Investment Shortfalls Research Articles

The English education system: undervalued and over-measured

The economic value of education is widely known. However, policymakers, despite recognising its economic benefits in theory, in practice treat education spending and school funding as a cost. In the English context, this has led to a shortfall in investment in education, training and skills. The prevailing characterisation of education as a cost obscures its genuine societal and economic value, and there is a particular need for better measurement of its social benefits, including human capital, in terms of health, civic participation, and well-being. This article explores the consequences of downplaying the investment role of education, which include cuts in real-terms education spending despite trying to pursue an economic growth agenda, and increases in educational and income inequality. The current (burdensome) accountability system then adds to the problem of underinvestment, measuring as it does only a narrow range of academic outcomes. Its high-stakes approach also appears to be undermining the desirability of teaching as a profession, which will be detrimental to education quality. This article discusses potential solutions, advocating for a comprehensive and long-term approach to education planning and measuring outcomes beyond traditional academic metrics. It urges a paradigm shift in perceiving education as a sustained, lifelong investment, necessitating strategic systemwide planning, cross-party consensus and, above all, a commitment to valuing the education system and its workforce. The article arises from a British Academy Lecture delivered in November 2022.

Role of development finance institutions on sustainable development goals: poverty eradication

Development Finance Institutions (DFIs) deliver services which aim at Sustaining Development Goals (SDGs) towards poverty eradication. The services delivered by DFI are quite unique and interesting. The study investigated role of DFI on SDGs with regards to poverty eradication. The study adopted critical review of recent works of literatures to identify the success factors of DFI’s as regards it role on the SDGs. In conclusion, undoubtedly, DFIs are becoming a key asset and a driving force for poverty eradication over the world. They share a common focus on fostering SDGs. Their mission lies in servicing the investment shortfalls of developing countries and bridging the gap between commercial investment and state development aid. The reviews of the previous literatures showed that that DFIs significantly impact on the level of job creation thus enhancing the standard of living and by helping countries catalyze the private investment required to meet the United Nations’ SDGs. The study therefore recommends amongst others that government should ensure that the money from DFIs are utilized efficiently and effectively for only the purpose it is meant for, to increase the level of infrastructural development and there is also need to address and resolve the growing policy contradiction between multilateral agencies as last resort sources of finance to cater for well-being, in order to reduce poverty and thus improve the standard of living of the people.

Do Financing Constraints Lead to Incremental Tax Planning? Evidence from the Pension Protection Act of 2006*

ABSTRACTOver the past three decades, academic research has sought to understand how cash shortfalls impact a firm's ability to take all available value‐increasing investment projects. We investigate whether firms facing greater financing constraints turn to tax strategies that generate lower cash effective tax rates (ETRs) to mitigate the adverse effect of these financing constraints. We use the Pension Protection Act of 2006 (PPA 2006) as an exogenous shock to financing constraints for pension firms, but not for other firms. Using a difference‐in‐differences research design, we predict and find that pension firms experience a decrease in their cash ETRs by 1.8%–2.4% after the PPA 2006, relative to other firms. These cash tax savings mitigate the investment shortfall brought about by financing constraints by 19%. We also predict and find that the decline in cash ETRs is greater among firms more adversely affected by the PPA 2006. Our paper sheds light on the direction, causality, and economic magnitude of the association between financing constraints and tax planning activities. We also provide insight into the role of tax planning activities within firms' broader corporate business strategies in responding to financing constraints.

