CAPITAL AND ITS PRODUCTIVITY IN FINLAND,

Transcription

1 CAITAL AND ITS RODUCTIVITY IN FINLAND irkko Aulin-Ahmavaara * and Jukka Jalava ** * aulin@neilinja.fi ** jukka.jalava@sa.fi

2 2 AULIN-AHMAVAARA IRO JALAVA JUA: CAITAL AND ITS RODUCTIVITY IN FINLAND Absrac: The fundamenal role of capial in economic growh has been long known. How capial should be defined and measured has been he subjec of much discussion. The saring poin of his sudy is mehodological as we define saring from a neoclassical producion funcion he indicaors for capial inpu and compare hese wih he radiional capial socks of naional accouns. The origin of Finnish capial measuremen is also raced. In he empirical par of he paper we apply he differen capial measures o Finnish daa in This period is ineresing as he early 1990s was a urbulen period for Finland wih GD declining by 11 per cen. We find as a resul of our number-crunching effor ha here was a specacular increase in capial produciviy growh afer he recession. Finally we observe how our new esimaes accord wih he previous view on how capial has influenced recen Finnish hisorical economic developmen. Our main resul is a resoluion of he Aro-ohjola paradox as we show ha a high rae of reurn was combined wih a low capial produciviy growh in

3 3 Inroducion The fundamenal role of capial in economic growh has been known a leas since he wriings of he physiocra Anne-Rober-Jacques Turgo and Adam Smih in he 18 h cenury. Since arl Marx and he Cambridge conroversies here has been consan dissension on how o define capial and wha for insance is mean by he quaniy of capial. Separae views even exis on he quesion wheher heerogeneous capial can be aggregaed ino a single measure of capial a all. The pracical measuremen of capial is also subjec o opposing views. Therefore he economic hisorian doing research on maers peraining o capial should be prepared o mee criicism. However as Hicks has i: Capial (I am no he firs o discover) is a very large subjec wih many aspecs; wherever one sars i is hard o bring more han a few of hem ino view. I is jus as if one were making picures of a building; hough i is he same building i looks quie differen from differen angles. 1 While he recen discussion in he hisorical economics lieraure has focused on alernaive models explaining economic growh 2 i.e. exogenous or endogenous growh 3 insiuions 4 and caching-up 5 he problems relaing o capial measuremen are many imes ignored alogeher and ofen is casually wrien o denoe boh he value of capial and he inpu ino producion i provides boh of which are hen assumed o decline uniformly by he same rae δ which is called he depreciaion rae. In he naional accouns (SNA93 6 and ESA95 7 ) on he oher hand here are wo measures of capial socks: he gross capial sock and he ne capial sock. The radiional capial sock measures have been developed since he 1950s and due o heir easy availabiliy hey have been widely used in produciviy calculaions. However neiher naional accouns capial sock measure is appropriae for use in produciviy or growh accouning compuaions. The gross capial sock does no 1 Hicks John Capial and Time Clarendon ress Oxford For an overview of he models see: Crafs Nicholas roduciviy Growh Reconsidered Economic olicy Vol. 15 Ocober Crafs Nicholas Exogenous or Endogenous Growh? The Indusrial Revoluion Reconsidered Journal of Economic Hisory Vol. 55 December Greasley David and Oxley Les Endogenous Growh or Big Bang : Two Views of he Firs Indusrial Revoluion Journal of Economic Hisory Vol. 57 December Booh Alan Melling Joseph and Darmann Chrisoph Insiuions and Economic Growh: The oliics of roduciviy in Wes Germany Sweden and he Unied ingdom Journal of Economic Hisory Vol. 57 June Abramoviz Moses Caching Up Forging Ahead and Falling Behind Journal of Economic Hisory Vol. 46 June SNA93 Sysem of Naional Accouns 1993 UN OECD EU IMF World Bank ESA95 European Sysem of Accouns Eurosa 1996.

