Slides Topic 5. Social Infrastructures

Table of contents
Topic 5: Social Infrastructures
Antonia Dı́aza
a
Universidad Carlos III de Madrid
Crecimiento Económico / Growth Theory

Clases magistrales (Lectures) 11
Dı́az (UC3M ) Topic 5: Natural resources and economic growth November 27, 2019 1/8
Table of contents
Table of contents
1 Social Infrastructures
2 Public investment
3 Institutions
Social Infrastructures Public investment Institutions
Social Infrastructures
Definition
What is the role of social infrastructures in development? The World Bank

Governance indicator project, index of
Accountability of politicians
Political stability
Government effectiveness
Regulatory quality
Rule of law
Control of corruption
Overall index runs from 0 (worst) to 1 (best)
Larger Social infrastructures are positively correlated with investment rates...
0.50
JOR
Investment share of GDP, 1988−2008
CPV
0.40 CHN KOR
BWA
LSO SGP
THA
MWI MYS HKG
MAR MUS
0.30 GNQ
DZA IDN JPN
PRT
IRN ECU GAB GHA
JAM ISL CHE
NIC
HND ISR ESP BEL
NPL
MRT LKA IND NAM TWN BRB
CYP AUS
LUX
FJI PER ROM ITA CHL AUT FIN
GNBBGDPRY TZA GRC NOR
IRL DNK
COL
0.20 GIN
PAK PHL MEX TTO ZAF CRI
BFA
MLI
SEN
BEN
ARG USA
FRA CANNZL
COM ETH GMBDOM BRAPAN
ZWE VEN NER TUR NLDSWE
GTM URY
PRI GBR
ZAR CMR
TGO PNG
COG SYR MOZ
TCD KEN
UGA
EGYMDG SLV
ZMB
BOL
BDI RWA
0.10 HTI
CAF
CIV
NGA
0.00
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
Social Infrastructure
... with measures of human capital...
1.6 SGP
TTO GBR
1.2 FRA HKG
BEL
NLD
AUT
NOR FIN
ITA IRL
ISL
1.0 GRC TWN USA AUSSWEDNK
TUR ESP CANCHE
0.8 ISR
JPN
PRT
CYP NZL
TFP Level, 2008 (U.S. = 1.0)
0.6 DOMMEX KOR BRB

VENIRN GTM CRI CHL
EGY ARG MYS
PAN URY
SYR COL SLVBRA ZAF MUS
0.4 GAB
ROM BWA
PER NAM
ECU THA JAM
DZA
PNG CHN IND
PAK HND MAR
0.2 BOLIDN JOR
PRY FJI
CIV PHL
LKAZMB
MLI
GMB
COG CMR
HTI MRT UGANIC
0.1 RWASEN
BGD NER MOZ
BEN
NPL
KEN TZA
CAF LSO GHA
TGO
MWI
BDI
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
... and TFP
1.6 SGP
TTO GBR
1.2 FRA HKG
BEL
NLD
AUT
NOR FIN
ITA IRL
ISL
1.0 GRC TWN USA AUSSWEDNK
TUR ESP CANCHE
0.8 ISR
JPN
PRT
CYP NZL
TFP Level, 2008 (U.S. = 1.0)
0.6 DOMMEX KOR BRB

VENIRN GTM CRI CHL
EGY ARG MYS
PAN URY
SYR COL SLVBRA ZAF MUS
0.4 GAB
ROM BWA
PER NAM
ECU THA JAM
DZA
PNG CHN IND
PAK HND MAR
0.2 BOLIDN JOR
PRY FJI
CIV PHL
LKAZMB
MLI
GMB
COG CMR
HTI MRT UGANIC
0.1 RWASEN
BGD NER MOZ
BEN
NPL
KEN TZA
CAF LSO GHA
TGO
MWI
BDI
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
Public investment
What is the role of public capital?

Can we think of an optimal tax rate?
Sustained growth
Technology
Assume that the final good is produced with capital, and labor,
1−α
Yt = Ktα (At Lt ) ,
At : Total Factor Productivity, At = A κt .

Lt = Nt , the size of the labor force and Ṅt /Nt = n.
κt : stock of social infrastructures, in per capita terms.
Sustained growth
Agents decisions and infrastructures
Agents invest the fraction s ∈ (0, 1) of their disposable income.

Government taxes income to finance infrastructures, κ̇t = τ yt .
In per capita terms
1−α
yt = ktα (A κt ) ,
k̇t = s (1 − τ ) yt − (δ + n)kt ,
κ̇t = τ yt − (δ + n)κt .
Sustained growth
The balanced growth path
At the balanced growth path, output per capita and infrastructures grow at the
same rate g, which is endogenous.
α
s(1 − τ ) 1−α
yt∗ = A κ∗t ,
δ+n+g
κ̇∗t y∗
= τ t∗ − (δ + n).
κ∗t κt
Hence,
α
1−α
s(1 − τ ) 1−α α
g+δ+n=τA ⇒ g = (τ A) [s(1 − τ )] − δ − n.
δ+n+g
The growth rate depends on taxes. Here we do not take into account the fact
that s may be affected by taxes.
Sustained growth
The growth rate of income and taxes
Steady state
Technology
Assume that the final good is produced with capital, and labor,
1−α
Yt = Ktα (At Lt ) ,
At : Total Factor Productivity, At = A κφt , φ ∈ (0, 1.

