Capital deepening

About: Capital deepening is a research topic. Over the lifetime, 5203 publications have been published within this topic receiving 230297 citations.

Where Has All the Education Gone

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

Raising the Speed Limit: U.S. Economic Growth in the Information Age

Abstract: THE CONTINUED STRENGTH and vitality of the U.S. economy continue to astonish economic forecasters.(1) A consensus is now emerging that something fundamental has changed, with "new economy" proponents pointing to information technology (IT) as the causal factor behind the strong performance. In this view, technology is profoundly altering the nature of business, leading to permanently higher productivity growth throughout the economy. Skeptics remain, however, arguing that the recent success reflects a series of favorable, but temporary, shocks. This argument is buttressed by the view that the U.S. economy behaves rather differently than envisioned by the "new economy" advocates.(2) Productivity growth, capital accumulation, and the impact of technology were topics once reserved for academic debates, but the recent success of the U.S. economy has moved them into popular discussion. This paper employs well-tested and familiar methods to analyze important new information made available by the recent benchmark revision of the U.S. national income and product accounts (NIPAs). We document the case for raising the speed limit: for an upward revision of intermediate-term projections of future growth to reflect the latest data and trends. The late 1990s were exceptional in comparison with the growth experience of the U.S. economy over the past quarter century as a whole. Although growth rates have not yet returned to those of the golden age of the U.S. economy in the 1960s, the data nonetheless clearly reveal a remarkable transformation. Rapid declines in the prices of computers and semiconductors are well known and carefully documented, and evidence is accumulating that similar declines are taking place in the prices of software and communications equipment. Unfortunately, the empirical record is seriously incomplete, and therefore much remains to be done before definitive quantitative assessments can be made about the complete role of these high-technology assets. Despite the limitations of the available data, the mechanisms underlying the structural transformation of the U.S. economy are readily apparent. As an illustration, consider the increasing role that computer hardware plays as a source of economic growth.(3) For the period 1959-73, computer inputs contributed less than 0.1 percentage point to annual U.S. economic growth. Since 1973, however, the price of computers has fallen at a historically unprecedented rate, and firms and households, following a basic principle of economics, have substituted toward these relatively cheaper inputs. Since 1995 the price decline for computers has accelerated, reaching nearly 28 percent per year from 1995 to 1998. In response, investment in computers has exploded, and the growth contribution of computer hardware has increased more than fivefold, to 0.46 percentage point per year in the late 1990s.(4) Software and communications equipment, two other types of IT assets, contributed an additional 0.30 percentage point per year for 1995-98. Preliminary estimates through 1999 reveal further increases in these contributions for all three high-technology assets. Next, consider the acceleration of average labor productivity (ALP) growth in the 1990s. After a twenty-year slowdown dating from the early 1970s, ALP grew 2.4 percent per year during 1995-98, more than a percentage point faster than during 1990-95.(5) A detailed decomposition shows that capital deepening, the direct consequence of price-induced substitution and rapid investment, added 0.49 percentage point to ALP growth. Faster total factor productivity (TFP) growth contributed an additional 0.63 percentage point, partly reflecting technical change in the production of computers and the resulting acceleration in their price decline. Meanwhile, slowing growth in labor quality retarded ALP growth by 0.12 percentage point relative to the early 1990s, as employers exhausted the pool of available workers. …

Capital Accumulation and Economic Growth

Abstract: A Theoretical model consists of certain hypotheses concerning the causal inter-relationship between various magnitudes or forces and the sequence in which they react on each other. We all agree that the basic requirement of any model is that it should be capable of explaining the characteristic features of the economic process as we find them in reality. It is no good starting off a model with the kind of abstraction which initially excludes the influence of forces which are mainly responsible for the behaviour of the economic variables under investigation; and upon finding that the theory leads to results contrary to what we observe in reality, attributing this contrary movement to the compensating (or more than compensating) influence of residual factors that have been assumed away in the model. In dealing with capital accumulation and economic growth, we are only too apt to begin by assuming a ‘given state of knowledge’ (that is to say, absence of technical progress) and the absence of ‘uncertainty’, and content ourselves with saying that these two factors — technical progress and uncertainty — must have been responsible for the difference between theoretical expectation and the recorded facts of experience. The interpretative value of this kind of theory must of necessity be extremely small.