Introduction

Capital formation is the net capital accumulation for a given country over an accounting period. Thus, it is considered the net accumulation of fixed assets such as equipment, tools, transport assets and electricity during the reporting period for a given country. To raise additional capital, the country must create savings and investments from household savings or based on government policies. Countries with a high rate of household savings can accumulate funds to produce capital goods faster, and the government managing the extra income can invest that income in capital goods. When investors buy stocks and bonds issued by corporations, firms can put capital at risk to increase production and create new innovations for consumers.

According to Bohm Bawerk, capital enables the circulation of methods of production because there is a net gain in productivity resulting from the use of such methods. Rapid capital accumulation can lead to an increase in the supply of tools and machinery per worker. It allows them to use mechanical devices to produce products.

According to some economists, higher population growth is an obstacle to economic development. Therefore, capital is needed to manage population growth. Capital is required to adopt family planning methods and other methods of population control, especially in poor and underdeveloped countries. Another argument is put forward that these countries lack food, shelter and housing, etc. capital is the main requirement for meeting its demand [What is the Role of Capital …].

Why is capital formation important?

Capital formation actually causes more money to circulate around the economy. The accumulation of fixed assets translates into investment and the production of more goods and services, which should increase the population's income and stimulate demand.

Capital formation does not happen by itself. It depends on the income of people living in the country, their savings and spending opportunities. This happens when the population has enough income to save and invest. Capital formation is the main measure of a country's economic health. Increasing production and investment leads to better financial conditions of the population and more spending, which contributes to economic growth. In theory, an economy with high capital formation should continue to grow, reinvesting its earnings to accumulate more–at least as long as inflation is kept at an appropriate level [Capital Formation: Definition …].

Capital is the most important factor of production, especially in a developing economy. Capital formation is defined as the part of the current product and import of the country that is not consumed or exported during the reporting period, but is allocated in addition to its stock of fixed assets [Capital Formation …].

Industry is considered as the leading area of capital formation and economic development. We can achieve economies of scale by applying advanced technology and division of labor and scientific management. Thus, production and employment will increase rapidly. This will lead to economic growth and capital formation.

Poverty and unemployment can be quickly eradicated through rapid industrialization. This happened in industrially developed countries like Japan. Slow growth of the industrial sector is responsible for widespread poverty and mass unemployment. Thus, with the rapid development of the industrial sector, the surplus labor force from the villages can be used in industry.

Industrial development contributes to rapid growth of national and per capita income. The history of economic development of advanced countries shows that there is a close relationship between the level of industrial development and the level of national and per capita income. Poverty and unemployment can be quickly eradicated through rapid industrialization. This happened in industrially developed countries like Japan. Slow growth of the industrial sector is responsible for widespread poverty and mass unemployment. Thus, with the rapid development of the industrial sector, the surplus labor force from the villages can be used in industry.

The Korean War (1950-53) almost completely destroyed the manufacturing facilities and infrastructure of the country's economy. After the war, the partition of the country destroyed the existing industrial infrastructure. In the 1950s, many foreign observers were pessimistic about the development of the Korean economy. Until the early 1960s, the economy was dependent on foreign economic aid and had a per capita income of less than $100, which was below that of many African countries (including Ghana and Kenya). South Korea started the process of economic development in the early 1960s. In 1962, the Korean government adopted a strategy of promoting more exports. The government has strongly supported exporting firms by providing various incentives, including credit allocation and favorable conditions in the tax system. The export financing system has also played an important role in supporting exports. As a result, South Korea's economic growth indicators in the last 30 years have been called an exemplary model of rapid economic development [Robert E. Lucas Jr., 1993].

International experience and example

Caterpillar (CAT) is one of the world's largest manufacturers of construction equipment. It makes equipment that other companies use to create goods and services. Caterpillar (CAT) is a company that raises funds by issuing shares and debt. In the first quarter of 2023, sales and revenue were $15.9 billion, a 17% increase compared to $13.6 billion in the first quarter of 2022. The increase was primarily due to favorable price realization and higher sales volume.

 The World Bank acts as a source of financial and technical assistance to developing countries with the aim of ending extreme poverty through its programs. The World Bank tracks gross capital formation, which it defines as expenditures on additions to fixed assets plus the net change in reserves. Fixed assets include plants, machinery, equipment and buildings used to create goods and services. Stocks include raw materials and goods available for sale. The World Bank measures capital formation by assessing the change in net savings. If the household savings rate increases, savers can make additional investments, buying stocks and bonds. If more households save, the country may report a cash surplus, which is a positive sign for capital formation. The World Bank also reports the amount of a country's central government's outstanding public debt compared to the country's gross domestic product (GDP), which is the sum of all the goods and services the country produces. If the rate of capital formation of a country increases, the country's GDP also increases.

Capital formation in Azerbaijan

In our country, this field is one of the priority directions of the economy. The basis of the development of Azerbaijan's economy, which was founded by the National Leader Heydar Aliyev, was the capital that entered the country thanks to the "Contract of the Century". It is as a result that in January-March 2023, the gross domestic product of 30.3 billion manats or 0.4 percent more than the corresponding period of 2022 was produced by the enterprises, organizations and individual entrepreneurs operating in the country. During this period, the added value produced in the oil and gas sector of the economy decreased by 3.9 percent, and in the non-oil and gas sector, it increased by 4.9 percent. 47.5 percent of added value is industry, 9.0 percent trade; vehicle repair, 5.4 percent in transport and storage, 5.0 percent in construction, 2.6 percent in agriculture, forestry and fishing, 1.9 percent in tourist accommodation and catering, 1.5 percent in information and communication fields, 17.6 percent were produced in other fields. Net taxes on products and imports accounted for 9.5 percent of GDP. GDP per capita was 2991.2 manats. Industrial enterprises and individual entrepreneurs operating in this field produced 18.6 billion manat industrial products in January-March 2023, or 3.2 percent less than in the corresponding period of 2022. Product production in the oil and gas sector decreased by 4.0 percent, and in the non-oil and gas sector, it increased by 4.7 percent [Macroeconomic indicators …].

In January-March 2023, 3,523.1 million manats were allocated to the fixed capital, or 40.3 percent more than in the corresponding period of 2022. The volume of investments in the oil and gas sector increased by 23.8 percent, and the volume of funds directed to the non-oil and gas sector increased by 51.7 percent. 1,941.3 million manats or 55.1 percent of the used funds were spent on production areas, 1,396.5 million manats (39.6 percent) were spent on service areas, and 185.3 million manats (5.3 percent) were spent on the construction of residential houses. 2577.3 million manats or 73.2 percent of the funds directed to the fixed capital were made up of internal funds. 2,517.5 million manats or 71.5 percent of the funds directed to the fixed capital were directly spent on construction works [Macroeconomic indicators …].

Таблица

Макроэкономические индикаторы

Table

Macroeconomic indicators

Source: State Statistics Committee of the Republic of Azerbaijan