0.5 Perspectives on the role of capital in development: physical  (Page 3/10)

However, this process received a hard jolt in 2008-2010: the international economic meltdown that led to the worldwide great recession. Consider: that at economic growth rates from 2000 to 2009 that allowed per capita income to grow at 3.2% per year faster than rich ones. At these rates only about 40 years would be required for emerging nations to “catch up” with the U.S. But per capita rates of growth in emerging nations tumbled from 2009-2013. They grew only 1.1% faster than the U.S. At that rate, 123 years would be required to catch up to the U.S.

A return to rates of growth prevailing in 2000-2008 will require very substantial investment of capital . Economist , September 13, 2014.

We first examine the role of Physical capital (manufactured capital) in the growth process. We will later examine some estimates of the relative role played by Physical capital formation.

Components of growth contribution of Physical capital.

But for a moment, just note the following:

Typical components of physical capital contribute to growth (all Physical capital):

More on this later.

We will see that in previous models of economic growth economic theorists were long preoccupied with Physical capital. In fact Human capital had no place at all in the models, which were widely used and respected even 25 years ago.

The role of Human capital in development was long neglected. No more. But there is now a danger that in stressing role of investment in Human capital , we may obscure the importance of investment in Physical capital, in assets such as factories, equipment private sector and the public sector. Physical capital in government sector (ex): roads, harbors, airports, bridges, etc.

Consider roads.

In U.S., in 1920 how many days were required to cross U.S. by road? Answer: 62 (primitive road network). By 1993, the U.S. had invested an additional $425 billion (in dollars of 2006) in the interstate system - 42,000 miles of new roads crisscrossing the nation. Result: costs in U.S. industry fell sharply by 20 cents for each $1 invested in the Interstate System. And , the Interstate Highway System had a huge impact on productivity, and U.S. competitive advantage. The cheapness of road transport in the U.S. is still unmatched anywhere.

The beginning of Interstate Highway System was in the first term of Dwight Eisenhower.

In late 50s 1/3 of annual U.S. production increase was due to the interstate highway system.

In the 50s 1/4 of annual U.S. production increase was due to the highway system.

In the 80s 7% of annual U.S. production increase was due to the highway system.

Consider the Chileans Highway System in Patagonia in 1967 and 2007, 40 years late. In 1967 couldn’t go by car to Patagonia (could only go from Santiago to Puerto Montt). Major investment in roads there has been strongly beneficial to economic growth.

Investment in Physical capital in road infrastructure was also important in Portuguese growth in recent years (1980-98). An empirical study in the International Economic Journal (September 2011) found that government investment in road infrastructure had 4 positive effects: