What effect does public and private capital have on income inequality? The case of the Latin America and Caribbean region

Chapter 2 - The relationship between public capital stock, private capital stock, and economic growth in the Latin American and Caribbean countries: A matter of complementarity

In this study, we analysed the relationship between public capital stock, private capital stock and economic growth for a group of 30 Latin American and Caribbean countries from 1970 to 2014. To achieve our goals, the panel vector autoregression methodology, panel dynamic ordinary least squares and panel fully modified ordinary least squares estimators were used. The results from our estimations point to both public and private capital having a positive effect on the long-run economic growth of the countries in our sample. However, the results also point to public capital seeming to crowd private capital in the short run, which could consequently be one of the explanations for the adverse effect that public capital stock seems to have on growth. (A result which was also found in the short-run analysis.) These findings suggest that governments in Latin America and the Caribbean should continue to support public and private investment projects, given the positive effect that both types of capital seem to have on the long-run economic growth of these countries. However, some changes should be made in the planning and execution of such investments in order to avoid some undesirable effects that seem to exist, especially in the short run.

Factors of production and elasticity of substitution play an essential role in economic growth accounting. Although production functions with constant elasticity of substitution between factors are more commonly utilized in growth accounting, studies based on production functions with variable elasticity of substitution are also conducted. Since production functions with variable elasticity of substitution provide more flexibility in parameters, they are more advantageous than other production functions. Besides, most studies focus on the elasticity of substitution between capital and labor. Studies on the sub-components of production factors are relatively few. In this study, capital stock is analyzed by dividing it into two subcomponents as public capital stock and private capital stock. The empirical results, in general, show that the elasticity of substitution between the public capital stock and the private capital stock is less than unity. In this context, public and private capital stock can be expressed as complementary inputs in the final production of goods and services. As a result, public expenditures on infrastructure can boost economic growth by raising the efficiency of private investments.

Purpose- This empirical study facet at Pakistan for the period between 1960 and 2017 in the connection between public investment, public capital stock, private investment, private capital stock, and real GDP. Design/Methodology- Using theoretical and empirical literature assessment, to measure the impact of private investment, private capital stock, government investment, and government capital stock on Pakistan's real gross domestic product, we involved the ARDL Bound tests. Findings- A positive and significant connection was revealed between government investment, a private capital stock with real GDP. Private investment showed a substantial but negative impact in the short run, despite capital stocks indicating a positive and insignificant relationship with Pakistan's RGDP. The long-term consequences showed that the government's capital stocks, public investment, private capital stocks, and RGDP from Pakistan are linked positively and significantly. Private investment, however, has shown harmful and detrimental or insignificant relations with Pakistan's RGDP. Practical Implications- Our study may benefit the Pakistani economy, particularly while useful for academics and researchers to understand the basic concept of 'capital-growth' philosophy.

In this article, we examine whether variations in the level of public capital across Spain's Provinces affected productivity levels over the period 1996 to 2005. The analysis is motivated by contemporary urban economics theory, involving a production function for the competitive sector of the economy (‘industry’) which includes the level of composite services derived from ‘service’ firms under monopolistic competition. The outcome is potentially increasing returns to scale resulting from pecuniary externalities deriving from internal increasing returns in the monopolistic competition sector. We extend the production function by also making (log) labour efficiency a function of (log) total public capital stock and (log) human capital stock, leading to a simple and empirically tractable reduced form linking productivity level to density of employment, human capital and public capital stock. The model is further extended to include technological externalities or spillovers across provinces. Using panel data methodology, we find significant elasticities for total capital stock and for human capital stock, and a significant impact for employment density. The finding that the effect of public capital is significantly different from zero, indicating that it has a direct effect even after controlling for employment density, is contrary to some of the earlier research findings which leave the question of the impact of public capital unresolved.

