of 17 OECD countries over the 1890–2013 period, this paper integrates production factor quality into the measure of TFP, namely by factoring the level of education of the working-age population into the measure of labor and the age of equipment in the measure of capital stock. We then estimate how the diffusion of technology impacts the growth of this newly measured TFP through two emblematic general purpose technologies, electricity and information and communication technologies (ICT). Using growth decomposition methodology from instrumental variable estimates, this paper finds that education levels contribute most significantly to growth, while the age of capital makes a limited, although significant, contribution. Quality-adjusted production factors explain less than half of labor productivity growth in the largest countries except for Japan, where capital deepening posted a very large contribution. As a consequence, the “one big wave” of productivity growth (Gordon in Am Econ Rev 89(2):123–128, 1999), as well as the ICT productivity wave for the countries which experienced it, remains only partially explained by quality-adjusted factors, although education and technology diffusion contribute to explain the earlier wave in the USA in the 1930s–1940s. Finally, technology diffusion, as captured through our two general purpose technologies, leaves unexplained between 0.6 and 1 percentage point of yearly growth, as well as a large proportion of the two twentieth-century technology waves. These results both support a significant lag in the diffusion of general purpose technologies and raise further questions on a wider view on growth factors, including changes in the production process, management techniques and financing practices. Measurement problems may also contribute to the unexplained share of growth.

Declining rate of return on capital and the role of intangibles in Japan : An empirical study using Japanese KLEMS (JIP) database

Abstract: Since the collapse of the bubble economy, economic growth rates in Japan have slowed down as a result of low capital accumulation. We focus on the low rate of return on capital, which led to this slow capital accumulation. Using Japanese KLEMS (JIP) database, we find that the increase in the capital/output ratio and low capital share led to the low rate of return on capital. Not only has the rate of return on capital declined, but also its variance has grown and the number of industries with negative rates of return has increased. Then, we estimate a modified factor price frontier model using industry-level data. In our estimations, the profit rate is explained not only by the real wage but also by intangible investments. Estimation results show that investment in IT and human resources leads to an increase in the profit rate. However, the complementary effects between research and development (R&D) capital and tangible capital are indefinite as suggested by Chun et al. (2015 14 ). Our study implies that the government should undertake a comprehensive innovation policy including improvements in IT and human resources and organizational structure as well as R&D investments to revitalize capital formation in Japan.

Learning about education

Abstract: Limited human capital investment is a common characteristic of low-income countries despite the fact that estimated returns to educational investment in low-income countries are generally higher than those in high-income countries Empirical evidence suggests that income and credit constraints can only account for a part of this underinvestment Recent experimental evidence shows that families' misperceptions about the returns to education play a role in their low-investment levels This paper builds a heterogeneous-agent model of human capital and growth that incorporates an adaptive learning mechanism to capture the way agents form perceptions about returns to education We find natural conditions guaranteeing existence of stable equilibria Along transition paths, agents' misperceptions about returns to education depress realized returns, which serves to reenforce and perpetuate low human-capital investment If human capital investments have both private and public returns, we find multiple stable equilibria, including those which are characterized by low investment and low returns (JEL D83, O10, I25)

Does institutional quality resolve the Lucas Paradox

Abstract: The Lucas Paradox observes that capital flows predominantly to relatively rich countries, contradicting the neoclassical prediction that it should flow to poorer capital-scarce countries. In an inf...

Public capital in the 21st century: as productive as ever?

Abstract: The global financial crisis and the euro area sovereign debt crisis that followed induced a rapid deterioration in the fiscal positions of countries across the globe. In the ensuing fiscal ...

Poland’s uninterrupted growth performance: new growth accounting evidence

Abstract: Since 1992 Poland has experienced an exceptionally long spell of output growth that was not interrupted even by the global economic crisis. Using a growth accounting exercise based on new estimates of flows of capital and labour services in the Polish economy during the period 1996–2013, we study the structure of this growth, highlighting the key role of certain supply-side factors. Most notably, unlike other European countries, the Polish economy recorded both a marked increase in capital deepening, a big improvement in workforce composition (driven mostly by educational attainment), and an uninterrupted process of productivity convergence. We also comment on the supply-side factors which contributed to Poland’s relative resilience to the global economic crisis of 2007–2010.

