The real growth in an economy is critically dependent on the existing stock of capital and the net accumulation in this stock through current investment. Since the stock of capital at one point of time is the outcome of the stream of investments made in the past, therefore, the growth rate of an economy in the final analysis is the function of investment both current and the past.

The close relationship between investment, capital accumulation and growth is identified in the theory of economic growth as 'capital fundamentalism'. There is a close nexus between economic growth and poverty reduction.

An increase in the real per capita income on a consistent and continuous basis has been identified as one of the essential prerequisites for alleviating poverty in the developing countries.

Since the increase in the real per capita incomes is linked with economic growth of a country, capital fundamentalism is indirectly but closely related with poverty reduction. The causation follows from investment to capital formation to economic growth to higher per capita income and finally to a lower level of poverty.

Capital fundamentalism in its essential form, embodies the truism that investment in human and physical capital is the first and the most vital precondition of economic growth of a country.

This truism was recognized by the classical and the neo-classical economists such as Adam Smith, David Ricardo, J.S. Mill, Alfred Marshall and Karl Marx, but it was in the 20th century that it was given the more formal structure and the rigorous treatment.

The list of economists who built their theories of growth around this concept includes R.F. Harrod, E. Domar, Ragner Nurske, J.M. Keynes, W.W. Rostow, Aurther Lewis, Robert Solow, Nicholas Kaldor, Gunner Myrdal, P.C. Mahalanobis, Robert Barro, etc.

With the ongoing evolution of the growth theory, the nature and the scope of capital fundamentalism have both widened and deepened. Given the pivotal role of investment in capital accumulation and growth, the studies on capital fundamentalism focus on questions such as the following: What is the desired level of gross investment for an economy to realize the target growth rate of real GDP? How is the 'ex ante' investment to be apportioned between the public and the private sectors to help achieve the real growth rate? How to define the sectoral priorities within the public and the private sectors such that investment allocations generate sectoral growth rates to match the overall growth rate of the economy? What is the optimal blend of national savings and foreign savings or external borrowing to finance the aggregate level of investment?

What are the main determinants and the principal deterrents to domestic investment and the foreign investment (portfolio and direct)? Why is that some of the countries are able to attract a huge quantum of foreign direct investment while others remain starved of such investment over a long period of time? What are the short-term and long-term consequences of financing gross investment from foreign debt rather than foreign direct investment (FDI)? What determines the efficiency and the productivity of investment in a country both sectoral and overall?

These are difficult and complex questions. The economic planners in each country have to provide answers to these questions taking into account the country's initial conditions, factor endowments, level of technological development, propensities to consume and save, capacity to mobilize resources through its taxation system and above all the political will of the principal stake holders and elite groups to make rational economic decisions.

These factors would broadly explain the wide variations observed across countries in the key parameters of capital fundamentalism such as quantum of the gross fixed capital formation, the distribution of investment between the private and the public sectors, the sectoral priorities of investment regime and the modes of its financing etc.

The contemporary revival of the theory of economic growth has brought about a renewed interest in the analysis of the basic parameters which define capital fundamentalism. The most critical and the pivotal parameter in this context is the level or quantum of the gross fixed investment in an economy.

Therefore, within the macro-economic framework, the key question faced by the economic planners is what should be the level of investment in absolute terms and as a ratio of GDP to steer the economy out of the low equilibrium level of productivity and real per capita income?

The answer to this question is not so simple. However given the level of real GDP per capita in the base year, some critical assumptions have to be made for determining the investment targets of an economy.

These assumptions relate to four important parameters of the economy, namely (a) the planning horizon or the time-frame adopted in the plan, (b) the target growth rate of real per capita income, (c) the growth rate of population and (d) the incremental capital output ratio (ICOR).

Depending upon the choice and the combination of the assumed values of the above parameters, the mechanics of investment-targeting can be developed using the well-known but robust framework provided by the Harrod-Domar model.