The effect of capital stock development that is composed of public, private and public–private partnership capital stock on the installed capacity of renewable energy that is a proxy of renewable energy investment is investigated. Data for 18 countries from Latin America and the Caribbean region in the period between 1990 and –2016 and the Quantile via Moments methodology approach are used. The estimated model indicates that the public and public–private partnership capital stock have a positive effect on the installed capacity of renewable energy, while the private capital stock does not cause any effect on the dependent variable. The positive effect of public and public–private partnership capital stock on the installed capacity of renewable energy is due to the high investment and maintenance costs, complex construction issues and economic returns that are not always high in the renewable energy projects. Indeed, during the initial process of development of these projects, the initial access to capital can be very difficult, and the investment of this kind of energy is often supported by public and public–private partnership capital which are most cheaper if compared with support of private capital only. Moreover, the non-impact of private capital stock is related to the high investment and maintenance costs of renewable energy projects as well the low private capital supply that consequently increases the financing costs that discourages the private participation on investment in renewable energy technologies.

Chapter 3 - Concentration hurts: Exploring the effects of capital stock on Latin American and Caribbean income inequality

The impact of public capital stock on energy consumption: Empirical evidence from Latin America and the Caribbean region

This research analysed the effect of gender inequality on the economic growth of seventeen countries in the Latin America and Caribbean (LAC) region from 1990 to 2016 using an ordinary least squares (OLS) regression model with fixed effects and a quantiles via moments model. Electricity consumption from new renewable energy sources, general government capital stock, private capital stock, trade openness, and urban population were used as control variables, and a battery of preliminary and post-estimation tests were conducted to guarantee the adequacy and suitability of both methodologies. The OLS model with fixed effects supports that gender inequality negatively affects gross domestic product (GDP) per capita. The quantiles via moments (QvM) model confirms the results of the OLS model with fixed effects and reveals that with increasing quantiles (25th, 50th, and 75th), gender inequality leads to decreases in LAC countries’ growth. LAC countries’ policymakers and institutions should improve gender equality to reach a higher development level and a more prosperous society. Developing policies that contribute to increasing women’s participation in the labour market, reducing the gender pay gap, supporting women’s education and training, constructing a more women-friendly and less patriarchal society, and developing measures to limit violence against women and early pregnancy and maternal mortality rates and increase women’s decision-making positions, particularly in public policy decision making, must be implemented.

In this paper, private investment and public investment are modelled in a differential game framework. A feedback Nash equilibrium solution is obtained. The private saving rate and the government's income tax rate are derived as functions of time, private capital stock, and public capital stock. Their relationship with model parameters — like the discount rate, the depreciation rate, terminal valuation of capital stock, marginal product of capital and the planning horizon — are examined. Various extensions of the basic model are made.

In this article the author introduces the government investments into a modified Cobb-Douglas production function. These government investments and the corresponding outlays of the private sector of the economy are divided into a public capital stock and a tertiary capital stock (the immaterial capital). These stocks are introduced into the production function in addition to labor and the private capital stock. Then the different time-lags between the income-effect and the capacity-effect are considered. In order to cope with the problems arising from the use of an analysis of regression, empirical investigations generally use the production function in the linearized form, for which the rates of increases are calculated. At the same time the problem of how to find realistic statistical weights (elasticities of production) arises for the new explaining variables. The author proposes two methods and calculates one (hypothetical) example. Following is a discussion of some empirical problems (time-lags, estimations of the capital-stock, elimination of fluctuations in the use of capacity, etc.). The results suggest strongly that the introduction of government investments into the macro-economic production function is useful tool to reduce the residual factor F.

The balanced growth restrictions implied by the neoclassical growth model imply that output, the private capital stock and the public capital stock share the same stochastic trend. We analyse the postwar US data on real output, real private capital stock and real public capital stock and find that the balanced growth restrictions cannot be rejected by the data. Removing the common stochastic trend from each series allows the estimation of output elasticities that is free from the spurious regression problem. The results support Aschauer's (1989) claim that, at the margin, public capital is more productive than private capital.

