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Wednesday, 6 July 2011

importance of capital formation or capital accumulation in the less developing countries and suggest measures to promote the rate of capital accumulation


Capital Formation or Capital Accumulation :-
Meaning :- Capital accumulation or capital formation means to increase the real assets of the country. In other words to increase the man made capital goods like machinery and buildings.

Importance of Capital Accumulation or Capital Formation :-
In the less developing countries economy depends upon capital accumulation. If the rate of investment increases, it increases the national income. On the other hand if investment falls national income. On the other hand if investment falls national income also falls. To break the vicious circle of poverty we will have t increase the investment by increasing the saving s in the country.

According to Prof. Ellis "The shortage of capital accumulation is the main obstacle in the way of economic development."

We should increase the rate of savings and then these savings should be utilized for investment.The marginal efficiency of capital should be higher than the rate of interest then we can increase the rate of investment in the country. By increasing the rate of investment we can increase the rate of employment, and rate of production in the country, the pr capita income will rise and it will improve the standard of living. So better utilization of resources and prosperity can prevail by increasing the rate of investment in the country.
Following are the important sources of capital formation :

1. Savings :-
In the less developed countries rate of saving is very low due to low per capita income. There are two types of savings, household savings and business sector savings. House hold savings are voluntary savings which are used for further investment. In the under developed countries rate of savings is 10% to 14% of national income.

2. Taxes :-
The government imposes the taxes on the public and this revenue is used for investment. These taxes are called compulsory savings.

3. Government Borrowing :-
Sometimes government borrows the money from the people and uses it for investment. It is an important source of capital formation.

4. Use of Idle Resources :-
By using idle resources government increases the production and investment. For instance in underdeveloped countries large area of land still barren, it can be cultivated by employing the services of unemployed people and role of capital formation can increase

5. Deficit Financing :-
The poor countries commonly use this source to increase the rate of investment in the country. By using this policy unemployed resourced are utilized and savings are generated for capital formation.

6. Foreign Aid :-
The developing countries also borrow from outside the country to increase the capital formation in the country. It can be obtained from a number of sources. Sometimes Govt. borrows from outside the country and sometimes from inside the country. Govt. also borrows from the international financial institutions like IMF, IBRD and UN agencies.


Measure To Promote the Capital Formation or Capital Accumulation :-
The following measures can be adopted to increase the rate of capital formation in the less developed countries :

1. Increase in Financial Institutions :-
The government of poor countries should increase the branches of banks in the rural areas. So villagers may be able to deposit their money in banks, instead of keeping it at home. Private financial institutions based on sound footing should be allowed to play their role.

2. Incentive To the People :-
To encourage the savings government should introduce various national savings schemes to attract the people. Higher rate of interest also attracts the people. When saving rate will rise, it will enhance the rate of investment.

3. Investment Opportunities :-
The government should increase the investment opportunities in the country and there should be no fear of nationalization. It will increase the rate of investment. Suitable environment is also compulsory for capital formation.

4. Increase in Taxes :-
The government may increase the taxes and this revenue can be utilized for investment. But due to the raise in taxes, there should be no reduction in investment.

5. Restriction on Imports :-
The government should restrict the imports of consumption goods. So the rate of consumption will fall and rise of saving will raise. It will increase the investment in their country.

6. Increase in Exports :-
By increasing the exported, government can earn foreign exchange which can be used on the import of capital goods.

7. Cut on Unproductive Expenditure :-
The government should reduce unproductive expenditure and increase the rate of investment, The expenditure on administration and defence can be reduced to promote investment.

8. Use of Foreign Aid :-
It is very useful for increasing the rate of capital formation. But it is curse when it is misused. In most of developing countries are face the burden of debt so that is the major reason of low investment.

9. Increase in Employment :-
In underdeveloped countries manpower is surplus. If we use it for productive purpose, it can increase the rate of investment. Govt. can introduce the various social welfare schemes and can increase the rate of employment.

10. Increase in Foreign Investment :-
The government should invite the foreigners to increase the rate of capital formation. Today the most of developing countries also offered various incentives to the foreigners to increase the rate of investment in their country.

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