According to this model, the growth rate (g) of an economy is the function of investment ratio (a) and the output capital ratio (k) which is inverse of capital output ratio (h).

In precise terms, g=a.k. which implies that growth rate of an economy is the product of two key parameters namely the investment ratio and output capital ratio. Alternatively a=gh which implies that the targeted investment ratio is the product of the target growth rate of real GDP and incremental capital output ratio (h).

The objective of any meaningful planning exercise is to design the macroeconomic framework incorporating the parameters of population growth and the targeted growth rate of real GDP per capita to determine the investment/GDP ratio for the specific planning horizon.

Let us assume that the planners have the objective of doubling the real per capita income of the country to bring about a structural transformation of the economy and reduce the poverty level by visible and substantial margins.

Now given the various parameters like ICOR etc, the required growth rate and the associated investment ratio will depend upon the planning horizon chosen for doubling the real per capita income.

The planners can work on different options and estimate the required investment ratio given the objective of doubling the real per capita income in five years, 10 years, 15 years or 20 years and beyond.

Let us assume that population growth rate is 1.8 per cent for the five years, 1.7 per cent for 10 years, 1.6 per cent for 15 years period and so on. The ICOR is assumed to be to 3.2 for the five years period, 3.5 per cent for the 10 years period and 3.8 for the 15 years and so on.

The assumptions of declining population growth rate and rising value of incremental capital output ratio intertemporally are consistent with the contemporary experience in the demographic and developmental transition across countries.

Having established the close linkages between investment, growth and poverty reduction, a set of possible scenarios of investment requirements can be put forward which could be specified in terms of the planning horizon of five years, 10 years and so on. For the duration of 30 years, six possible paradigms/scenarios can be developed, which are summarized in the accompanying Table.

The first scenario is libelled as the Keynesian Short Run Poverty Reduction Scenario (KSRPRS), under which the real per capita GDP would be doubled in the relatively short period of 5 years.

This would require annual compound growth rate (ACGR) of 14.9 per cent in the real per capita income for the 5 years and annual growth rate of 16.7 per cent in real GDP assuming the population growth rate of 1.8 per cent per annum for this period.

With the assumed ICOR of 3.2, investment equivalent to 53.4 percent of GDP would be required to achieve doubling of real GDP per capita during the five years period. This investment level is certainly too high considering the perennial shortage of the private and public savings in the less developed countries.

This scenario has arbitrarily been associated with the name of the famous British economist J. M. Keynes for his famous statement on the time factor in human life i.e. "In the long run, we are all dead".

The Keynesian philosophy emphasized the short run solutions to the economic problems unlike the classical economists who believed in the long run automaticity of full employment equilibrium of the economic system.

However, achieving an investment/GDP ratio of above 50 per cent is quite illusory for the poor countries and this scenario may not be workable for all practicable purposes.

For that reason, many millions in these countries would live and die in absolute poverty, as the countries would not be able to achieve such a high level of investment required to break the poverty trap in a short period of five years.

The second scenario for doubling the real per capita income is identified as High Growth Poverty Reduction Scenario (HGPRS) covering the 10 years period and requiring the annual growth of 7.2 percent in the real per capita income and 8.9 percent annual growth in the real GDP, assuming that population grows at the rate of 1.7 per cent per annum during this period.

With the ICOR of 3.5, the gross fixed investment ratio required to double the real income per capita would be 31.7 per cent of GDP. This scenario is less ambitious when compared with the first scenario.

However, a large number of countries are not in a position to mobilize savings of this magnitude and as such doubling of real per capita income in 10 years timeframe seems to be out of reach for the majority of the resource-starved developing countries.

The third scenario is earmarked as Medium Run Poverty Reduction Scenario (MRPRS), which covers the 15 years span for doubling the real per capita GDP, implying a growth rate of 4.7 percent per annum.

With the population growth rate assumed to be lower at 1.6 per cent per annum and capital output ratio assumed at 3.8, the total investment required to generate the growth target would be 23.9 per cent of GDP.