The Future of Asia’s Natural Gas Market: The Need for a Regional LNG Hub

Despite being the world’s largest LNG-consuming region and the fastest-growing LNG market, Asia still lacks an LNG trading hub and associated pricing benchmark that reflect the region’s gas market fundamentals and send a reliable price signal for imports. Recent changes in the LNG market have improved conditions for the emergence of one or more hub-based prices in Asia as an alternative to oil-indexation, the prevalent LNG pricing structure in the region. In addition, an oversupplied market has created a common need between buyers and sellers to find new ways to trade and finance LNG at a time of demand uncertainty and investment shortfalls. These developments not only would make the LNG market more open, transparent, and competitive by facilitating physical exchanges and hedging but also would bring broader benefits, including greater regional integration, enhanced energy security, and greener economic development. Singapore is well-positioned to serve as an LNG hub, given its geographic position; established trade, legal, and financial ecosystem; and progress toward assuming this role.

Do Financing Constraints Lead to Incremental Tax Planning? Evidence from the Pension Protection Act of 2006

Over the last three decades, academic research has sought to understand how cash shortfalls impact a firm’s ability to take all available value-increasing investment projects. We investigate whether firms facing greater financing constraints turn to tax strategies that generate lower cash effective tax rates (ETRs) to mitigate the adverse effect of these financing constraints. We use the Pension Protection Act of 2006 (PPA 2006) as an exogenous shock to financing constraints for pension firms, but not for other firms. Using a difference-in-difference research design, we predict and find that pension firms experience a decrease in their cash effective tax rates by 1.8 to 2.4 percentage points after the PPA 2006, relative to other firms. These cash tax savings mitigate the investment shortfall brought about by financing constraints by 19 percent. We also predict and find that the decline in cash ETRs is greater among firms more adversely affected by the PPA 2006. Our paper sheds light on the direction, causality, and economic magnitude of the association between financing constraints and tax planning activities. We also provide insight into the role of tax planning activities within firms’ broader corporate business strategies in responding to financing constraints.

Assessing the Impact of Investment Shortfalls on Unfunded Pension Liabilities: The Allure of Neat, but Faulty Counterfactuals

In this paper I provide a methodological critique of the conventional method for assessing the impact of investment shortfalls and other contributors to unfunded pension liabilities, and offer a methodologically sound replacement with substantive policy implications. The conventional method – simply summing the annual actuarial gain/loss figures over time – provides a neat, additive decomposition of the sources of the rise in the Unfunded Accrued Liability (UAL). In doing so, however, it implicitly assumes that in the counterfactual exercise, amortization would adjust dollar-for-dollar with the interest on additional UAL. That is, even if the total (and average) shortfall from covering interest is substantial, the marginal shortfall is assumed to be zero. This is not how contribution shortfalls arise under funding formulas typically used by public plans in the United States. Using the actual funding formula in the counterfactual – with contribution shortfalls on the margin -- leads to much higher estimates of the UAL impact of investment shortfalls than the conventional method. The reason is that there are large interactions over time between investment shortfalls and marginal contribution shortfalls. The conventional counterfactual implicitly assumes away these interactions. The resulting additivity is alluring, but illusory. The conventional method also leads to untenable results on other UAL-drivers. Most striking is the implication that the cumulative UAL impact of pension obligation bonds (POB’s) is no different from the initial impact of receiving the proceeds, independent of the return (actual or assumed) on those proceeds. The underlying problem with the conventional framework is that it has emerged without careful attention to the counterfactual scenarios it is meant to address. This paper provides explicit and internally consistent counterfactuals to better understand the conventional method and its flaws, as well as the reasons for using instead the actual amortization formula in the counterfactual. Mathematical methods are used to illuminate the theoretical issues that lie behind any simulations. The analytical results are illustrated empirically with an adapted version of the actuarial history of the Connecticut State Teachers’ Retirement System (CSTRS), FY00-FY14. The example is instructive because it is a highly underfunded system, notable for its high (and unreduced) assumed rate of return (8.5 percent), as well as its use of $2 billion in POB proceeds to reduce the UAL in FY08, just before the market crash.

