Changes in Capital Formation and Investment

Capital formation is of great importance for both the agricultural sector, due to its long term effects on production, as well as for the overall economy because of the boost for investments that further the economic development. The agrarian reforms lead to a shift in the methods of capital formation. Small farms pay few taxes because they are exempted as the larger share needed for subsistence is not counted and only a small percentage of the products are subject to sales and export taxes. On the other hand, the chances for non monetary capital formation increase. On the small farms, it is possible to make considerable increases in capital stock over the years by investing labour in small improvements on the farm. However, this is generally only found at the level of the individual farm whereas there are organizational problems already at the village level. Reforms aiming at collectivization have better chances of succeeding in forming capital by means of invested labour even at a higher level than the farm.

The propensity to save will likewise sooner grew as a result of the farm size being reduced, at least following a period of increased consumption. In small farms, there is a marked tendency to invest, even overinvest. This depends, naturally, upon there being alternatives to consumption in other words, that real investment opportunities are given in the form of a supply of appropriate objects being available on the market. Furthermore, credit must be supplied and the necessary aid given through extension services.

The way capital formation takes place changes after an agrarian reform. Whereas the landowners had taken over capital formation earlier- sometimes inappropriately used- a new form of organization will have to take their place. This task generally falls to the state. If the state fails to absorb some of the proceeds through taxes, rent, and prices, the overall development suffers as the means will not be available to build up the nonagricultural sector as well as to provide state services to agriculture.