UNDERSTANDING HARROD-DOMAR LINEAR MODEL OF GROWTH

This model was developed as a solution for developed countries and international financial institutions to play a major role in the reconstruction of countries after the Second World War and the great depression first in Europe and later to the Asian, African and Latin American continents. The model emphasized on savings, investments, economic growth, and capital output. Further this model made use of the prevailing conditions in the 1940s where the war and the great depression had created major unemployment with many countries experiencing labor surplus.

Using this model, economic growth was a subject of savings and investment and therefore international financial institution were able to calculate the amount of capital injection required by developing countries to realize a particular level of growth. Further the model ruled out any prospects of development for developing countries in the absence of developed countries’ support and propagated the idea that borrowing for developing countries was the only way to development and that debt was a good thing.

Summary of the model

-          The model was based on the concept of savings and capital output.

-          It emphasized that labor in developing countries was in surplus but capital was limited and therefore countries had to find ways of enhancing savings to make use of the surplus labor in order to grow their economies

-          This model emerged after the second world due to the following factors

o   Numerous challenges facing developing countries and interest by developed countries to assist

o   The overwhelming surplus labor in developing countries due to the disruption of the wars and the great depression and the limited capital and savings requiring foreign aid and capital support from developed countries meaning developing countries cannot exist without developed countries (dependency)

o   USSR having developed through forced savings and investment provided a justification for the model

o   Marshall plan which entailed support to previously communist countries which provided an opportunity for western countries to micro manage the economies of developing countries

Critique

-       Savings does always translate to economic growth since saving may just be a confounding factor with other myriad of factors determining economic growth just as the political stability of the country. More so some countries such as Thailand recorded some substantial level of growth without any meaningful savings records.

-         The model is too linear and simplistic indicating that savings will translate to capital stock, which translate to investment translating to economic growth and capital output for sustained growth. However other factors such as technological progress now determine the pace of growth far more than savings alone.

-       Since mechanism in developing countries to manage savings are not in place or developed this model may only apply in developed countries only

-        The model does not differentiate between economic growth and economic development, assuming that economic growth will translate to economic development.

-    The model assumes that heavily borrowing will automatically translate to economic growth. however evidence has shown that developing countries characteristics of heavily borrowing end up with run-away debt and do not necessarily develop