Public Investment in the UK

Toigo and Woods consider the role of public investment in the UK fiscal policy framework. First, they examine the general guidelines for public investment policy: these should address both microeconomic considerations concerning efficiency and the costs and benefits of individual projects and macroeconomic considerations about the impact of the aggregate level of public investment in the short and the long term. The Authors examine the arguments supporting a specific treatment of public investment (the potential to self-finance, inter-generational fairness and the political economy issues leading to a bias against public investment) and the way this treatment can be embodied in a rule based framework. Finally, they describe the UK framework both at the macro and micro level and examine the role of Public Private Partnerships. Toigo and Woods conclude noting that the new framework has contributed to addressing the shortfall in public investment which had previously characterised the UK.

Change in the Managerial Efficiency and Management Technology of Hotels: An Application to Thailand

This article estimates the change in managerial efficiency and management technology of a sample of hotels in Chiang Mai, Thailand, during 2002–2006. The study applies the data envelopment analysis (DEA) methodology proposed by Banker et al (1984) to examine managerial efficiency in 2002 and 2006. The Malmquist productivity approach developed by Färe et al (1992) is employed to evaluate the change in managerial efficiency and management technology over the same period. The results show that medium-sized and small hotels tend to be more managerially efficient than large hotels. The total factor productivity declined slightly owing to a lack of investment in management technology. Instead, the hotels in the sample concentrated on improving managerial effort. This shortfall in technology investment could hamper productivity in the longer term.

Leveraged and Inverse ETFs, Holding Periods, andInvestment Shortfalls

Leveraged and Inverse ETFs replicate the leveraged or the inverse of the daily returns of an index. Several studies have established that investors who hold these investments for periods longer than a day expose themselves to substantial risk as the holding period returns will deviate from the returns to a leveraged or inverse investment in the index. It is possible for an investor in a leveraged ETF to experience negative returns even when the underlying index has positive returns. In this article, the authors estimate distributions of holding periods for investors in leveraged and inverse ETFs.Using standard models, they show that a substantial percentage of investors may hold these shortterm investments for periods longer than one or two days or even longer than a quarter.They estimate the investment shortfall incurred by investing in leveraged and inverse ETFs compared to investing in a simple margin account to generate the same leveraged or short-selling investment strategy. The authors find that investors in leveraged and inverse ETFs can lose 3% of their investment in less than 3 weeks, an annualized cost of 50%. They also discuss the viability of leveraged and inverse leveraged ETFs that rebalance less often than daily and calculate their costs to investors. <b>TOPICS:</b>Exchange-traded funds and applications, portfolio construction, risk management

Leveraged and Inverse ETFs, Holding Periods, and Investment Shortfalls

Leveraged and Inverse ETFs, Holding Periods, and Investment Shortfalls

Long-Term Fundamentals of the 2008 Economic Crisis

The current economic crisis has long-term causes that are rooted in the economic dynamics of globalization. I argue that globalization (a) increases the world economic growth rate; (b) is consistent with development, underdevelopment and miracle growth; (c) increases inequality in leading countries; and (d) generates a transition path along which the interest rate diminishes if capital accumulates at a faster rate than technological change. This condition is generated by cheap-factor-seeking foreign direct investment (FDI), which by combining advanced technologies with low costs yields extraordinary profits and experiences lower incentives for innovation. Over the period 1980-2007, liberalization unleashed a wave of globalization, and the international sector experienced miracle growth. Profits rose to all time highs and global saving exceeded global investment. This savings glut or investment shortfall fueled a global housing appreciation, after which excessive risk in a deregulated financial market led to a financial meltdown. While restoring financial markets and reducing the housing market fallout have been immediate priorities for the U.S., economic growth can only be recovered by restoring global investment. Lowering interest rates cannot generate very much investment, nor will consumption flows from fiscal spending. To stimulate the global economy, whole new economic sectors and technologies must be developed in advanced countries, and economic development deepened in underdeveloped countries. At the same time, a global harmonization of corporate taxes, ending the corporate tax haven loophole, would raise funds for publicly provided goods that complement private investment and balance incentives between local and international production. It would also reduce the polarization between developed and underdeveloped countries, balance global markets with global governance, and strengthen global cooperation.

