Returns to skills around the world: Evidence from PIAAC

Existing estimates of the labor-market returns to human capital give a distorted picture of the role of skills across different economies. International comparisons of earnings analyses rely almost exclusively on school attainment measures of human capital, and evidence incorporating direct measures of cognitive skills is mostly restricted to early-career workers in the United States. Analysis of the new PIAAC survey of adult skills over the full lifecycle in 23 countries shows that the focus on early-career earnings leads to underestimating the lifetime returns to skills by about one quarter. On average, a one-standard-deviation increase in numeracy skills is associated with an 18 percent wage increase among prime-age workers. But this masks considerable heterogeneity across countries. Eight countries, including all Nordic countries, have returns between 12 and 15 percent, while six are above 21 percent with the largest return being 28 percent in the United States. Estimates are remarkably robust to different earnings and skill measures, additional controls, and various subgroups. Instrumental-variable models that use skill variation stemming from school attainment, parental education, or compulsory-schooling laws provide even higher estimates. Intriguingly, returns to skills are systematically lower in countries with higher union density, stricter employment protection, and larger public-sector shares.     

The role of infrastructure investment and factor productivity in international tax competition

In this paper we use data from 30 developed economies from 1999 to 2014 to analyse the importance of infrastructure investments and factor productivity for explaining international capital tax competition. Our results indicate the existence of intensive tax competition in effective average corporate taxation during this period. It is also suggested that non-tax variables of third countries affect a country's corporate tax policy. Countries whose direct competitors have better infrastructures or are more productive compensate with lower capital taxation. In this way, their infrastructure investment and productivity-enhancing policies are used as strategic substitutes for capital taxation. With regard to the characteristics of closest competitors, we find that corporate tax competition is fiercer among countries that are characterized by similar infrastructure investments and geographical proximity.     

The prospects of a monetary union in East Asia

This paper assesses the empirical desirability of the East Asian economies to form a monetary union. The Structural Vector Autoregression (VAR) method is employed to assess the nature of macroeconomic disturbances among the East Asian countries, as a preliminary guide in identifying potential candidates for forming an Optimum Currency Area (OCA). In comparison with European countries, East Asia has less symmetric underlying structural shocks but the speed of adjustment to shocks is much faster. The empirical results suggest that there exists a scope among some small sub-regions, comprising mainly of ASEAN countries, for potential monetary integration. The finding of an increased symmetry of shocks among countries after the Asian Financial crisis indicates that the regional policy-coordinating effort after the crisis has put the region on the right track if monetary union is a desired goal.     

The curse of natural resources in the transition economies*

The curse of natural resources is a well‐documented phenomenon for developing countries. Economies that are richly endowed with natural resources tend to grow slowly. Among the transition economies of the former ‘Eastern Bloc’, a similar pattern can be observed. This paper shows that a large part of the variation in growth rates among the transition economies can be attributed to the curse of natural resources. After controlling for numerous other factors, there is still a strong negative correlation between natural resource abundance and economic growth. Among the transition economies the prime reasons for the curse of natural resources were corruption and a neglect of basic education. In order to overcome the curse of natural resources and move to a sustainable path of development, the resource abundant transition countries should fight corruption and ensure that their resource revenues are invested in human capital or the preservation of natural capital.     

Economic complexity,human capital and economic growth: empirical research based on cross-country panel data

Economic complexity reflects a country’s production capabilities and plays an important role in economic growth. This article measures the economic complexity of 210 countries using the method of reflections, and investigates the impact of economic complexity and human capital on economic growth. The measurement results show that there are significant differences regarding the level of complexity among countries. High-income economies have higher complexity than low- and middle-income economies. The empirical findings demonstrate that economic complexity and different levels of human capital have positive effects on long- and short-term growth. A positive interaction effect on economic growth exists between economic complexity and human capital. In addition, secondary education as a proxy for human capital has a relatively greater positive direct effect and a much stronger interactive effect with complexity on economic growth. In addition, the magnitude of the interaction effect between economic complexity and human capital on long- and short-term growth increases as the revealed comparative advantage threshold grows.     

EMPIRICS OF CHINA'S OUTWARD DIRECT INVESTMENT

Abstract.  We investigate the empirical determinants of China's outward direct investment (ODI). It is found that China's investments in developed and developing countries are driven by different sets of factors. Subject to the differences between developed and developing countries, there is evidence that: (i) both market-seeking and resource-seeking motives drive China's ODI; (ii) Chinese exports to developing countries induce China's ODI; (iii) China's international reserves promote its ODI; and (iv) Chinese capital tends to agglomerate among developed economies but diversify among developing economies. Similar results are obtained using alternative ODI data. We do not find substantial evidence that China invests in African and oil-producing countries mainly for their natural resources.     

