Rates of return across the world: Where are they going?

A large number of studies done in both mainstream and heterodox traditions report an increase of profit rates in most developed countries between the early 1980s and the start of the global recession of 2008-09. However much less is known about the levels and trends of the return on capital (ROC) in developing and post-communist, transition economies. Our paper addresses this omission by providing estimates of recent ROC trends and levels for all countries where sufficient data is available. Our sample includes twenty-five highly-developed countries (HDCs), twenty-nine less developed countries (LDCs), and twenty-three transition economy countries (TECs).  During the 1995 – 2007 study period, their combined GDP comprised between 83% to 89% of the world’s total.

Using the standard decomposition of the ROC into its distributional and technology-efficiency factors, we analyze the key drivers of profitability: profit shares, capital efficiency and relative prices. We find that over the period of study, the average ROC increased in all three groups of countries. The main contributor to this growth was the increase in average productivity of capital, measured by output-capital ratio. In LDCs, it was driven almost exclusively by the secular growth of capital productivity, while in HDCs and TECs, profit shares growth and the decline in the relative price of capital goods also contributed to the ROC increase.

In our study, we also investigate the convergence of profit rates. The novelty of our approach is in examining whether profitability equalization, typically tested in intra- and inter-industry context, can also be detected in the cross-country comparison of macroeconomic profit rates. To preview our main result, we detect a trend toward cross-country convergence of profit rates, determined primarily by the convergence of profit rates in developing and transition economies. However this convergence is far from complete as average ROC in developing countries still remains significantly higher than in the rest of the world.

Key words: Profit rate, Capital productivity, National income distribution, Convergence

JEL classifications: E11, E25, P24