Capital Formation in Underdeveloped Countries.

In the rapidly growing volume of literature on the problems and prospects for economic development, considerable attention is being devoted to the determinants of net capital formation or, more particularly, to the obstacles to and limitations upon capital formation in underdeveloped countries. Explanations of capital deficiency are commonly organized in terms of two separate sets of forces: factors accounting for low saving propensities, on the one hand, and those responsible for weakness in the inducement to invest, on the other. The most obvious explanation for low rates of capital formation is the present poverty of underdeveloped countries. Their capacity to undertake productive investment appears to be sharply limited by the very low levels of per capita income combined with the frequently extravagant expenditure patterns of the rich and an interest, among virtually all income classes, in the acquisition of certain kinds of durable consumer goods. The preoccupation with the low level of domestic saving in underdeveloped areas as an independent determinant of low rates of capital formation creates a host of difficulties in attempting to move from the micro to the macroeconomic level of analysis.