The field of development economics grew around the assumption that economic backwardness was due to lack of capital, and could thus be cured through investment and the consequent capital accumulation. Accumulating capital has remained at the heart of the more sophisticated recent growth models in which the notion of capital is expanded to include human capital, and other immaterial factors like knowledge and technology determine its productivity. In such models, the rate of growth of investment is considered one of the variables more directly under the control of policy-makers, through the lever of direct public expenditure. However, already in the 1960s observers working on the ground in developing areas reported that even where adequate financial resources were made available, capital could not be put in place at the rate and in the quantities required by the theoretical models. It was not money that was insufficient, but the capacity of backward economies to transform it into capital through investment for lack of competence, motivation, effort, or other immaterial factors.
My former advisor Judith Tendler first advised me of this paradox on the basis of her work within donor agencies, where aid officials perceived financial resources to be abundant, and not scarce as they are described to be in the public domain. The problem for them was to find opportunities to deploy resources in accordance to the rules and criteria of their development strategy. The same thing is reported today in Europe with regard to structural funds for the development of lagging regions. Funds are needed, are made available for investment to lagging regions and their use is rationally planned for seven-year periods. Yet, it is very hard to follow the timeline of these plans, that is, to increase the endowment of fixed capital of lagging areas at the desired rate.
Despite being well-known to practitioners, however, the problem of absorption never made it to the forefront of academic debate on economic development. One of the few exceptions is Rickard Eckaus’s 1973 article published in the edited volume “Development and Planning”. The reason for this lack of academic interest in the problem of absorption of funds may be that it questions one of the foundations of economic theory: the notion of scarcity – in this case, scarcity of resources for investment in underdeveloped areas. If facts do not conform to economic theory, facts must be wrong.
How should economic theory interpret the fact that lagging countries and regions are unable to invest when they are put in the conditions to do it?