Long-Term Fundamentals of the 2008 Economic Crisis

The current economic crisis has long-term causes that are rooted in the economic dynamics of globalization. I construct a Solow-style endogenous model of capital accumulation, technological change, trade and foreign direct investment (FDI), based on myopic agents. Combining advanced technologies with low labor costs, FDI yields extraordinary profits that generate asymmetric innovation incentives that explain the following stylized facts. Globalization (a) increases the world economic growth rate; (b) is consistent with development, underdevelopment and miracle growth; (c) increases inequality in leading countries; (d) generates a transition path along which the interest rate diminishes if capital accumulates at a faster rate than technological change. Over the period 1980-2007, liberalization unleashed a wave of globalization, and the international sector experienced miracle growth. Profits rose to all time highs and global saving exceeded global investment. This savings glut or investment shortfall fueled a global housing appreciation, after which excessive risk in a deregulated financial market led to a financial meltdown. While restoring financial markets and reducing the housing market fallout are immediate priorities for the US, economic growth can only be recovered by restoring global investment. Lowering interest rates cannot generate very much investment, nor will consumption flows from fiscal spending. To stimulate the global economy, whole new economic sectors and technologies must be developed in advanced countries, and economic development deepened in underdeveloped countries. A global harmonization of taxes, which is eventually necessary anyway, is required to fund publicly provided goods, to balance incentives between local and international production, to reduce the polarization between developed and underdeveloped countries, to balance global markets with global governance, and to reinforce global cooperation. Developing the green energy sector is consistent with these aims.

International Investment for Retirement Savers: Historical Evidence on Risk and Returns

An important decision facing retirement savers is how to allocate their savings across different assets. The decision includes the choice of how to divide investments between domestic and foreign holdings. This study uses return data for 1927-2005 to determine whether cross-border investing in the past would have been advantageous to retirement savers in eight large industrialized countries. By assumption investors can buy mutual fund shares in index funds for stocks and bonds in their home country and in any of seven foreign countries. The mutual funds' foreign holdings are not hedged to protect investors against currency fluctuations. The paper's goal is to determine whether workers in the eight countries would have obtained higher expected retirement incomes, with smaller risk of catastrophic investment shortfalls, if they invested part of their retirement savings in foreign stocks and bonds. Consistent with past theoretical and empirical findings, the results show that workers could have improved expected financial performance by investing in foreign as well as domestic equities. Remarkably, retirement savers in nearly all countries would have obtained higher average pensions with a 100% foreign allocation than with a 100% domestic allocation, even if they followed extremely native strategies in allocating equity investments across different foreign markets. For retirement savers in most countries, though not the United States, native overseas investment strategies would also have reduced the risk of catastrophically poor investment performance. In all countries, retirement savers who selected a global portfolio allocation along the efficient frontier could obtain better average pensions with lower risk of very small pensions than savers who restrict their investments to the domestic stock and bond funds.

CEOs

From the Texas Medical Institute of Technology, Austin, Texas. Funding support for this session was provided by Texas Medical Institute of Technology (TMIT). Correspondence: Charles R. Denham, MD, TMIT, 3011 North Inter-regional Highway-35, Austin, TX 78722 (e-mail: [email protected]).

Public Investment in the United Kingdom

The new fiscal and expenditure policy framework adopted in the United Kingdom in 1997 included clear fiscal rules and a reformed system of budgetary controls and capital appraisal procedures. These macro and micro reforms allowed the historic shortfall in public investment to be addressed. This article lays out some general considerations for public investment policy, including involving the private sector, and describes how the United Kingdom has implemented a strategy to deliver an increase in public investment while maintaining a sustainable fiscal position.

