Capital Stock Growth Research Articles

Comment on “China's Recent Economic Performance and Future Prospects”

Comment on “China's Recent Economic Performance and Future Prospects”

Strong Exports, High Unemployment, Low Gdp Growth - a Neoclassical Diagnosis of the German Disease (Exportweltmeister, ArbeitsplatzwüSte, Wachstumsschlusslicht - Eine Neoklassische Diagnose Der Deutschen Krankheit)

This paper shows that the symptoms of the German Disease - high export growth, high unemployment and low real GDP growth - are easily explained by unbalanced real wage growth within the framework of a neoclassic open economy model: In this model unbalanced real wage growth causes unemployment and a decrease of domestic investment yields. Resulting low domestic investment decreases capital stock growth and hence real GDP growth. The excess supply of domestic savings flows abroad, where yields are higher. This causes a depreciation of the domestic currency or - in case of a monetary union - a relative decrease of the domestic price level compared to the price level of the other member countries of the currency union. As a consequence, demand for domestic exports grows, while demand for domestic imports decreases, such that net exports grow. An empirical analysis reveals that all basic features of this mechanism are found in the data. The policy implications are clear-cut: The gap between domestic labor productivity and the average domestic wage level must be closed in the long run.

POPULATION AGEING, HUMAN CAPITAL ACCUMULATION AND ECONOMIC GROWTH IN CHINA

This paper uses a Computable General Equilibrium model to explore the macroeconomic impact of growth in the human capital stock for a given ageing profile of the population in China, during the first half of this century. It examines whether the projected reduction in the total dependency ratio for the period 2000 to the 2030s can be exploited for energetic human capital formation. Policy simulations show that accelerating human capital formation raises both total output and per capita real income dramatically. Public expenditure on education is, therefore, welfare enhancing, mitigating the adverse effects of population ageing while laying the foundation for supporting China's rapidly increasing elderly population. The basic policy message is that China should significantly increase investment in human capital. The long implementation lags of such policies and the rapidly growing proportion of the elderly population suggest that this investment should be undertaken without delay.

Importance of Financial Sectors For Growth in Accession Countries

We use a production function approach in investigating the relationship between financial development and economic growth in 9 EU accession - mostly transition countries. These findings are compared with the results for the group of 18 developed countries, and separately, with the results for a group of less developed EU countries - structural fund recipients. We use aggregate measures of financial development as well as measures for single segments of financial sectors. In context of transition countries, bond markets are, to our knowledge, taken explicitly into account for the first time. We find that domestic credit and bond markets together with real capital stock growth stimulate economic growth in transition. With progress in cohesion, educational attainment becomes the next important factor that contributes to economic growth followed by labor participation in mature market economies. For the developed countries, financial sector did not play any positive role for growth over the period under study. We conclude that transfer mechanisms for growth differ over the development cycle. This is important to growth theory, to the sequencing of economic reforms and to financial sector development priorities.

Changing Importance of Financial Sectors for Growth from Transition to Cohesion and European Integration

We use a production function approach in investigating the relationship between financial development and economic growth in 9 EU accession - mostly transition countries. These findings are compared with the results for the group of 18 developed countries, and separately, with the results for a group of less developed EU countries - structural fund recipients. We use aggregate measures of financial development as well as measures for single segments of financial sectors. In context of transition countries, bond markets are, to our knowledge, taken explicitly into account for the first time. We find that domestic credit and bond markets together with real capital stock growth stimulate economic growth in transition. With progress in cohesion, educational attainment becomes the next important factor that contributes to economic growth followed by labor participation in mature market economies. For the developed countries, financial sector did not play any positive role for growth over the period under study. We conclude that transfer mechanisms for growth differ over the development cycle. This is important to growth theory, to the sequencing of economic reforms and to financial sector development priorities. (author's abstract)

Potential Output in the Czech Republic: A Production Function Approach

This paper deals with the Czech economy supply side performance from the macroeconomic point of view. In order to evaluate the supply side behaviour we calculate the potential output dynamic path and contribution of its particular determinants using the production function method. The results show that the potential output growth was rather slow around 2 per cent. This implies that e. g. even 3 per cent growth can cause macroeconomic imbalances. Increase of the non-accelerating-inflation-rate of unemployment (NAIRU), weak growth of the capital stock and weak growth of total factor productivity appear to be the reasons for the constrained ability of the Czech economy to grow steadily and converge to EU level.

