Is Industrialization prevented by lack of Capital?

From the Growthcon WordPress blog comes the post: Do you need more money for Economic Growth to occur? In this post, the author Dietz Vollrath, a professor in economics, discusses whether or not a country or regional area needs to create more money in order to grow an economy. Why is this important for Industrialization you might ask? Imagine that you have control of a small agrarian society today. Your country has various smaller corporations related to agriculture and the production of food products. However, you desire for your country to enter the modern age and you wish to take advantage of the considerable natural resources present in the territory that you control. What is necessary to bring about this transition and is the lack of capital one of the factors that hinders industrialization? These are the questions that we will explore in the next several paragraphs.

According to Professor Vollrath, no new money is needed in an economy to create growth (i.e. more value for the local currency and increase in jobs and production). From the blog post: “Economic growth occurs either because we produce more of existing things, or because we introduce new things that that are more valuable than the old things we produced – which shows up in relative price differences.” The keyword here being relative price as the professor points out in the next line. “The level of absolute prices is irrelevant. The level of nominal spending is irrelevant. For any modern economy, it is effectively impossible for there to be “not enough money” to let growth occur.”

It is at this juncture that we must return to the original premise of this blog post. Is industrialization prevented by lack of capital? Many people in the Venture Capital business would argue yes. Richard Florida and Donald F Smith Jr. both argue that in order for a country to make the jump there must be enough initial capital to make the jump to (as Vollrath would say) “[producing] new things that are more valuable than the old things produced.” This is the problem for many countries today that are looking to make the jump into the modern age. Why then is venture capital not so readily obtained? Gonzalo Miranda from the Astral Venture Capital company based out of Chili states that one of the limitations is because of the unknown profitability of the initial investment into undeveloped countries.

Imagine again that we are ruling our country and bringing it into the modern age. In order to purchase the infrastructure needed to begin drilling and then processing oil, we would first have to demonstrate that our country can maintain this production and then be profitable. We would have to create an environment where other countries could come to ours to obtain the oil that we process and pull out of the ground. And so we are back to the original question. Is industrialization prevented by lack of capital? I would argue that it is.

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