4 4 ake ino accoun he possible decline in he capial good's producive capaciy as i ages. The ne capial sock depics he marke value of capial and no is producive capaciy. In growh accouning based on neoclassical heory (and he produciviy research associaed wih i) he measure of capial inpu o be used (insead of gross or ne socks) is widely acceped o be he Jorgenson and Griliches 8 measure of capial services based on he concep of producive capial. The producive capial socks of homogeneous capial goods are aggregaed using heir renal prices. Complee consensus has no been reached on he empirical side eiher hough here has been a vivid recen discussion especially under he auspices of he OECD. 9 The differences in opinion mainly focus on he definiion and quanificaion of depreciaion. 10 There is no consensus on wha he measure of capial should encompass eiher. In produciviy research produced fixed asses land and invenories are ofen included in capial inpu. In addiion o hese human capial and naural resources are needed in producion. Research and developmen expendiure can also be seen as capial formaion. In some cases even he inclusion of financial capial ino he measure of capial inpu has been suggesed. 11 The purpose of his paper is wofold. Firsly we inroduce sae-of-he-ar ools of economic analysis o Finnish daa and exensively discuss wha kind of heoreical and empirical choices have o be made in quanifying capial and is conribuion o growh and produciviy in he period 1975 o The origin of Finnish capial 8 Jorgenson Dale W. and Griliches Zvi The Explanaion of roduciviy Change Review of Economic Sudies Vol. 34 July OECD Mehods Used by OECD Counries o Measure Socks of Fixed Capial Naional Accouns: Sources and Mehods No. 2 aris: OECD OECD Measuring Capial - OECD Manual: Measuremen of Capial Socks Consumpion of Fixed Capial and Capial Services aris: OECD OECD Measuring roduciviy - OECD Manual: Measuremen of Aggregae and Indusry-level roduciviy Growh. aris: OECD Aulin-Ahmavaara irkko The SNA93 Values as a Consisen Framework for roduciviy Measuremen: Unsolved Issues Review of Income and Wealh Volume 49 March Hill Rober J. and Hill T. eer A New Concepual Approach o he Measuremen of Capial Gains Depleion and Ne Naional roduc School of Economics Universiy of Souh Wales Discussion aper 99/9. 11 euning Sephen The Role of Financial Capial in roducion Review of Income and Wealh Volume 45 December The reason we sar our periodizaion from he year 1975 is ha he share of secondary producion in GD only peaked as lae as Thus he paern of developmen hus far had differed in Finland from oher developed counries where usually he main conribuion o economic growh firs shifed from primary producion o secondary producion during he process of indusrializaion and subsequenly from secondary producion o eriary producion as counries enered he pos-indusrial sage. Alhough he absolue conribuion of services o GD in Finland surpassed ha of secondary producion already in 1956 boh coninued by and large o increase heir relaive shares a he expense of primary producion unil Hjerppe Riia Suomen alous kasvu ja rakennemuuos Sudies on Finland s Economic Growh XIII Bank of Finland ublicaions Helsinki 1988.

5 5 measuremen is also raced. We observe how he differen capial measures perform in a urbulen period in Finnish economic hisory. This period is ineresing because he Finnish economic recession in he early 1990s was very severe; wih GD declining by 11 per cen from 1990 o 1993 (he 1930s recession was much less severe in comparison as GD declined by only 3.5 per cen ). We define capial as produced angible fixed asses such as machinery equipmen and produced inangible fixed asses such as compuer sofware and consruc in he neoclassical radiion he indicaors for capial inpu and compare hese wih he radiional capial socks of naional accouns in Finland. We show how he renal prices are used in he aggregaion of heerogeneous producive capial socks ino a volume index of capial services for he whole economy and discuss he alernaive raes of reurn on capial. A sensiiviy analysis on he impacs of he differen capial measures on growh capial produciviy and muli-facor produciviy (MF) is also performed which o our knowledge has no been done for Finland before. The mos significan resul of our number-crunching effor is an observaion of a specacular increase in capial produciviy growh in he laer par of he 1990s. Secondly we observe how our new esimaes accord wih he previous view on how capial has influenced recen Finnish hisorical economic developmen. Olli Halia and Mikko Leppämäki coined he erm Aro-ohjola paradox o describe he seemingly conflicing observaions of Mai ohjola and Eero Aro. 13 ohjola observed ha in a high invesmen raio resuled in low capial produciviy growh and concluded ha capial was inefficienly used in Finland. ohjola acknowledged ha capial fundamenalism he view ha economic growh would be aained by massive fixed invesmens did resul in growh. His poin was ha he high social cos paid by Finland due o high invesmen raios could have been lower wih a more efficien use of capial. Aro counered wih his findings of reasonable reurns on capial especially in he paper indusry. We offer an empirical resoluion (as Halia and Leppämäki already presened a heoreical one) o he Aro-ohjola paradox by observing how capial produciviy and he reurn on capial have evolved. In our resuls we show ha a high rae of reurn was combined wih a low capial produciviy growh in This paper is organized in he following way. Firs he sage is se by going hrough he genealogy of capial measuremen in Finland unil heir incorporaion in he naional accouns. We coninue by showing how capial is defined in he naional accouns and how hese definiions are relaed o he producive capial socks and heir renal prices. The penulimae secion conains our empirical resuls and he ulimae secion concludes. 13 Halia Olli and Leppämäki Mikko Do Shareholders Care Abou Corporae Invesmen Reurns? Finnish Economic apers Spring ohjola Mai Tehoon pääoma. Uusi näkökulma alouemme ongelmiinwsoy Helsinki Aro Eero W. erformance and Inernaional Compeiiveness of Lised aper Indusry Groups Finland vs Sweden Canada and USA Helsinki School of Economics Working apers W

