Capital Accumulation Issues - Coursework Example

Capital Accumulation Introduction: In pristine terms, capital accumulation refers to the creation of wealth by nations. This formation of wealth is generated through productive use of assets, for which investments are made, and which may used, either for consumption purposes, or for generating further assets value. Despite Marxist theories identifying capital accumulation as bourgeoisie and amassing of wealth by capitalists as anti-people, by way of subjugating poor and oppressed masses, it is an undeniable fact that this predominant concept of modern day business has acquired added status and significance in the 21st Century, when globalisation and e-commerce-induced technological advancement have rendered corporate existence and future growth subservient on marketing competitive advantages and better skills in a rapidly changing global business environment. There are several factors that could determine a country’s economic progression. It could be as diverse aspects as the availability of roads and infra-structural facilities as the quality of education and the significant technological prowess the country is able to wield in the comity of nations. Various methods of capital accumulation: The accumulation of capital could be done in a variety of ways which could be identified as follows: By making large scale savings by ensuring that the consumption is less than earnings and thus surplus funds are generated. By making investments by compounded interest methods Making concrete means of the productions and financial investments being made through use of funds The accumulation of human capital resources through use of man power for generating and accumulating wealth. By making investments produce wealth through generation and regenerating of resources Resorting to Foreign Direct investments and equity participation of foreign governments or public/ private agencies in investments of government and/or private sectors and also capital repatriation from NRI’s Determination of growth rate through Harrod-Domar Model: In the context of capital accumulation, the Harrod-Domar Model assumes significance since it is a determinant of the growth rate G. If Y could be represented as GDP and S=Savings, then the growth of savings is determined by GDP-S=SY. Next, the level of capital K in order to produce output Y is symbolized by equation K =σy where σ= capital – output ratio. (Theoretical Models of economic growth). The Investments represented by I is an important determinant for the produce as well as increase in capital. Thus, ∆K = σ∆Y. Thus, it could be said that for the equilibrium point to be reached, a consensus needs to be made between demand and supply of a country’s produce. Hence I = S. I = ∆K= σ∆Y, and I = S, therefore, σ∆Y= sY, Therefore the equilibrium rate of growth g is given by g =∆Y/Y = s/σ (Theoretical Models of economic growth). This model is important since the equilibrium growth rate of the output = Ratio of the marginal propensity to save and the capital=output ratio. How the economy is growing is based on the growth of the capacity of the economy to produce as compared with the demand of the produce of the state. By putting to use this example, it is proposed to take a hypothetical instance of capacity production level at 1000/year and a capital-output ratio of 3. Therefore capital stock is 3000. If, in this hypothetical instance, the marginal propensity to consume out of the Gross Domestic Product (GDP) is 0.7, then the marginal propensity to save is 0.3, which is inclusive of all types of savings. The equilibrium growth rate = propensity to save/capital output ratio, and in this case, it would be 0.3/3 or 10% annual growth rate. Now applying the current GDP of 1000 level of savings = 1000x.3= 300. Similarly the growth rate is 0.1x1000 = 100. And finally, the capital output ratio for the additional capital = 3x100= 300. Thus, the position in this hypothetical case is safe in that the level of increased investments matches the available savings of 300. In other words the increased level of savings is quite capable of meeting the increased investment requirements. (Theoretical Models of economic growth). But often, in empirical situations it is found that the increased levels of savings may not be sufficient to encourage increased investments and recourse needs to be taken to extragenous means in order to reach targets and objectives through application of capital accumulation. Methods of quantifying capital accumulation: It is next proposed to consider the various methods of assessing or quantifying the accumulation of capital that could be summarized as follows: 1. Company financial statements and balance sheets in which complete assets are depicted according to the requirements of bodies of governing International Accounting Standards. 2. Data collected from governmental tax sources relating to accumulation of assets made by individuals, firms, joint stock companies and giant conglomerates having multiplicity of business interests 3. Government statistical agencies, government public accounting bodies and institutions. 