capital formation and example in one country in Africa

1. CIVIL
SERVICE
INSTITUTE
DEPARTMENT OF DEVELOPMENT
MANAGEMENT

2. CAPITAL
ACCUMULATION AND
ECONOMIC GROWTH
ECONOMIC DEVELOPMENT

3. GROUPTWO
ASSIGNMENT
COURSE LECTURER : MUBAARIK
DALJIR

4. GROUPTWO MEMBERS
• Khadar Abdi Osman
• Hamda Hussien Adam
• Shafi’i Abdirahman Ismail
• Nasir Mohamed Omer
• Fatha Abdi Mouse
• Samiir Abdiqadir Hassan
• Fahad Mohamed Abdilahi
• Abdirihiim Abdilaahi Adam
• Fahad Mohamed Abdilaahi
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5. CONTENTS
• Introduction
• Relevance of Capital Formation
• Reasons of low rate of capital formation
• Sources of Capital Formation
• Somaliland capital formation
• Reference
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6. INTORDUCTION
capital accumulation is the growth in wealth through investments or profits. The goal is to
grow wealth can include appreciation, rent, capital gains, and interest. And is one of the
building blocks of a capitalist economy. Also refers to the appreciation in the value of the
amount invested in any kind of asset, whether it is tangible or intangible; in other words, it
is the positive difference between the invested value and the value on the date of
calculation. For example, suppose if we have invested an amount of $100,000 in some
shares and on the date of calculation, the value of such shares is $150,000, then the amount
of capital accumulation is $50,000, which is the difference of amount invested and the
amount on the date of calculation.
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7. CONT..
This activity is the foundation of the economic system
of capitalism in which all the economic activities are
planned and prepared around accumulating the
capital. That is to say, all investments are made for
realizing financial profit.
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8. RELEVANCE OF CAPITAL FORMATION
• Increase productivity of various sectors:
capital formation increases the stock of
material and human capital. The productivity
in agriculture, manufacturing and mineral
sector etc. increases.
• Increase in National Income: Capital
formation helps in raising national output
which in turn raises the rate and level of
national income.
• Increase employment: The increased
investment in various sectors of the economy
leads to increase employment opportunities
in a country.
• Break the vicious circle of poverty: it helps
in breaking the vicious circle of poverty in
the LDCs.
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9. • Expansion of market: Capital formation makes it possible to produce
the goods on large scale. As the good of one industry will be the inputs of
other and so on. Thus the size of the market will be extended.
• Control Inflation: Capital formation increases the supply of goods in the
country. It thus helps in controlling inflation and bringing stability in the
economy in the long-run.
• Self-Sufficiency: A country engaged in capital formation will be able to
produce a variety of goods and make the country self- sufficient. This
will reduce a country’s dependence on foreign countries.
• Correct Balance of Trade: Capital formation helps in building import-
substitution industries. The reduced demand of the foreign goods helps in
solving the problems of adverse balance of trade.
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CONT……

10. • Proper Utilization of Natural Resources: The adequate volume
of capital formation makes it possible to utilize the natural
resources of a country to the maximum extent and thus increase
the rate of economic growth rapidly at a higher rate.
• Technological Progress: Technological progress requires higher
rate of capital formation. The technological improvements helps in
getting more output from the same resources.
• Building up of infrastructure: The building up of sound
infrastructure like road, railways, communication system, power
etc. is an vital significance of capital formation which helps in
breaking Vicious Circle of poverty.
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CONT……

11. REASONS OF LOW RATE OF CAPITAL FORMATION
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Reason 1. Low Level of National Income & 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.
Reason 2. Lack in Demand of Capital:
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”.
Reason 3. Lack in Supply of Capital:
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.
Reason 4. 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.

