National Capital Formation

How and Why is National Capital Formation Important?

To get a better understanding of how National Capital Formation works and why it is important, we only have to think of Japan and Germany after World War II.  The economies of these two countries were in ruins, and within 30 years both of them emerged as superpowers.  In fact, even Taiwan and Hong Kong are in great shape (even though they were once part of China). Capital formation is important and has to be managed well.

How to make the distinction?

There are distinct sets of economies – developing, emerging and less developed countries (LDC).  Developed countries have invested their capital well and have the necessary infrastructure and human capital in place to function efficiently. Developing countries are soliciting and receiving capital to develop and update their infrastructure and offer goods and services needed by other countries.  LDCs lag behind as they are unable to come up with enough capital to plough back into their economies.  The distinction is also made on the basis of income levels per capita.

What Role does Capital play in Economic Growth and Development?

Let us first define the terms.

  • Economic Growth is what happens when there is an increase in national income or product generally broken down further and expressed as per capita income. National income is then aggregated further and expressed as Gross National Product.  When GNP rises, it is referred to as Economic Growth.
  • Economic Development means much more.  Some countries have a single product which is in great demand (like oil) and they are able to generate a lot of income which in turn leads to increased per capita income.  Genuine economic development takes place when the overall economy is developed in tandem with education and other services.  People have to participate in the development process to bring about fundamental change in the economic structure of a country.

This can be achieved with foreign involvement – economic growth should confer benefits on a wide cross section of society and not just a few individuals.  Capital requirements can be organized from within the economy and also from outside investments.  Once there is enough evidence that a country is capable of utilizing resources well, other sources for investment are made available to let an economy realize its potential.