The process of building up the necessary stock of capital
equipment requires huge resources for financing it. Either a part of national
income must be saved for the production of capital goods or the necessary
funds for the purpose must be borrowed
from abroad. The various methods of financing economic development, will be
discussed in detail in a separate section . Here we may only emphasize that
domestic saving is a sine qua non of
capital formation. In fact, professor Arthur Lewis has defined the process of
economic growth as one of transforming a country from a 5 percent to a 15
percent saver. But savings though necessary are not sufficient for the purpose
of capital formation, which involves the following three independent
activities:
a) an increase in the volume of real savings so that
resources that would have been used for consumption purposes may be released
for the purpose may be released for the
purpose of capital formation.
b) a finance and credit mechanism, so that the available
resources may be availed of by private of by private investors or government
for capital formation and
c) the act of investment itself , so that
resources are used for the production of capital goods
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