Showing papers on "Physical capital published in 1994"

Getting Interventions Right: How South Korea and Taiwan Grew Rich

Abstract: Most explanations of Korea's and Taiwan's economic growth since the early 1960s place heavy emphasis on export orientation. However, it is difficult to see how export orientation could have played a significant causal role in these countries' growth. The measured increase in the relative profitability of exports during the 1960s is too insignificant to account for the phenomenal export boom that ensued. Moreover, exports were initially too small to have a significant effect on aggregate economic performance. A more plausible story focuses on the investment boom that took place in both countries. In the early 1960s both economies had an extremely well- educated labor force relative to their physical capital stock, rendering the latent return to capital quite high. By subsidizing and coordinating investment decisions, government policy managed to engineer a significant increase in the private return to capital. An exceptional degree of equality in income and wealth helped by rendering government intervention effective and keeping it free of rent seeking. The outward orientation of the economy was the result of the increase in demand for imported capital goods.

Internal versus External Capital Markets

Abstract: This paper presents a framework for analyzing the costs and benefits of internal versus external capital allocation We focus pritnarily on comparing an internal capital market with bank lending While both represent centralized forms of financing, in the former case the financing is owner-provided, while in the latter ceise it is not We argue that the ownership aspect of internal capital allocation has three important consequences: (1) it leads to more monitoring than bank lending; (2) it reduces managers' entrepreneurial incentives; and (3) it makes it easier to efficiently redeploy the assets of projects that are performing poorly under existing management

Short-Term versus Long-Term Interests: Capital Structure with Multiple Investors

Abstract: We study the problem of financial contracting and renegotiation between a firm and outside investors when the firm cannot commit to future payouts, but assets can be contracted upon. We show that a capital structure with multiple investors specializing in short-term and long-term claims is superior to a structure with only one type of claim, because this hardens the incentives for the entrepreneur to renegotiate the contract ex post. Depending on the parameters, the optimal capital structure also differentiates between state-independent and state-dependent longterm claims, which can be interpreted as long-term debt and equity. © 1994 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

International capital mobility in the 1990s

Abstract: This paper surveys the performance of international capital markets and the literature on measuring international capital mobility. Three main functions of a globally integrated and efficient world capital market provide focal points for the analysis. First, asset-price arbitrage ensures that people in different countries face identical prices for a given asset. Second, to the extent that the usual market failures allow, people in different countries can pool risks to their lifetime consumption profiles. Third, new saving, regardless of its country of origin, is allocated toward the world's most productive investment opportunities. The paper evaluates the international capital market's performance of these roles by studying data on international interest-rate differences, international consumption correlations, international portfolio diversification, and the relation between national saving and investment rates. The conclusion is that while international capital mobility has increased markedly over the last two decades, international capital movements remain less free than international movements, even among the industrial countries.

Capital Goods Imports and Long-Run Growth

Abstract: This paper presents an endogenous growth model of an open economy in which the growth rate of income is higher if foreign capital goods are used relatively more than domestic capital goods for the production of capital stock. Empirical results, using cross country data for the period 1960-85, confirm that the ratio of imported to domestically produced capital goods in the composition of investment has a significant positive effect on per capita income growth rates across countries, in particular, in developing countries. Hence, the composition of investment in addition to the volume of total capital accumulation is highlighted as an important determinant of economic growth.

6. Constituting Social Capital and Collective Action

Abstract: Ignoring the impact of changes in physical capital on a form of social capital - the rules used in farmer-organized irrigation systems - can lead to the unintended consequence that the physical capital is not as productive as intended. Analysis focuses on the choice of rules made by farmers in homogeneous and heterogeneous situations. Using this analysis, it is possible to illustrate why many donor-funded improvements in physical capital have had counterproductive results.