Productivity growth in East Asian manufacturing: a fading miracle or measurement problem?

Despite the intensive debates on the East Asian economic miracle that persisted during the last decade, the verdict on the source of output growth is inconclusive. There can be no dispute over the importance of total factor productivity (TFP) growth in the process of economic development and raising the level of living standards. But, the question of whether TFP growth played a significant role in East Asian economic growth remains contentious, especially in Singapore's case. This paper provides an updated review on productivity growth in the East Asian manufacturing and that of Hong Kong, Japan, Korea, Singapore and Taiwan, and recommends options for further research to improve understanding on the issue of TFP growth in East Asian manufacturing. Copyright # 2005 John Wiley & Sons, Ltd. To uncover the source of the East Asian economic miracle, the debates on productivity growth in East Asia have been widespread since the 1990s. Due to differences in data, methodology and sample period selected, recent empirical TFP studies have, not surprisingly, revealed mixed results. In an influential paper by Young (1995), he pointed out that the spectacular economic performance in East Asia was not as impressive as previously thought and claimed the economic success was nothing more than intensive factor accumulation. Using growth accounting and breaking down output growth into components that can be attributed to the observable factors of the growth of capital stock and labour force, Young showed that TFP growth (or Solow residual) in East Asian countries was comparable with those of developed economies. Young's finding further predicted that high economic growth is unlikely to be maintained in East Asian economies due to scant progress in the level of TFP. While the findings of Kim and Lau (1994), Krugman (1994), and Collins and Bosworth (1996) are generally consistent with Young's, Chen (1997) raised concerns over possible

DIVERSIFICATION OF RISK AND GROWTH

This paper provides evidence that domestic opportunities to share risk have contributed to slower growth. We first provide a simple model economy that demonstrates how a country's ability to diversify risk is linked to its growth rate. In the context of the model economy, we then investigate empirically whether there is any systematic relationship between domestic opportunities to diversify risk and growth. We employ two econometric procedures: (1) traditional instrumental variables estimation and (2) dynamic panel methods. Interpreted in the context of the model economy, the empirical analysis reveals a robust negative relationship between domestic opportunities to diversify risk and both capital stock and output growth.

Explaining European Unemployment: Testing the NAIRU Hypothesis and a Keynesian Approach

The aim of the paper is to compare the NAIRU hypothesis regarding ­European unemployment and a Keynesian approach to the issue and to evaluate them econometrically. For the NAIRU explanation, wage push variables are key in explaining the rise of European unemployment, for a Keynesian approach it is capital accumulation that is key. The theories are tested using time series data for Germany, France, Italy, the UK and the USA, using the seemingly unrelated regression method (SUR). Unemployment benefits, union density and the tax wedge are used as wage push variables, and the growth of business capital stock as the accumulation variable. The NAIRU specification performs poorly, with only the tax wedge having a positive effect on unemployment as predicted and only unemployment benefits having a negative effect on employment growth. However the results are not robust to changes in the specification. The Keynesian approach is more successful, with capital accumulation being statistically significant in all countries and robust to changes in the specification. Moreover, it can be pooled across countries.

Regimes of Interest Rates, Income Shares, Savings and Investment: A Kaleckian Model and Empirical Estimations for some Advanced OECD Economies

ABSTRACTThe first part of the paper deals with the effects of an exogenous variation in the monetary interest rate on the real equilibrium position of the economic system in a Kaleckian effective demand model. Different regimes of accumulation are derived and it is shown that a negative relation between the interest rate and the equilibrium rates of capacity utilization, accumulation and profit usually expected in post‐Keynesian theory only exists under special conditions. In the second part the model is applied to the data of some major OECD countries, the relevant coefficients are estimated and the relevance for an explanation of the course of GDP and capital stock growth since the early 1960s is discussed.