6 6 revious research Boh in produciviy analysis and growh accouning capial inpu is ofen measured by using eiher gross 14 or ne 15 capial socks (or boh 16 ). The socks are consruced using he perpeual invenory mehod (IM) pioneered by Raymond Goldsmih in Neiher of hese sock measures however depics he producive capaciy of capial. In he GCS he capial good is assumed o reain is full producive capaciy unil reiremen. The NCS is a measure of wealh; i describes he marke value of he capial sock. The marke value is of course dependen on he expeced evoluion of he producive capaciy bu does no reflec he producive capaciy a a cerain poin in ime. The value of he asse declines as is service life draws o an end (wih less fuure revenues accruing) even hough no physical deerioraion in he capial good s producive capaciy necessarily akes place. In growh accouning based on neoclassical heory he measure of capial inpu o be used is widely acceped o be he Jorgenson and Griliches 18 measure of capial services based on he concep of producive capial. The producive capial socks for homogeneous capial goods are aggregaed using heir renal prices. Inuiively when adding up e.g. he socks of non-residenial buildings and compuer sofware we mus in he producion funcion ake noice of he fac ha heir respecive service lives and price changes are very differen (compuer sofware mus generae revenue in a much shorer period han buildings since capial heory 19 ells us ha he capial asses value equals he discouned flow of fuure renal paymens ha he good is expeced o accrue). Olavi Niiamo 20 disinguished he difference beween he capial in place (sock) 14 Denison Edward F. Unied Saes Economic Growh Journal of Business Vol. XXXV April Maddison Angus Growh and Slowdown in Advanced Capialis Economies Journal of Economic Lieraure Vol. XXV No endrick John W. How Much Does Capial Explain? in Szirmai Adam van Ark Bar and ila Dirk (eds.) Explaining Economic Growh Essays in Honour of Angus Maddison Conribuions o Economic Analysis Norh Holland Maddison Angus Macroeconomic Accouns for European Counries in van Ark Bar and Crafs Nicholas (eds.) Quaniaive Aspecs of os-war European Economic Growh CER Cambridge Universiy ress O Mahony Mary Measures of Fixed Capial Socks in he os-war eriod: A Five Counry Sudy in van Ark Bar and Crafs Nicholas (eds.) Quaniaive Aspecs of os-war European Economic Growh endrick John W. roduciviy Trends in he Unied Saes rinceon Nordhaus William D. The Recen roduciviy Slowdown Brookings apers on Economic Aciviy Vol No Denison Edward F. The Inerrupion of roduciviy Growh in he Unied Saes Economic Journal Vol. 93 March Goldsmih Raymond W. A erpeual Invenory of Naional Wealh Sudies in Income and Wealh XIV New York: NBER Jorgenson and Griliches The Explanaion of roduciviy Change. 19 Diewer W. Erwin Measuring he rice and Quaniy as Capial Services Under Alernaive Assumpions Discussion aper No Deparmen of Economics The Universiy of Briish Columbia In his earlier work Niiamo alernaively used consumpion of elecriciy in indusry and power direcly

7 7 and he capial in use (services) in an early MF calculaion for he Finnish manufacuring indusry. As capial inpu he quie eleganly used he volume index of he elecriciy used in manufacuring. An early aemp o consruc acual capial socks for Finland was done by alevi oljonen. 21 He was well versed in sae-of-he-ar capial measuremen bu decided no o use he IM mehod when consrucing residenial and non-residenial capial socks due o daa availabiliy and reliabiliy issues. Insead oljonen used daa on building socks in he 1950 and 1960 censuses as bench-marks. He esimaed he flows in he inerim years using consrucion saisics as proxies for invesmens and he volume changes by ype of building as basis for esimaes of reiremens. In an oher sudy done he same year Eino Laurila did no even aemp o measure capial socks he simply defined (he change in capial) as invesmens and calculaed capial-oupu raios a consan 1954 prices. 22 These raios he compared wih hose of oher advanced European economies respecively a differen sages in he business cycle and by indusry. In he mid-1970s Reino Hjerppe and eri ohi calculaed gross capial socks for he years and 1967 a fixed 1963 prices. 23 In addiion o buildings hey also incorporaed measures for civil engineering consrucion and machinery and equipmen. The mehodology used was a combinaion of he IM bench-marks plus invesmens less reiremens and physical quaniies imes heir uni prices. Seppo Suokko and irkko Valppu used he perpeual invenory mehod consisenly o esimae gross capial socks a consan 1975 prices for he years Their work laid he foundaions for a join venure hree years laer when Saisics Finland as a par of implemening SNA68 also sared o compile capial sock saisics. 25 Boh gross and ne socks as well as reiremens and consumpion of fixed capial in curren and consan 1975 prices were included in he measures of he socks and flows of fixed capial. As he invesmen series were (and are) he main inpus ino he Finnish naional accoun s capial sock calculaions he sock series were rebased o a new base year whenever he capial formaion (and producion) series were rebased. The base years have been and The swich o 1995 also enailed an enlargemen of he asse classificaion as he inangible fixed asses insalled for driving machines and in his laer work only elecriciy as proxies for capial services. Niiamo Olavi Tuoavuuden kehiys Suomen eollisuudessa vuosina [The Developmen of roduciviy in Finnish Indusry ] ansanaloudellisia ukimuksia XX Niiamo Olavi Tuoanofunkio sen jäännösermi ja eknillinen kehiys Moniseuja ukimuksia n:o 9 Tilasollinen ääoimiso oljonen alevi ääomakannan käsie ja miaaminen sekä sovelluus Suomen rakennuskanaan vuosina Moniseuja ukimuksia n:o 8 Tilasollinen ääoimiso Laurila Eino H. apialbildningen och kapiales produkivie i Finland åren Ekonomiska Samfundes Tidskrif 1968: Hjerppe Reino and ohi eri ääomakanalaskelmien ongelmisa in okonaisaloudellisia ongelmia II Tilasokeskus ukimuksia nro Suokko Seppo and Valppu irkko ääomakana vuosina Taloudellinen suunnielukeskus Vihavainen Hilkka Valppu irkko Suokko Seppo and Björk Bo-Chriser ääomakana vuosina Tilasokeskus ukimuksia nro

