Faster Capital Accumulation Research Articles

Republic of Moldova

This paper presents 2019 Article IV Consultation with the Republic of Moldova and its Sixth Reviews Under the Extended Credit Facility and Extended Fund Facility Arrangements. Moldova’s economic growth remained solid in the first three quarters of 2019, with output expanding nearly 5 percent, supported by strong domestic demand. The three-year program has been broadly successful in achieving its objectives. Comprehensive reforms have rehabilitated the banking system and strengthened financial sector governance, entrenching macrofinancial stability. Prudent and well-coordinated policies are needed to safeguard the progress achieved. Decisive governance and institutional reforms are necessary for faster, sustainable, and inclusive growth. Safeguarding central bank independence is a priority. The inflation-targeting (IT) regime remains appropriate, but additional efforts are needed to improve policy credibility, promote exchange rate flexibility, and disincentivize foreign currency intermediation. Widespread governance and institutional vulnerabilities are major impediments to accelerating income convergence. Addressing these could have significant growth dividends through faster capital accumulation, reduced labor and human capital headwinds from emigration, and higher productivity.

Capital Misallocation and Financial Development: A Sector-Level Analysis

This study investigates how financial development affects capital allocation across industries in a panel of countries at different stages of development (China, India, Mexico, Korea, Japan and the US) over the period 1980-2014. Following the approach proposed by Chari et al (2007) and Aoki (2012), we compute wedges for capital and labour inputs for 26 industrial sectors in the six countries and add them up to economy-wide measures of capital and labour misallocation. We find that more developed financial systems allocate capital investment more efficiently than less developed ones. If financial development is low, faster capital accumulation is associated with a worsening of allocative efficiency. This effect reverses for higher levels of financial development. Sectors with high R&D expenditures or high capital investment benefit most from financial development. These effects are not only statistically significant, they are also large in economic terms.

Factor Endowment, Structural Coherence, and Economic Growth

This paper studies the linkage between structural coherence and economic growth. Structural coherence is defined as the degree that a country's industrial structure optimally reflects its factor endowment fundamentals. The paper found that at least for the overall capital, the shares of capital intensive industries were significantly bigger with higher initial capital endowment and faster capital accumulation. Moreover, there is a positive relationship between a country's aggregate output growth and the degree of structural coherence. Quantitatively, the structural coherence with respect to the overall capital explains about 30% of the growth differential among sample countries.

Physical capital accumulation in Asia 12: Past trends and future projections

The pace of capital accumulation in East Asia has simply been stunning. In this paper, we investigate sources of this fast accumulation and make projections for the future. We estimate a “convergence” equation for physical capital per capita, which is derived from an open economy growth model, using a pooled cross-country, across-decade sample of the entire world. We also conduct projections for the next two decades. We find that an economy with a low level of capital stock per capita tends to experience faster accumulation subsequently. Asian economies have certainly benefited from this “convergence effect”. But on the other hand, other factors such as a low rule of law score and high investment goods prices have worked against them. Our projection shows that, if those economies wish to maintain their current pace of fast capital accumulation, the keys would be to reduce distortions in the domestic market and to improve the quality of institutions.

Factor Endowment, Structural Coherence, and Economic Growth

This paper studies the linkage between structural coherence and economic growth. Structural coherence is defined as the degree that a country's industrial structure optimally reflects its factor endowment fundamentals. The paper found that at least for the overall capital, the shares of capital intensive industries were significantly bigger with higher initial capital endowment and faster capital accumulation. Moreover, there is a positive relationship between a country's aggregate output growth and the degree of structural coherence. Quantitatively, the structural coherence with respect to the overall capital explains about 30% of the growth differential among sample countries.

