Research

A Theoretical and Empirical Framework

This paper introduces a novel theoretical and empirical framework for analyzing frontier AI compute as a distinct form of productive capital. Extending standard semi-endogenous growth models, we formalize a "compute capital" stock separate from general ICT capital and demonstrate that AI productivity is a joint function of compute capacity, data availability, and human expertise. Using a newly constructed cross-country panel dataset of effective AI compute capacity covering 42 economies from 2016 to 2024, we document substantial and widening global compute inequality: the top five economies account for over 82 percent of estimated global frontier AI compute, while the bottom quartile shares less than 1.2 percent. Exploiting quasi-natural experiments, including the October 2022 U.S. semiconductor export controls on China, regional data center openings, and cloud provider expansion events, we identify causal effects of compute access on firm-level productivity, AI-related research and development, and labor-market outcomes. A one-standard-deviation increase in effective compute access is associated with a 3.7 percentage point gain in sectoral total factor productivity and a 12 percent increase in AI-related patent filings. We then develop a structural industrial organization model of the cloud computing and semiconductor supply chain to evaluate welfare implications of market concentration, finding that the current oligopolistic structure generates deadweight losses equivalent to 0.3 to 0.8 percent of GDP in advanced economies. Policy counterfactuals suggest that targeted compute subsidies for research institutions yield higher social returns than broad-based industrial subsidies, while overly restrictive export controls accelerate indigenous chip development in targeted economies without proportionally reducing their AI capabilities. Our findings have direct implications for competition policy, industrial strategy, AI governance, and the design of international technology agreements.

The Economic Institute | 10 June 2025

Evidence from U.S. Equity Markets

This paper develops and tests a unified multi-factor asset pricing framework that incorporates systematic market risk, size, value, liquidity, and volatility risk premia into a single coherent model for the cross-section of expected equity returns. Using comprehensive data on U.S. common stocks from the Center for Research in Security Prices (CRSP) spanning 1963 to 2023, merged with Compustat accounting data, intraday Trade and Quote (TAQ) microstructure data, and OptionMetrics implied volatility surfaces, we construct tradable factor-mimicking portfolios for each priced risk dimension and evaluate the model's ability to explain average returns on a broad array of test assets. Our liquidity factor, constructed from a composite measure that synthesizes the Amihud (2002) illiquidity ratio, the Pastor and Stambaugh (2003) traded liquidity innovation, and a bid-ask spread measure derived from TAQ data, earns an unconditional premium of 0.41 percent per month (t-statistic = 3.87) and exhibits low correlation with existing Fama and French (2015) factors. Our volatility risk premium factor, constructed as the return differential between portfolios sorted on the spread between option-implied and realized volatility, commands a premium of 0.34 percent per month (t-statistic = 3.21) and captures compensation for bearing aggregate uncertainty risk that is not subsumed by the market or value factors. In formal Fama and MacBeth (1973) cross-sectional regressions on 25 size and book-to-market portfolios, 25 size and momentum portfolios, 10 industry portfolios, and 25 size and illiquidity portfolios, the unified five-factor model (Market, SMB, HML, LIQ, VOL) produces a cross-sectional R-squared of 78 percent and a mean absolute pricing error of 0.07 percent per month, compared with 54 percent and 0.14 percent for the CAPM, 68 percent and 0.11 percent for the Fama-French three-factor model, and 73 percent and 0.09 percent for the Fama-French five-factor model. The GRS test of Gibbons, Ross, and Shanken (1989) fails to reject the null that all pricing errors are jointly zero at conventional significance levels (p-value = 0.127) for our model, whereas it decisively rejects the CAPM (p

The Economic Institute | 15 March 2025

Growth, Services, Manufacturing, and the Unfinished Reform Agenda

This paper examines India's economic liberalization programme initiated in 1991 and its consequences for structural transformation, growth, and development across the subsequent three decades to 2024. Beginning from a severe balance-of-payments crisis that compelled the Narasimha Rao government and Finance Minister Manmohan Singh to dismantle the License Raj and open the economy to foreign direct investment, trade, and market forces, India's growth trajectory accelerated markedly over the following decade. We trace the trajectory of GDP per capita from US$303 in 1991 to US$2,731 in 2024, situating this expansion within a structural narrative centred on the rise of services, the emergence of a globally competitive information technology and business process outsourcing industry, fitful progress in manufacturing, and persistent challenges in agriculture and rural development. The paper draws on National Sample Survey data, Annual Survey of Industries data, Reserve Bank of India statistics, Centre for Monitoring Indian Economy microdata, and World Bank indicators to construct a comprehensive account of India's uneven transformation. Beyond the aggregate growth story, we analyse the distributional, institutional, and governance dimensions of India's liberalization experience. The services sector's share of GDP rose from roughly 41 percent in 1991 to 59 percent by 2024, driven primarily by the IT revolution centred on Bangalore, Hyderabad, and Chennai, yet manufacturing remained stubbornly anchored at approximately 15 percent of GDP, failing to replicate the labour-absorbing industrialization that powered East Asian economic miracles. Rural distress, declining female labour force participation, and sharp interstate divergences between prosperous southern states and lagging northern ones complicate the growth narrative. We evaluate landmark institutional reforms including the Goods and Services Tax of 2017, which unified India's fragmented indirect tax system; the controversial demonetization of 2016; the Jan Dhan Yojana financial inclusion initiative; and the transformative digital public infrastructure built around Aadhaar biometric identity (with 1.3 billion enrollments) and the Unified Payments Interface, which processed over two trillion US dollars in transactions in 2023. Our analysis identifies the unfinished reform agenda and the structural challenges, including the demographic dividend, infrastructure gaps, and climate vulnerability, that will shape India's economic prospects through the middle of the 21st century.

The Economic Institute | 20 January 2025

From Aid Dependency to Innovation Frontier

This paper presents a comprehensive case study of South Korea's industrial policy transformation from 1961 to 2024, examining how a low-income agrarian economy systematically evolved into the world's tenth-largest economy and a global leader in advanced manufacturing, semiconductors, and digital technology. Drawing on six decades of macroeconomic data, sectoral analyses, and policy documentation, we trace the sequential phases of Korea's development strategy, from import-substitution and heavy-chemical industrialisation under the Park Chung-hee era, through export-oriented liberalisation in the 1980s, the traumatic restructuring following the 1997 Asian Financial Crisis, and the contemporary pivot toward innovation-driven growth. Our analysis identifies five critical policy mechanisms that underpinned Korea's transformation: (i) strategic credit allocation through state-directed banking, (ii) conditional reciprocity in government-chaebol relations, (iii) massive human-capital investment coupled with technology absorption, (iv) adaptive institutional reform in response to crisis, and (v) the deliberate construction of national innovation systems. We evaluate the distributional consequences, including rising income inequality and household-debt burdens, and draw transferable lessons for developing economies pursuing structural transformation in the 21st century.

The Economic Institute | 15 November 2024