4. National and international accounting bodies. The macro-economic theory adopts a holistic approach and considers the aspects of the entire national economics. In this case, the capital accumulation would refer to the ways and means by which nations would be willing and desirous of gaining capital accumulation and conduct independent research for putting it into most optimum utilization for overall national gains. How capital inflows impact upon countries: In certain case, it is seen that developed and developing countries in today’s economic scenario are heavily dependent upon external financial sustenance and direct investments for economic gains and implementation of development programmes. In fact, the inflow of FDI and capital inflows have assumed favourable propositions even when compared to exports and it would not be wrong to say that in several economies, capital accumulation in the form of capital inflows, in terms of labour, funds and technology has often substituted for trade development and expansions programs.” The magnitude and volatility of capital flows from industrial countries can therefore have a significant influence on developing country investment and output.” (International Linkages: Three perspectives. P.85). Moreover, it is seen that the effect of high doses of capital inflows could also affect the other developing countries in the region and could cause regional economic imbalances, especially when such countries are trading partners. Coming to the aspects of poor and underdeveloped countries, it is seen that these countries, especially in the sub Suburban African belt are heavily dependent on aid and relief from richer and developed economies. In such cases the sustenance of local economies are based on meager export earnings and agriculture produce which may not be representative of the total capital inflows. The Chinese experience – a case study: “A country that was among the poorest in the world three decades ago with only $175 per capita income in 1978 (measured in 2000 dollars) is now a thriving middle income country with a per capita income of more than $2000, and one that is growing with more than 10 percent per year. (Hofman & Kuijs 2007). It is seen that in the Chinese context, their growth rate has been phenomenal and truly amazing in the context of its economic conditions, even three decades ago. Their unsurpassed GDP growth has been based on exports and capital accumulation and the best use of resources, including human capital. But there are several concerns that are concomitant with high growth rates in terms of growing income disparities between the rich and poor, inflationary trends and more weightage and importance given to SOE (State Owned Enterprises) who are, in some cases less efficient and productive than private firms. (Dollar & Wei 2007). Although the SOE’s are less efficient and profitable than private, they account for a sizeable chuck of investments and compose nearly 1/3 of the manufacturing units available in the country. Further, China has several deficiencies in its State owned enterprises in terms of administrative malfunctioning and inadequacies, political interventions and lack of suitable compensation packages that could attract and retain talented professionals in various areas. Its entry to the WTO in 2001 has ensured that China’s exports and domestic economy gets the necessary fillips, though late. All these developments have come with the price of higher pollution and potentially environmentally hazardous conditions. (Dollar & Wei 2007). From the above chart it is quite evident that China’s investments: GDP ratio has been quite outstanding growing from around 34% in 1995 to around 40% in 2005. The other countries in the region has not been able to keep pace with this phenomenal growth figures, considering the fact that China had opened up its economy to globalization only in the recent past. “China opened up its economy, changing from a virtually closed economy to one where trade (exports plus imports) makes up more than 60 percent of GDP, which is exceptionally high for a country the size of China.” (Hofman & Kuijs 2007). The key factor has been the human capital and work culture. But concerns have been raised about the quality and performance of its SOE’s. They are flush with funds received from the major banks and have not considered profitability or ROI as high in their priority. From the table below it is quite evident that nearly 54% of the total banking in China is in the hands of just four banks who need to provide more funds to private sector if these growth figures are to be perpetually maintained and enhanced in the future years also. In other words, capital accumulation in China needs to divert necessary funds for private and non-govt. sectors. (Dollar & Wei 2007). Conclusions: It may be concluded that what is understood to be the main drivers that promote the economic growth of countries has been diagnosed. The growth rate of the real-per capital income GDP has been increased by legal compliances, reduced government spending, better health and educational facilities, robust birth control measures and better trade. (Dawson 1998). Bibliography DAWSON, John W (1998). "Review of Robert J. Barro, Determinants of Economic Growth: A Cross-Country Empirical Study. [online]. EH.Net Economic History Services. Last accessed 22 February 2008 at: http://eh.net/bookreviews/library/0102 DOLLAR, David & WEI, Shang-Jin (2007). Underutilized Capital. [online]. International Monetary Fund. Vol (44) 2. Last accessed 22 February 2008 at: http://www.imf.org/external/pubs/ft/fandd/2007/06/dollar.htm HOFMAN, Bert & KUIJS, Loius (2007). Rebalancing China’s Growth. Last accessed 22 February 2008 at: http://www.petersoninstitute.org/publications/papers/hofman1007.pdf International Linkages: Three perspectives. The Financial Channel: Box 2:2: Channels of Business Cycle Transmission to Developing Countries. P.85. Last accessed 22 February 2008 at: http://www.imf.org/external/Pubs/FT/weo/2001/02/pdf/chapter2.pdf Theoretical Models of economic growth. The Harrod-Domar Growth Model. [online]. San Jose State University Department of Economics. Last accessed 22 February 2008 at: http://www.sjsu.edu/faculty/watkins/growthmodels.htm Read More