CAUSES OF LOW CAPITAL FORMATION / LOW PER CAPITA INCOME IN PAKISTAN
The main reasons for the low rate of capital formation in Pakistan are as under:-
1. Low Income
The savings are essential for capital
formation and savings depend upon the size of income. Per capita income is low
and the propensity to consume is very high. So the entire income is spent on
consumption. The saving rate is almost 8.4% of the GNP in Pakistan in 2014-15
as compared to 12.9% in 2013-14.
2. Low Productivity
The natural
resources are unutilized, underutilized or miss-utilized due to lack of
skilled labour, technological knowledge, non-availability of capital etc. The
resources owners are unable to save and invest. These
3. Population Growth Rate
The growth rate of the population is
very high i.e. 1.92% in Pakistan. On the other hand, the per capita income is
low. As a. result, the entire income is spent on bringing up the additional
numbers of the population and little is saved for capital formation.
4. Lack of Initiative
The lack of
entrepreneurial ability is another factor responsible for low capital formation
in LDCs like Pakistan. Entrepreneurship is regarded as the focal point in
the process of economic development but the small size of markets, deficiency
of capital, lack of private property, etc. retard enterprise and initiative.
5. Lack of Economic Over Heads
There is a
lack of economic overheads like power, transport and communication, water etc
in Pakistan. The existence of these economic overheads is essential to make
fruitful investment and to encourage enterprise. This process of encouragement
of enterprise leads to the path of capital formation.
6. Lack of
Capital Equipment
The total capital
investments are low in Pakistan due to deficient capital
7. Imperfect Markets
8. Disguised
Unemployment
Nearly 60.8% population of Pakistan has stuck to the agriculture sector. There is of unemployment and
disguised unemployment in Pakistan which has decæased the per capita income.
9. Imports of
Consumer Goods
The less-developed
countries, like Pakistan import consumer goods from developed countries, The
foreign exchange is utilized for importing these Items The less foreign exchange
is saved to import capital goods.
10. Demonstration Effect
Everybody
has a desire to adopt the standard of living of his prosperous neighbours. Similarly,
there is a tendency to adopt the higher consumption standards of advanced
countries. As a result, the rise in incomes is spent on increased expenditure on
conspicuous consumption Thus, savings are negligible, and the rate of capital
formation fails to rise.
11. Hoardings
The people of
less developed countries like Pakistan. spend their income on precious goods,
i.e. ornaments of gold and silver, stones, metals etc. for their prestige and
honour. This type of hoarding retards the saving rate which is a main source of
capital.
12. Unequal Distribution of Income
In Pakistan, there are extreme inequalities in income
distribution which keep the rate of capital formation low. The larger savings
are possible by the higher income groups and they inVest in unproductive
channels
13. Lack of Financial Institutions
Another reason for the low rate of capital formation in
Pakistan is the lack of financial institutions to procure funds for investment.
The capital and stock markets, credit and banking institutions are not properly
developed. As a result, sufficient savings cannot be mobilized for investment
purposes.
14. Deficit Financing
One of the important sources of capital formation is a deficit financing when deficit financing leads to an inflationary situation in the economy, it tends to lower the rate of capital formation.
15. Technological Backwardness
Technological
backwardness also stands in the way of capital formation
16. Increased Taxes
When the government of Pakistan increases the number and rates of taxes as a means of
forced savings, the income of consumers is reduced, Direct taxes reduce income
directly while indirect taxes reduce income by raising prices. Thus savings and
capital formation are retarded.
17. Economic Backwardness
Unskilled labour, factors immobility, limited specialization, ignorance, customs and traditions, social structure etc. are the main components of economic backwardness. These are also responsible for the low rate of capital formation in Pakistan.
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