Capital fundamentalism, economic development, and economic growth

Abstract: Few economic ideas are as intuitive as the notion that increasing investment is the best way to raise future output. This idea was the basis for the theory"capital fundamentalism."Under this view, differences in national stocks of capital were the primary determinants of differences in levels of national product. Capital fundamentalists viewed capital accumulation as central to increasing the rate of economic growth. Evidence to support this view was based mostly on case studies of less developed countries. Neoclassical growth theory and growth accounting research indicated that differences in patterns of investment and capital formation were not the main factors that led nations to be rich or poor, fast-growing or slow. Technology, rather than capital accumulation, appeared to drive improvements in living standards in the long run. Evidence to support this view was based mostly on data from advanced countries. Recent research on growth and development has lent support to two conclusions that capital fundamentalists would find attractive: that differences in national patterns of physical capital accumulation can explain many differences in levels of national product, and that increases in national investment rates can produce major increases in rates of economic growth. The authors find that although the capital-output ratio varies positively with the level of per capita income, there is little support for the view that capital fundamentalism should guide the agenda for research and policy advice. Extending standard growth accounting procedures to a broad sample of 105 countries, they find: 1) differences in capital-per-person explain few of the differences in output-per-person across countries; 2) growth in capital stocks account for little of output growth across countries; and 3) the ratio of investment to Gross Domestic Product is strongly associated with economic growth - but there is more reason to believe that economic growth causes investment and savings than investment and savings cause economic growth.

Getting Interventions Right: How South Korea and Taiwan Grew Rich

Abstract: Most explanations of Korea's and Taiwan's economic growth since the early 1960s place heavy emphasis on export orientation. However, it is difficult to see how export orientation could have played a significant causal role in these countries' growth. The measured increase in the relative profitability of exports during the 1960s is too insignificant to account for the phenomenal export boom that ensued. Moreover, exports were initially too small to have a significant effect on aggregate economic performance. A more plausible story focuses on the investment boom that took place in both countries. In the early 1960s both economies had an extremely well- educated labor force relative to their physical capital stock, rendering the latent return to capital quite high. By subsidizing and coordinating investment decisions, government policy managed to engineer a significant increase in the private return to capital. An exceptional degree of equality in income and wealth helped by rendering government intervention effective and keeping it free of rent seeking. The outward orientation of the economy was the result of the increase in demand for imported capital goods.

The Effects of Outbound Foreign Direct Investment on the Domestic Capital Stock

Abstract: This paper analyzes the effect of outbound foreign direct investment (FDI) on the domestic capital stock. The first part of the paper shows that only about 20 percent of the value of assets owned by U.S. affiliates abroad is financed by cross-border flows of capital from the United States. An additional 18 per cent represents retained earnings attributable to U.S. investors. The rest is financed locally by foreign debt and equity. The second part of the paper analyzes data for the major industrial countries of the OECD and finds that each dollar of cross- border flow of foreign direct investment reduces domestic investment by approximately one dollar. This dollar for dollar displacement of domestic investment by outbound FDI is consistent with the Feldstein-Horioka picture of segmented capital markets. It suggests that while portfolio funds are largely segmented into national capital markets, direct investment can achieve cross-border capital flows. A dollar outflow of direct investment reduces domestic investment by a dollar and this is not offset by a change in international portfolio investment. This ability of foreign direct investment to circumvent the segmented national capital markets also appears in the expanded use of foreign debt and equity capital to finance the capital accumulation of foreign affiliates of U.S. firms. Taken together, these estimates suggest that each dollar of foreign assets acquired by U.S. foreign affiliates reduces the U.S. domestic capital stock by between 20 cents and 38 cents.

The Production of Human Capital and the Lifecycle of Earnings: Variations on a Theme

Abstract: After a brief summary of Ben Porath's 1967 model approach, I enquire into the empirical validity and some implications of his insights. Section 2 is an attempt to answer the question: Are the shapes and magnitudes of growth in wage profiles largely attributable to human capital investments? Section 3 tests the proposition that over the working age capacity wages (i.e. wages before netting out investment) decline before observed wages do. Implied timing of labor supply provides the test. The findings shed light on developments in the U.S. labor market in the past several decades. In section 4 some implications are drawn from Ben Porath's model for interpersonal differences and historical changes in life-cycle human capital investments. The positive correlation between schooling and training, predicted by the model is found in cross-sections. It also shows up in parallel movements in schooling and training in the 1980's as the demand for human capital increased. Once again, observed U.S. patterns are highlighted.

The Replacement Problem

Abstract: We construct a vintage capital model of economic growth in which the decision to replace old technologies with new ones is modeled explicitly. Depreciation in this environment is an economic, not a physical concept. We describe the balanced growth paths and the transitional dynamics of this economy. We illustrate the importance of vintage capital by analyzing the response of the economy to fiscal policies designed to stimulate investment in new technologies.

The Effects of Factor Taxation in a Two-Sector Model of Endogenous Growth

Abstract: This paper examines the effects of taxation in a two-sector model of endogenous growth, based on the joint accumulation of physical and human capital. Both transitional dynamics and balanced growth paths are computed, and the response to wage taxes, capital taxes, and consumption taxes is explored. Welfare costs of alternative tax regimes are computed. The capital tax is by far the least efficient method of generating revenue. The differences between taxes with respect to their effects on long-run growth rates are relatively unimportant. The key difference between the capital tax and wage or consumption taxes lies in their different level effects on the permanent paths of output, consumption, and labour supply.

