Jürgen Stark: Investing today in the world of tomorrow
Welcoming speech by Dr Jürgen Stark, Deputy Governor of the Deutsche Bundesbank, for the
Deutsche Bundesbank Spring Conference 2000, held in Frankfurt on 28 April 2000.
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Ladies and gentlemen,
I am happy to welcome you here at the Bundesbank's second Spring Conference, also on behalf of the
President who unfortunately is unable to attend. I am glad that you have come, some of you from very
far, to join us in a discussion of problems which are of great interest to academics and economic
policymakers alike. This Spring Conference is indeed designed to promote an exchange of views
between economists and politicians from Germany, Europe and overseas.
Last year's conference, which took place shortly after the start of monetary union, focused on the
monetary transmission process in general and in Europe in particular. This year's conference will
focus on investment.
There are certainly enough reasons for choosing this topic in a world where technological progress and
a modern capital stock are often considered to be the key to prosperity and where the basic investment
conditions are changing in many ways. At the same time it is probably not going too far to say that
many questions as to the behaviour of investors still remain.
If this conference helps us to better understand investors' behaviour, to judge the significance of some
basic conditions more adequately and to assess more precisely the impact of investment decisions on
economic growth and prosperity in our countries, it will surely have been worth the trouble of coming
to Frankfurt.
Academics and economic policymakers have been debating the importance of investment and its
determinants for a long time. Some of the topics discussed are similar all over the world, for example
implications of globalisation for the investment process. On the other hand in some respects focal
points of the debate in the US differed from those in Europe. In the US formerly an unsatisfactory
productivity growth and more recently the debate on the New Economy played a key role.
In Europe we had some other main topics. Let me just briefly sketch some of the issues which have
time and again played a role in Germany and in Europe over the past few decades.
After the investment ratio declined distinctly in connection with the first oil price shock in the
mid-1970s, interrupted only by the reunification boom in Germany, low investment resurfaced in
Germany and other countries as a matter of concern. In the second half of the seventies the situation
was given a name in Germany, "investment backlog", and an improved framework was called for in
order to solve this problem. Quite often investment was discussed from a short-term perspective
focusing on its contribution to demand. Since then, there has been a growing awareness that the supply
side plays a predominant role, where investment is a guarantee of a sufficiently high and modern
capital stock and is a prerequisite for growth.
In the 1980s and 1990s the focus has again shifted somewhat in Europe. Given the high level of
unemployment, the question now concerns not only the link between investment and growth but also
that between investment and the demand for labour.
Of course the link between investment or the capital stock, on the one hand, and employment, on the
other, is complex. Substitutability must be taken into account, as does complementarity. The
significance of investment for an economy's production potential, labour productivity and a country's
international competitiveness are all key issues.
On balance, I believe there is no doubt that sufficient investment is a basic prerequisite for mastering
the labour market problems in Europe. Of course this is not to say that changes in the pool of available
labour, such as improving job-seekers' professional qualifications, are not necessary as well. And
certainly the relative factor prices must also contribute to solving the problem.
In this connection the future problems of an ageing population should also be borne in mind.
Economists have been warning us about this problem for a long time, and now the general public is
becoming more and more aware of this issue. The resulting challenges can be mastered more easily,
the more productive capital and labour become. This again highlights the key role of investment.
Having made these brief comments on the significance of investment, I do not need to give further
reasons as to why we have chosen the determinants of investment behaviour to be the main topic of
our conference.
If one asks what the determinants of investment are, a number of variables come to mind: the demand
situation faced by the enterprises, financial factors including the profitability of real investment
compared to other forms of investment, the risks associated with investments, etc.
Let me start with the role of government, since it affects investment decisions in many ways and
because it is an important topic for economic policymakers - they can make many mistakes but also
quite a few positive contributions in this regard.
Government regulations can have a variety of effects on investment behaviour. Tax legislation in a
broader sense, that is including write-offs and subsidy provisions, is a well-known example. Ever
since the studies by Hall and Jorgensen in the mid-1960s, if not before then, economists have
thoroughly researched these effects on the user cost of capital and hence on investment. What are the
consequences if government amends the legislation governing the user cost of capital or the internal
financing possibilities? Relatively reliable answers to these questions must be found before we can
turn to the follow-on subject of whether government should pursue such objectives, and if so, how.
In this context we should also give some thought to the role of inflation and price stability in
investment, for instance in the case of a biased tax system that leads to the taxation of phantom profits
arising from inflation.
Another aspect of this complex issue is government itself in its role as an investor. In the last few
years we have witnessed a wave of privatisation in Europe. This development and the associated
deregulation are a response to familiar demands - not least those made by many central banks,
including the Bundesbank - that the state should concentrate on its "core operations". It is hoped that
private investors will increasingly utilise the leeway thus opened up to bring about a general increase
in prosperity and new dynamism in our economies.
Besides, the fact that such a more deregulated economy based on the principles of free competition
usually facilitates the task of maintaining price stability is, of course, a very welcome feature from the
central banks point of view.
