Human Capital Spending, Inequality, and Growth in Middle-Income Asia

Asia’s rapid population aging fortifies the case for strengthening human capital investments. Further, the experience of the newly industrialized economies suggests that human capital investments will be a vital ingredient of the transition from middle income to high income. Those investments can also affect equity and public finances. In this paper, we use data from the National Transfer Accounts to empirically analyze the effect of human capital investment in Asian countries on economic growth, inequality, and fiscal balance. Our empirical evidence suggests that human capital investments have a positive effect on labor productivity and, hence, output. The positive effect is stronger for poorer households and, hence, beneficial for equity. We also find that such investments can generate sufficient tax revenues to improve the fiscal balance. Overall, our evidence points to a positive effect of human capital on growth, equity, and fiscal balance in Asia

The distributional consequences of tax reforms under capital-skill complementarity

This paper analyses wage inequality and the welfare effects of changes in capital and labour income tax rates for different types of agents. To achieve this, we develop a model that allows for capital–skill complementarity given non-uniform distributions of asset holdings and labour skills. We find that capital tax reductions lead to the highest aggregate welfare gains but are skill-biased and thus increase inequality. However, our analysis also shows that the inequality effects of capital tax reductions are lower over the transition period compared with the long run

Distributional effects of FDI: How the interaction of FDI and economic policy affects poor households in Bolivia

This paper provides a computable general equilibrium analysis of the medium to long-run impact of FDI inflows on poverty and income distribution in Bolivia. The simulation results suggest that FDI inflows enhance economic growth and reduce poverty. However, the income distribution typically becomes more unequal. In particular, FDI widens income disparities between urban and rural areas. The Bolivian government may promote growth-enhancing and poverty-alleviating effects of FDI by overcoming labour market segmentation and providing complementary public investment in infrastructure. Yet, simulated policy reforms or alternative productivity scenarios are hardly effective in reducing the divide between urban and rural areas. --Foreign direct investment,Poverty and income distribution,Bolivia,Computable general equilibrium analysis

On the possibility and driving forces of secular stagnation: a general equilibrium analysis applied to Belgium

This paper investigates the possibility of today’s OECD economies entering into a very long period of poor per capita economic growth and very low real interest rates. We construct a general equilibrium model with overlapping generations of heterogeneous individuals, differing in ability and human capital, and with genetic and financial transfers from parents to children. Our model allows to study within one coherent framework the effects of those factors that are most often mentioned in the literature as possible drivers of secular stagnation: demographic change, a slowdown in the rate of technical progress, rising inequality, borrowing constraints, and downward rigidity in the real interest rate. We calibrate our model to Belgium and find that its predictions match key facts in Belgium in 1950-2009 very well. We then simulate projected future changes in technical progress and demography. In alternative scenarios we additionally impose rising inequality, borrowing constraints and/or a lower bound to the real interest rate. When we assume unchanged public policies and a modest future rate of technical progress, our conclusions about future per capita output and growth are rather pessimistic. Demographic change is by far the most influential cause of low growth. If a lower bound to the real interest rate is binding, it could considerably aggravate the problem of stagnation

Housing and capital in the 21st Century

Thomas Piketty’s Capital in the 21st Century has attracted public, policy and academic attention. Although there is a growing research literature on the formation, distribution, utilization and wider implications of housing wealth there has been little discussion of Piketty’s work in housing studies. This paper outlines and assesses the major contributions of Piketty, including re-emphasizing distribution and political economy perspectives within economics, modelling growth and distribution, establishing detailed long run patterns of wealth change and policy implications. The paper highlights the significance of shifting housing wealth in increasing inequalities in some countries: housing matters in macro-shifts. We also draw out the implications of house price and wealth growth for the balance of rentier vs. entrepreneurial forms of capitalism. If Piketty’s work is important for housing research, we also argue the converse, that housing research findings can strengthen his analysis. The stylized facts of advanced economy metropolitan growth suggest that housing market processes and wealth outcomes will drive higher inequality and lower productivity into the future unless housing and related policies change markedly. Piketty, strong on evidence and conceptualization is weak on policy development and housing studies can drive more effective assessments of change possibilities