8 as defined by SNA93/ESA95 were inroduced. 8

9 9 Capial in he naional accouns In he mos recen worldwide naional accouning recommendaion SNA93 he passages on capial socks are raher dispersed. aragraph saes ha he perpeual invenory mehod is usually used o obain measures for gross and ne capial socks. According o SNA93 sock measures are needed for analyzing producion and produciviy and for balance shees. Based on SNA93 also he European sysem of naional accouns has been revised. Also ESA95 deals wih capial socks briefly and fragmenarily. In paragraph 6.04 he IM is recommended whenever direc informaion on capial socks is missing. The ne capial sock is he sock measure in boh SNA93 and ESA95. I is used in balance shees inpu-oupu analysis and use ables. 26 Gross capial sock (GCS) is he value of he capial used in producion valued a as new prices i.e. regardless of age or acual condiion a a cerain poin of ime. GCS consiss of he value of he cumulaed pas invesmens less he cumulaed reiremens of fixed asses. A capial good is reired from he capial sock when is service life expires. Gross capial sock he perpeual invenory mehod: S 1 s= 0 G G (1) = ds I s G a he end of year is esimaed using G where d s is he surviving share of he cohor of capial goods ha are s years old in year and S is he maximum service life of he asse ype. 27 The relaive share of survivors is declining and evenually goes o zero. The GCS of he whole economy is calculaed as he sum of he gross capial socks by asse ype indusry and ype of producer. The gross capial sock as such is no needed in he SNA93/ESA95 accouning framework. reviously he GCS was hough of as a kind of producion poenial. However since he gross capial sock does no ake ino accoun he physical deerioraion of asses i is only used as an inermediae sep in calculaing producive and ne capial socks and no always even for ha. For insance he U.S. Bureau of Economic Analysis now direcly calculaes ne capial socks for all capial asses The use able describes he use of goods and services by produc and ype of use i.e. inermediae consumpion final consumpion capial formaion or expor. ESA95 European Sysem of Accouns paragraph SNA93 and ESA95 do no presen formulas. The equaion shown here is he auhors inerpreaion of he SNA93 and ESA95 verbal definiions. 28 az Arnold J. and Herman Shelby W. Improved Esimaes of Fixed Reproducible Tangible Wealh Survey of Curren Business May Fraumeni Barbara M. The Measuremen of De-

10 10 Ne capial sock (NCS) is he marke value of he capial in use. The ne value of he capial good is defined as he curren purchaser s price of a new asse of he same ype less he cumulaed consumpion of fixed capial. 29 The naional accouns erm consumpion of fixed capial broadly equals he erm depreciaion which is more widely used in economics and economic hisory. 30 According o he SNA93 consumpion of fixed capial is calculaed for all capial goods in he GCS using eiher he linear or geomeric depreciaion formula. Consumpion of fixed capial is he decline in he value of capial during he accouning period due o physical deerioraion normal obsolescence normal accidenal damage and aging. 31 preciaion in he U.S. Naional Income and roduc Accouns Survey of Curren Business July SNA93 Sysem of Naional Accouns 1993 paragraph By depreciaion is in he produciviy lieraure usually mean he difference in price a he same ime poin in ime beween wo oherwise idenical capial goods of successive vinages. This is he loss in value due o aging which is ofen called cross-secion depreciaion. Diewer W. Erwin Measuring he rice and Quaniy as Capial Services Under Alernaive Assumpions. Hill T. eer The roducive Capial Sock and he Quaniy Index for Flows of Capial Services paper presened a he meeing of he Canberra-group in Washingon D. C. November SNA93 Sysem of Naional Accouns 1993 paragraph ESA95 European Sysem of Accouns paragraph az & Herman Improved Esimaes of Fixed Reproducible Tangible Wealh

11 11 roducive capial socks and renal prices Capial performs capial services being a facor of producion along wih labour and inermediae goods. The quaniy of services a capial asse produces is usually dependen on is age. Assuming ha he capial service a new homogeneous asse performs is one and ha he flow of relaive services is declining: (2) and d 0 = 1 s d s 1 0 d ( = ) s. Assuming ha all capial asses evenually are discarded or reired so ha he capial service diminishes o zero: (3) lim d = 0. s s The capial service of a new year acquired capial good is. The capial service of he capial good acquired he previous year 1 is hen d 1 I and d 1 s I s for he asses invesed in year s. When he flow of capial services of a new asse is hough o be proporional o he capial asse d s can also be said o represen he relaive efficiency of he capial goods acquired in year s. The flow of capial services can be perceived as represening he services of fixed capial analogously o labour represening he services of human capial in he producion funcion. Furhermore assuming ha he differen vinages of capial services are compleely subsiuable and ha here is only one kind of capial (and no inermediae goods) he producion funcion can be wrien as: (4) A F L ) = AF( L [ d I + d I + d I ] = ( S 1 S + 1 Q L ). The sum wihin brackes can also be expressed as: S 1 s= 0 (5) = d s I s which is ofen called he producive capial sock (CS). 32 Equaion (5) is mean o be used direcly on he invesmen vinages. A firs sep in calculaing producive capial socks is o choose he profile of efficiency decline. Commonly used assumpions are he hyperbolic and he geomeric age-efficiency profile. 33 In his paper we will only deal wih geomeric decline in I 32 OECD Measuring Capial. OECD Measuring roduciviy. 33 For an exensive coverage of he subjec see: Jorgenson Dale. W. Gollop Frank and Fraumeni Barbara roduciviy and US Economic Growh Harvard Universiy ress Cambridge Massachuses 1987.