However, it also goes without saying that government has to make investments. It is generally
assumed that public investment in infrastructural projects is an important means of raising the
productivity of private investment. The interesting question as to the extent to which this is the case
and regarding which of these investments are to be seen in a more positive or negative light will
certainly also be addressed during this conference. It is of special interest against the background of
structural changes in our economies, which may be facilitated but sometimes also hampered by such
government "input", particularly if you bear in mind that those investments are not cost-free.
If a central bank had staged a conference on investment in the past the debate would have focused on
the interest-rate sensitivity of investments. It was frequently regarded as the hub of the monetary
transmission process. Over the last few years this assessment has changed somewhat. I believe it was
not a coincidence that this issue remained virtually unmentioned - at least not explicitly mentioned - at
the Bundesbank's conference on the transmission process last year.
There are probably a number of reasons for this development. For one thing, the concept of the
optimum conduct of monetary policy has evolved. The issue on the agenda today is the search for
monetary policy rules, transparency and credibility. The sometimes too mechanistic views of the past
on the fine-tuning effects monetary policy has on economic activity have thus taken a back seat. The
transmission process has also turned out to be much more complex than originally thought and cannot
be restricted to one or only a few parameters. Nevertheless a central bank must not disregard the
sensitivity of investment when trying to estimate its impact.
In the light of sometimes heated debate surrounding the relevance of the user cost of capital in
explaining investment behaviour, other links between monetary policy and investment decisions have
gained increasing weight in the last few years. The importance of financial constraints and their main
origins are now being debated extensively. The participants in this conference will surely have a few
things to say on this issue.
In this area the institutional pattern of relationships between enterprises and an economy's sources of
financing is of major importance.
How significant is it if enterprises borrow funds more through banks or on the capital markets? How
important is sufficient capitalisation for enterprises? What role does the balance-sheet structure of
banks or competition among banks play in the willingness to grant loans? These and many more
questions are vital and are by no means only of theoretical interest nowadays.
It has frequently been predicted that the structure of financial systems and corporate finance will
change in the wake of the technological progress in the financial markets and possibly also in
connection with European monetary union.
In the past, bank loans played a predominant role in corporate finance in Germany and in most other
countries in continental Europe. This has changed somewhat of late and a further development
towards increasing direct financing through the capital market is to be expected. There is wide
speculation as to how this will affect investment. For instance, will more direct access to a broad
capital market tend to ease the financial constraints - or, conversely, will the investment process
become more disruption-prone owing to the diminished role of bilateral relationships between banks
and enterprises? Will some enterprises profit by such changes and others be at a disadvantage? And so
on.
Naturally, the structure of the financial system is shaped by many factors, and the legal framework is
only one of many aspects. Before a decision is taken on the actual formulation of these legal
provisions, the central banks will certainly be consulted. Therefore, it is important for us at the central
banks to assess the probable impact of a changed financial system on investment behaviour in the
corporate sector and on the effectiveness of monetary policy.
In this connection it is also vital for such a legal framework to be reliable. The general relevance of
uncertainty for investment behaviour has recently attracted quite some attention, and it will be
interesting to observe how events will unfold in this field.
A "one-size-fits-all" assessment of the determinants of investment behaviour would certainly
oversimplify the issue. Construction investment is only comparable with investment in machinery and
equipment to a limited extent, while stockbuilding is a different matter altogether.
Investment in research and development is becoming a particularly important element in ensuring a
future-proof economy. In addition, there is good reason to assume that this type of investment is
governed by a different set of rules, either because of the higher risks involved or because it pays off
only after a relatively long time or because investors in this field have few realisable assets to offer to
their lenders as collateral. Against this background, an analysis of investment in research and
development would appear to be particularly important. I am glad that this conference will devote
particular attention to that aspect.
Today's world is characterised above all by globalisation. National borders are much less of a barrier
for the markets than they used to be. This is a result of technological progress, which enables us to
overcome time and space much more quickly, and of the triumph of the market economy. Nobody can
afford to reject it unless he is willing to make massive sacrifices in terms of welfare. In Europe we
have actively promoted this already existing trend by creating the single market and by establishing
European monetary union.
The innovations associated with investment have made a crucial contribution to an increased
convergence of the markets. Conversely, worldwide integration is exerting a strong influence on the
determinants of investment. Competition has become tougher; today investment decisions no longer
depend solely on local conditions but on international conditions. From the early nineties to 1998
cross-border investment all over the world tripled.
This development has been viewed with concern by some. Domestic investment by non-residents has
sometimes been debated in terms of "selling out the country" and has at times raised fears that such
investment is solely intended to eliminate troublesome competitors. In turn, investment abroad has
raised fears of domestic jobs being lost. Even though these concerns cannot be brushed aside lightly,
and hardships may occur in individual cases, it is important to keep driving home the fact that, on the
whole, the integration of economies contributes to the more efficient use of resources, the
dissemination of knowledge and the growth of global prosperity.
I think my introduction has spanned a wide range of topics. As you can see, we have many unresolved
issues. Although nobody can expect that all these issues will be resolved once and for all by tomorrow
night, I am confident that by the end of this two-day conference we will have a clearer idea of the
interdependencies which we will need to monitor especially closely in the future. And maybe one of
these discussions will also bring us closer to knowing that we have a better understanding of
investment behaviour after this conference. With this in mind, I wish us all a successful conference.