Perpetual Structural Change, Multiple Steady States and Global Equilibrium Indeterminacy in Two-Sector Endogenous Growth Models

Under the condition that education sector uses human capital as the only input of production, human capital could flow out from final goods sector to education sector eternally, which is defined to be perpetual structural change in the present paper. The emergence of perpetual structural change implies that there are two stable steady states in Uzawa-Lucas model. One has fast human capital accumulation, and the other has slow human capital accumulation. Nevertheless, fast human capital accumulation is not necessarily associated with fast economic growth, nor increases consumer welfare definitely. This conclusion is consistent with the empirical findings that there is no relationship between growth in years of schooling and per capita GDP growth. Moreover, we also find that the indeterminacy of the initial value of the wage rate for human capital is the root of global and local equilibrium indeterminacy, which could arise even though there are neither external effects nor market imperfections in the present paper.

Big Business Stability and Economic Growth: Is What's Good for General Motors Good for America?

What is good for big business need not generally advance a country%u2019s overall economy. Big business turnover correlates with rising income, productivity, and (in high income countries) faster capital accumulation; consistent with Schumpeter%u2019s (1912) creative destruction and recent formalizations like Aghion and Howitt (1992). Turnover appears to %u201Ccause%u201D growth; and disappearing behemoths, more than rising stars, drive our results. Stronger findings suggest more intense creative destruction in countries with higher incomes, as well as those with smaller governments, Common Law courts, smaller banking systems, stronger shareholder rights, and more open economies. Only the last matters more in lower income countries.

Large Corporate Sector Stability and Economic Growth: Is What's Good for General Motors Good for America?

What is good for a country's leading corporations is generally not good for the country's overall economy. Turnover in the list of a country's top ten corporations between 1975 and 1996 is associated with faster overall economic growth, faster productivity growth, and (in high income countries) faster capital accumulation. This is critically due to old leading firms declining or disappearing, as well as to new firms arising, and this turnover appears to 'cause' economic growth. We interpret this as consistent with Schumpeter's (1912) theory of creative destruction, in which growth entails creative new firms destroying old stagnant ones. Our findings are much stronger in high than low income countries, suggesting that creative destruction plays a greater role in the growth of more developed economies. Creative destruction appears to be more intense where government is smaller, Common Law holds sway, banking systems are smaller, shareholder rights are better protected, and the economy is more open. Only the last is more important in low than high income countries.

Foreign Direct Investment In China: Effects On Growth And Economic Performance

By almost all accounts, foreign direct investment (FDI) in China has been one of the major success stories of the past 10 years. Starting from a base of less than $19 billion in 1990, the stock of FDI in China rose to over $300 billion at the end of 1999. Ranked by the stock of inward FDI, China thus has become the leader among all developing nations and second among the APEC nations (only the United States holds a larger stock of inward FDI). China's FDI consists largely of greenfield investment, while inward FDI in the United States by contrast has been generated more by takeover of existing enterprises than by new establishment, a point developed later in this paper. The majority of FDI in China has originated from elsewhere in developing Asia (i.e., not including Japan). Hong Kong, now a largely self-governing special autonomous region of China itself, has been the largest source of record. The dominance of Hong Kong, however, is somewhat illusory in that much FDI nominally from Hong Kong in reality is from elsewhere. Some of what is listed as Hong Kong-source FDI in China is, in fact, investment by domestic Chinese that is round-tripped through Hong Kong (see footnote 2). Other FDI in China listed as Hong Kong in origin is in reality from various western nations and Taiwan that is placed into China via Hong Kong intermediaries. Alas, no published records exist to indicate exactly how much FDI in China that is nominally from Hong Kong is in fact attributable to other nations. According to official sources, in the period 1992-96, FDI from developing Asian nations dominated total FDI flows into China, but since 1996 a growing portion of these flows has come from other sources (i.e., Europe, North America, and Japan). This latter FDI generally has been of a different character than FDI from developing Asian nations. While the latter has been concentrated in export-processing activities in sectors in which China has revealed comparative advantage, much of the former has been directed more toward the domestic market in sectors in which China has no revealed comparative advantage. Thus one consequence of a rising percentage of FDI from Japan, Europe, and North America has been that overall the activities of foreign-invested enterprises in China have become somewhat more focused on the domestic market, and less on export markets, in the late 1990s relative to the mid-1990s. The consequences are discussed in more detail later in this paper. This includes an econometric test of whether FDI in China has contributed to increased total factor productivity growth in those provinces that have received large amounts of FDI. The tests suggest that the result is positive, and hence that FDI has contributed significantly to economic growth in China beyond that which results from faster capital accumulation.

