Physical Capital Investment Research Articles

Enhancing Human Capital Investment - Key to Unlock China's Economic Plight of Unbalanced Development

In recent years, it is very important for China to maintain the strong and sustainable economic growth, and we believe enhancing human capital investment is the key. According to the statistics, China's current human capital investment has fallen into the low-level trap, which means that the economic growth heavily depends on labor-intensive and resource-driven investment, and the relationship between human and physical capital investment becomes imbalanced. In addition, the coexistence of human capital shortage and employment pressure, the mismatch between human capital investment structure and talent demand, and insufficient human capital investment caused by unfair income distribution are becoming more and more serious. We advise a re-examination of our human capital investment strategy as the main policy to solve the problems.

The impact of education investment on Sri Lankan economic growth

Abstract We evaluate the contribution of investment on education to Sri Lanka’s economic growth during the period 1959–2008. Physical capital, economic policy changes and the ethnic war are also evaluated due to their substantial importance. This study uses a framework encompassing both the neoclassical and endogenous growth model. The impact of education is assessed through a quality adjusted human capital stock measure. The returns to investment in education are positive but significantly lower than those found for other developing economies. Unlike the case of most developed economies, higher returns from investment in physical capital cannot produce any sizable positive externalities. The war has had the expected negative effect on output, and the results on economic policy changes are inconclusive. The results indicate a need for an appropriate strategy to allocate resources on education to improve its returns to the economy.

A Minskyan Road to Financial Reform

ABSTRACT In the aftermath of the global financial collapse that began in 2007, governments around the world have responded with reform. The outlines of Basel III have been announced, although some have already dismissed its reform agenda as being too little (and too late!). Like the proposed reforms in the United States, it is argued, Basel III would not have prevented the financial crisis even if it had been in place. The problem is that the architects of reform are working around the edges, taking current bank activities as somehow appropriate and trying to eliminate only the worst excesses of the 2000s. Hyman Minsky would not be impressed. Before we can reform the financial system, we need to understand what the financial system does—or, better, what it should do. To put it as simply as possible, Minsky always insisted that the proper role of the financial system is to promote the “capital development” of the economy. By this he did not simply mean that banks should finance investment in physical capital. Rather, he was concerned with creating a financial structure that would be conducive to economic development to improve living standards, broadly defined. In this paper, we first examine Minsky’s general proposals for reform of the economy—how to restore stable growth that promotes job creation and rising living standards. We then turn to his proposals for financial reform. We will focus on his writing in the early 1990s, when he was engaged in a project at the Levy Economics Institute on reconstituting the financial system (Minsky 1992a, 1992b, 1993, 1996). As part of that project, he offered his insights on the fundamental functions of a financial system. These thoughts lead quite naturally to a critique of the financial practices that precipitated the global financial crisis, and offer a path toward thorough-going reform.

Human Capital Formation on Skill-Specific Labor Markets

This paper focuses on the dynamic link between skill-specific labor markets with search frictions. Human capital investment is formed through households' endogenous decision, and competes with physical capital investment. Idiosyncratic shock shifts the skilled labor share and changes tightness in both skilled and unskilled markets. Given inelastic labor participation, the model can generate downward-sloping Beveridge curves in aggregate, skilled and unskilled labor markets. Upon a neutral shock, total unemployment decrease is two-staged: firstly with a reduction in unskilled unemployment, and then due to a sharp decline of skilled unemployment when skill substitution dominates. A higher elasticity of substitution between two types of labor leads to higher volatility of the model variables and higher u - v correlation.

Fiscal Policy and Growth in Saudi Arabia

Whether government spending can boost the pace of economic growth is widely debated. In the neoclassical growth model, it is supplies of productive resources and productivity that determine growth in the long-run. In endogenous growth models, an increase in government spending may raise the steady-state rate of growth due to positive spillover effects on investment in physical and/or human capital. This paper examines the relationship between government spending and non-oil GDP in the case of Saudi Arabia. Using time-series methods and data for 1969-2005, we find that increases in government spending have a positive and significant long-run effect on the rate of growth. Estimated effects of current expenditure on growth turn out to exceed those of capital expenditure—suggesting that government investment in infrastructure and productive capacity has been less growth-enhancing in Saudi Arabia than programs to improve administration and operation of government entities and support purchasing power. We discuss possible reasons for this finding in the Saudi case and draw some policy implications.