Development theory from the 1940s through the 1960s emphasized market failures, discontinuities, irreversibilities, and excessive social inequality. In the 1980s and 1990s the emphasis shifted to economic growth supported by the trinity of stabilization, liberalization, and privatization. But increasing problems of social inequality hamper economic growth and the sustainability of development. It is time, says Solimano, to rethink the development paradigm. In the 1980s and 1990s, economic growth (material progress) became the main development goal under the policies known as the Washington Consensus. Earlier concerns about inequalities of income and wealth were replaced by policies emphasizing macroeconomic stabilization (reducing inflation and cutting fiscal deficits) and structural reform (trade liberalization, financial deregulation, privatization, and a shift to a smaller state). But fiscal adjustment and market liberalization alone have not brought stable, equitable development. Inequality of income and wealth, far from declining, seem to have increased in Latin America. The Washington Consensus has supported social policies that rely on targeting, growth-led poverty reduction, and delivery of social services partly through the private sector. Loose ends to this strategy include: - Growth patterns that favor skilled labor and nonlabor factors of production. - The exclusion of vulnerable groups for whom the market produces little income. - Overreliance on commodity-based growth for human development. - Political manipulation of beneficiaries and weak institutional ability to reach targeted groups. - Higher quality services provided by the private sector to high-income and upper-middle-class groups and lower quality services provided by the state to lower-income groups. Social policies in developing countries in the past decade have been defined largely in terms of poverty reduction. Solimano argues that income distribution and the reduction of social inequality are valid policy targets on their own. Empirical evidence and theories of endogenous growth emphasize complementarities between social equity and growth. To the extent that social inequality engenders social conflict, invites taxation of physical investments, and induces economic populism, it hampers economic growth. Social policies to promote equitable development should include: - Good, broad-based education and health services. - Greater access to credit by low-income households and small-scale producers. - More equal access to land and ownership of capital stock (say, after privatization). Social safety nets are needed when unemployment, wage cuts, and declining income threaten the poor. Austerity policies without such safety nets as emergency employment programs, food distribution to children, and minimum income support schemes unduly hurt the poor, the vulnerable, and the politically weak, making fiscal retrenchment difficult and socially regressive. This paper - a product of the Colombia, Ecuador, Venezuela Country Management Unit, Latin America and Caribbean Region - will appear in Andres Solimano, Eduardo Aninat, and Nancy Birdsall, eds., Distributive Justice and Economic Development (University of Michigan Press, 1999, forthcoming). Andres Solimano may be contacted at asolimano@worldbank.org.

Chapter 6 - The role of public, private, and public-private partnership capital stock on the expansion of renewable energy investment in Latin America and the Caribbean region

Income inequality is a pervasive problem in South Africa and particularly affects the Eastern Cape, where poverty levels remain high despite several efforts to address this societal issue. The datasets from 1499 households used for this study, were extracted from the 2021 South African General Household Survey. This study thus examined the distributional pattern of households’ income inequality in Eastern Cape, South Africa, through the use of exploratory data analysis and application of regression-based decomposition of inequality. The EDA results revealed that relatively older households are more concentrated than those young people, female-headed households were also predominant in the study area, while the majority of the households are Black South Africans. The magnitude of the monetary variables’ departure from the mean inferred clear evidence of a widened households’ income disparity or inequality in the study area. The decomposition analysis indicated the contributions of various socioeconomic factors to income inequality. The findings from the regression-based decomposition of inequality found household size, access to basic infrastructure services, possession of assets, internet communication facilities, and households’ population group, as the major drivers of the households’ income inequality in the province, while livelihood diversity has a relatively moderate proportionate contribution. On the other hand, factors such as age and gender of the household head, as well as households’ involvements in agriculture have a minor effect on the households’ income inequality. This paper finally concludes that the relative contributions of each factor contributing to inequality were deemed important for designing effective policy-relevant interventions which can be used to promote economic growth and to address this persistent challenge of income inequality in society.