12 12 efficiency 34 hus s (6) d = ( 1 δ ). s As poin of deparure in a growh accouning exercise is ofen a sandard neoclassical producion funcion where he change in MF is calculaed using he Törnqvisindex. The Törnqvis-index is also used in aggregaing heerogeneous capial inpu. Differen ypes of capial are aggregaed using heir respecive renal prices which akes ino accoun he conribuions of differen ypes of capial o producion. A subsiuion owards capial asses wih higher marginal producs implies a change in capial qualiy. As renal price he Hall-Jorgenson 35 renal price is used: I I I (7) = r + δ ρ0 0 In equaion 7 he depreciaion rae δ can be esimaed from he expeced ageefficiency profile. Holding gain/loss ρ can be obained from he price index of new capial asses. The remaining unknown erm is he ne rae of reurn on capial r. In he ex-ane approach some ineres rae can be used as reurn on capial e.g. he base rae of he cenral bank. In he ex-pos approach he inernal reurn on capial is esimaed. Tha is i is assumed ha he indusry s capial income Ψ is equivalen o he impued rens i receives each period : (8) Ψ = j 0 j. j The rae of reurn can be solved by placing equaion (7) ino equaion (8): (9) r Ψ = δ j j 0 I j ( ρ j 0 ) j 0 j I j 0 j. In empirical work nominal value added less labour income 36 is mosly used as capi- OECD Measuring Capial. 34 Empirical research performed in he U.S. has suppored he use of geomeric depreciaion applied direcly on he invesmen vinages. Hulen Charles R. and Wykoff Frank C. The Measuremen of Economic Depreciaion in Hulen C. R. (ed.): Depreciaion Inflaion and Taxaion of Income from Capial The Urban Insiue ress Washingon D. C Hulen Charles R. and Wykoff Frank C. Issues in he Measuremen of Economic Depreciaion: Inroducory Remarks Economic Inquiry Vol. XXXIV January Jorgenson Dale W. Empirical Sudies of Depreciaion Economic Inquiry Vol. XXXIV January Fraumeni The Measuremen of Depreciaion. 35 Hall Rober E. and Jorgenson Dale W. Tax olicy and Invesmen Behavior American Economic Review Vol. 57 June This equals he naional accouns compensaion of employees plus he impued labour income of he selfemployed. The impued labour income is usually esimaed by muliplying he self-employed s hours worked by wage earners average hourly earnings.

13 13 al income. The renal prices are used o aggregae producive capial socks by asse ype ino a measure of capial services by indusry. If he capial inpu is a ranslogarihmic funcion of is componens hen he capial service of indusry i ha is he volume index of is capial inpu can be expressed as 37 (10) 1 1 v ij i ij j i i i c = Π = where he weighs ν are defined as: (11) 2 / = i ij ij ij ij i ij ij ij ij i v. 37 Jorgenson Gollop and Fraumeni roduciviy and US Economic Growh.

14 14 Capial in Finland: Resoluion of a Debae Our focus shifs from heory o applicaion as we urn our aenion o how differen capial measures perform in quanifying a urbulen period in recen Finnish economic hisory. This period is ineresing because he Finnish economic recession in he early 1990s was very severe; wih GD declining by 11 per cen from 1990 o 1993 (he 1930s recession was much less severe in comparison as GD declined by only 3.5 per cen ). Our resuls also enable us o compare capial produciviy growh and he rae of reurn on capial prior o he 1990s recession he indicaors which are he main ingrediens of he Aro-ohjola paradox. We used a geomeric age-efficiency profile in calculaing producive capial socks for Finland. The producive capial sock in year for a homogeneous capial asse ype is defined as 38 : 1 ) τ = 0 τ (12) = (1 d) + I = (1 d I where I is gross fixed capial formaion and d is rae of depreciaion. The symbols for indusry and asse ype (i and j) have been suppressed for noaional simpliciy. In he ex-ane mehod we used he cenral bank s base rae as rae of reurn and used equaion (7) o calculae he renal prices. In he ex-pos mehod we used equaion (9) o calculae he inernal rae of reurn and equaion (7) o calculae he renal prices. These renal prices were used o aggregae he eigh differen capial asse ypes ino a volume index of capial services (see Table 1 for he asse ype classificaion and he average service lives). 39 The capial goods are also classified by ype of producer and indusry which accouns for he variaion in service lives. Consumer durable goods invenories and land are no included in he capial socks. τ 38 For recen applicaions see: Jorgenson Dale W. and Siroh evin J. Raising he Speed Limi: US Economic Growh in he Informaion Age Brookings apers on Economic Aciviy Timmer Marcel Ypma Gerard and van Ark Bar IT in he European Union: Driving roduciviy Divergence? Research Memorandum GD-67 Groningen Growh and Developmen Cenre Universiy of Groningen Ocober When he fixed price producive capial socks are aggregaed using he prices of new invesmen goods as weighs he resul is capial quaniy and when hey are aggregaed using renal prices as weighs he resul is capial services.

