Economic Development: Theory and Policy Applications

By Fidelis Ezeala-Harrison | Go to book overview
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Capital Accumulation and the Process
of Development

This chapter deals with the role of capital formation in the development process. This role, together with its accompanying requirements of technological skill and know-how, cannot be overemphasized. Although both physical capital and financial capital are implied, financial capital is deemed to be just a means to acquiring physical capital. Financial capital is based on the savings decisions that finance physical capital, which involves the actual real investment decisions. In the LDCs, savings and investment decisions are often combined because of the low level of development of financial markets and institutions. Therefore, it may not be necessary always to draw the line between physical capital and financial capital.

Capital has always been recognized as the single most critical factor determining a nation's ability to develop. In fact, it is regarded as the prime mover of the development process. It is made of the various forms of investment in the development of land and natural resources, construction of residential and industrial buildings, physical plants and equipment, raw materials, and human capital. Human capital is the acquisition of knowledge, skill, and technological know-how through investment in human resources. 1

Within the internal aspects of a country's development circumstances, capital formation, entrepreneurial ability, and technological know-how together constitute the most essential requirements in generating and sustaining growth. In an LDC, capital accumulation would enable the economy to break, and indeed reverse, the vicious circle of poverty that tends to constrain the ability to initiate growth. More capital would increase the capital-labor ratio, enabling productivity to increase, leading to higher incomes, higher savings ability, and higher investment and capital accumulation for further growth.

Higher capital formation would enable the economy to be capable of making higher capital consumption allowance, and to facilitate more effective utilization of capital stock, resulting in higher productivity. This is especially essential in the creation and maintenance of the infrastructural base of the economy,


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Economic Development: Theory and Policy Applications


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