1.3.4.5 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.
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