Women’s health-what’s new worldwide

This report provides an overview of the current evidence base regarding gender equality and economic growth. The authors propose that achieving gender equality in the developing world could enhance economic growth through population growth increasing labor productivity improving agricultural productivity and attracting and increasing the investment in physical capital.

An Empirical Inquiry into the Nature of Welfarism

Economists typically evaluate policies based on how such policies affect individuals’ utilities. We follow this approach by taking a welfarist view of the USA’s espoused policy of promoting liberty in other parts of the world. However, we take a nuanced view by investigating the type of welfare that the USA promotes. On one hand, we identify a direct value of liberty in the sense that basic human rights like freedom of speech, freedom to express one’s religious beliefs, and freedom to form associations improve welfare. In this case, liberty is directly consumed. We argue that this improvement in welfare comes simply from giving people greater levels of freedom and is independent of the existence of other inputs. On the other hand, we identify an indirect value of liberty because liberty is indirectly consumed insofar as it is an input in an economy’s production function and therefore affects welfare through its effect on an economy’s capacity to produce goods and services. However, unlike the direct effect mentioned above, we argue that liberty alone cannot produce this indirect effect and therefore needs complementary inputs like investments in physical and human capital. We identify foreign aid as a source of information for investigating a donor’s direct and indirect values of liberty. In our empirical work, our identification strategy exploits the aforementioned difference in the characteristics of the direct and indirect values of liberty to test whether the USA's foreign aid allocation is motivated by a direct value or and/or an indirect value for liberty. As a test of validity, we apply our methodology to the aid allocation of donors who, we believe, are different from the USA. These are Arab donors and Scandinavian countries (i.e., Sweden, Norway, and Denmark). We also include the UK.

Advertising, Brand Capital, and Asset Returns

We provide a theoretical and empirical analysis of the link between advertising expenditures, brand capital, and asset returns in the cross-section of U.S. publicly traded firms. Interpreting advertising expenditures as firms' investment in brand capital, we document that: (i) firms with high brand capital investment rates underperform firms with low brand capital investment rates by 7% per annum; and (ii) brand capital intensive firms outperform low brand capital intensive firms by 4.1% per annum. Based on standard Q-theory of investment, we develop a structural dynamic investment-based model in which advertising expenditures and firm's risk are both jointly and endogenously determined. The model replicates the empirical asset pricing facts reasonably well. In addition, the model is consistent with the time-series properties of brand capital and physical capital investment rates, as well as with the unusually high advertising expenditures during seasoned equity offerings. Taken together, our results suggest that standard Q-theory of investment provides a useful framework for understanding the dynamics of advertising expenditures by corporations.

Factors Affecting Manufacturing and Agricultural Productivity Trends Among Asian Countries

Manufacturing productivity has been increasing faster relative to agricultural productivity in a number of Asian countries in recent years. The literature provides two hypotheses for this phenomenon. First, increases in physical capital investment led to manufacturing productivity growth in many Asian countries (Tinakorn and Sussangkarn 1994). Second, greater exposure to trade and foreign direct investment contributed to improvements in manufacturing productivity (Pack and Westphal 1998). Using data from several Asian countries between 1970 and 2005, we find that OLS regressions only support the first hypothesis. However, after we account for the endogeneity between openness and FDI inflows, we find evidence supporting the second hypothesis. These results have various implications for trade and FDI policies.