Lt = Nt , the size of the labor force and Ṅt /Nt = n.
κt : stock of social infrastructures, in per capita terms.
Steady state
Agents decisions and infrastructures
Agents invest the fraction s ∈ (0, 1) of their disposable income.

Government taxes income to finance infrastructures, κ̇t = τ yt .
In per capita terms
1−α
yt = ktα A κφt ,
k̇t = s (1 − τ ) yt − (δ + n)kt ,
κ̇t = τ yt − (δ + n)κt .
Steady state
The balanced growth path
In this economy there is no growth in the long run since φ < 1. Thus,
1
α
(1−α)(1−φ) φ ! 1−φ
s(1 − τ ) τ
yt∗ = A ,
δ+n+g δ+n
τ
κ∗t = y∗ .
δ+n t
Hence,
φ(1 − α)
τ∗ = .
φ(1 − α) + α
Institutions
Questions
What dictates:
The investment rate in new capital? (s)
The investment rate in new human capital? (u)
The adoption/discovery of new technologies? (µ)
The level of investment in innovation? (`A )
These factors all create level effects on output per worker. Why are some
countries on a high level, while others remain on a low level?
Institutions
Answers?
Several:
Geography. Easy access to certain resources makes it cheaper to invest/use
them.
Culture. Certain cultures value savings or education more than others.
Institutions. Rules of the economic game, so to speak.
Olson (1996) - compare several places identical in geography and culture
North vs. South Korea
East vs. West Germany
China vs. Taiwan and Hong Kong
They differ in institutions.
The investment problem

The role of institutions
How do we think of institutions?

Property rights: the ability to keep what you earn in profits, savings, wages
Transactions: the ability to easily trade assets, sign contracts
Enforcement: contracts and laws are enforced consistently over time
The overall point is that “good” institutions will encourage people to invest
because they can keep what they earn and they can make long-run investments
because the rules won’t arbitrarily change over time.

Practical Evaluation
How do we think of this with respect to our existing model. Think of the value of
a patent (or value of contract to produce certain intermediate good)
π
PA = (1)
r−n
is the present discounted value of the profits. The value of this dictates how much
effort goes into innovating or adopting technology - sR .
Think of institutions as how they play with this value. Let there be some fixed
cost that you have to pay if you buy the patent, F , so now PA is
π
PA = −F (2)
r−n

Fixed Costs
What could make up fixed costs, F ?

License fees
Bribes
Protection money
Rights to market in some area
Taxes
Anything that raises F , the fixed cost of owning the patent, will drive down the
value of a patent, PA . The lower PA , the less innovation/adoption we do, `A
drops.

Doing Business
World Bank collects data on how long it takes to set up businesses, and cost in
terms of licenses, fees, etc..
U.S.: six days and equivalent 1.4% of average income
India: 29 days and equivalent 50% of average income
Nigeria: 34 days and equivalent 70% of average income
Honduras: 14 days and equivalent 63% of average income
It is not trivial to start new firms, invest in new equipment, adopt a new
technology in most poor countries.

Corruption
To invest in a Russian company, a foreigner must bribe every agency

involved in foreign investment, including the foreign investment office,
the relevant industrial ministry, the finance ministry, the executive branch
of the local government, the legislative branch, the central bank, the
state property bureau, and so on. The obvious result is that foreigners
do not invest in Russia. Such competing bureaucracies, each of which
can stop a project from proceeding, hamper investment and growth
around the world, but especially in countries with weak governments.
Shleifer and Vishny 1993, pp. 615 Äı̀16.
’

Profits
Institutions also affect the scale of profits.

Larger markets (more L) means more profits
Barriers to trade limit market sizes, reduce profits
Lower profits means less innovation
Rich places:
U.S.: Can sell in any state with minimal or no additional requirements
E.U.: Joins many small countries together into one big market

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Table of contents

Topic 5: Social Infrastructures

Crecimiento Económico / Growth Theory

What is the role of social infrastructures in development? The World Bank

0.6 DOMMEX KOR BRB

0.6 DOMMEX KOR BRB

What is the role of public capital?

At : Total Factor Productivity, At = A κt .

Agents invest the fraction s ∈ (0, 1) of their disposable income.

At : Total Factor Productivity, At = A κφt , φ ∈ (0, 1.

Agents invest the fraction s ∈ (0, 1) of their disposable income.

The investment problem

How do we think of institutions?

The investment problem

The investment problem

What could make up fixed costs, F ?

The investment problem

The investment problem

To invest in a Russian company, a foreigner must bribe every agency

The investment problem

Institutions also affect the scale of profits.

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