15 15 Table 1 Asse ypes and average service lives of fixed asses Asse ype Average service life in years Non-residenial buildings Civil engineering and oher srucures Transpor equipmen 7 25 Oher machinery and equipmen 5 32 Mineral exploraion 10 Compuer sofware 5 Enerainmen lierary or arisic originals 10 Improvemen of land Since residenial buildings are a significan par of he capial sock (39% of he nominal producive sock in 2001) bu are no acually a producion facor we decided o omi residenial invesmens from our definiion of capial and symmerically also he value added of indusry operaing and leing of dwellings from GD a basic prices. In Table 2 can be seen he shares of he CS by asse ype. The share of nonresidenial buildings has grown nearly 10 percenage poins and consiues close o half of he capial sock while he share of civil engineering has declined o 22 per cen. Togeher non-residenial buildings and civil engineering srucures are more han wo hirds of he capial sock in The share of ranspor and oher machinery and equipmen was one hird of he sock in 1975 bu heir share has declined o slighly more han a quarer in The share of inangible produced asses (mineral exploraion sofware and originals) was less han 3 per cen of he CS and improvemen of land 2 per cen in he year The invesmen raio less residenial gross fixed capial formaion (i.e. nominal invesmens divided by nominal value added) changed from 23.2 per cen in via he early 1990s 18.5 per cen o 17.7 per cen in he years There was a shif regarding capial afer he early 1990s recession o more inensive growh ha is economic growh was achieved wih less invesmens and greaer capial produciviy han previously. 40 The lower invesmen raio in he 1990s resuled in a deceleraion of he growh raes of he differen kinds of capial 41 as can be seen in Table 3 and in Figure 1 42 where he volume indexes are shown graphically wih year 1975 normalized as Jalava Jukka Accouning for Growh and roduciviy: Finnish Muli-facor roduciviy Finnish Economic apers 15 Auumn On he definiion of GCS and NCS in Finnish naional accouns see Saisics Finland Capial Sock Daa Time series ESA95 revision Naional Accouns 2000: See he appendix for he series. The early 1990s economic recession is clearly visible in he graph and is he reason behind he periodizaion of ime in he subsequen ables.

16 16 The GCS has consisenly grown faser han he oher kinds of capial hroughou he observaion period. The oher capial measures grew in on average by per cen per year bu he picure changes during he recession. By 1995 he NCS is nearly a he pre-recession level as he average growh rae in is close o zero. A he same ime he growh raes of he capial services were he weakes: -0.5 per cen. In he years he ex-ane capial services grew 1.1 per cen per year he ex-pos capial services by 0.9 per cen per year he ne sock by half a per cen and capial quaniy by 0.7 per cen. The main differences beween NCS capial quaniy and capial services are due o differen assumpions regarding reiremens/depreciaion. In he case of capial services a composiional shif owards inangible capial has also aken place (Table 4). Afer he recession he growh rae of he gross sock is closer o ha of he capial services han he NCS. The growh raes of he socks are also influenced by he depreciaion raes which have increased since here has been a shif o capial goods wih shorer service lives (Table 5). Table 2 Shares of nominal producive capial sock by asse ype % Non-resid. buildings Civil engineering ec Transpor equipmen Oher machinery and eq Mineral exploraion Compuer sofware Originals Improvemen of land Toal Source: Own calculaions; daa from Saisics Finland.

17 17 Figure 1 Capial services capial quaniy GCS and NCS volume-indexes =log (100) Capial services exane Capial services expos 49 Capial quaniy GCS 46 NCS Source: Own calculaions; daa from Saisics Finland. Table 3 Growh raes of capial % Capial services (ex-ane) Capial services (ex-pos) Capial quaniy GCS NCS Source: Own calculaions; daa from Saisics Finland. Table 4 Growh raes of he producive capial sock by asse ype % Non-resid. buildings Civil engineering ec Transpor equipmen Oher machinery and eq Mineral exploraion Compuer sofware Originals Improvemen of land Source: Own calculaions; daa from Saisics Finland.