Health and economic growth among the states of Brazil from 1991 to 2000

Health status can affect economic growth through at least three mechanisms: 1) directly, through the relationship between health status and individual earnings, 2) indirectly, through the effect of health on levels of education, and 3) through physical capital investments. Poor health status causes considerable losses in individual income by decreasing labor productivity, numbers of hours worked, and participation in the labor force. These losses can affect a population's level of wealth and contribute to decreased social well-being. The main goal of this study is to assess the relationship between health and economic growth among the Brazilian states between 1991 and 2000. In order to take into account the different epidemiological and morbidity profiles observed among the states, several health measures were selected such as infant mortality rate, hospital mortality rate in the public healthcare system due to perinatal complications, and proportion of deaths from selected causes (vascular diseases, diabetes, cancer, AIDS and other communicable diseases, homicides and ill-defined causes). Our main findings show that in Brazil health correlates positively with economic growth. We also found that decreases in infant mortality rates are closely associated with higher rates of economic growth. We found a significant negative relationship for health indicators that are related to poverty, less access to health care services and deaths from avoidable causes, such as communicable diseases and hospital mortality rates due to perinatal complications. In contrast, we found a positive and significant correlation between the proportion of deaths from diabetes and cancer, on the one hand, and economic growth, on the other.

Estimates of Human Capital in Canada: The Lifetime Income Approach

This paper produces an estimate of market-based human capital investment and stock for Canada over the period from 1970 to 2007 based on the lifetime income approach and compares it with that of physical and natural capital investment and stock. It adopts the methodology developed by Jorgenson and Fraumeni, and estimates human capital stock as the expected future lifetime income of all individuals. Human capital investment is estimated as changes in human capital stock due to the addition of new members of the working age population arising from the rearing and education of children and the effect of immigration on human capital.The main findings are as follows: 1. The volume of aggregate human capital rose at an annual rate of 1.7% in Canada for the period 1970 to 2007, and most of the growth is due to the increase in the number of individuals in the working-age population. The rising education level of the Canadian population is also a significant contributing factor to the growth in human capital. 2. The compositional effects of aging of the Canadian population (a movement to a population that is older on average) reduced human capital growth by 0.6% per year over the period 1980 to 2007, while the rising education level increased human capital growth by 0.7% per year over the period. 3. Human capital stock on a per capita basis increased at 0.9% per year for the period 1970 to 1980, due to the rising education attainment during the period. After 1980, human capital stock per capita was virtually unchanged due to two offsetting factors: rising education level which increased human capital stock and the compositional effects of population aging, which reduced human capital stock. 4. The value of human capital investment and stock exceeds the value of physical capital investment and stock, and the ratio of human capital investment and stock to physical capital investment and stock declined over time. In 2007, human capital stock is about four times as large as physical capital stock while investment in human capital is about two times the magnitude of investment in physical capital. 5. The levels of human capital investment and stock estimates are sensitive to the assumptions made about expected future income growth and the rate used to discount the future income when calculating human capital, but the growth of the quantity and price of human capital investment and stock is not sensitive to the assumptions in these areas

What Do Banks Do? What Should Banks Do?

Before we can reform the financial system, we need to understand what banks do; or, better, what banks should do. This paper will examine the later work of Hyman Minsky at the Levy Institute, on his project titled “Reconstituting the United States’ Financial Structure.” This led to a number of Levy working papers and also to a draft book manuscript that was left uncompleted at his death in 1996. In this paper I focus on Minsky’s papers and manuscripts from 1992 to 1996 and his last major contribution (his Veblen-Commons Award-winning paper).Much of this work was devoted to his thoughts on the role that banks do and should play in the economy. To put it as succinctly as possible, Minsky always insisted that the proper role of the financial system was to promote the “capital development” of the economy. By this he did not simply mean that banks should finance investment in physical capital. Rather, he was concerned with creating a financial structure that would be conducive to economic development to improve living standards, broadly defined. Central to his argument is the understanding of banking that he developed over his career. Just as the financial system changed (and with it, the capitalist economy), Minsky’s views evolved. I will conclude with general recommendations for reform along Minskyan lines.

