LDCs AND CAPITAL ACCUMULATION...how possible when poverty is rife among youths?

Introduction
Many third world countries have been characterized by poor standard of living of their people and all their efforts are being directed at improving the well being of these people. Standard of living refers to the quality and quantity of goods and services available to people, and the way these goods and services are distributed within a population. It is generally measured by standards such as real (i.e. inflation adjusted) income per person and poverty rate. Other measures such as access and quality of health care, income growth inequality, educational standards. Examples are access to certain goods (such as number of refrigerators per 1000 people), or measures of health such as life desires. It is the ease by which people living in a time or place are able to satisfy their wants.

The purpose of this essay is to explain and give examples of some of the economic concepts which can be translated into economic policies and programmes in order to improve living conditions in the republic of lamafrasia, one of the developing countries whose people are living in poverty. The essay will also strive to explain how these concepts will be put into practice and improve peoples’ well being. It is also worth noting that Lamafrasia recently voted into power a new president, Bata, H. Tanda, who vowed to deal with various economic problems which have characterized the republic of Lamafrasia.
The president stated that he will ensure that there is capital accumulation in the country, diversify the economy and broaden the export base, ensure a favourable balance of payments, pursue a disciplined fiscal policy and ensure growth of the Gross Domestic Product.
Capital Accumulation
Capital Accumulation refers to increasing a country’s stock of capital (net investment in fixed assets) to increase the production of capital goods which necessitate the production of consumer goods (Todaro, 2003:823). Capital can be generally defined as assets invested with the expectation that their value will increase, usually because there is the expectation of profit, rent, interest, royalties, capital gain or some other kind of return.

The definition of capital accumulation is subject to controversy and ambiguities, because it could refer to a net addition to existing wealth, or to a redistribution of wealth. If more wealth is produced than there was before, a society becomes richer; the total stock of wealth increases. But if some accumulate capital only at the expense of others, wealth is merely shifted from A to B. Most often, capital accumulation involves both a net addition and a redistribution of wealth, which may raise the question of who really benefits from it most.
In economics, accounting and Marxian economics, capital accumulation is often equated with investment of profit income, especially in real capital goods. The concentration and centralisation of capital are two of the results of such accumulation. But capital accumulation can refer variously to working and consuming less than earned (saving or accumulating the residual) relying on the effects of compound interest to increase initial capital real investment in tangible means of production.

The president of Lamafrasia would ensure capital accumulation by reducing expenditure in social sectors such as health and water and sanitation so that more funds are saved for investment in machinery. As such, newly acquired machinery, coupled with improved human capital would bring positive developmental effects to areas such as the mining sector which will eventually create employment ,higher incomes and improved standard of living of the people of Lamafrasia.The labour force will be engaged in the production process to create value of the production by adding man power to the machinery and raw materials which will therefore make a constant capital of the investment project and increase production(Langdon,1999:50).

The other policy which the president of Lamafrasia should introduce is to deliberately provide loans to small and medium scale entrepreneurs so that they acquire more machinery. For example, if small scale farmers are given loans to buy equipment such as ploughs and irrigation pumps, coupled with endowed water and forestry land in lamafrasia, will increase production and more profits will be amassed. This profit will be saved and reinvested .As such, the majority of the people in Lamafrasia will have enough to eat.
An increase in production would mean more profit or surplus which will be the excess over the cost of the constant capital and variable capital within a given period of the investment’s life.
Following the Harrod-Domar model, the savings ratio (s) and the capital coefficient (k) are regarded as critical factors for accumulation and growth, assuming that all saving is used to finance fixed investment. The rate of growth of the real stock of fixed capital (K) is:
Where Y is the real national income. If the capital-output ratio or capital coefficient () is constant, the rate of growth of Y is equal to the rate of growth of K. This is determined by s (the ratio of net fixed investment or saving to Y) and k.
A country might for example save and invest 12% of its national income, and then if the capital coefficient is 4:1 (i.e. $4 billion must be invested to increase the national income by 1 billion) the rate of growth of the national income might be 3% annually (Ibid: 51).
Therefore, if Lamafrasia will be improving economically, then the living conditions of its people will improve as they will have access to good health facilities, clean and safe drinking water, enough food to eat as well as good education facilities.