Trade and Growth in the Age of Global Value Chains

Abstract: We revisit the relationship between trade and growth taking into account the recent expansion of global value chains (GVCs). We develop a new instrument for trade based on gravity estimations. Our instrument exploits a recent transportation shock: the sharp increase in the maximum size of container ships, which has more than tripled between 1995 and 2007. This shock has an asymmetric impact on different bilateral trade flows, based on the ex-ante presence of deep-water ports across countries, since these are the only ports that can accommodate the new larger ships. Our empirical set-up allows us to obtain instrumental variables not only for gross trade flows, but also for the different value added components of exports, for which we run separate gravity estimations based on WIOD data. We find that trade has a positive effect on GDP per capita, both in levels and in growth terms. Evidence at the country and industry level suggests that the effect works through both productivity improvements and capital deepening. We show that the effect of exports on income is crucially moderated by differences in their value added composition. In particular, we find evidence of stronger export effects on growth for countries that upgrade their positioning or improve their participation to GVCs more than others over time.

Factor accumulation and economic growth in Pakistan: incorporating human capital

Abstract: Purpose The purpose of this paper is to examine the long-run and short-run relationship between factor accumulation (i.e. physical capital and human capital) and economic growth by calculating the stocks of human capital and real physical capital. Design/methodology/approach The study uses endogenous growth model, where GDP per worker is the dependent variable and factor accumulation (real physical capital per worker and human capital) is the explanatory variable under the autoregressive distributive lag framework from 1973 to 2014 for Pakistan. Findings The results suggest that there is a long-run relationship between factor accumulation and GDP per worker in Pakistan. Findings of the study are consistent with the endogenous growth model suggesting that accumulation of human capital increases labor productivity, employment level and per capita income, and causes economic growth. Practical implications Developing countries like Pakistan should increase share of human capital for economic development. Government should invest in the education sector because investment in human capital has a large potential of productivity growth and welfare increase in developing countries. Originality/value This study challenges the notion of human capital and real physical capital stock used by different researchers. Considering human capital as a core factor of production, a series of human capital as average year of schooling is calculated by utilizing the perpetual inventory method.

Capital taxation, investment, growth, and welfare

Abstract: This paper formulates a model of economic growth to study the effects of broad capital taxation (of profits, dividends, and capital gains) on macroeconomic outcomes in small open economies. A framework of exogenous growth permits modeling countries in transition to a country-specific steady state and to discern steady-state and transitory effects of shocks on economic outcomes. The chosen framework is amenable to structural estimation and, in view of the parsimony of the model, fits data on 79 countries over the period 1996–2011 well. The counterfactual analysis based on the estimated model suggests that capital-tax reductions induce positive effects on output and the capital stock (per unit of effective labor) that are economically significant and are accommodated within time windows of 5 years without much further economic response after that. The responses of economic aggregates are found to be relatively strongest to changes in corporate-profit-tax rates and weaker for dividend and capital-gains taxes.

Workforce churning, human capital disruption, and organisational performance in different technological contexts

Abstract: We assess the influence of workforce churning on the relationship between organisational human capital and labour productivity. Building on collective turnover research and human capital theory, we examine how the components of workforce churning (i.e., voluntary turnover, involuntary turnover, and new hires) influence the relationship between existing human capital and labour productivity. Further, we examine how this influence varies according to a firm's technological intensity. Our data come from 1,911 Italian manufacturing firms and reveals that collective voluntary turnover negatively affects the relationship between organisational human capital and labour productivity regardless of an organisation's level of technological intensity. In contrast, collective involuntary turnover enhances the relationship between human capital and labour productivity, and its effect is even stronger for organisations with more technologically intensive operations. Finally, our results suggest that the integration of new hires disrupts the relationship between human capital and productivity, particularly for firms with technologically intensive operations.

Can the Kiwi Fly? Achieving Productivity Lift-off in New Zealand

Abstract: New Zealand's poor long-run productivity performance has puzzled domestic economists and international observers for decades. To provide answers, this article sketches out the broad reasons why lifting productivity has proven so difficult. Against the background of ongoing changes in technology and in the global trading environment, the article also puts forward a number of high-level policy suggestions aimed at countering the economic forces that have constrained productivity, including opening the economy to new opportunities for international connection, and encouraging capital deepening, greater competition and more effective innovation. Getting this right requires a deep understanding of New Zealand's productivity track record and potential in the 21st century global economy and presents a major challenge for the New Zealand public sector.