Public and Private Capital Productivity Puzzle: A Nonparametric Approach

Is public expenditure productive? Is there a shortfall or excess in public capital investment? We address these old issues in light of new econometric tools. It is argued that the Cobb-Douglas specification that ignores nonlinearity inherent in the functional relationship of the production technology causes incorrect estimates of input elasticities. To avoid possible model misspecification, we use Li-Racine generalized kernel estimation. This procedure is used to estimate the returns to private capital, employment, and public capital in gross state product from a panel of 48 states for 17 years. In contrast to previous studies, we find that the return to public capital is positive and significantly different from zero.

Public and Private Capital Productivity Puzzle: A Nonparametric Approach

Is public expenditure productive? Is there a shortfall or excess in public capital investment? We address these old issues in the light of new econometric tools. It is argued that the Cobb‐Douglas specification that ignores nonlinearity inherent in the functional relationship of the production technology causes incorrect estimates of input elasticities. To avoid possible model misspecification, we use Li‐Racine generalized kernel estimation. This procedure is used to estimate the returns to private capital, employment, and public capital in gross state product from a panel of 48 states for 17 years. In contrast to previous studies, we find that the return to public capital is positive and significantly different from zero.

Commentary: The Savings-Investment Balance: Is there a UK investment shortfall?

In the first half of this decade, the world experienced a period of low short and long-term interest rates. Shortterm rates have risen from these low levels, first in Canada and the United Kingdom, then in the United States and finally in the Euro Area. Long-term rates, by contrast, remained low, suggesting that holders of longterm debt expected the rise in short-term rates to be only temporary. Only in the past few months has the apparently anomalous pricing of long-term debt started to disappear. But with interest rates on long-term debt similar to short-term market rates internationally, the market does not yet show that the traditional upwardsloping yield curve and, on this basis, long rates remain depressed. They are also markedly below the levels of two to three years ago.

Risk and Reward of International Investing for U.S. Retirement Savers: Historical Evidence

A crucial decision facing retirement savers is how to allocate their savings across broad investment classes, including the choice of how to divide investments between domestic and foreign holdings. This study investigates whether cross-border investing would have been advantageous to U.S. retirement savers in the past. The analysis is based on empirical evidence on asset returns in eight industrialized countries that have reliable historical time series data on stock and government bond returns. The goal is to determine whether U.S. workers would have obtained higher expected retirement incomes, with smaller risk of catastrophic investment shortfalls, if they invested part of their retirement savings in foreign stocks and bonds without hedging the currency risks of their overseas investments. The results show that workers could indeed have increased their expected pensions if they included unhedged foreign assets in their portfolio and if the portfolio were selected from one on the efficient frontier. Under many naive investing strategies, however, increasing workers' allocation to overseas assets will not reduce the risk of catastrophically poor investment performance. The tabulations show that the risk of obtaining a very low pension replacement rate actually increases if workers allocate a sizeable percentage of their savings to overseas investments.

Risk and Reward of International Investing for U.S. Retirement Savers: Historical Evidence

A crucial decision facing retirement savers is how to allocate their savings across broad investment classes, including the choice of how to divide investments between domestic and foreign holdings. This study investigates whether cross-border investing would have been advantageous to U.S. retirement savers in the past. The analysis is based on empirical evidence on asset returns in eight industrialized countries that have reliable historical time series data on stock and government bond returns. The goal is to determine whether U.S. workers would have obtained higher expected retirement incomes, with smaller risk of catastrophic investment shortfalls, if they invested part of their retirement savings in foreign stocks and bonds without hedging the currency risks of their overseas investments. The results show that workers could indeed have increased their expected pensions if they included unhedged foreign assets in their portfolio and if the portfolio were selected from one on the efficient frontier. Under many naive investing strategies, however, increasing workers’ allocation to overseas assets will not reduce the risk of catastrophically poor investment performance. The tabulations show that the risk of obtaining a very low pension replacement rate actually increases if workers allocate a sizeable percentage of their savings to overseas investments.