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Reason 5. 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.
Reason 6. 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.
Reason 7. 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.
Reason 8. 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.
CONT…

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Reason 9. Lack of Effective Fiscal Policy:
Lack of effective fiscal policy or financial policy in under-developed countries also retard capital formation to some extent. Burden of
taxation is too much which is out of people’s capacity. This leads to increase in cost price of capitalized goods and not consumption goods
by which exported goods in internal market do not hold in external market in competition to best and cheap goods.
Reason 10. Lack of Investment Incentives:
Still another cause of the low rate of capital formation is the lack of investment incentives in most of the under-developed countries. This
leads to low rate of productivity which, in turn restricts capital formation.
Reason 11. Deficit Financing:
If crosses its limits, it tends to low rate of capital formation. Whenever, deficit financing is made in the country, it leads to rise in prices and
as a result, all commodities become costly. Under this situation, it becomes hard to save as the entire amount is spent. This results in the
saving and low rate of capital formation.
Reason 12. Unequal Distribution of Income and Wealth:
Since there is extreme unequal distribution of income and wealth in most of the under-developed and backward countries which keep the
rate of capital formation relatively low. In fact, it restricts real investment in the economy which greatly effects the capital formation.
Reason 13. Demographic Reasons:
In under-developed countries, the growth rate of population is very high which keeps the rate of capital formation at a low level. It is
because most part of their income is spent on bringing up the additional numbers. Thus, there is little scope of saving and as a result, it
aggravates the growth of capital formation.
CON…

14. SOURCES OF CAPITAL FORMATION
 Voluntary savings by household
and business sectors
 Involuntary saving by transferring
resources from consumers and
producers to government through
taxation.
 Government borrowing
 Use of idle resources
 Deficit financing
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 Foreign Aid
 Restrictions of imports
 Direct Foreign Investment
DOMESTIC SOURCES: EXTERNAL SOURCES:

15. SOMALILAND CAPITAL
FORMATION
The private sector faces significant
constraints when operating Somaliland.
The most serious constrain is the lack of
access to finance, poor infrastructure,
limited human capital and insecure land
rights also constitute major constraints to
private sector growth.
Somaliland’s level of investment is low
when compared to other sub Saharan
economies (figure 1) this is likely due to
combination of firms finding it difficult to
access finance for investment and not been
able to earn high returns whilst operating.
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Soure:Amazon.com

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FIGURE ONE
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Djibouti Ethiopia Rwanda sub saharan Africa somaliland
Gross fixed capital formation (%of GDP)
Source: world development indicator (latest data used) WB Somaliland house hold survey 2013

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Firms of Somaliland are smaller than firms in similar economies around in the world.
The average firm in Somaliland(excluding micro firms) has just 7 workers compared
16 or more in Rwanda and 45+ in Ethiopia. Larger firms are more productive,
innovative and more likely to export.
Most firms in Somaliland are newly are smaller and family owned and operated
family members as workers. To encourage Somaliland firms to grow up they need to
transform their sole-proprietorship status into “partnership or/and corporate entities”
with a bigger working capital by attracting more sizeable investment (local and
foreign).
In the 2012 world bank’s Doing Business Index, Hargeisa was ranked as 174 out of
183 on the ease of doing business. This is worse than the sub Saharan average of 137.
Somaliland ranking may. In fact be on overestimate of how easy it is to do business if
it is easier to do business in the capital than else where in the country.
CONT…

18. • The most commonly cited obstacles to doing business is
accessing Finance. In 2012 Hargeisa ranked as last in the
world for cost and ease of getting credit. When compared to
Subsaharan countries.
• Only 1.4% of firms applied for a loan in 2012. The approval
rate for loans (at 43%) is around half of that Ethiopia and
Rwanda. Due to the dearth of financial institution, many firms
depends on remittance from abroad to gain access finance this
depends on personal connection rather than investment
opportunities. Remittance make up between 35 and 70% of
GDP.
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CONT…

19. REFERENCES
https://www.investopedia.com
The theory of capital Ch10 by F.A.Lutz
https://study.com
NDP II
Seminar on the Programming of Economic Development by
UNDP in 1963 at king’s college London
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20. THANKYOU
GROUP TWO

21. ANY QUESTIONS
DEVELOPMENT MANAGEMENT