Favorable balance of payment
Balance of payments can be defined as a system of recording all of a country's economic transactions with the rest of the world over a period of one year.
In economics the balance of payments (or BOP) measures the payments that flow between any individual country and all other countries. It is used to summarize all international economic transactions for that country during a specific time period, usually a year. The BOP is determined by the country's exports and imports of goods, services and financial capital as well as financial transfers It reflects all payments and liabilities to foreigners (debits) and all payments and obligations received from foreigners (credits). Balance of payments is one of the major indicators of a country's status in international trade, with net capital outflow. The balance, like other accounting statements, is prepared in a single currency, usually the domestic. Foreign assets and flows are valued at the exchange rate of the time of transaction.

The balance of payments (BOP) is an accounting of a country's international transactions over a certain time period, typically a calendar quarter or year. It shows the sum of the transactions (purely financial ones, as well as those involving goods or services) between individuals, businesses, and government agencies in that country and those in the rest of the world.
Every international transaction results in a credit and a debit. Transactions that cause money to flow into a country are credits, and transactions that cause money to leave a country are debits. For instance, if someone in Lamafrasia buys a South Korean stereo, the purchase is a debit to the Lamafrasia account and a credit to the South Korean account. If a Lamafrasian company sends an interest payment on a loan to a bank in the United States, the transaction represents a debit to the Lamafrasian BOP account and a credit to the United States BOP account.

The BOP statement divides international transactions into three accounts: the current account, the capital account, and the financial account. The current account deals with international trade in goods and services and with earnings on investments. The capital account consists of capital transfers and the acquisition and disposal of non-produced, non-financial assets. The financial account records transfers of financial capital and non-financial capital.

An economy can have either a favorable or unfavorable balance of payments.
A favorable balance of payments exists when more payments are coming in than going out. Therefore, the government of Lamafrasia should impose high tariffs on foreign goods so as to discourage importing. This will mean that foreign goods and services will be expensive as compared to locally produced goods. As a result, local manufacturers will be encouraged to produce more goods and services and the local people will be buying high quality goods, in large quantities and at stable prices. The surplus goods and services produced by local companies will be exported and that will earn foreign exchange for the country. In this way people will benefit directly as the government of Lamafrasia will have a” rich” budget that will carter for all their needs in areas such as health, education and sanitation.

Another way in which the republic of Lamafrasia can ensure a favorable balance of payments is to invest massively in economic sectors such as mining and manufacturing industries so as to increase production. For example the government should pump more money in technology advancement so that Lamafrasia can start producing goods with high technological contents. In this way, consumer durables will be manufactured locally and thereby will be no need to be importing from abroad. Per se, the republic of Lamafrasia will not be spending its money to pay debts which would be accrued as a result of exporting less and importing more goods and services but instead it would acquire more money to finance the national budget and increase savings for investment in many industries. These industries will create employment for the local people and improve their standards of living.

Furthermore, the republic will be credit worth in the sense that if its balance of payment is stable, then international financial institutions like the World Bank and International Monetary Funds (IMF) will be able to lend money to the country. This will help the people of Lamafrasia in that if a country has a deficit in the budget, it will be able to borrow from the IMF or World Bank to fund the budget. The country can also borrow in order to invest and foster economic development.
Diversifying the economy and Broadening Export base
The government of Lamafrasia can reduce the poverty levels in the country by diversifying the economy. This entails investing in different sectors so as to increase production and make more profits for investment. For example, concentration should not only be in the mining sector but in other sectors such as agriculture, energy, tourism, manufacturing industry and public service .Lamafrasia is endowed with plenty of water and land which can be used, together with modern machinery and skilled labour, to increase production.
Water can also be used to generate electricity and export to the neioughbouring countries. The returns in both the agriculture and energy sectors will be used to boost other sectors such as mining and manufacturing industries whose margin of productivity is higher than that of the agriculture sector. In this way, the local industries would become active and more people will be employed. Related to this would be improving public services such as roads and other physical infrastructures as well as water and sanitation sectors. Good roads and improved infrastructure will attract Direct Foreign Investment(FDI) through Multilateral companies(MNCs) that will come to invest in the country .In this way ,these companies will create employment for local people as well as create a dominal effect for other supplying companies.

As a result of diversifying the economy, the export base would be broadened as more goods and services of different kinds will be produced and exported to other countries. Broadening the export base can be achieved by increasing productivity, which will lead to increased savings for investment. Productivity can be increased by transforming the labour force in rural or traditional sectors into urban or industry sector. This labour force must be equipped with modern technological machinery in order to increase its margin of productivity. For example, the government should provide skills training in order to equip the workforce with technical know-how. If the workforce is well skilled, then production will increase as they will be producing more in fewer days. This will in turn broaden the export base.

