To achieve a high percentage of investment, a good deal of effort would be necessary to mobilise domestic savings of the nation.
Consumption has to be cut down to increase domestic savings. In a socialistic economy the entire expenditure of development is made by the state. In a capitalist economy the state would use only indirect methods to restrict consumption to push up the level of savings.
The state might also induce certain institutional changes to induce greater savings among the masses.
The state might do some savings by creating a surplus budget. In spite of all these efforts domestic savings may not be adequate to achieve a desired rate of investment. In such cases, the Government might resort to borrowing from abroad.
Prof. Lewis has laid down three main principles for planning investment in a planned economy:
i) Investment should be financed as far as possible by savings otherwise inflation will develop;
ii) Stocks of raw materials and finished commodities must be there;
iii) Investment should not be beyond the physical resources available. It is foolish to plan for more investment than the available physical resources will permit. Further it is essential that the limited funds available for investment should not be frittered away in the production of non-essential goods.
Another complex problem to be solved by the planning authority is the direction or pattern of investment. To determine the rate of investment or the absolute volume of investment is not enough.
What is more important is how the investible funds are to be distributed amongst the various sectors of the economy.
As rightly pointed out by Prof. Lange, the problem in an under-developed country is not merely one of assuring sufficient productive investment but also of directing that investment into such channels as will provide for the most rapid growth of the productive power of national economy.
It is suggested that investment in an under-developed economy should be governed by the following principles:
i) Low capital-output ratio;
ii) Social Marginal Product (SMP) criterion;
iii) Labour absorption and balance of payments criterion;
iv) Time-series criterion.