Capital Formation

A modem economy requires a vast array of capital goods. Countries must abstain from current consumption to engage in fruitful roundabout production. But there’s the rub, for the poorest countries are near a.subsistence standard of living. When you are poor to begin with, reducing current consumption to provide. for future consumption seems impossible.

The leaders in the growth race invest at least 20 percent of output in capital formation. By contrast, the poorest agrarian countries are often able to save only 5 percent of national income, Moreover, much of the low level of saving goes to provide the growing population with housing and simple tools. Little is left over for development.

Even before acquiring the most sophisticated computers, however. developing countries must first build up their infrastructure, or social’ overhead capital, which ‘consists of the large-scale projects upon which a market economy-depends. For example, a regional agricultural adviser helps farmers in an area learn of new seeds or crops  a road system links up the different markets: a public-health program people against tv phoid or diphtheria and protects the population beyond those inoculated. In each of these cases it would be impossible for an enterprising firm to capture the social benefits involved, because the firm cannot collect fees from the thousands or even millions of beneficiaries. Because of the large indivisibility and external effects of in  infrastructure, the government must step in to make or ensure the necessary investments.

In many developing countries, the single most pressing problem is too little saving. Particularly in the poorest regions, urgent current consumption competes with investment for scarce resources. The result is too little investment in the productive capital so indispensable for rapid economic progress.

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