FACTORS RESPONSIBLE FOR GROWTH OF CAPITAL

FACTORS RESPONSIBLE FOR GROWTH OF CAPITAL

FORMATION OR ACCUMULATION Of" CAPITAL

Capital is a produced means and it comes into existence when wealth is used for further production. It means that formation of capital depends upon the quantity of wealth, made available for further production. Availability of wealth for such a purpose, however, depends upon saving (that portion of wealth which is not consumed). In other words, capital formation or accumulation, in a country, is directly related to the size of saving, the people have. It may be noted here that J.S. Mill also considers capital as a product of saving. According to him "since all capital is the product of saving, that is, of abstinence from present consumption for the sake of a future good, the increase of capital must depend upon two things the amount of fund from which saving can be made and the strength of its disposition which promot to it".1 This clearly indicates that the formation of capital in a country depends upon (1) the ability of the people to save and invest, and (2) the willingness of the people to save and invest. The word invest means to use the saving for further education or to use it for earning an income.

ABILITY TO SAVE AND INVEST

Ability to save and invest of the people depends upon the excess of income over expenditure. Taking the people as a whole it can be said that the ability to save and invest of a nation is determined by excess of production over consumption. In case, production is just equal to consumption, there will be no saving.

Ability of people to save especially in under-developed countries including that of Pakistan is low because of the fact that the income of the majority of the people is low and they cannot have a surplus of income over expenditure. Only a small percentage of people have a surplus income to be calla ban^ saving. Saving, therefore, is made available by them for accumulation or formation of capital in the country. As a result, rate of capital formation is very low in such countries. It can be raised by increasing the production and economizing consumption.

WILLINGNESS TO SAVE AND INVEST

Willingness to save and invest of the people are influenced by two sets of considerations, namely, the subjective considerations or personal factors and the objective considerations.


Subjective considerations include the factors which are associated with the individuals who save. They include the following :-

Foresightedness.
Social and political considerations.
Economic considerations.
Temperamental considerations.

Foresightedness:- People save a certain portion of their income by way of foresightedness. They save for rainy days or to meet social obligations like education and marriages of their children in later part of their life. They also save to cover the period of their old age when their earning capacity is reduced to the point of nullity.

Social and political considerations refer to the fact that people save in order to have a prestige in the eyes of others. A wealthy man is respected in the society and, therefore, people save to become a wealthy person and hay the social prestige. Further, a wealthy man is always in a position to have say in the political circle and, therefore, people save to become a wealth person so as to have a place in the political field of the country.

Economic considerations refer to the idea of receiving income from savings. People save to make further earning. They deposit their savings in the bank and earn interest. They purchase stocks and shares and earn dividends. By using their savings in the above manners they are in a position to cam an income on their savings. Entrepreneurs make saving in order to use it for expansion of their undertakings or to cover the gap between receipts and expenditures in the course of their business.

Temperamental considerations refer to the fact that there are people 10 are saving minded and they make saving as a matter of habit. They save a certain portion of their income without any motive behind it.

However, it may be very clearly noted that the above factors have their influence only when the income of the people is of reasonable size. In case, size of income is very small the subjective factors have little influence on size of saving. For instance, in Pakistan and other under-developed countries, income per capita is very low and the people have no opportunity to have a surplus after meeting their ordinary expenses. The subjective factors, therefore, are ineffective in such countries.



OBJECTIVE CONSIDERATIONS

There are certain considerations which are not personal or in which the personality of the individual is not involved. They are called objectives considerations and include the conditions which create a favourable climate for saving. They are the following :-

1. Peace and tranquility.
2. Security.
3. Adequate return on investment.
4. Existence of an organised money-market.

5. Fiscal Policy of the government.

1. Peace and tranquility influence the willingness of people to save and invest. In case, there exist social or political disturbances, future becomes uncertain and as such, people have no incentive to save and invest. When peace and tranquility prevail in a country, the economic activities go in a normal way and people have faith in future. They feel that their saving will be adequately rewarded and their investment will bring a reasonable gain They, therefore, have incentive for saving and investment. Contrary to it, the incentive for saving disappears, when peace is disturbed and future becomes insecure.

2. Security is another consideration which motivates saving and investment. If lawlessness prevails in the country, property and life of the people are endangered and people in such a situation, have no incentive to save because they are afraid of being exposed to danger of theft, robbery and murder. However, if there exist institutions like banks which provide security to the saving, people will continue to make saving even lawlessness prevails in the country.

3. Adequate return to investment also plays an important role in providing incentive for saving. When investment opportunities are there and such opportunities yield adequate returns saving is encouraged and its size rises. Opposite happens, when the investment does not bring adequate returns

However, people also save for reaons other than investment such as to provide for emergency or old age and to meet the social obligations in later part of their life. Saving will be there even the rate of returns (the rate of interest) is negligible. But this cannot be denied that the size of saving, even in such conditions fluctuates with the rate of interest. Higher the rate of interest, smaller is the size of saving. In case, saving is made purely for obtaining an income, the size of saving will rise with the rate of interest and it will diminish as the rate of interest falls.



Further, entrepreneurs, when the rate of interest rises, increase the rate of their saving to meet capital requirements of their enterprises from their own resources rather than borrow from the market. As a result, when the rate of interest rises, business sector increases the size of saving. When the rate of interest falls their size of saving diminishes so as to maintain a higher level of working capital and obtain a profit higher than the rate of interest. In such a situation they prefer the borrowed capital for the expansion of their business.

4. Existence of an organised money-market also influences the willingness of the people to save and invest. Money market consists of banks. Insurance Companies, Stock Exchanges, etc. Presence of these institutions provides a market for saving. People save money and deposit it into banks and earn income in shape of interest besides having transactional facilities. Insurance companies provide protection against financial risks and, therefore, people purchase insurance policies and pay premiums. Money collected by Insurance Companies by way of premiums is invested and capital formation takes place. Similarly, Stock Exchange which transacts in shares and securities, provides opportunities to the people to use their saving for acquiring shares and securities which give them income in the shape of dividends or interest. The amount of saving collected through shares and securities are used for productive purposes and as such, capital formation takes place.