Capital goods are the intermediary goods that are used in the production of final goods, and are a key to turning a developing country into a developed one. In simple terms capital goods are the tools, technology, skills, roads, transmission lines, electricity, infrastructure, tables, pens, and even the savings that are available for future use. Capital itself is the valuation of those capital goods in terms of a currency such as dollars. The way to get a country to reach the status of a developed country is to accelerate the creation of these capital goods in it. Constraints on investments retard the growth of this creation of capital goods. In the absence of foreign funding, the savings of the locals become the only source of capital. This means that there has to be sufficient savings locally, which can only be built by holding back the consumption by a huge segment of the country, before capital goods creation picks up pace.
A relative degree of freedom of investments directly correlates with the rate of development of a country. Whether the funding for these comes from internal or external sources is immaterial. Strangely enough, whether the enterprises that create these capital goods are locally owned, foreign owned or a mix is also immaterial, although privately owned enterprises in comparison are a magnitude more efficient than public enterprises. What’s important to note is that once these capital goods come into existence the ability to create higher order capital goods increases exponentially. What happens is that as availability of lower order goods helps create the ability to build higher order goods.
If a country first starts making wires, and some circuitry, it can in time acquire the ability to make semi-conductor chips, avionic devices, robotics, nanotechnology, and so on and so forth to goods requiring higher and higher sophistication. This also spurs other capital goods such as the software industry that helps in controlling the hardware. These are just a few examples, other examples would be purification techniques for water, or methods to achieve greater yield for crops, and a host of other products that are in demand by the consumers.
China now is forcing the issue upon Pakistan by agreeing to invest over $500 billion in projects. This of course is a very positive step for the development of Pakistan. Notice though the artificial barriers to foreign capital investment by the government that China had them whip away in a day.
“The zone, he said, incorporated numerous relaxations in different sectors, under the FTZ’s new capital registration system, foreign investors were no longer required to contribute 15 percent capital within three months and full capital within two years of the establishment of a foreign invested enterprise (FIE). “
There were rules and regulations preventing and restricting capital from coming or leaving the country freely. Higher taxes and greater bureaucratic process also discourages foreign and even local capital investments. These are the kinds of unnecessary rules and regulations that need to be removed for freer commerce.
Unless those with capital, internal or external don’t put their funds in (for their own profits of course) the rate of development of this country will stay under par. People don’t realize how truly amazing this ability to get foreign capital is. Only three or so hundred years ago it was unheard of people from one country investing in another. David Ricardo wrote his book On the Principles of Political Economy and Taxation in 1817 and he simply assumed the fact that there was no capital investments abroad.
With the new global world, if a country is free enough and with minimal restrictions, capital can come in and develop it at a rate previously considered preposterous. The problem is the government and those few in power who are in charge of making decision. The tendency in Pakistan has been to stifle this pouring in of funds in the name of developing local industries and protecting infant industries. This practice ends up creating harmful cartels in the country that are in control of the resources and are tough to destroy.
As we now know, the capital goods formation no matter where it comes from is the driving force behind development and growth. We can also see how the protectionist policies of the government restrict formation of new capital goods. Reliance on local funding becomes the main source and as a result the opportunity to leapfrog the country to the status of a developed country is significantly diminished. The local populace in the process also ends up paying higher prices for the same goods as cartels have little competition due to government protection.
Not all goods and enterprises made locally are of lower standard of course, but precisely because of this reason these industries don’t need protection. These are the local enterprises that can expand globally without support.
In the absence of foreign capital the development and growth in Pakistan would be extremely slow. It would take decades or centuries in an attempt to catch up with the developed countries while these countries further developed.
The only advantage of not being a developed country is that not much experimentation is needed in identifying methods that failed. Those innovations and technologies that don’t pan out can be avoided simply because of the experience gained by observing their failures in the developed countries. This does allow a developing country to get close to catching up with a developed country at a faster rate.
Capital, although a great help in moving a country along an expansionary path, is unfortunately not sufficient in itself. There is something else that’s even more important than the capital and it is the ideals and mentality of the free unhindered markets. This spirit of the free enterprise is based on the Respect for Property and the Rule of Law. Without these two essential ingredients in ample supply the journey becomes quite tenuous. To become rich and prosperous the people of Pakistan will have to embrace the respect for property and the rule of law as their guiding lights before any real progress with a faster accumulation of capital goods can become a reality.