CAPITAL FORMATION: Less developed countries (LCDS) are generally said to be characterized by several features including capital scarcity and lower industrial base when compared with the developed countries (DCS) of the world. Some economists such as Adam Smith, W.W. Rostow and W.A. Lewis have laid emphasis on capital formation as a major determinant of economic growth.
A faster rate of economic growth and development can occur if the LCDs can accelerate the pace of industrialization in their domestic economies. The accumulation of capital in any developing country like Nigeria requires the mobilization of an economic surplus.
For instance, if investment is to increase, there must be a growing surplus above current consumption that can be tapped and directed into productive investment channels. It implies, therefore, that the process of domestic capital formation involves an increase in the volume of real saving, so that resources can be released for investment purposes.
However, in Nigeria the need for external resources to supplement domestic resources for economic development has been on the increase. The sources of external resources to Nigeria are mostly from donor agencies such as the Word Bank, International Monetary Fund (IMF) and the industrialized countries. These capitals are given as direct grants or serviceable loans for specific projects.
Underdeveloped countries are those when compared with advanced countries are under equipped with capital in relation to population and natural resources.
The main features of underdevelopment in these countries can be summarized as low per capital income, low level of living, and low level of productivity, excessive dependence on agriculture, low rate of capital formation, unemployment and underemployment as well as underutilization of natural resources (Fakiyesi, 2005). This view of economic backwardness is often rationalized against the vicious circles of poverty.
Some Conceptual Explanations and CAPITAL FORMATION
Capital formation:According to, capital formation refers to be process of acquiring the stock of human and physical capital such as persons with different skills, knowledge and education, machines, plants and equipment which are critical for social and economic development. The meaning of capital formation is that society does not apply the whole of its current productive activity to the needs and desires of immediate consumption, but directs a part of it to the making of capital goods: tools and instruments, machines and transport facilities, plant and equipment (Jhingan, 2003). Capital formation, therefore, consists of both tangible goods like plants and machinery and intangible goods like high standards of education, health, scientific traditions and research and indeed all the various forms of real capital that can so greatly increase the efficacy of productive effort. The essence of this process, for a country like Nigeria, is the diversion of a part Nigeria’s currently available resources to the purpose of increasing the stock of capital goods so as to make possible an expansion of consumable output in the future thereby sustaining development.
Sustainable Development: The World Commission on Environment and Development (1987) sees sustainable development as development which meets the needs of the present generation without compromising the ability of the future generation to meet their own need. This means that the present generation will not live at the expense of future generation. To achieve lasting satisfaction of human needs and improvement of the quality of human life, therefore, such development must continuously seek to accumulate both human and physical. Sustainable development is therefore a comprehensive concept embracing lasting improvement in all facets of human life. In Nigeria, for instance, it has to do with continuous and lasting improvement in the economic, agricultural, industrial, political, banking and education sectors.
Rationale for Capital Formation
Capital formation has been regarded as one of the principal factors for sustainable economic development. With a reliable capital formation, the vicious circles of poverty in underdeveloped countries could be disengaged. This would bring about higher levels of income, increased demand, production and investment. Capital formation leads to full utilization of the available resources. Consequently, the rationale for capital formation in any economy, can be summarized as follows:
- Economic development depends on the formation of capital equipment that would abound in sufficient scale to ensure increased productivity in all sectors of the economy.
- Investment in capital equipment in capital equipment also leads to employment opportunities. Capital formation leads to technical progress, which helps realize the economies of large-scale production and increases specialization. It provides machines, tools and equipments for the growing labour force. Thus, capital formation benefits labour.
- There is the expansion of market and removal of market imperfections by the creation of economic and social overhead capital. This tends to break the vicious circles of poverty both the demand side and the supply side.
- The strains of inflationary pressure on a developing country can be curtailed at a considerable extent by increased capital formation. The output of agricultural products and manufactured consumer goods tends to increase with a rise in the rate of capital formation. It is the steady rise that augments the supply of goods, controls inflation, stabilized and sustains the economy.
Capital formation leads to the proper exploitation of natural resources and the establishment of industries. This increases income levels and the varied wants of the populace are met, thereby catering for the welfare of the economy.