The Economic Consequences of the 2018 US-China Trade Conflict: A CGE Simulation Analysis

Abstract: This paper aims at evaluating the economic consequences of the 2018 US-China trade conflict. The potential impact of the proposed tariff increases is calculated using a global CGE model. Capital deepening and technological spillover induced by trade are also taken into account to explore the long-run influence. We can derive the following implications. First, the additionally imposed tariffs on goods alone declines the GDP in the US and China by 0.1% and 0.2%, respectively. The equivalent variation in the US and China is reduced by 9.8 billion and 35.2 billion USD, respectively. Although other countries gain from trade diversion, losses exceed gains globally. Second, considering the effect from capital deepening and technological spillover induced by trade makes the situation worse. The GDP in the US and China declines by 1.6% and 2.5%, respectively. The equivalent variation in the US and China is reduced by 199.5 billion USD and 187.1 billion USD, respectively. Again, the trade diversion is not large enough to recover losses in these countries. Third, the imposed tariffs distort relative prices, resulting in changes to the global production structure. Both the US and China lose their comparative advantage in transport, electronic, and machinery equipment production, while other countries expand their production in these sectors. Finally, China’s retaliatory tariff increases worsens the US economy to some extent, but it comes at a cost to the Chinese economy. In the long run, retaliation is not an appropriate policy response.

Tripartite decomposition of labor productivity growth, FDI and human development: evidence from transition economies

Abstract: This study investigates the relative contribution of technological change, technological catch-up and capital deepening as drivers of labor productivity growth in 14 transition economies during the period 2000–2012. In addition, the study extends the usual decomposition of labor productivity growth by encompassing the impact of foreign direct investment (FDI) on labor productivity growth in transition economies. To illustrate the relative contribution of FDI as a driver of labor productivity growth, we present a simple theoretical model that augments Kohli [Labour productivity vs. total factor productivity. IFC Bulletin 20 (April), Irving Fisher Committee on Central Bank Statistics, International Statistical Institute, 2005] and Grosskopf et al. (Aggregation, efficiency, and measurement, Springer, New York, pp 97–116, 2007) decomposition of the labor productivity. The insights derived in this model provide an underpinning to the empirical analysis in this study. Using Blundell–Bond dynamic panel General Method of Moments estimators, the main finding of dynamic panel data regressions shows that technological catch-up, technological change, and human development level, trade and demographic of population ageing are the main factors that affect labor productivity growth in transition countries. Furthermore, the findings of dynamic panel data regressions show insignificant positive impact of FDI on productivity growth in transition economies. One explanation is that the 14 transition economies that are included in this study do not reach a minimum human development threshold level.

IT and productivity: A firm level analysis

Abstract: Using a novel comprehensive data set of IT investment at the firm level, we find that a firm investing an additional euro in IT increases value added by 1 euro and 38 cents on average. This marginal product of IT investment increases with firm size and varies across sectors. IT explains about 10% of productivity dispersion across firms. While we find substantial returns of IT at the firm level, such returns are much lower at the aggregate level. This is due to underinvestment in IT (IT capital deepening is low) and misallocation of IT investments.

Trade and Growth in the Age of Global Value Chains

Abstract: We revisit the relationship between trade and growth taking into account the recent expansion of global value chains (GVCs) We develop a new instrument for trade based on gravity estimations Our instrument exploits a recent transportation shock: the sharp increase in the maximum size of container ships, which has more than tripled between 1995 and 2007 This shock has an asymmetric impact on different bilateral trade flows, based on the ex-ante presence of deep-water ports across countries, since these are the only ports that can accommodate the new larger ships Our empirical set-up allows us to obtain instrumental variables not only for gross trade flows, but also for the different value added components of exports, for which we run separate gravity estimations based on WIOD data We find that trade has a positive effect on GDP per capita, both in levels and in growth terms Evidence at the country and industry level suggests that the effect works through both productivity improvements and capital deepening We show that the effect of exports on income is crucially moderated by differences in their value added composition In particular, we find evidence of stronger export effects on growth for countries that upgrade their positioning or improve their participation to GVCs more than others over time

Labour Market Regulations and Capital Intensity

Abstract: What is the impact of labour market regulations as measured by the OECD indicator of employment protection legislation (EPL) on capital and skill composition? Precisely, this study investigates the effects of changes in EPL on changes in four types of capital and three components of labour skill. They include construction, non-ICT, ICT, and Rand D capital components on the one hand, and low-, medium-, and highly-skilled labour on the other. Our analysis is grounded on a large country-industry panel dataset of fourteen OECD countries, and eighteen manufacturing and market service industries, from 1988 to 2007. It shows that strengthening EPL lowers ICT capital and, even more severely, R and D capital relative to non-ICT and construction capital; it also brings down low-skilled relative to highly-skilled workers' employment. These results suggest that structural reforms for more labour flexibility could have a favourable impact on firms' Rand D investment and hiring of low-skilled workers

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.