Capital markets and capital allocation: Implications for economies in transition*

Recent work showing that a sounder financial system is associated with faster economic growth has important implications for transition economies. Stock prices in developed economies move in highly firm‐specific ways that convey information about changes in firms’ marginal value of investment. This information facilitates the rapid flow of capital to its highest value uses. In contrast, stock prices in low‐income countries tend to move up and down en masse, and thus are of scant use for microeconomic capital allocation. Some transition economy markets are coming to resemble those of developed economies, others those of low‐income countries. Stock return asynchronicity is highly correlated with the strength of private property rights in general and public shareholders’ rights in particular. Other recent work suggests that small entrenched elites in low‐income countries preserve their sweeping control over the corporate sectors of their economies by using political influence to undermine the financial system and deprive entrants of capital. The lack of cross‐sectional independence in some transition economies’ stock returns may be a warning of such economic entrenchment. Sound property rights, solid shareholder rights, stock market transparency, and capital account openness appear to check this, and thus contribute to efficient capital allocation and economic growth.     

Economic structure and factor payments

There is a growing body of evidence that the labour payment share in national income varies across countries and over time, suggesting that the popular aggregate Cobb–Douglas production function may not capture income share dynamics. There remains conflicting evidence on the importance of natural resource rents among low income economies and on estimates of the rate of return to produced capital. This paper focuses on the structural differences among countries, confirming the importance of the agriculture sector in estimates of labour and land’s share of factor income based on 81 countries at diverse levels of economic development in the year 2005. I find that cross-country data are best modelled by a CES production function with an elasticity of substitution of 0.8 and that many low income countries have a higher return to capital than the United States.     

Endogenous leadership and sustainability of enhanced cooperation in a repeated interactions model of tax competition: Endogenous leadership in tax competition

In this study, the endogenous timing of moves is analyzed in an infinitely repeated game setting of capital tax competition between a subgroup (a tax union) of countries agreeing on partial tax harmonization and outside countries. It is shown that in a subgame perfect equilibrium of the infinitely repeated tax competition game, they simultaneously set capital taxes in every stage game when a tax union comprises similar countries with respect to productivity, whereas they may set capital taxes sequentially in every stage game when a tax union comprises dissimilar countries. This finding is significantly different from Ogawa (2013), although we also assume that capital is owned by the country's residents, as in Ogawa's model. This is because a disadvantaged member country of the tax union would suffer from larger losses when a tax union comprising dissimilar countries, and thus the tax union will choose the strategy of moving Late for the sake of sustaining tax harmonization to avoid such losses.     

The productivity effect of government capital in developing and industrialized countries

This paper uses an aggregate production function to examine the effect of government capital formation on growth of labour productivity in an annual panel of 12 developing and 12 OECD economies covering the period 1976–1989. The results from a pooled model of all 24 countries indicate that contribution of government capital to labour productivity is positive and statistically significant. This result also holds in separate samples of the industrialized and developing economies where we find that, while there are productivity differentials between the two types of economies with respect to private capital, there are no differences with regards to public capital.     

The IMF and the Liberalization of Capital Flows

We evaluate the claim that the International Monetary Fund precipitated financial crises during the 1990s, by pressuring countries to liberalize their capital accounts prematurely. Using data from a panel of developing economies from 1982–98, we examine whether the changes in the regime governing capital flows took place during participation in IMF programs. We find evidence that IMF program participation is correlated with capital account liberalization episodes during the 1990s. We verify the robustness of our results using alternative indicators of capital account openness. To determine whether decontrol was premature, we compare the economic and financial characteristics of countries that decontrolled during IMF programs with those of countries who did so independently, and find some evidence of IMF-led premature liberalizations.     

Unconventional monetary policy and capital flows

This paper examines the connection between the stance of domestic monetary policy and international capital flows. It first provides a simple theoretical framework describing the mechanisms behind the cross-border spillovers of domestic monetary policy. Then, it empirically investigates the impact of U.S. unconventional monetary policies (UMPs), implemented in the aftermath of the recent global financial crisis, on U.S. capital flows to developing economies and non-UMP advanced economies. The results suggest that the use of quantitative easing by the Federal Reserve has been associated with increased net portfolio flows to developing countries and, to a lesser extent, non-UMP advanced economies. An exit from these UMPs is likely to cause capital flow reversals in U.S. capital-importing countries. Countries with greater exchange rate flexibility, stronger fiscal and current account positions, and higher capital mobility are likely to fare well following an exit from UMPs in the U.S.     

Enforcing the 1988 Basel Capital Requirements: Did it Curtail Bank Credit in Emerging Economies?

We examine whether the enforcement of bank capital asset requirements (CARs) curtailed the supply of credit in emerging economies. Preliminarily, we identify 16 emerging economies that – according to official and impartial reports – enforced the 1988 Basel standard during the 1990s. Then we perform our twofold econometric analysis. In the former part, we use macro data to test whether, controlling for economic fundamental variables, the enforcement brought about a slowdown in aggregate credit in these countries vis-a-vis other emerging economies. We find some support for our hypothesis. In the latter part, we employ individual bank data to better identify the 'capital crunch' effect of the enforcement. Here, we find that CAR enforcement – according to the 1988 Basel standard – significantly curtailed credit supply, particularly at less well-capitalized banks. The two empirical parts together suggest that the CAR enforcement did curtail aggregate credit in the examined emerging countries and that this result is rooted in the attempt by under-capitalized banks to reduce their loans. We argue that among developing countries – where banks are often the only source of financial intermediation – the positive effect of higher capital requirements, represented by the reduction of poor quality lending, may be offset by their negative impact on bank liquidity and on the level of economic activity. Hence, our results suggest that particular care is required to avoid potential negative macroeconomic effects when phasing in new and higher capital requirements in emerging economies.
(J.E.L.: G18, G21, G28)     