18 18 Table 5 Depreciaion raes of he producive capial sock by asse ype % Non-resid. buildings Civil engineering ec Transpor equipmen Oher machinery and eq Mineral exploraion Compuer sofware Originals Improvemen of land Toal Source: Own calculaions; daa from Saisics Finland. Table 6 shows he average annual growhs of he prices of new invesmen goods. The mos moderae price increases are o be seen in machinery and equipmen. By 2001 he price developmen has been mos rapid in sofware non-residenial buildings and mineral exploraion. Table 6 Average annual growhs in prices of new invesmen goods % Non-resid. buildings Civil engineering ec Transpor equipmen Oher machinery and eq Mineral exploraion Compuer sofware Originals Improvemen of land Source: Own calculaions; daa from Saisics Finland. The small share of profis in naional income keeps he ex-pos rae of reurn smaller han he ex-ane rae of reurn during he recession of he early 1990s (Table 7). Correspondingly he lae 1990s boom years are refleced as ex-pos raes of reurn being higher han heir ex-ane equivalens. Erns Bernd and Melvyn Fuss observe in a sudy of he U.S. manufacuring indusry 43 where hey rea capial as a quasi-fixed producion facor ha he use of he ex-ane rae of reurn during cyclical swings leads o he marginal produc of capial differing from capial s income share. When using he ex-pos rae of reurn here is no such problem. According o 43 Bernd Erns R. and Fuss Melvyn A. roduciviy Measuremen wih Adjusmens for Variaions in Capaciy Uilizaion and Oher Forms of Temporary Equilibrium Journal of Economerics Vol. 33 Ocober- November

19 19 aul Schreyer ierre-emmanuel Bignon and Julien Dupon his is only so when he quaniy of capial canno be adjused during he period of producion. 44 Furhermore he ex-pos measure is prone o measuremen errors and i requires knowledge of levels of capial socks. Esimaes of capial sock levels are usually less reliable han measures of changes in capial. Table 7 Raes of reurn (arihmeic averages) % Ex-ane Ex-pos Source: Own calculaions; daa from Saisics Finland. The capial produciviies (Table 8) reinforce he picure given in Table 3. The gross capial sock has grown mos rapidly during he observaion period; hence capial produciviy measured wih he GCS is always he lowes. The ne capial sock usually overesimaes he relaive change in capial produciviy (excep during he recession). The mos eye-caching feaure of Table 8 is he significan increase in capial produciviy during he laer par of he 1990s. However as we have no included invenories and land in our measure of capial socks our ex-pos raes of reurn are likely o be somewha oversaed. Sill capial s growh conribuions calculaed wih boh ex-ane and ex-pos measures are nearly idenical (Table 9). Neiher do he growh conribuions of gross and ne capial socks differ ha much from ha of he capial services excep during he recession when he GCS overesimaes capial s conribuion. Afer he recession he conribuion of he NCS is slighly smaller han ha of he oher kinds of capial. Gauged by all measures of capial boh he absolue and relaive impac of capial on Finnish economic growh has diminished. The resuls in Tables 7 and 8 can be used o offer a resoluion o he Aro-ohjola paradox. Our figures show ha capial produciviy growh was very low in he period In his sense we corroborae Mai ohjola s view on capial being inefficien during his period. 45 However a recen sudy by Marcel Timmer Gerard Ypma and Bar van Ark repors ha he raio of labour produciviy growh o MF growh in is very similar in Finland he U.S. and he EU. Finnish labour produciviy (L) grew 1.9 imes faser han MF and he raios were 2.0 and 2.1 respecively in he U.S. and he EU. 46 These findings imply ha he conribuion of Finnish capial produciviy growh o MF was no ha differen from he EU and U.S. averages. Tha Eero Aro would find high reurns on capial in he paper in- 44 Schreyer aul Bignon ierre-emmanuel and Dupon Julien OECD Capial Services Esimaes: Mehodology and A Firs Se of Resuls OECD Saisics Direcorae Working aper (forhcoming). 45 ohjola Tehoon pääoma. 46 Timmer Ypma and van Ark IT in he European Union.

20 20 dusry in he same period ha ohjola coined as inefficien we also find plausible as we repor a double-digi ex-pos rae of reurn for he whole economy in Our resuls were preceded by Olli Halia and Mikko Leppämäki who mahemaically showed ha i is possible for shareholders financial reurn o grow faser han capial produciviy. 48 They showed ha his can happen if he growh in he value of shareholders equiy is posiive bu ha he financial reurn would be higher if he shareholders invesed elsewhere. Thus he owners do no inerfere wih he managers unsuccessful invesmens ha are depleing he value of he firm. Also Jukka Jalava implicily showed ha here was a major increase in capial produciviy growh afer 1995 as he repored a simulaneous increase in MF growh and decrease in labour produciviy growh (MF is he geomeric average of labour and capial produciviy so if MF growh goes up and L growh down hen C growh mus also go up). 49 However here we explicily showed ha growh in capial produciviy was low alhough he rae of reurn on capial was quie reasonable. This is inuiively undersandable since when he reurn on capial is high (he rae of reurn on capial equals capial s marginal produc) here is no necessarily a need o improve capial s average produciviy (Table 8 shows he average produciviies) unil he rae of reurn goes down. Only faced wih declining reurns he firms ake acion o uilize capial more efficienly. 50 Therefore we concur wih Halia and Leppämäki s conclusion ha he paradox is acually no paradox a all. I would seem ha Aro failed o discern he difference in capial s good performance in gaining a reasonable reurn on capial (is marginal produc) wih is less han good performance in average produciviy growh. Table 8 Capial produciviy % Capial services (ex-ane) Capial services (ex-pos) GCS NCS Source: Own calculaions; daa from Saisics Finland. 47 Aro erformance and Inernaional Compeiiveness. 48 Halia and Leppämäki Do Shareholders Care Abou Corporae Invesmen Reurns? 49 The excepional increase in Finnish capial produciviy is also corroboraed by he resuls of Timmer e al. as he Finnish L/MF growh raio declined o 1.1 in whereas i was 2.3 in he U.S. and 2.8 in he EU. Jalava Accouning for Growh and roduciviy. Timmer Ypma and van Ark IT in he European Union. 50 Our inuiion is reinforced by Figure 13 in a recen paper by ekka Sauramo. Sauramo ekka Funkionaalinen ulonjako Suomessa: ollaanko asapainossa? Discussion apers 192 Labour Insiue for Economic Research December 2003.