Quantifying embodied technological change

We estimate the rate of embodied technological change directly from plant-level manufacturing data on current output and input choices along with histories on their vintages of equipment investment. Our estimates range between 8 and 17 percent for the typical US manufacturing plant during the years 1972–1996. Any number in this range is substantially larger than is conventionally accepted with some important implications. First, the role of investment-specific technological change as an engine of growth is even larger than previously estimated. Second, existing producer durable price indices do not adequately account for quality change. As a result, measured capital stock growth is biased. Third, if accurate, the Hulten and Wykoff (1981, Depreciation Inflation, and the Taxation of Income From Capital; Urban, Washington, DC, pp. 81–125) economic depreciation rates may primarily reflect obsolescence.

What India has to Learn from China

In 1970 China had a per capita income which was half that of India. In around thirty years the position has been reversed with the Chinese per capita income becoming eighty per cent higher than that of India. The remarkable turn around can be explained by a much higher rate of growth of GDP in China combined with greater restraints on population growth. The former has been facilitated by an investment rate, which greatly exceeds the Indian rate and faster growth in human capital stock. Governance is not a significant explanatory variable of the difference in economic performance as the Indian performance in governance has been marginally better than that of China. However, it must be remembered that the Chinese have paid for their better economic performance in terms of a more polluted environment.

The Effects of Taxation in a Kaleckian Growth Model

We analyse the effects of balanced budget changes in the tax rates on wages and profits on the trend component of fixed investment, on the trend rate of growth of capital stock and on the trend rates of capacity utilization. A modified version of Kalecki's growth model is used to analyse the long‐term effects of taxation on the growth performance of the economy.

Uncertainty and the slowdown of capital accumulation in Europe

The slowdown in the process of capital formation in continental Europe in the 1990s is analysed. Sector-level data from the OECD's International Sectoral Data Base (ISDB) are used. Econometric estimates of an investment function indicate structural instability in the early 1990s and, specifically, a break in the coefficient linking the growth of capital stock to demand. This result neither seems to be related to non-linearities in the relationship between capital formation and expected demand, nor to the sectoral composition of European economies. Evidence is found that the drop in the accelerator is at least partly attributable to greater demand uncertainty in the 1990s as compared with the earlier period.

Incentives and static and dynamic gains from market reform: rice production in Vietnam

This article develops a dynamic model to account for the enhanced incentive effects that result from market reform through a move toward private property rights and competitive markets. Reform is captured through an emerging profits function which depends on effective prices and incentives to work harder. Static and dynamic output gains from reform are derived through increases in total factor productivity and induced capital accumulation. The model is applied to rice production in Vietnam over the period 1976–94. The more extensive is market reform, the larger the effects found on rice output, the capital stock and transitional growth rates, suggesting that incentives and more competitive markets matter greatly.

The Production-Side Approach to Estimating Embodied Technological Change

We estimate the rate of embodied technological change directly from plant-level manufacturing data on current output and input choices along with histories on their vintages of equipment investment. Our estimates range between 8 and 17 percent for the typical U.S. manufacturing plant during the years 1972-1996. Any number in this range is substantially larger than is conventionally accepted with some important implications. First, the role of investment- specific technological change as an engine of growth is even larger than previously estimated. Second, existing producer durable price indices do not adequately account for quality change. As a result, measured capital stock growth is biased. Third, if accurate, the Hulten and Wykoff (1981) economic depreciation rates may primarily reflect obsolescence.

The Production-Side Approach to Estimating Embodied Technological Change

We estimate the rate of embodied technological change directly from plant-level manufacturing data on current output and input choices along with histories on their vintages of equipment investment. Our estimates range between 8 and 17 percent for the typical U.S. manufacturing plant during the years 1972-1996. Any number in this range is substantially larger than is conventionally accepted with some important implications. First, the role of investment-specific technological change as an engine of growth is even larger than previously estimated. Second, existing producer durable price indices do not adequately account for quality change. As a result, measured capital stock growth is biased. Third, if accurate, the Hulten and Wykoff (1981) economic depreciation rates may primarily reflect obsolescence.

