Dynamic inefficiency is defined as capital over-accumulation. A more complex explanation shows that this occurs when r < g, where r is the real rate of interest and g is the growth rate of the economy. Barro and Sala-i-Martin specify this definition in terms of savings such that the actual savings rate in the economy is greater than the golden rule savings rate. The golden rule savings rate is defined as a rate that has no “effect on consumption in the long run and consumption is at its maximum possible level among balanced growth paths.” Government can cause and perpetuate this economic inefficiency if it determines a savings rate that is different from the golden rule savings rate. The growth rate criterion of dynamic inefficiency yields dynamic inefficiency for all the years of this study (1980 to 1996). The authors obtained gross fixed capital formation from International Financial Statistics. From the same source, net capital income was calculated as gross domestic product less government consumption less private consumption less net exports. The results show that net capital income exceeds investment. Hence, by the Abel criterion, this implies dynamic inefficiency.
