Real and pecuniary capital in the industrialization process : A case study of Cyprus



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The empirical analysis of this study was devoted to a systematic investigation of the possible effects of real and pecuniary capital on the industrial development of underdeveloped countries, with particular reference to the industrialization of Cyprus. The factors contributing to the industrial development were sought by analyzing (1) the supply of real and pecuniary capital in Cyprus; (2) the demand for real capital and the extent of investment opportunities in Cyprus; (3) the operational efficiency of the financial institutions of Cyprus in allocating the available capital funds; and (4) the indirect influence of "real" factors upon the industrial capital accumulation. The analysis of the volume and sources of saving indicates that Cyprus does not have a scarcity of pecuniary capital but does experience a scarcity of real saving. Domestic saving in Cyprus supports Lewis' hypothesis that voluntary private saving depends on an unequal distribution of income. The level of government saving was not only related to total domestic saving but was also affected by various socio-political factors. The banking system, representing the second source of pecuniary capital, shows a high bank liquidity ratio, plethora of accumulated bank deposits, and high ratio of deposits to outstanding loans. Although the banking system has had some success in mobilizing voluntary savings, perhaps because of absence of alternatives, the existing inefficiency of financial institutions in channelling capital funds contributed to a sub-optimum allocation of funds, especially within the industrial sector. Regardless of the flow of capital funds problems that faced Cyprus, the study shows that Mrs. Robinson's hypothesis "where enterprise leads finance follows" applied. It has been shown also that real capital accumulation is not the "core" of economic growth but it is the use of capital funds in the "array of productive goods." The bottleneck of industrial growth, therefore, was due to the mobilization of investible funds in less productive and capital absorptive sectors, investment-pulling sectors, such as construction. Limited accumulation of capital funds in sectors with low K/0 ratios affects adversely these sectors' degree of specialization, efficiency and productivity and restricts internal economies of scale and external economies. The complementary human-tangible capital relationship, the shortage of trained and skilled labor in Cyprus and the applicability in Cyprus of Mrs. Robinson's hypothesis suggest, ceteris paribus, that investment priority be given to human investment in order to accelerate the rate of industrial growth of Cyprus. The general observations made on the relationship of techniques used in Cyprus manufacturing and real capital accumulation conclude as follows: The existing techniques, most of which are labor-intensive in nature, do not require large amounts of real capital because they are mainly associated with the levels of skill and the training of labor. In capital-intensive industries, advanced techniques are related to the amount of real capital accumulation as well as to the qualitative characteristics of labor. This interdependence which was evident in Cyprus supports the previously suggested compl iment arity of "tangible" and human capital. In brief, it may be said that the problem of the industrialization of Cyprus depends upon the nature of saving and investment behavior patterns rather than on the actual supply of saving and on the degree that "real" factors affect real capital accumulation and complement capital and labor productivity.