Literature Review

1. ESTABLISHMENT OF CAPITAL AND ECONOMIC DEVELOPMENT

By : Riller Katipana & Darma Kamaruddin

1.1. Introduce

Almost all economists emphasize the importance of capital formation as the main determinant of economic growth. According to Prof. Nurkse; The meaning of capital formation is that the society does not use all of its current productive activities for consumption needs and wants, but uses only partly for the manufacture of capital goods; Tools, machinery and transport facilities, factories and equipment-all forms of real capital that can rapidly increase the benefits of productive endeavors. The essence of that process then is the transfer of some resources that are now present to society in order to increase the supply of capital goods in such a way as to enable the expansion of output that can be consumed in the future.

1.2. Theoretical Framework

Nurkse's definition above only concerns the fertilization of material modsal and the neglect of human capital. Every precise definition must concern both, according to Dr Singer; Capital formation consists of items that look like factories, tools and machinery, as well as unseen goods such as high quality education, health, scientific and research traditions. The same opinion is also expressed by Simon Kuznet in the following phrase; "The formation of domestic capital does not only involve costs for construction, equipment and domestic supplies, but also other equipment except the expenditure required to maintain output at the existing level. It also includes financing for education, recreation and luxury goods that provide more prosperity and productivity to individuals and all public expenditures that serve to improve the morale of working people. " So the term of capital formation includes the material and human capital.

1.3.The Importance of Capital Formation

The formation or collection of capital is seen as one of the factors as well as the main factor in economic development. According to Nurkse, the vicious circle of poverty in developing countries can be cut through capital formation, as a result of low income in developing countries, demand, production and investment are low or low. This causes a shortage in the capital goods sector and can be overcome by capital formation. Through it the supply of machinery, tools and equipment increases, as production extends so that economic and social overheads are created. Capital formation leads to the full utilization of existing resources so as to increase the magnitude of national output, earnings and employment, reduce inflation and balance of payments deficits, and make the economy free from foreign debt burdens.

1.4. The main objective of economic development

The main objective of economic development is to build capital equipment on a scale sufficient to increase productivity in agriculture, mining, plantation, industry and other fields. The capital is also required for school, hospital, road and railway construction as well as other infrastructure. In short, economic development is the creation of social and economic overhead capital. This is possible only if the rate of capital formation in the country is quite fast, ie if part of the income or output in the community is only slightly used for consumption and the rest saved and invested in capital equipment.

1.5. Capital formation creates market expansion.

Capital formation can help get rid of market imperfections through the creation of social and economic overhead capital - cutting the vicious cycle of poverty from both supply and demand sides. Further capital formation makes development possible even as the population continues to increase rapidly. In high-growth developing countries such as Indonesia, there is a correlation between the increase in output per capita and the working capital ratio. But in countries that intend to raise the capital-labor ratio it is forced to face two problems; First, the capital-labor ratio falls as a result of the rising population so that a large net investment is needed to overcome the decline in the ratio. Secondly, as the population increases rapidly, it becomes difficult to obtain sufficient savings to obtain the required amount of investment because of the low per capita income that makes the marginal tendency to keep saving low so that the only way is to increase the rate of capital formation.

1.6. Capital formation addresses the balance of payments issue.

Developing countries are also faced with balance of payments issues, as most countries export primary goods (such as raw materials and agricultural products) and import almost all manufactured goods and capital goods. The formation of domestic capital is one of the main breakthroughs of balance of payments difficulties. By establishing a substitute industry for imports, the import of such goods may be reduced, on the other hand, by increasing the projection of all sorts of consumer goods and capital goods, the composition of exports will change. Together with agricultural products and industrial raw materials, exports of manufactured goods also begin. So the formation of capital to solve the problem of balance of payments.

1.7. Capital formation can solve the problem of foreign debt.

The rapid pace of capital formation, gradually reduces the need for foreign capital because capital formation in fact helps achieve self-sufficiency in a country and reduces the burden of foreign debt. If a country borrows from another country for the long term, the debt is a heavy burden for future generations. At each lending, the day-to-day debt burden grew larger and can only be repaid by charging higher taxes. Tax expense increases and money flows out in the form of debt repayments. And only with the formation of a country's capital can be detached from foreign debt problems.

1.8. Concept Limitations

From the presentation of the existing concept has a limitation on capital formation, it means that capital formation in economic development only look at the material aspects found in developing countries, whereas if seen in the growth of one country the capital formation in addition to the material side should also be increased also On the formation of human capital. This is because the formation of human capital has an important role and is the factors that accelerate the economic development of a country. So this concept needs to be developed by looking at the formation of capital in the aspect of the formation of human capital consisting of political factors, social-culture, technology and entrepreneurship in a country.

2. HIDDEN UNEMPLOYMENT AS POTENTIAL SAVINGS

2.1. The Meaning of Hidden Unemployment

Unemployment Hidden as Savings Potential The concept of hidden unemployment is introduced into the theory of backwardness by Roenstein-Rodan and then detailed by Ragner Nurkse. In a narrow sense this concept means that with certain productive techniques and productive resources the marginal productivity of labor in the underdeveloped sector of the State is zero. It is therefore possible to divert excess labor from the agricultural sector without reducing the total agricultural output. Such unemployment is encountered in agriculture where too many laborers work as a result of the scarcity of other alternate or complementary employment opportunities.

2.2. Problem

Maurice dobb and Ragner Nurkse independently developed the thesis that unemployment hidden in a densely populated country could be a source of capital formation. According to Nurkse the state of unemployment hidden in underdeveloped countries is a potentially saving potency. The State is in danger of suffering from unemployment hidden on a massive scale at mass. Nurkse shares the issue of hidden unemployment as a potential savings into two parts: First how to feed the excess population transferred to various capital projects and second how to provide equipment to the new workers. Nurkse is convinced that in the hidden unemployment of a densely populated backward country is contained in it the potential for saving that can be effectively used as a means of capital formation.

2.3. Concept Limitations

The limitations of this concept are: 1. Consumption tendency is not constant 2. Problems of collection and distribution of food surplus 3. Surplus of goods that can be marketed not increased 4. Difficult to direct the unemployed hidden 5. Impossible to get a job without payment of wages 6. Only succeed in totalitarian countries 7. Problems of inflation and balance of payments 8. Uneducated workers are unlikely to raise capital output 9. Unsustainable assumptions about tech neutrality 10. Impact of population growth on capital formation 11. Can not be fixed on direct poduktif 12. Production slump From the above discussion can It is said that the existence of unemployment is hidden as a potential for hidden savings and therefore as a source of capital formation in a densely populated backyard populated with a number of difficulties and very little practical significance for a country that chooses democracy as its way of life.

2.4. Conclusion

From the existing discussion it can be concluded that little or nothing at all in the phenomenon described as 'hidden unemployed' or as 'underemployed' or unemployment as long as the symptoms are genuine social problems, will not be taken into account in a thorough and in-depth study On the low productivity of the laborers employed by the cause, the range of issues, and possible solutions.

Reference :

R. Nurkse, 1953, “Problems of Capital Formation in Underdeveloped Countries”, Oxford Basis Blackwell.

Kuznets, Simon. 1995. “Economic Growth and Income Inequality”. American Economic Review.

Jhingan, 2000. "Development Economics and Planning". Jakarta: Rajawali Press.