rate of return on capital

Diane Monaco dmonaco at pop3.utoledo.edu
Thu Apr 18 10:42:20 PDT 2002


At 09:45 AM 4/17/2002 -0400, you wrote:
>Carrol Cox wrote:
>
>>Why is it counter-intuitive? I would assume that colonial profits have
>>_never_ been higher in absolute terms than profits at "home" -- they are
>>simply a requirement for the absorption of capital that otherwise would
>>not be active at all.
>>
>>Return in Developed Nation: X %
>>
>>Return on additional investment in developed nation: 0 %
>>
>>Return on Investment in Colony: X/2 %. Better than nothing.
>>
>>This is why imperialism is _not_ a policy adopted by imperialist nations
>>but the very mode of existence of capital.
>>
>>It is also why capital (if not destroyed) will destroy the human
>>species.
>
>The only thing wrong with this quasi-syllogism is that the marginal return
>in the developed nation is >0%, which is why about 2/3 of FDI goes to
>developed countries (and the remainder is concentrated in only about 10
>"developing" countries).

Thanks Doug, Christian, Carrol, Ulhas, and others. Empirically the data seems to suggest that the return on capital is lower in developing countries. I would expect it to be higher. My reasons:

1) Many developing countries have current account deficits which would imply accommodating capital account inflows...of course if everything freely flows.

2) A suppressed supply of capital in a country would push up the rate of return...of course if demand is also suppressed the effect on the rate would depend on the magnitudes.

3) A standard "increasing at a decreasing rate" production function suggests a lower marginal rate (slope of the function) at lower levels of capital.

I think part of the problem here is how does one measure the "return" on capital and what is the meaning of "return" to investors. In the real world, return is not the only factor that influences investment, "risk" also plays a role and then there is the matter of the exchange rate during the investment period. So the return in developing countries may be quite high relative to the return in developed countries but when the rate of depreciation of the currency and risk factors associated with political instability, budget deficits, and such are brought in, the "return" may finally be relatively lower. Then perhaps we should be asking what does the data reflect: a) "return" or b) "return + currency depreciation - political instability -...-"?

Also, another thought is that the aggregate production function in developing countries may be very different from what we assume it to be. If it's actually increasing at an increasing rate then marginal rates would be lower at lower levels of capital.

Many thanks, Diane



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