Emerging Market Countries’ Access to International Financial Markets

Recent global imbalances have changed the way international capital flows are shared among developed and developing countries. In the new environment, the U.S., a former lender, has become a borrower. This article discusses how the privileged position of this new borrower might influence developing countries?? access to international financial markets. It suggests that for some emerging market countries, the recent increase in current account surpluses might be because of worsening in their borrowing opportunities. Empirical analysis for 39 emerging market economies shows that the increase in the U.S. deficit limited the access of emerging market economies that we analyzed in Commonwealth of Independent States, Developing Asia, Central and Eastern Europe to international financial markets for the 1980?C2009 time period.     

Capital Flows, Capitalization, and Openness in Emerging East Asian Economies

We examine the international capital flows of seven East Asian emerging economies over the last decade and a half. We find that domestic capital market conditions appear to be the best predictors of the changes in the total capital flows of these countries. Overall, changes in capital market openness are less helpful in explaining the behavior of the recent capital flows of these economies. Finally, we find that, while US macroeconomic conditions are strong predictors of GDP growth in the region, US conditions matter very little for the region's capital flows.     

The effects of education and aging in an OLG model: long-run growth in France,Germany and Italy

The purpose of the paper is to provide a long-run analysis up to 2050 of the interplay between financial integration, diverging labor productivity, and the aging process in the larger European countries. We use the Prometeia overlapping generation model for Italy, Germany, and France which are modeled as open economies in capital markets. Our projections provide a core-periphery structure in which Germany, the most abundant human capital country, shows the highest but a decreasing growth rate due to pronounced aging, and finances capital accumulation processes in France and Italy. We find that financial trends are reversed in the late 2010s when Italy begins to over-save as the gap in human capital endowment, and then in productivity, becomes larger compared to the other two countries. This leads to a reduction in physical capital accumulation and innovation processes in Italy. We employ fiscal experiments to correct the long-run divergent behavior of countries in order to get a more homogeneous growth rate path among countries. We also measure the impact of taxation on net-wealth in Italy, and evaluate the internal and spillover effects.     

INTERNATIONAL STUDIES OF FACTOR INPUTS AND TOTAL FACTOR PRODUCTIVITY: A BRIEF SURVEY

This paper summarizes the results of several studies on total factor productivity of twenty-five countries over the period 1950–1965. Some methodological issues which underlie the derivation and calculation of the familiar partial and total factor productivity indices are discussed. Though evidence on labor productivity for a large number of countries is presented and discussed, the main thrust of the discussion is in terms of the determinants of total factor productivity. The quantitative and qualitative contributions of labor and capital to growth of income are assessed with special attention to the contrasting patterns of these contributions among developed and developing economies. The problems of acceleration and retardation of the growth rate of some economies are considered and possible explanations are offered. Variations in the magnitude and sectoral distribution of the growth rates in several countries over this period are examined. Finally, areas for further research in comparative economic growth are suggested.     

Is East Asia an optimum currency area?

This paper assesses the empirical desirability of the East Asian economies to an alternative exchange rate arrangement (a monetary union) that can potentially enhance the exchange rate stability and credibility in the region. Specifically, the symmetry in macroeconomic disturbances of the East Asian economies is examined as satisfying one of the preconditions for forming an Optimum Currency Area (OCA). We extend the existing literature by improving the methodology of assessing the symmetry shocks in evaluating the suitability of a common currency area in the East Asian economies employing the Bayesian State-Space Based approach. We consider a model of an economy in which the output is influenced by global, regional and country-specific shocks. The importance of a common regional shock would provide a case for a regional common currency. This model allows us to examine regional and country-specific cycles simultaneously with the world business cycle. The importance of the shocks decomposition is that studying a subset of countries can lead one to believe that observed co-movement is particular to that subset of countries when it in fact is common to a much larger group of countries. In addition, the understanding of the sources of international economic fluctuations is important for making policy decisions. The falling share of country specific factor and the rising role of region factor indicate that East Asia has become increasingly favorable for a monetary union. However, the share of country-specific factor that is still significant implies that it could be costly to renounce individual currencies to advance into a monetary union in East Asia.     

Growth and Income Distributions in Four EU Economies

Dynamic multi-sectoral and multi-household general equilibrium models are constructed to show how the economies of Germany, France, Spain and the United Kingdom will evolve from 2006 to 2090. These models generate dynamic paths of investment and capital accumulations, demand and supply across production sectors, consumption and welfare of households, relative prices of goods and services, revenue and expenditure of governments, exports, imports, and trade balance consistent with the dynamic general equilibrium in these economies. The models show that inequalities in income distribution among households will not decrease but widen if the current mix of direct and indirect taxes continues in all four countries. Growing inequalities in these economies justify further investments in education and skills.