Money, Banking, and Capital Formation

Abstract: We consider a monetary growth model in which banks arise to provide liquidity. In addition, there is a government that issues not only money, but interest-bearing bonds; these bonds compete with capital in private portfolios. When the government fixes a constant growth rate for the money stock, we show that there can exist multiple nontrivial monetary steady states. One of these steady states is a saddle, while the other can be a sink. Paths approaching these steady states can display damped endogenous fluctuations, and development trap phenomena are common. Across different steady states, low capital stocks are associated with high nominal interest rates; the latter signal the comparative inefficiency of the financial system. Also, increases in the steady state inflation rate can easily reduce the steady state capital stock.

Firm-Specific Human Capital amd Optimal Capital Structure

Abstract: The authors consider the moral hazard in managers undersupplying imperfectly-marketable, firm-specific human capital. Firms may cope by granting long-term wage contracts that protect managers against employment termination. Although ex ante efficient, these contracts may be ex post inefficient when managerial ability is discovered to be low. Precommitted firms must honor these contracts, unless there is ownership transfer that permits their legal invalidation. Bankruptcy is one such transfer mechanism. Since managers anticipate the contractual consequence of bankruptcy, leverage worsens moral hazard; this cost provides a counterbalance to the debt tax shield and leads to an optimal capital structure. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Determinants of capital structure choice and empirics on leverage behavior: a comparative analysis of hotel and manufacturing firms.

Abstract: The relationship between a firm's capital structure, its cost of capital, and its stock value is an important financial and investment issue today. Using a cross- sectional regression analysis, the leverage behavior of 33 firms in 2 industry groups-the hotel industry and the manufacturing sector-was examined. Findings showed that all leverage determinants studied, excepting firm size, are significant in explaining leverage variations in debt behavior. In addition, although more industry- specific variables are needed, leverage behavior in hotel firms can be analyzed using traditionally theorized capital structure determinants. As such, the capital structure in the hotel industry is better understood, and some important distinctions between short-term and long-term debt behavior in hotel and manufacturing firms are revealed.

Population Age Structure, Intergenerational Transfer, and Wealth: A New Approach, with Applications to the United States

Abstract: This paper focuses upon intergenerational transfers overlapping generation models generational accounting and life cycle saving while assuming golden rule steady states and stable age profiles of transfers and economic activity. Using 1987 US data synthetic cohort methods were employed to explore how resource allocation over the life cycle generates real wealth and transfer wealth through the family public sector and financial markets. While data problems assumption violations and accounting framework shortcomings would not permit firm conclusions transfer wealth in the US nonetheless seems to be about 2/3 greater than real wealth. Social Security wealth Medicare wealth and government debt are the main positive forms of wealth and together have greater value than real wealth. Transfer wealth must therefore displace holdings of physical capital and lead to lower labor productivity and higher interest rates.

Factor Mobility and International Trade

Abstract: This paper develops a two-country model of trade and factor mobility in which capital is sector-specific but internationally mobile. The model avoids the implausible predictions of specialisation in Heckscher-Ohlin models and exhibits a rich variety of responses to exogenous shocks, including transfers, capital taxes, and tariffs. The results throw light on the relationship between goods and factor trade, reconciling the conflicting views of previous writers. It is argued that the model holds out the possibility of a new paradigm in international trade theory in which international factor movements play a central rather than a peripheral role.

Endogenous growth, human capital, and industry wages

Abstract: Lucas' model (1988) of external effects of human capital formation is taken as a starting point for looking at the impact of human capital on wages. Even though most empirical tests of New Growth Theory are made using time-series and cross-sections of countries — with good reasons — I suggest a microeconometric approach in order to test Lucas' basic assumption of external effects of human capital. As a first step, internal effects of education are filtered out by using wage functions for individuals in Austria. In the second step, resulting industry wage premiums are regressed on industry-specific characteristics and, above all, on average human capital in the industry to account for external effects of human capital.