Exploring the Linkages between Productivity and Social Development in Market Economies

This paper explores the linkages between productivity and social development from the perspective of synthesizing the findings of projects undertaken by the Centre for the Study of Living Standards in three related areas. The first is a project exploring the linkages between productivity and social well-being involving researchers from around the world and culminating in the edited volume Toward a Social Understanding of Productivity. Contributions discuss both linkages from productivity to social well-being, as in the case of productivity's role in improving fiscal balances; and from social well-being to productivity, as in the case of social and cultural factors surrounding the desire and capacity of families to invest in the education of children having powerful long-term consequences in a knowledge-driven economy. The second area is the Index of Economic Well-being developed by the Centre for the Study of Living Standards. Each of the four components - consumption, stocks of wealth, equality and economic security - are positively affected by productivity, and some in addition can in turn positively affect productivity. The third area is statistical research into the relationship between productivity and poverty in developing countries. It is found that this relationship is even stronger than that between economic growth and poverty reduction, and about as important as that between GDP per capita growth and poverty reduction. It is also found that the level of income inequality mediates the relationship between productivity growth and poverty reduction. The greater the level of inequality and any increase in inequality, the less an increase in productivity and income will reduce poverty.Productivity, Social Well-being, Social, Economic, Index of Economic Well-being, IEWB, Inequality, Poverty, Developing Countries, Market Economies, Development, Social Development, Growth

Income Skewness, Redistribution and Growth: A Reconciliation.

The so-called “fiscal policy approach" predicts that increases in income skewness should be associated with an intensification of redistributive efforts, at least in democracies. If redistribution is detrimental to growth, then this implies that a poor middle class is bad for long-run productivity; a prediction which has found empirical support. However, cross-country studies tend to find a negative association between income skewness and the amount of redistribution taking place, and, a positive relationship between redistributive taxation and growth. This paper offers a reconciliation of the existing theory and these puzzling findings. Specifically, the model predicts that the traditionally stipulated chains of causality holds within countries, whereas the puzzling correlations mentioned above may arise across countries. We provide a test of our explanation and find support for our approach using data on income taxes, taxes on property and expenditures on education.income distribution; political economy; endogenous growth

Programs without alternative: Public pensions in the OECD

--

Technological Innovation and Inclusive Growth in Germany. Bertelsmann Stiftung Inclusive Growth for Germany|18

Economic growth in Germany is no longer as inclusive as it used to be. Between 1990 and 2010 all measures of income and wealth inequality rose considerably,1 which even led the media to portray Germany as a ‘divided nation’.2 Income inequality was relatively low before 1990, and even declined over much of the 20th century, but changed direction after German unification. The rise in income inequality from 1990 onwards is depicted in Figure 1 through various inequality indicators and the ‘at-risk-of-poverty rate’. It can be seen that all measures of income inequality (before and after tax) increased markedly after 1990 along with the ‘at-risk-ofpoverty rate’.3 Felbermayr et al. (2014) furthermore document that the rise in wage inequality was faster in Germany than in the United States, the United Kingdom, and Canada between the mid-1990s and 2010. This rise in income and wage inequality has been accompanied, and to a certain extent occasioned, by a simultaneous increase in wealth inequality. Using data from the Socio-Economic Panel (SOEP), Frick and Grabka (2009) show, that the Gini coefficient for wealth increased from 0.77 to 0.80 during this period, and wealth grew particularly strongly at the top 1 percent of the wealth distribution

Reforming the Liberal Welfare State : International Shocks, Unemployment and Household Income Shares

We would like to thank Suresh Chand Aggarwal, Deb Kusum Das, Wendy Li and participants at the IARIW 34th General Conference, Dresden, Gaaitzen de Vries, Marcel Timmer and seminar participants at Groningen, Holger Görg, Fredrik Sjöholm, and John Skåtun for useful comments and suggestions. This work was supported by the NORFACE ERA-NET (New Opportunities for Research Funding Agency Co-operation in Europe Network) Welfare State Futures Programme, Grant Number 462-14-120. The usual disclaimer applies.Publisher PD