Determinants of capital accumulation.
The country's rate of capital formation is influenced by a number of socio-economic and political factors.
- Technology:- A higher and more advanced technology implies a higher rate of capital formation. High technology enables the creation of capital goods hence capital formation. LDCs have low technology levels which limits their rate of capital accumulation.
- Labour productivity:- When labor is skilled and highly productive, the rate of capital accumulation s high: countries with low labour productivity like Uganda, therefore have low rates of capital formation.
- Existing stock of capital:- capital is used to create more capital. Therefore a higher stock of already existing capital would mean the creation of more capital hence a higher rate of capital formation. Low existing stock of capital hinders capital formation in developing countries like Uganda.
- The level of employment:- When many people are employed in the country, incomes are earned and saved hence facilitating capital accumulation. High unemployment levels as in the case of developing countries has limited the rate of capital formation.
- Savings:- When savings are high in a country, the level of investment is bound to be high hence capital accumulation. But low savings levels brought about by low incomes hinder capital formation.
- Profit level:- High profit level enables individuals and groups of individuals to reinvest there by increasing on the stock of capital. Low profit levels in less developed countries (LDCs) are responsible for low capital formation in these countries.
- Wage rate. The higher the wage rate paid to labour, the higher the rate of capital accumulation by workers. Low wage rates hinder the process of capital accumulation as is the case for countries like Uganda.
- Government policy:- This may encourage or discourage investment which affects the process of capital accumulation. Conducive government policy aimed at promoting investment through subsidies, tax holidays and favorable investment laws lead to high capital accumulation.
- Political climate;- Political instability discourages both local and foreign investors and leads to destruction of capital assets which hinders the process of capital accumulation. This has been the case for developing countries like Uganda. Political stability encourages and promotes investment hence a high rate of capital formation.
- Cultural attitudes:- Conservatism or resistance to change in most developing countries has been responsible for their low capital accumulation. Traditional beliefs and customs could hinder adoption of modern changes which accelerates capital formation.