Economic development and different forms of capital

Various forms of capital constitute the overall wealth in regions and in countries. The goal of economic development is increasing the wealth of a country or a region, leading to higher living standards of the respective inhabitants. Higher levels of wealth can be attained by a process of investment in various forms of capital leading to higher levels of aggregate capital stock. Figure 2.2 describes the various types of capital that constitute the wealth of a country as follows:

  • • Natural capital includes the various resource endowments of the country - the quality of land, the mineral stock and water supply, etc.
  • • Production capital includes the investments by firms in buildings and machinery.
  • • Human capital involves the size and composition of the workforce, including formal and informal skills.
  • • Social capital incorporates the networks and institutions that link a society together. [1]

Figure 2.2. The forms of capital

Rural regions have higher endowments of natural capital. The various forms of capital are not uniformly distributed across the territory of a country, with some regions having larger amounts of one form of capital than others. In particular, rural regions have higher endowments of natural capital than urban regions and in turn lower endowments of production and public capital. Further, investments in one form of capital may lead to dis-investments or reductions in other forms of capital. Mines are depleted to provide the inputs for processing industries and the resulting profits are used to increase the quantity of production capital, such as processing machinery, and public capital, such as port facilities for mineral exports. In this sense, rural regions, abundant in land and natural resources, play an important role in providing important benefits from this form of capital nationwide.

The bulk of the investment choices in the various forms of capital are carried out at sub-national level. From this perspective, the development strategy of a country can be thought of as the choice of where and how to make various investments in the five types of capital. The OECD New Rural Paradigm (NRP) (see page 104) and modern regional policies extend this approach by recognising that there is a territorial aspect to investment choices. Indeed, around two-thirds of OECD countries’ overall public investments target sub-national regions (Box 1.5). How these investment strategies are designed and implemented has important implications for the well-being and productivity of people within regions, with implications for aggregate well-being and productivity. A number of OECD principles for public investment can better guide member countries to better design public investments at the sub-national level (see Box 3.10).

  • [1] Public capital includes the physical infrastructure, roads, bridges power grid, etc.and the various facilities of government.
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