Longevity, Capital Formation and Economic Development

Many researchers have concluded that longer life expectancies prompt increased investment in education, as a prolonged labor supply raises the rate of return on education. Besides explaining the empirical evidence behind this conclusion (at an absolute level), there is another issue to be discussed: does time spent in studying and working increase proportionally with higher longevity? Building on an extended life-cycle model with an assumption on a more realistic distribution of life cycle mortality rates, this article considers dynamic effects of prolonging longevity on economic development by directly introducing changes in longevity into the economy, which is more preferable than comparative static analysis that relies on changes in relevant parameters. It shows that prolonged life expectancy will cause individuals to increase their time in education but may not warrant rises in labor input. Later we show that higher improvement rate of longevity will also promote economic growth, even if we exclude the mechanism of human capital formation and only consider the growth effects of the higher improvement rate of life expectancy from physical capital investment.

Property rights for the poor: Effects of land titling

Secure property rights are considered a key determinant of economic development. The evaluation of the causal effects of property rights, however, is a difficult task as their allocation is typically endogenous. To overcome this identification problem, we exploit a natural experiment in the allocation of land titles. In 1981, squatters occupied a piece of land in a poor suburban area of Buenos Aires. In 1984, a law was passed expropriating the former owners' land to entitle the occupants. Some original owners accepted the government compensation, while others disputed the compensation payment in the slow Argentine courts. These different decisions by the former owners generated an exogenous allocation of property rights across squatters. Using data from two surveys performed in 2003 and 2007, we find that entitled families substantially increased housing investment, reduced household size, and enhanced the education of their children relative to the control group. These effects, however, did not take place through improvements in access to credit. Our results suggest that land titling can be an important tool for poverty reduction, albeit not through the shortcut of credit access, but through the slow channel of increased physical and human capital investment, which should help to reduce poverty in future generations.

Aid and investment in LDCs: A robust approach

This paper uses panel data and the Local Linear Kernel Estimator (LLKE), to investigate the effects of aid on physical capital investment in developing countries. Specifically, we investigate the robustness of the relationship between aid and physical capital investment in Less Developed countries (LDCs) using two different measures of aid and five measures of the policy environment. We find that external aid has a positive and significant impact on physical capital investment given the support of the sample data we use. This effect is robust to the measurement of aid as well as the policy environment. However, the character of the positive relationship between aid and investment varies with the combination of the aid measure and the policy environment. We find that conditional on inflows, the better the policy environment, the higher the investment rate, all things being equal. The results have implications for aid research and aid policy.

Income Taxes, Subsidies to Education, and Investments in Human Capital

We study a two-sector economy with investments in human and physical capital and imperfect labor markets. Human and physical capital are heterogeneous. Workers and firms endogenously select the sector they are active in, and choose the amount of their sector-specific investments in human and physical capital. To enter the high-skill sector, workers must pay a fixed cost that we interpret as direct cost of education. Given the distribution of the agents across sectors, at equilibrium, in each sector there is underinvestment in both human and physical capital, due to non-contractibility of investments. A second source of inefficiency is related to the self-selection of the agents into the two sectors. It typically induces too many workers to invest in education. Under suitable restrictions on the parameters, the joint effect of the two distortions is that equilibria are characterized by too many people investing too little effort in the high skill sector. We also analyze the welfare properties of equilibria and study the effects of several tax-subsidy policies on the total expected surplus.

Some macroeconomic aspects of global population aging.

Across the demographic transition, declining mortality followed by declining fertility produces decades of rising support ratios as child dependency falls. These improving support ratios raise per capita consumption, other things equal, but eventually deteriorate as the population ages. Population aging and the forces leading to it can produce not only frightening declines in support ratios but also very substantial increases in productivity and per capita income by raising investment in physical and human capital. Longer life, lower fertility, and population aging all raise the demand for wealth needed to provide for old-age consumption. This leads to increased capital per worker even as aggregate saving rates fall. However, capital per worker may not rise if the increased demand for wealth is satisfied by increased familial or public pension transfers to the elderly. Thus, institutions and policies matter for the consequences of population aging. The accumulation of human capital also varies across the transition. Lower fertility and mortality are associated with higher human capital investment per child, also raising labor productivity. Together, the positive changes due to human and physical capital accumulation will likely outweigh the problems of declining support ratios. We draw on estimates and analyses from the National Transfer Accounts project to illustrate and quantify these points.

