Financing Development

Abstract

Real capital formation from domestic resources involves two basic steps. Firstly, it requires an increase in the volume of real saving, and secondly, the act of investment itself. In the absence of international trade and foreign borrowing, capital formation is only possible through abstinence from present consumption and when society produces a surplus of consumer goods sufficient to meet the needs of labour engaged in producing capital. In a purely subsistence economy, saving and investment are simultaneous acts in the sense that if a producer is to develop the means of production he must sacrifice time and resources which would otherwise be used for consumption purposes. In a money economy, savings and investment may be undertaken by different groups, and the process of capital formation is likely to require some form of finance and credit mechanism to channel savings from willing lenders to willing borrowers. In fact, in the early stages of development savings may not be the major barrier to capital formation but rather the unwillingness or inability to invest. The unwillingness to invest may stem from cultural attitudes or simply a realistic assessment of the risks involved. The inability to invest, on the other hand, may result from shortages of factors of production and supplies necessary for particular types of capital formation that would be profitable.