Causes of Low Capital Formation and Accumulation in West African countries

Causes of Low Capital Formation and Accumulation in West African countries are discussed in this article. We hope you find it informative.

Reasons why national income is low in West African countries

Meaning of Capital Formation or Accumulation

Causes of Low Capital Formation and Accumulation in West African countries
Causes of Low Capital Formation – Photo Source:

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Capital formation or capital accumulation is the system of increasing the stock of real capital of a country. Simply put, it is a situation in which the net investment in the form of fixed assets is drastically increased.

In order for a country to have the capacity to accumulate more capital, there has to be an increase in savings and a great reduction in the rate of consumption of the consumer goods made available in the country. The rate of economic development of any country directly has to do with the rate of the formation of capital.

In countries like Britain, Japan, and the United States of America which have been more advanced, stocks of capital are high because of the high rate of capital formation meanwhile in many other countries of the world which are still yet to be developed especially African countries, there is a low rate of capital accumulation as a result of low per capita income and low savings, which ultimately results in what is usually called the vicious circle of poverty.

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Causes of Low Capital Formation in West African Countries

A lot of factors come to play in the causes of low capital formation in West African countries and some of them include:

1. Existence of a vicious circle of poverty

Because the low income exists, it results in meager savings, which in turn brings about a shortage of capital for investment, leading to low investment.

Low investment, in turn, leads to low output and eventually leads to low income. The low-income results again in low savings and the vicious circle continues without a break.

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2. Wasteful Expenditure

A lot of governments in West African countries are engaged in exuberance expenditure which is not necessary, these expenditure ends up affecting the economy of the country negatively without leaving any positive impact on the well-being of the nation. This action ultimately results in another terrible situation where the government lacks capital for meaningful investments.

3. Inequitable distribution of income

In many West African countries, the gap between the rich and the poor is so thick that only a few individuals are rich while the majority are poor.

And to make matters worse, in these countries, the few rich ones spend their money on prestigious projects which are non-productive and nonbeneficial to the general populace and these generally give rise to low capital formation.

4. Higher propensity to consume

In many West African countries, the urge to spend by people is higher than the desire to save. There is a high taste for imported goods, e.g. cars, television, rice, and clothing materials. This high propensity to consume results in low savings and investment.

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5. Low savings

Many working-class people in West Africa do not have the habit of saving and are usually poor. This sometimes is a result of their low income which is not even enough to cater to their immediate needs, This ultimately brings a negative effect on capital formation.

Frankly analyzing these situations and looking into them and many more, the problems of low capital formation can be solved When these challenges are looked into by the various governments of West African countries and the solution is proffered.

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