SUNK COSTS OF CAPITAL AND THE FORM OF ENTERPRISE: INVESTOR‐OWNED FIRMS AND WORKER‐OWNED FIRMS*

ABSTRACT**: This paper examines implications of sunk costs of capital for efficient forms of enterprise. It is assumed that firm owners and outside traders are asymmetrically informed of venture risks, and that there are sunk costs associated with investment in physical and human capital. We then make an efficiency comparison between investor‐owned and worker‐owned firms. We find that the firm is efficient when it is owned by the input supplier (the investor or worker) who incurs large sunk costs. This is because such an input supplier can credibly signal to the other input supplier that he in fact has a safe project. An empirical study based on the Japanese manufacturing industry seems to support the theoretical result.

Innovative Capability and Financing Constraints for Innovation More Money, More Innovation?

Economic theory suggests that financing constraints may occur due to capital market imperfections. These particularly affect investments in innovation projects as such projects are typically characterized by a high degree of uncertainty, complexity and specificity. Financing innovation externally is thus likely to be more costly compared to financing of other investment. Hence, internal sources of financing are crucial for the implementation of innovation projects. However, internal funds are not inexhaustible either. They are naturally limited and raising new equity may be costly and often undesired. Financing constraints, however, may not affect all firms to the same extent. This paper addresses the question of which firms face financing constraints. Such identification is particularly interesting for policy makers in order to design effective policy schemes as financing constraints lead to a suboptimal level of investment in innovation. In contrast to previous empirical studies, our analysis is based on the idea of an ideal test for identifying financial constraints on investment in innovation as proposed by Hall (2008). She suggests that 'the ideal experiment for identifying the effects of liquidity constraints on investment is to give firms additional cash exogenously, and observe whether they pass it on to shareholders or use it for investment and/or R&D. [...] If they choose the second [alternative], then the firm must have had some unexploited investment opportunities that were not profitable using more costly external finance'. That is, these firms have been financially constrained. This study contributes to the literature in the following three main aspects. First, we employ a direct indicator derived from survey information in which firms were offered a hypothetical cash payment. Second, we account for the firm's choice between alternatives of use for the money. Third, we introduce the concept of innovative capability and how it affects financing constraints for innovation. The results from our econometric analysis show that financial constraints for innovation do not depend on the availability of funds per se, but are driven by innovative capability through increasing resource requirements. That is, firms with high innovative capability but low financial resources are more likely constrained than others. Yet, we also observe constraints for financially sound firms that may have to put some of their ideas on the shelf. Firms with low innovative capability choose other options, such as investment in physical capital. Taking account of all options for usage of the additional money, we further find in contrast to the innovation decision, the decision to serve debt is to a large extent driven by the financial background. Firms with low internal funds or a bad credit rating would primarily repay debt instead of investing additional cash in innovation projects.

Some Macroeconomic Aspects of Global Population Aging

Across the demographic transition, declining mortality followed by declining fertility produces decades of rising support ratios as child dependency falls. These improving support ratios raise per capita consumption, other things equal, but eventually deteriorate as the population ages. Population aging and the forces leading to it can produce not only frightening declines in support ratios, but also very substantial increases in productivity and per capita income by raising investment in physical and human capital. Longer life, lower fertility, and population aging all raise the demand for wealth needed to provide for old age consumption. This leads to increased capital per worker even as aggregate saving rates fall. However, increased capital per worker may not occur if the increased demand for wealth is satisfied by increased familial or public pension transfers to the elderly. Thus institutions and policies matter for the consequences of population aging. The accumulation of human capital also varies across the transition. Lower fertility and mortality are associated with higher human capital investment per child, also raising labor productivity. Together, the positive changes due to human and physical capital accumulation will likely outweigh the problems of declining support ratios. We will draw on estimates and analyses from the National Transfer Accounts project to illustrate and quantify these points.