21 21 Table 9 Alernaive growh conribuions of capial GD a basic prices (excl. dwellings) average annual volume growh 1 Conribuion 2 Capial services (ex-ane) Capial quaniy Capial qualiy Capial services (ex-pos) Capial quaniy Capial qualiy GCS NCS Capial s income share er cen. 2 ercenage poins. Numbers may no add o oals due o rounding. Source: Own calculaions; daa from Saisics Finland. Table 10 shows he MF esimaes by alernaive ypes of capial. Labour inpu is here hours worked unadjused for qualiy changes. The endency of he NCS o overesimae capial produciviy is no refleced ha much in MF due o capial s small income share. In he lae 1990s he relaive change in MF is ever so slighly larger when using he NCS han when using he oher measures of capial due o boh an increase in capial s share of income and he faser growh rae of he ne sock. The picure given by he GCS during he recession once again differs he mos from ha of he capial services. On he whole when comparing he MF growh raes in Table 10 wih he growh of GD i is clear ha he residual is and has been he mos imporan conribuor o economic growh in Finland during he whole observaion period. Table 10 Alernaive muli-facor produciviy measures % Capial services (ex-ane) Capial services (ex-pos) GCS NCS Source: Own calculaions; daa from Saisics Finland.

22 22 Conclusion The saring poin of his paper was mehodological as we inroduced sae-of-hear ools of economic analysis o he Finnish case and exensively discussed wha kind of heoreical and empirical choices have o be made in quanifying capial and is conribuion o growh and produciviy. The use of capial services insead of gross or ne capial socks does no aler he previously held view of he developmen of capial inpu during he period During he early 1990s economic recession he volume index of capial services shows a much greaer decline in capial inpu han does he ne sock. Correspondingly in he lae 1990s capial services grow faser han does he ne sock. The gross sock grows during he whole observaion period a he mos rapid rae. The calculaions based on he ne capial sock somewha exaggerae he decline in capial produciviy in he early 1990s and oversae he growh in capial produciviy afer The mos significan feaure observed is common o all measures of capial i.e. a marked increase in capial produciviy in he laer par of he 1990s. The differences in growh conribuions are no ha sriking eiher. The conribuion of capial o Finnish economic growh looks raher similar boh when using he heoreically correc capial services measure and when using gross or ne capial socks. During he recession he gross sock clearly oversaes he case hough. Afer he recession he conribuion of he ne sock is slighly smaller han ha of he oher capial ypes and boh he growh rae and he conribuion of he gross sock are closer o he correc one. The effec (of which alernaive capial measure is used) on muli-facor produciviy is minor a he level of he whole economy. Alhough he composiion of capial has shifed ino a more shor-lived and inangible direcion he good old in he producion funcion is by no means obsolee. I has jus ransformed which poses a grea challenge for a hisorical analysis of he proximae sources of our economic growh. We also observed how our new esimaes accorded wih he previous view on how capial has influenced recen Finnish economic hisory. Our empirical findings show ha reasonably high raes of reurn on capial and low produciviy growh of capial did coexis in Finland in This confirms he heoreical resul o his effec obained by Olli Halia and Mikko Leppämäki. Therefore we concur wih heir conclusion ha he Aro-ohjola paradox is no paradox a all. The era of low capial produciviy growh ended wih a sep-up afer The increase in capial produciviy nowihsanding he conribuion of capial o Finnish economic growh has declined significanly. This is because he Finnish economy relies more on MF afer he 1990s recession han previously as growh has become more inensive han before. The diminishing imporance of capial sems from he fac - as aul David David aul Does he New Economy Need All he Old IR Insiuions? Digial Informaion Goods and

23 23 poins ou - ha he focus in developed counries' producion has shifed from he mere efficien managemen of rouines o he abiliy o solve problems and innovae. Hence work on beer undersanding he measure of our ignorance i.e. MF is called for. Especially as he residual is he mos imporan conribuor o Finnish economic growh or pu anoher way he greaer par of our growh is presenly lef unexplained. Access o nowledge for Economic Developmen paper presened a WIDER Conference on The New Economy in Developmen May 2002 Helsinki.

24 24 Appendix Table A1 Volume indexes of he capial series 1975=100 Capial services (ex-ane) Capial services (expos) Capial quaniy GCS NCS Source: Own calculaions; daa from Saisics Finland.