Technology Upgrading with Learning Cost: A Solution for Two Productivity Puzzles

As it takes time and effort to learn how to fully utilise new technology and realise its maximum potential productivity gain, adoption of new technology tends to reduce productivity temporarily, even though the potential productivity gain in the long run outweighs this short run loss. This paper points to such “learning cost” in technology upgrading as a potential explanation of the following two “productivity puzzles” reported in the Information Technology (IT) literature and in the studies of East Asian economic growth. First, in the 1980s, US companies made enormous IT investments, but little productivity gain was observed. Second, Total Factor Productivity (TFP) growth of “Newly Industrialising Countries” (NICs) in East Asia was mediocre in spite of the impressive investment drive in those countries. A simple model of optimal intervals for technology upgrading with learning cost is developed. This model predicts that a company with higher frequency in technology upgrading will tend to have higher market value even with lower current profitability. An empirical study using unbalanced panel data of 1,031 US companies from 1986 to 1995 supports this prediction. Extending the scope from firm-level to industry-level, the paper estimates the magnitude of industry-wide learning-by-doing effects using annual data on 15 sub-industries in the Japanese machinery manufacturing sector from 1955 to 1990. The results show that industry-wide learning-by-doing was strong in low-tech industries where technological change was relatively slow, while it was insignificant in high-tech industries which experienced rapid technological evolution. It is also observed in the US and Japanese manufacturing industries that TFP growth tends to decrease with faster capital accumulation. This negative correlation is reproduced in simulations based on the extended model of learning cost. Apprendre a pleinement utiliser une nouvelle technologie et achever son gain potentiel de productivite demandent du temps et des efforts. Pour ces raisons, l’adoption d’une nouvelle technologie tend a baisser temporairement la productivite meme si le gain de productivite a long terme depasse cette perte a court terme. Cette etude presente l’existence des “couts d’apprentissage” comme une explication potentielle a deux paradoxes de la productivite releves dans les etudes concernant les technologies informatiques ainsi que celles portant sur la croissance economique en Asie de l’Est. Premier paradoxe: en depit des investissements enormes par les firmes americaines pendant les annees 80, il en a resulte peu de gain de productivite. Second paradoxe: la croissance de la productivite totale des facteurs (TFP) dans les nouveaux pays industrialises (NPI) de l’Asie de l’Est a ete mediocre malgre leur taux d’investissements exceptionnellement eleve. On modelise, dans cette etude, l’adoption de nouvelles technologies sous l’hypothese des couts d’apprentissage, et on obtient, dans ce cadre, son intervalle optimal. Le modele prevoit que l’adoption technologique plus frequente tend a augmenter la valeur de marche des firmes meme si elle baisse la rentabilite courante. A l’aide des donnees de panel sur 1031 firmes americaines pour la periode 1986-95, une etude econometrique nous permet de confirmer la prevision du modele. Pour etendre l’analyse, on estime aussi l’amplitude des effets de l’apprentissage par pratique (learning by doing) au niveau des branches industrielles. Pour ce faire, on utilise les donnees annuelles (1955-1990) pour 15 branches japonaises fabriquant des machines. Les resultats montrent que l’apprentissage par pratique est plus important pour le gain de productivite dans les industries a basse technologie ou les changements techniques sont relativement lents, alors qu’il occupe une place non significative dans les industries a haute technologie ayant connu une evolution technologique rapide. Par ailleurs, on trouve aussi que le taux de croissance de TFP tend a diminuer avec une accumulation de capital plus rapide dans les industries manufacturieres americaines et japonaises. Cette correlation negative est aussi reproduite par les simulations basees sur le modele elargi des couts d’apprentissage.