Do Low Wages Stimulate Investment? An analysis of the relationship between distribution and investment in Turkish private manufacturing industry

Ozlem Onaran and Nurhan Yenturk

International Review of Applied Economics, 2001, vol. 15, issue 4, 359-374

Abstract: This study analyses the relative impact of profitability and demand on accumulation in Turkish private manufacturing industry on the basis of the theoretical framework outlined by Marglin & Bhaduri (1990). The main motivation behind this analysis is to shed light on the demand aspects of the slowdown in accumulation in the manufacturing industry despite the increase in profitability during the structural adjustment episode. For this purpose, the ratio of investment to value-added is estimated as a function of the profit share and an accelerator term, namely the growth rate of value-added, using panel data for the 26 industries of the private manufacturing sector. The results show that investment is not responsive to the profit share, whereas growth has a consistent positive impact. This result is significant in explaining the inability of pro-capital income policies to stimulate manufacturing investments throughout the export-promotion era. The export boom maintained by the use of the existing capacity rather than by new investments shows the limits of export demand to compensate for the fall in domestic consumption out of wages. The results make a strong case against the argument that profitability enhances accumulation. Evidence shows that it is not possible to enhance accumulation and long-term potential for growth simply based on promoting profitability, without paying attention to the demand aspects.

Date: 2001
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DOI: 10.1080/02692170110081912

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