Abstract
The purpose of this paper is to investigate factors affecting capital formation in selected Arab Countries. These countries are Bahrain, Egypt, Jordan, Kuwait, Morocco, and Saudi Arabia. It adopts neoclassical monetary growth models derived from Sidrauski model to examine the substitution relationship between money and capital. Further analysis has been conducted to examine the complementarity relationship between money and capitalthat was driven based on Mackinnon argument. In his argument Mackinnon objected the perfect substitution relationship between capital and money in developing countries, where financial markets are immature and inefficient. Accordingly, investors will depend on self financing, where savings are held in money. As a result, an increase in money demand will contribute in increasing capital. Moreover, Mackinnon emphasizes the role of government expenditure in improving capital stock. The analysis has been performed with unbalanced pooled data, and models have been tested by using the GLS method considering fixed and random effects. The results indicate that self-financing and government expenditure play a significant role in improving capital stock. These results are consistent with Mackinnon argument and might explain the contribution of money supply in improving capital stock in developing countries.
Highlights
Capital is one of the main factors of production that is required to attain nation’s development
According to the previous econometric results, this study indicates the positive effect of money supply on capital formation, which implies that money is not neutral in Arab countries
Results came consistent with the argument presented by Mackinnon (1973), where a positive significant relationship between money supply and capital formation in the selected Arab countries proves the complementarity relationship between these two variables
Summary
Capital is one of the main factors of production that is required to attain nation’s development. The basic one has been introduced by Solow and Swan (1956), in which growth of capital is influenced by savings level, growth of labor force, and technology Their assumption that savings are held in a form of fixed assets ignores alternative choices like liquid assets, money, or bonds. Mackinnon (1973) discussed the main differences between developing and developed countries in terms of the form at which savings are held In his argument, Mackinnon presented a complementarity relationship between money and fixed assets in developing countries, where money holding will contribute to capital stock improvement. Most of the Arab countries suffer from shortage and/or high fluctuation in national savings, which has negatively affectedthe ability to financenew investment and development projects They were unable to accumulate the intended level of capital. Model estimation and empirical results are illustrated in the sixth section, and the seventh section presents the conclusion
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