Lack of capital development

Incidence

Local savings in developing countries are often badly invested in terms of the facilitating of further economic growth. The shortage of long-term financing not only undermines capital formation but also shortens the time horizon of investors, and tends to direct funds into short-term speculative investments with quick pay-offs. An excessive preference for purchasing land leads only to its over-valuation. Over-investment in buildings in metropolitan cities is a feature of some developing countries, especially during inflation. Larger enterprises often merely reinvest in the extension of their own concerns where more diffused investment through the economy would bring larger returns to the economy as a whole. Lax monetary policies, high inflation and negative interest rates have helped to perpetuate this situation in some developing countries. Besides, the capacity to save, particularly in the case of debtor countries, has been impaired by the adjustment policies adopted in response to external imbalances.

Claim

Research findings and practical experience accumulated over the years have caused many writers to question the central role assigned to capital accumulation. Referring to the historical experience of developed countries of widely varying institutional conditions and political systems in the nineteenth and twentieth centuries, they have observed that development has been the result of a combination of political, social and economic changes which have interacted to produce further changes. Such factors as institutional changes, technological progress, population growth and migration, a heightened spirit of enterprise, improvements in the quantity and quality of the labour force, and the widening of markets, have all played a part, along with capital formation, in promoting development. Some writers have even seen capital accumulation as more a consequence than a cause of development.