Top Menu

What is the Role of Capital in Economic Development?


Undoubtedly, capital is the core of economic development. In simple words, capital refers to that part of the wealth of an economy which is utilized for further production of wealth.

It includes all forms of reproducible wealth utilized directly or indirectly in the production of a large volume of output.

A huge amount of capital is invested on the construction of irrigation schemes, production of agricultural tools, building of big dams and bridges, land reclamation machines, roads, railways, airports etc.


According to Colin Clark, “Capital goods are reproducible, wealth used for the purposes of production.” A United National study states as, “further production of other goods.”

Role of Capital:

Prof. Simon Kuznets and Prof. Ragnar Nurkse regarded that capital occupies a central place in the theory of economic development.

They accepted a manifold role as:


1. Helpful in Raising Per Capita Productivity:

Capital is helpful in raising per capita productivity as the stock of capital in an economy is closely related to the possibilities of effecting changes in the scale of technology of production. In fact, the economy remains in a better position to enjoy the advantages of large scale production and increased production.

2. Methods of Production:

According to Bohm Bawerk, capital makes possible the round about methods of production as there is a net gain in productivity as a result of using such methods. Rapid capital accumulation may further lead to an increased supply of tools and machinery per worker. They enable them to use mechanical devices for producing goods.


3. Necessary for Implementation of Production:

With rapid growing population, increased capital accumulation is pre- requisite for expanding production and providing employment to the growing labour force.

4. Technical Progress is Possible:

Additional capital is required to adopt new technology. It may either finance the discovery of new techniques or helps to change the existing knowledge of commercial exploitation through new innovative design. In short, capital leads to the progress of technology at the highest speed.

5. Capital and Agricultural Development:

It is also observed that capital is also required for the development of agricultural sector. In most of the underdeveloped countries, more than 70 per cent people are directly or indirectly dependent on this sector while in developed countries, hardly 5 per cent to 10 per cent people are dependent on agriculture. Therefore, in poor countries, capital is needed for the development of irrigation, to control flood, and for crop rotation.

6. Capital and Industry:

Capital is the basic need for the development of industrial sector also. It is required to adopt moderate and latest technology specially in underdeveloped countries. In fact, the mode of production is primitive and out- dated. As a result, it adversely affects the productivity. In order to accelerate the pace of economic development in industrial sector, capital is the key factor.

7. Capital and Natural Resource:


Generally, in underdeveloped countries, natural resources are under-utilized or misused on account of the fact that these countries do not possess sufficient capital. In this way, it is capital which leads to put the proper utilization of natural resources.

8. Capital and Population Growth:

According to some economists, higher growth of population is an obstacle in the path of economic development. Therefore, capital is needed to control the population growth. Capital is required to adopt family planning techniques and other methods of controlling population specially in poor and less developed countries. Another argument is also advanced that capital is foremost requirement to meet the requirement of food, shelter and housing etc. in these countries.

9. Capital and Public Utility Services:


Prof. Lewis has noted less developed countries need very heavy expenditure on public utility services and infrastructures like road, railway, electricity and communications etc. In fact, these basis qualities must bring the pace of development of a country.

hit counter