This level of investment is apparently feasible for some of the developing countries which are taking concrete and effective measures to increase the level of domestic savings and are also able to mobilize additional loans from the affluent nations or international financial institution (IFIs) like the IMF, the World Bank, the ADB etc.

The fourth scenario labelled as Long Run Poverty Reduction Scenario (LRPRS) postulates a doubling of per capita income in 20 years, which would necessitate its annual growth rate of 3.5 per cent and an investment GDP ratio of 20.5 per cent assuming the population growth rate of 1.5 per cent per annum and an ICOR of 4.1 for this period. This implies that a minimum investment of 20.5 per cent would be the necessary prerequisite for doubling the level of real per capita income and making a visible dent in the level of poverty.

A fairly large number of countries in the Asian and African regions are capable of raising their savings/investment level to this threshold and get out of poverty trap in a period of 20 years.

The fifth scenario marked as Extended Long Run Poverty Reduction Scenario (ELRPRS) is based on the objective of doubling the real per capita income in the extended period of 25 years, which will have to grow at the rate of 2.8 per cent per annum and with the assumed growth rate in population of 1.4 per cent per annum, but a higher ICOR of 4.4, the level of required investment would be around 18.5 per cent.

Considering the extended period for doubling the real per capita income, a majority of the poor countries is likely to meet the target of gross fixed investment generating the targeted growth rate of real GDP and the real per capita income.

Those countries which fail to mobilize the total savings of about 19 per cent of GDP for the long-term revival of growth and employment will remain trapped in poverty and unemployment for a long period of time.

The sixth scenario covering the 30 years period for doubling the real per capita income would require its growth rate of 2.3 percent and GDP growth of 4.7 per cent assuming the population growth of 1.3 per cent per annum and an ICOR of 4.7 which will give the target of investment ratio of 16.9 per cent.

This scenario which can be called the Absolutely Long Run Poverty Reduction Scenario (ALRPRS) would imply that a minimum investment of about 17.0 per cent of GDP is a sine qua non for moving out of conditions of lower growth and high poverty prevailing in the developing countries.

Without being country-specific, the mechanics of determining the investment requirements of an economy as outlined above under the six scenarios, critically highlight the relevance of economic parameters such as the time horizon, the target growth rate of real GDP per capita, the rate of population growth and capital output ratio.

Any deviation from the assumed values of these parameters would directly affect the level of investment required to double the real per capita income. For example, if the growth rate of population is pitched on the higher side as compared to the assumed values in the six scenarios presented above, the investment targets will increase accordingly.

Similarly if the values of capital output ratio diverge from those assumed in this exercise, the investment requirements will change on the same lines. The heuristics of capital fundamentalism provide an important lesson for poverty reduction in the developing countries.

The large size of population fuelled by its high growth rate being the principal cause of poverty in most of the developing countries, a drastic reduction in the population growth rate is one of the most important measures to break the vicious circle of low savings, low investment and low per capita income in the developing countries.

The maximum growth rate of population, which can be considered as sustainable for a majority of the poor counties is half a percentage point or 0.5 percent per annum.

If the developing countries are able to achieve this low rate of population growth, their savings rate will increase and at the same time, their investment requirements to double the real per capita income will be reduced by a substantive margin.

While projecting the investment requirements of an economy, the value of incremental capital output ratio (ICOR) has been assumed to rise as the planning horizon increases.

As an indicator of capital productivity, immense variations have been observed in the magnitude of ICOR country-wise, sector-wise and time-wise. However, by launching comprehensive programmes of productivity enhancement, the value of ICOR can be reduced thus lowering the investment requirements of the economy to achieve the target growth rates. The augmentation of national and sectoral productivities of an economy is a critical aspect of capital fundamentalism, which requires further analysis.

(The author is the Chief (Macroeconomics) in the Planning Commission, Islamabad.)