Reasons For Low Rate Of Capital Formation

The basis of low rate of capital formation in less developed countries (LDCs) such as Nigeria depend largely upon our saving culture, institutions mobilising these savings, and the investment of these savings. These factors could be explained under the following heading: 

Low-income nature of the LDCs accounts largely for low capital formation experienced in such countries. Consequently, the economies of the LDCs are backward in all her sectors; this is also responsible for their low per capita income. Low income leads to a higher propensity to consume leaving nothing to save as a way of capital formation. Large savings are essential for capital formation, which also depends on the size of income of the economic agents.

The size of dependants on prospective investors provides little or no income to save as a way of capital formation. Moreover, large percent of children of the LDCs dominate the countries’ population thereby creating a heavy burden on the parents in bringing them up. This eats up the hunk of their income leaving nothing to save. In addition, the life expectancy in the LDCs is very low and short; workers die in their prime ages leaving few adults within the working age brackets to carter for the children.

This is high inequality in income distribution, which creates gap between savings and consumption. However, income inequalities do not imply larger savings, but the disparity in income brings distortion in real investment and the rate of capital formation. People have to look to others for assistance or provide them with loan to invest in business.

Capital formation is been retarded by the backwardness in technology. As a result, per unit labour productivity and per unit capital productivity remain low.

 Sources of Capital Formation

The sources of capital formation could be seen in the increase in income of the people. This can be done by the capacity utilisation of the resources of the society of a country in an efficient manner by utilising unused resources productively through increase in division of labour.

Perpetuation of income inequalities in most LDCs countries, particularly developing countries such as Nigeria, brings about low income and thus marginal propensity to save is very low. It is believed that only those with high income that has high marginal propensity to save and invest for capital formation.

Another means of capital formation is the increase in the profit of business investment. There is the tendency for the capital of an individual or business to increase rapidly if investment opportunities are very profitable. As a way out, the government can assist to build-up profit by giving subsidies and tax rebates to companies.

CONCLUSION

Our discussions show that capital formation is very vital in the business circle; it serves as the basis in which investment can be increased. Therefore, it is very essential for business owners to save as a way of capital formation, which will eventually increase their investment portfolio.

SUMMARY

This unit threw light on how capital formation can be achieved through the various approaches. These approaches suggest that capital formation is very important for any economic growth and development. We also considered how capital formation (in both human and materials) could be best combined for rapid development in an economy.

TUTOR-MARKED ASSIGNMENT

• Identify the importance of capital formation to an economy. 
• Mention and discuss four reasons for low rate of capital formation. 
• Identify and discuss the sources of capital formation.