Convergence: International comparisons based on a simultaneous equation model with regional effects

A structural model incorporating regional effects is fitted to cross-sectional data for 60 countries. The model integrates various strands in the literature, including the dynamic Verdoorn Law linking productivity growth to output growth, and relationships between educational attainment, trade and innovativeness. Most notably, the structural model supports the thesis that a country's innovativeness and, consequently, capital stock growth, depend on the level of technology in the 'surrounding' region.The approach adopted is set within the context of the theoretical and empirical analysis of increasing returns and cumulative causation. However, the resulting parameter estimates lead to a reduced form that implies convergence to an equilibrium rather than divergent productivity levels. The equilibrium productivity level ratios (vis-à-vis the USA) indicate that countries are converging on different levels, although a group does attain the USA productivity level.

The Tyranny of Concepts: CUDIE (Cumulated, Depreciated Investment Effort) Is Not Capital

Using the word capital to represent two different concepts is not such a problem when government is responsible for only a small fraction of national investment and is reasonably effective (as in the United States). But when government is a major investor and is ineffective, the gap between capital and cumulative, depreciated investment effort (CUDIE) may be enormous. A public sector steel mill may absorb billions as an investment, but if it cannot produce steel it has zero value as capital. The cost of public investment is not the value of public capital. Unlike for private investors, there is no remotely plausible behavioral model of the government as investor that suggests that every dollar the public sector spends as investment creates capital in an economic sense. This seemingly obvious point has so far been uniformly ignored in the voluminous empirical literature on economic growth, which uses, at best, cumulated, depreciated investment effort (CUDIE) to estimate capital stocks. But in developing countries especially, the difference between investment cumulated at cost and capital value is of primary empirical importance: government investment is half or more of total investment. And perhaps as much as half or more of government investment spending has not created equivalent capital. This suggests that nearly everything empirical written in three broad areas is misguided. First, none of the estimates of the impact of public spending identify the productivity of public capital. Even where public capital could be very productive, regressions and evaluations may suggest that public investment spending has little impact. Second, everything currently said about total factor productivity in developing countries is deeply suspect, as there is no way empirically to distinguish between low output (or growth) attributable to investments that created no factors and low output (or growth) attributable to low (or slow growth in) productivity in using accumulated factors. Third, multivariate growth regressions to date have not, in fact, controlled for the growth of capital stock, so spurious interpretations have emerged. This paper - a product of Poverty and Human Resources, Development Research Group - is part of a larger effort in the group to understand the importance of public sector actions for economic growth.

Economists, Soviet Growth Slowdown, and the Collapse

Western forecasters overestimated economic growth in the USSR in the last fifteen years of its existence. They were projecting at least the continuation of the recent growth rates, if not their increase, in the near future, at the time when growth was slowing down. The errors of the forecasts of the late 1970s did not lead the forecasters to abandon this approach, and led to the overestimation of growth in the 1980s. A simple continuation of the 1951-75 trend in growth rates yielded more accurate predictions than those based on the aggregate production function or large-scale econometric models. The paper discusses two likely reasons for Sovietologists ignoring the slowdown trend. Forecasters were using the data that, because of an error of interpretation, overestimated the growth of capital stock and implied declines in the level of total factor productivity. To project continued growth slowdown meant to project the continuation of productivity decline, an implausible development. Also, in a kind of Gresham's Law, less accurate forecasts drove out more accurate ones, as doubt was cast on the motives of the supplier of the latter, the CIA. The faculty club wisdom of the late 1980s-1990s that the CIA in those years was making the USSR appear stronger than it actually was in order to provide a justification for the American military buildup had no foundation. As far as growth forecasting is concerned, the CIA analytic efforts were superior to those of academic Sovietologists.