Share your thoughts: If Capital Accumulation is key to Growth, How then can Developing Nations grow?
Development has often been associated with an increase in a country’s production of goods and services (Gross Domestic Product) along with improvement in human living conditions. Some Economists termed this as “growth with improvement in living standards”.
Over time, Economists and theorists have connected the ability of a country to grow to its ability to accumulate capital and reallocate resources from extractive activities to manufacturing, led by Charles Cobb and Paul Douglas in the ’40s. In developing societies, however, high capital accumulation is impossible due to the high rate of poverty which limits their ability to save, over-dependence on their resource endowments (economic activities mostly extractive with little to no value addition), as well as fragility due to internal crisis arising from resource control conflicts which further makes developing nations less attractive for investment.
Development in resource-endowed societies, like nations in Sub-Saharan Africa, is slowed due to the trap of low capital accumulation resulting from the low level of savings because of the high rate of poverty. The low level of investment in these nations can be attributed to the low level of savings and a weak manufacturing sector, they depend on gains from raw exports of their resource endowment with little to no value addition. As a result of this, growth in these societies is majorly led by the government, contributing over 60–70% of the GDP through government expenditures in life with the Keynesian school of thought.
Unfortunately, state-led growth in these societies is also tied to their earning capability from taxes, sale of resources, and capital receipts (loans and grants). However, due to the low level of investment and high poverty rates, earnings from taxes are little, reducing the fiscal space of governments to earnings from crude resource sales, loans, and grants. This dependence on factor endowment with little to no industrial base trap these nations in the ‘Resource Curse’ quagmire. In addition, corruption and weak governance systems further incapacitate these societies’ ability to navigate these challenges and grow at a faster pace.
If developing nations, therefore, need to accumulate capital to expand their industrial base and grow, what are the options for them? How can they accumulate the necessary capital to engender their growth and development considering their peculiarities as stated above?
I’d love your comments and contributions. Thank you.