The Lamafrasian government should also massively liberalize the market so as to encourage both foreign and local private investment. It would ensure that private companies are given incentives that will encourage them to start up businesses in Lamafrasia.It will also assure foreign investors that the country will continue following democratic practices especially that some investors had backed out as a result of some anticipated uncertainty of the aftermath of elections. The president should also cut tariffs on capital goods which will be imported so as to increase productivity. In this way, a lot of investors will be encouraged to invest massively and as such create competition in the production industry.Competetion means that a lot of goods will be produced to meet local demand and surplus will be exported to other countries. In this way, people of Lamafrasia will enjoy a market system that will be controlled by the forces of demand and supply and as such will be provided with high quality goods. Furthermore, since there will be a lot of goods and services in supply, then the prices would tend to go down. For example, if there are many companies that are producing sugar, each of them would strive to provide the best sugar in large quantities and at a favaourable price.

Growth of Gross Domestic Product
The Gross Domestic Product (GDP) or Gross Domestic Income (GDI) is one of the measures of national income and output for a given country’s economy. It is the total monetary value of all final goods and services produced in a particular economy; the dollar value of all goods and services produced within a country’s borders in a given year. GDP can be defined in three ways, all of which are conceptually identical. First, it is equal to the total expenditures for all final goods and services produced within the country in a stipulated period of time (usually a 365-day year). Second, it is equal to the sum of the value added at every stage of production (the intermediate stages) by all the industries within a country, plus taxes less subsidies on products, in the period. Third, it is equal to the sum of the income generated by production in the country in the period—that is, compensation of employees, taxes on production and imports less subsidies, and gross operating surplus (or profits).

It attempts to measure the sum of incomes received by the various wealth-creating sectors of the economy, from manufacturing and retail to agriculture and service industries. For example it will calculate all the money which the country will collect from mining industry, agriculture, from taxes such pay as you earn (PAYE) and corporate tax from business firms. It will also include money paid to the government in terms of fines, license fees and tariffs and custom duties.

Essentially, it tells us how much money was made in the economy over a certain period of time. In mainstream economics, the purpose of government policy is to encourage economic activities that will contribute to the income of the country. One way the president of Lamfrasia can encourage such activities is to introduce low interest rates in financial lending instituions.This will allow people to have access to money and have savings for investment especially that the republic of Lamafrasia has some pockets of industrial advancement. More savings entails investment, which in turn will lead to mass production of goods and services. This scenario will contribute to the increase of GDP of Lamafrasia.In addition, low interest rates will allow existing companies in Lamafrasia to take advantage of lower financing costs to engage in new business activities. For example a company which is specialised in producing one commodity like radio cassettes will also venture into other business of producing motor bikes because of availability of investment funds.

Another policy measure which the president must introduce is to increase expenditure in key economic and social sectors of the economy. Funding social sectors like education will contribute to the growth of GDP in the sense that the majority of the labour force will be skilled and professional and as such be able to improve productivity of the country. A skilled labour force, as earlier alluded to, will have a higher margin of productivity as compared to unskilled labour force. The health sector must also be well funded in order to have good health facilities which the people will appreciate. In doing so, the majority of the population in Lamafrasia will be health and actively participate in economic activities. It is said that “a health nation is a wealth nation”.
One other advantage of having improved and good health facilities is that people will not be spending more hours queuing up for inefficient facilities in health centres.Instaed most of their time will be spent on economic activities rather than spending most of their time at hospitals because health attention will be quick due to improved facilities.

The Lamafrsian president will also have a task of attracting foreign investment as a way of increasing GDP of the country. For example, countries like Malaysia and South Korea have raised their national income through Direct Foreign Investment(FDI).This can be done by providing incentives to foreigners so that they come and set their businesses in Lamafrasia.Such incentives would include low corporate taxes, stable exchange rate, stable inflation rate and maintaining other macroeconomic variables constant for a long time. The government of Lamafrasia will also ensure that responsible, transparent, effective and accountable government institutions will be put in place in order to protect the business of investors. It shall also reduce labour cost through labour regulations and low taxes, as well as to allow free repatriation of profits.
This would be argued that it would not contribute to the development of the country as government would be getting less tax. It would as well be argued that there will be no infrastructure building because these companies will be repatriating their profits. However, the positive aspect of this is that these companies will create employment for the local people thereby increasing government’s tax base. For example, if 5 million people out of a total population of ten million are employed by foreign companies, the government would be making huge sums of money as compared to taxing only 200 people who can be employed by local firms and the government. If the tax base is wide, then even tax will not be high in terms of percentage because the government will have a lot of sources of tax rather than taxing too high on few people.
The final implication of this will be that the GDP of the country will increase and people will have more and improved goods and services provided to them. The government of Lamafrasia will have a budget that will have more savings for investment and well funded social sectors. For example if the GDP of the country is high, there will be enough learning materials in schools, teacher will be available and with good conditions, hospitals and all health centres will be equipped with modern and improved facilities and above all, economic sectors will be well funded to increase the country’s productivity.

