Capital formation and economic development

Capital formation and economic development

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  Capital formation and economic development CHAPTER NUMBER3
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  Capital formation andeconomic development Capital accumulation results when some part of present income is saved and invested in order to gerfuture output and income. New factories, machinery, equipment and materials, increase the physical stock of capital of a nation and make it possible for expanded output level to be achieved. These directly productive investments are supplemented by investments in what is knowns as social and economic infrastructure such as, roads, electricity, water and sanitation and communication etc. Meaning of capital accumulation: According to prof. RangnerNurkse: The meaning of capital accumulation is that the society does not apply to the need and desires of immediate consumption but directs a part of it to the making of capital goods, tools and instruments machinery and transport facilities, plants and equipment, all the various forms of real capital that can so greatly increase in the efficiency of productive effort. In other words; Addition in qualitative and quantitative to the stock of the man made means of production is called capital formation.
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  The rate ofaccumulation of an economy’s physical stock of capital is an important determinant of the rate of growth of an economy and is represented in various production functions and economic growth models. IMPORTANCE OF CAPITAL FORMATION: Most development economists like W.W. Rostow and Arthur Lewis for long period of time are the view that capital is the most import factor in economic development. FOLLOWING ARE THE ARGUMENTFOR SIGNIFICANCE OF CAPITAL FORMATION: To raise the level of national income: Rate of capital formation helps significantly. Increasing rate of capital formation lead to raise the national output the ultimately affects the level of national income positively. Thus the only solution to solve this complex problem of low-income trap is the capital formation. To overcome the problems: Of increasing population, process of capital formation plays vital role. Adverse effect of high population growth rates is low per capita income. To raise the per capita income with increasing population , rapid growth in national income necessary . thus through capital formation a country can raise their level of national income to solve the problem of low per capita income.
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  Level of employment: Ina country is directly related with the rate of capital accumulation of that country. Increasing rate of capital formation leads to high rate of investment and production that creates opportunities of employment in a country. Building up of social infrastructure Like roads, power, communication system means of transportation, laws, is an important effect of capital formation. To improve the balanceof payments In LDCs role of domestic capital formation have been greatly appreciated. Most of LDCs export raw materials or primary goods and import almost manufactured goods from other countries. Capital formation plays his due role by establishing the import substitues units which helps in reduction of imports. So, capital formation is the only solution to overcome the acute problem. To reduce the burden of foreign deb Is is highly advocated that capital formation process could be helpful tool. One of the main purpose of capital formation is to make country self sufficient. By making investment in import substitution units. When a country borrow from foreign countries it creates the burden of debt on that nation. To escape from debt trap, capital formation is necessary. External debt of Pakistan in fiscal year increased to 9 6 dollar billion against 50.1 dollars billion last year.
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  Inflationary pressure: In LDC’sis a very common problem that arises due to shortage of goods in these countries. Through capital formation LDC’s output of agriculture and manufacture products tends to increase. However to overcome problems of shortage and inflation in a country, steady rise in the rate of capital formation in the shortage and inflation in a country, steady rise in the rate of capital formation in the long run is compulsory. Current inflation rate growth up to 13.3% during fiscal year 2009-2010 Expansion of market: Is also fruit of capital formation. By making investment in agricultural and industrial sector, production of these sector can be increase thus production could be sold .thus surplus production could be sold in new markets to get maximum benefits. Technological improvements: Means an increase in technical efficiency ,defined as producing more with the same inputs or producing same quantity of output with fewer inputs. Changes in technical efficiency result from inventions and innovations, which are only possible when the investment level is increased the rate of capital formation.