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Laying a solid foundation of economic facts and ideas, this book provides a comprehensive look at the critical role of public capital in development.
This book presents fifteen papers selected from the papers read at the 53rd Congress of the International Institute of Public Finance held at Kyoto, Japan, in August 1997. Although organized under the general title of Public Finance and Public Investment, the Congress covered a wide range of topics in Public Finance. One of the highlights of the Congress was a historic and brilliant debate between two of the greatest living authorities in the area of public finance, Professors James M. Buchanan and Richard A. Musgrave, on the nature of the welfare state and its future. Part I of this book is concerned with this debate and its empirical counterpart. James M. Buchanan (Chapter 1) warns that the welfare state will be unsustainable unless it preserves generality or at least quasi generality in welfare programs. The introduction of overt discrimination in welfare programs through means testing and targeting can only diminish public support. He argues that a political version of the "tragedy of commons" will emerge if and when identifiable interest groups recognize the prospects of particularized gains as promised by discriminatory tax or transfer payments. Faced with mounting pressure from entitlement-like claims of special interest groups against public revenues on one hand and equally strong pressure against further tax burdens on the other, political leaders are attracted to solutions that single out the most vulnerable targets. Distributional disagreement among classes will then become a major source of political discourse and an impetus for class conflict.
This paper constructs an efficiency-adjusted public capital stock series and re-examines the public capital and growth relationship for 52 developing countries. The results show that public capital is a significant contributor to economic growth. Although the estimated coefficient for the income share of public capital is larger in middle- than in low-income countries, the opposite is true for the marginal product of public capital. The quality of public investment, as measured by variables capturing the adequacy of project selection and implementation, are statistically significant in explaining variations in economic growth, a result mainly driven by low-income countries.
A rigorous, pathbreaking analysis demonstrating that a country's prosperity is directly related in the long run to the skills of its population. In this book Eric Hanushek and Ludger Woessmann make a simple, central claim, developed with rigorous theoretical and empirical support: knowledge is the key to a country's development. Of course, every country acknowledges the importance of developing human capital, but Hanushek and Woessmann argue that message has become distorted, with politicians and researchers concentrating not on valued skills but on proxies for them. The common focus is on school attainment, although time in school provides a very misleading picture of how skills enter into development. Hanushek and Woessmann contend that the cognitive skills of the population—which they term the “knowledge capital” of a nation—are essential to long-run prosperity. Hanushek and Woessmann subject their hypotheses about the relationship between cognitive skills (as consistently measured by international student assessments) and economic growth to a series of tests, including alternate specifications, different subsets of countries, and econometric analysis of causal interpretations. They find that their main results are remarkably robust, and equally applicable to developing and developed countries. They demonstrate, for example, that the “Latin American growth puzzle” and the “East Asian miracle” can be explained by these regions' knowledge capital. Turning to the policy implications of their argument, they call for an education system that develops effective accountability, promotes choice and competition, and provides direct rewards for good performance.
This book addresses three questions that are central to the analysis of fiscal policy. First, how good are linearization and higher-order approximations in an endogenous growth model with public capital? Second, how important are the transitional dynamics in assessing fiscal policy alternatives when comparing the long-run economic growth and welfare? Third, is a consumption tax optimal in an economy with public and private human capital when the tax structure is time-invariant? To answer these questions, I have used an endogenous growth model where the growth is driven by accumulation of human capital and fueled by a public capital externality. I conclude: (i) the policies that involve the highest rates of economic growth do not always provide the highest welfare; (ii) the traditional methods used to analyze the impact of tax policy alternatives might involve significant approximation errors, and the use of actual transitional path in analyzing fiscal policy in this book eliminates this problem; and (iv) the long-run welfare benefits of fiscal policy reform may take years to be realized, with welfare losses accruing in the short-run.