Tuesday, 9 April 2013

Implications of the Harrod-Domar Model

What are the implications for developing countries?

  • The main obstacle to development according to HD is the relatively low level of new capital formation in most poor countries. 
  • To grow we must increase savings and the productivity of investment e.g. via technological changes.
  • The “savings gap” can be facilitated through foreign aid or private foreign investment. 
  • Similar to the rationale behind the Marshall Plan, the MP was the American program to aid Europe in which the US gave economic support to help rebuild European economies of WW2 to prevent the spread of soviet communism . The plan was in operation for four years beginning in April 1948. The goals of the USA were to rebuild a war devastated region, remove trade barriers, modernize industry and make Europe prosperous again.
  • The model implies, therefore, that the promotion of investment by government planning and command is needed to accelerate economic growth in low-income economies. Infact, the Harrod-Domar model provided a framework for economic planning in developing economies, such as India's Five Year Plan.

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