Disciplined Fiscal Policy
Fiscal policy is the use of government spending and taxation to influence the economy. When the government decides on the goods and services it purchases, the transfer payments it distributes, or the taxes it collects, it is engaging in fiscal policy. The primary economic impact of any change in the government budget is felt by particular groups—a tax cut for families with children, for example, raises their disposable income. Discussions of fiscal policy, however, generally focus on the effect of changes in the government budget on the overall economy. Although changes in taxes or spending that are “revenue neutral” may be interpreted as fiscal policy—and may affect the aggregate level of output by changing the incentives that firms or individuals face—the term “fiscal policy” is usually used to describe the effect on the aggregate economy of the overall levels of spending and taxation, and more particularly, the gap between them.

Fiscal policy is said to be tight or contractionary when revenue is higher than spending (i.e., the government budget is in surplus) and loose or expansionary when spending is higher than revenue (i.e., the budget is in deficit). Often, the focus is not on the level of the deficit, but on the change in the deficit. Thus, a reduction of the deficit from $200 billion to $100 billion is said to be contractionary fiscal policy, even though the budget is still in deficit.

The government of any country will strive by all means not to get into budget deficit. This is commonly seen to increase the magnitude of downswings, so it probably worsens the standard of living. The reason is that when the economy is in recession, tax revenues decrease because people's incomes decrease, so the only way to maintain a balanced budget is to either increase taxes or decrease government spending, both of which are contractionary for the economy. So this results in tightening fiscal policy during a recession.
Therefore, the government of Lamafrasia will implement policies that will ensure that tax collected by the government should increase.
However, knowing very well that the majority of people in Lamafrasia are living in poverty, the government will not increase the amount of money an individual worker pays as tax but it will broaden the tax base. This will be done by reducing the tax percentage and having flexible categories of threshold for taxation. For example all those getting between 200-500 lamafrasian kwacha will be paying 10 percent of their salary as tax while those getting between 500-1000 will be paying 15 percent of their salary. This will mean that the government will have a wide base from where it will be collecting money rather than hiking the tax percentage and “milky” a few individuals. As a result, the government of Lamafrasia will have enough resources for economic development.

The lamafrasian government will also reduce unnecessary spending in order to ensure a disciplined fiscal policy. Spending in unproductive sectors will be cut so that the government can concentrate on sectors which will stimulate production and foster economic growth. For instance, salary increments for politicians shall not be increased especially that these people are supposed to be servants of the electorates and not take politics as an economical business. Therefore, this means that the government will not borrow unnecessarily in order to meet the cost of these insignificant issues. The Lamafrasian government will also ensure that the people in-charge of collecting government revenue, That is, Lamafrasia Revenue Authority(LRA), should be honesty, accountable and transparent so that every person in the will have a share of the “cake”. It shall also ensure all individuals who will misappropriate government resources will be punished accordingly.

Once a disciplined fiscal policy is implemented, the government of Lamafrasia will be able to finance developmental activities and provide all basic necessecities such as safe and clean drinking water, good sanitation and improved health and education facilities to the citizen of Lamafrasia.In addition, economic sectors which will be priotised would create employment for the local people and improve their standards of living. These sectors would also stimulate economic growth through increased margin of productivity.

In conclusion, it can be deduced that almost all the economic concepts which have been discussed above are centered on increasing production and productivity of a particular country in order to foster any meaningful economic growth. It is important to note that many developing countries are endowed with some natural resources but lack savings to invest in technology and machinery in order to increase the margin of productivity and produce goods with high technological contents. For any country to develop there is need to have enough savings which will be invested in both human and machinery so that an effective capital is accumulated. With an effective capital in place, the labour force will be transformed from traditional to urban or industry where output will be massive, thus eradicating hunger and absolute poverty, which is hitting most developing countries. Therefore, the bottom line for economic growth is simply investment in human and machinery.