Productivity Growth in Canada and the United States: Recent Industry Trends and Potential Explanations

Abstract: Labour productivity growth in Canada was weaker than that in the United States from the mid-1980s to 2010, leading to a decline in Canada’s relative productivity level. This situation was mainly due to the lower multifactor productivity (MFP) growth experienced in most Canadian industries in that period. After 2010, however, the pattern reversed itself as labour productivity growth in Canada exceeded that of the United States. Higher labour productivity growth in Canada for the 2010-2014 period was due to a relatively larger capital deepening effect and relatively higher MFP growth. Both these developments were associated with stronger output growth and stronger demand in Canada. In addition, the contributions of ICT producing and ICT intensive using industries to U.S. labour productivity growth waned after 2010. For Canada, ICT producing industries contributed little to overall labour productivity before and after 2010, while ICT intensive using industries exhibited stronger productivity growth after 2010. The latter may reflect the more moderate ICT investment in Canada compared to the United States in the 1990s and early 2000s and the more gradual realization of benefits of ICT usage.

The quantification of structural reforms

Abstract: This paper summarises earlier OECD work aimed at quantifying the impact of structural reforms on economic outcomes. It overviews: i.) insights obtained for the linear relationships linking policies and economic outcomes (including multi-factor productivity, capital deepening and employment) for an almost complete set of OECD countries, ii.) non-linear results on how policies interact with each other in OECD countries, and iii.) results extended for emerging-market economies looking at whether policy effects vary across countries depending on the level of economic development and whether institutions have an influence on economic outcomes. The paper lists of policies and institutions that could be used to quantify the effect of reforms. It also gives some guidance on how to quantify reforms in OECD and non-OECD countries. It provides mid-point estimates of the long-run effects on per capita income levels through the three supply-side channels. Finally, it raises the issue of estimation and model uncertainty.

Tax Avoidance by Capital Reduction: Evidence from Corporate Tax Reform in Japan

Abstract: A new size-dependent tax system was introduced in Japan on April 1, 2004. We exploit this exogenous institutional change as a natural experiment and empirically examine how firms endogenously reacted to a size-dependent tax system in terms of both financial and real activities. Using a large-scale firm-level data over the period from 1996 to 2006, we test several hypotheses obtained from our theoretical model based on financial constraints faced by firms. From our empirical analyses, we obtain the following results that are consistent with the theoretical model. First, firms that originally held stated capital above the threshold set by the new tax system were more likely to reduce their stated capital to the threshold’s level or below after the announcement of the new tax system. Second, firms with lower labor productivity, and smaller asset size were more likely to do so. Finally, firms that reduced their stated capital showed ex-post lower growths in asset size and sales, and the magnitude of which became larger over time. These results suggest that the size-dependent policy induced endogenous capital reduction of a group of firms, which resulted in their lower growth.

Modeling the Dynamics of Sectoral TFP Growth in Ethiopia: Explaining Persistent Economic Debacles

Abstract: This paper provides a rigorous analysis for modeling the dynamics of sectoral total factor productivity growth in Ethiopia over the period 1970 - 2010 It also attempts to estimate total factor productivity growth rate for agriculture, industry and service sector using sectoral growth accounting approach, and then examines determinants that affect sectoral productivity by employing a vector autoregressive model that incorporates exogenous variables The study then finds that sectoral economic growth largely depends on factor accumulation instead of factor productivity As a result of this, labour becomes the dominant source of agricultural growth while capital deepening explains the immense source of growth in industry and services over the reference period, regardless of the various political economy regimes Total factor productivity growth, however, is negative on average across economic sectors and heavily reflects the lack of efficiency and technological change that bottlenecked economic growth The study also finds that economy openness, imported capital goods, and service liberalization are statistically significant variable and positively influence the sectoral total factor productivity growth in agriculture, industry and service sector respectively The study therefore recommends that the government focuses on widening economy openness in order to driving up agricultural total factor productivity, and pays more attention to importation of strategic technologies and reduces trade and service barriers associated with in order to foster industrial and service total factor productivity respectively