Total Capital and Economic Growth

Abstract: In contrast to the official estimates of gross private domestic investment and associated capital stocks prepared by the Bureau of Economic Analysis (BEA), the author presents estimates of total investment and capital, human and nonhuman, tangible and nontangible, by all sectors of the U.S. economy. Total investment is 3.1 times the BEA estimate in 1929, rising to 4.1 times in 1990. It accounts for almost half of adjusted GDP in the latter year. As hypothesized, real total capital stocks rise at about the same 2.9 percent average annual rate as real gross domestic product 1929–90, 0.1 percentage points more in the total economy and 0.2 points less in the predominant business sector. Increases in nontangible capital (mainly education, training, health, and research and development—“R&D”-) largely explain the growth in total tangible factor (capital) productivity in the whole economy. Nontangible, human capital has grown relatively faster in the business sector than in the entire economy, helping to explain its more rapid productivity advance. The author recommends that when BEA shifts to the U.N. standard system of accounts, it include nontangible and human tangible investments and capital in “satellite” accounts, as well as tangible investments for all sectors in the core accounts. This will greatly facilitate the analysis of economic growth.

Tax Policy and International Capital Flows

Abstract: Although capital is now generally free to move across national borders, there is strong evidence that savings tend to remain and to be invested in the country where the saving takes place. The current paper examines the apparent conflict between the potential mobility of capital and the observed de facto segmentation of the global capital market. The key to reconciling this 'Feldstein-Horioka paradox' is that, although capital is free to move, its owners, and especially the agents who are responsible for institutional investments, prefer to keep funds close to home because of a combination of risk aversion, ignorance and a desire to show prudence in their investing behavior. The paper presents evidence on the capital mobility and on capital market segmentation. The role of hedging and the difference between gross and net capital movements for individual investors and borrowers are discussed. The special place of foreign direct investment is also considered. The segmentation of the global capital market affects the impact of capital income taxes and subsidies. This is discussed in the final section of the paper

Capital Flight, External Debt and Domestic Policies

Abstract: It is now well documented that capital flight has been a dominant feature of capital movements between developing and industrial countries. Since 1988 reductions in the stock of flight capital more than account for private capital flows to emerging markets. This suggests that what appears to be a diversification of portfolios of residents of developed countries may be a restoration of 'home bias' in the portfolios of residents of developing countries. We show that changes in the stock of capital flight can increase or decrease welfare depending on the structure of distortionary taxes and subsidies on capital income and the effects of capital flight on the tax base.

Power and the Control of Capital

Abstract: This essay reviews three recent books on the political economy of finance in postcolonial Asia and Latin America and suggests a framework for examining the relationship between political power and varying patterns of control over investment resources. The stress is on the constraints different controllers of capital can impose on state leaders, the conditions under which policymakers can subvert these constraints, and how conflicts within the state over the trajectory of policy are mediated by who (or what) supplies critical investment resources and the institutional channels through which the resources flow.

The “Public Capital Hypothesis”: The Case of Germany

Abstract: Recently, both in the literature as well as in public discussion it is argued that the neglect of the public infrastructure capital stock might be responsible for the generally observed productivity slowdown of the U.S economy (see Tatom (1991) for a short summary of the delete).This hypothesis, which has been labeled the “public capital hypothesis”, posits that public infrastructured directly and indirectly affects the productivity of the private economy in a positive way. Directly, “public” services produced with the stock of infrastructure capital enter as intermediate services the private production processes. Indirect effects the arise because private and public capital are considered to be complementary, that is, public capital raises the productivity of private capital. Aschauer (1989) for the U.S. and Berndt and Hansson (1991) for Sweden provide empirical evidence in favour of this hypothesis. The fundamental idea of the “public capital hypothesis”, namely the inter-relationship of productivity in the private economy and the provision of public infrastructure, is not that new. This aspect has been examined both theoretically and empirically in the urban economics literature in the past (see for example, Costa, Ellson and Martin, (1987), and Segal, (1976)).In addition, Diewert (1986) presented an intensive theoretical examination of the benefits of public investment as an explanation for the slowdown of productivity observed throughout most industrialized countries.

The impact of controls on capital movements on the private capital accounts of countries' balance of payments : empirical estimates and policy implications

Abstract: This paper reports research on the impact of controls on capital movements on the private capital accounts of countries` balance of payments using data drawn from 52 countries for the period 1985-92. The results indicate that: (1) capital controls operated by developing countries have not been effective in insulating the private capital accounts of these countries` balance of payments, and (2) capital controls operated by industrial countries significantly affected the structure of their capital flows mainly by inhibiting net foreign direct and portfolio investment outflows. The results, which are consistent with other observations, raise issues for the policy toward the maintenance and liberalization of controls on capital movements by developing countries.