Insufficient Financial Resources and Deficiency Of Capital

Insufficient Financial Resources and Deficiency Of Capital

The financial sector and its role in the process of economic development has attracted notable attention since the early 1990s. In particular, the crucial need for a stable banking system was highlighted in the wake of the Asian financial crisis of the late 1990s. The rapid influx of short-term, speculative capital flows to Asian economies was a major contributing factor to the crisis. States with stronger domestic financial sectors and particularly robust banks, however, better absorbed the ripple effects of the external shock. Increasing the openness of financial markets via liberalization may not be positively related to economic growth unless banks are stable and sophisticated enough to absorb international investment, competition, and negative shocks.

Development of a nation without the availability of adequate capital either in the form of physical capital or in the form of human capital is not possible. The higher the rate of capital formation (physical as well as human), the faster is the pace of economic growth. On the other hand, deficiency of capital has been the primary cause of underdevelopment in the third world economies

Main reasons for low rate of capital formation in an economy

# Low Level of National Income and Per Capita Income:

The root cause of capital deficiency in under-developed countries is low level of real national and per capita income which limits to the motives of savings and investments.

Due to lack of desired investments, capital formation has no increase. Hence, due to low production, there is low national and per capita income and, in turn, this forces to low capital formation.

This situation tends to perpetuate itself and the poor countries continue to be poor. The low rate of capital formation is a partial link in a vicious circle in such countries. Unless, the vicious circle of poverty is broken, the rate of capital formation cannot be raised.

# Lack in Demand of Capital:

Another cause of low rate of capital formation in under-developed countries in lack of demand of capital. In the words of Prof. Nurkse, “Low productivity in under-developed countries, people have low real income and, thus, purchasing power is low and so due to low demand, investment has effect which again reduces national income and productivity and rate of capital formation remains low”.

# Lack in Supply of Capital:

Like demand of capital, lack of supply of capital is responsible for low capital formation. However, due to lack of necessary supply of capital in under-developed countries, the process of capital formation is not boosted up. As a result, capital formation remains at low level. Therefore, in the opinion of Prof. Nurkse, Due to low rate of real income per capita in under-developed countries, there is low saving capability, hence, there is less capital. Due to lack of capital, there cannot be established basic business and industries so the production falls down.

# Small Size of Market:

Due to small size of domestic market, investment is not encouraged in poor countries. It does not expand the work of economic development and modern machines cannot be used as extra quantity produced has no market access.

# Lack of Economic and Social Overheads:

Basic overheads like roads, buildings, communication, education, water, health etc. are generally lacked in under-developed countries which react as improper atmosphere for the capital formation and slow process of capital formation.

# Lack of Skilled Entrepreneurs:

Able and efficient entrepreneurs are not available in under-developed countries. It is the only reason for low rate of capital formation. Due to absence of risk-taking entrepreneurs, establishment of industries and expansion is quite limited and industrial diversification is not carried out and no balanced development of economy is possible.

# Immobility of Savings:

Immobility of saving also causes low rate of capital formation. Due to lack of banking and other credit institutions, poor countries have limited financial activities. Whatever, these financial institutions exist, they are of small size and unable to collect the savings from distant places, thus, resulting in no enthusiasm to savings in a society. This creates the problem of hoarding and saving is used for non­-productive purposes.

# Backwardness of Technology:

Under-developed countries also face the problem of technical knowledge. Production is carried on old and less productive techniques. As a result, these countries have low productivity and per capita production and income’s low quantity, lowers the standard of the rate of capital formation.

# Demonstration Effect:

Demonstration effect also stands in the path of capital formation. Prof. Nurkse has cited the reason of low rate of capital formation, “due to demonstration patterns of people come into contact with best goods