Question

Explain how the Harrod Domar Growth Model was used in state planning in developing countries. While this model was effective in reconstructing European economies after world war II, it did not turn out to be effective in facilitating economic growth in developing countries. Why?

Answer 1

Harrod domar growth model was used in state planning in developing countries wherein it stated that the economic growth will be driven by higher savings, thus higher investment, efficiency of capital, increased output and thus increased income. Countries based their economic planning on this model in the 20th century, by increasing enhancement in technology and decreasing the capital output ratio, thus enhancing productivity in the economy.

Developing countries spent heavily on technology as they were heavily agrarian based and to speed track agricultural activites. They aimed for higher income levels at a certain target year, higher consumption and investment levels in the economy. All these functions aimed to drive up the economic growth of developing nations.

It was very hard to increase savings rates in developing nations as they lacked the basic amenities for survival. Thus poor people had to shell out more for basic amenities as the government didn't readily provide them, such as access to water, etc. While european countries already had all the basic infrastructure in place to increase savings level.

Developing countries have a high level of corruption which the model does not take into account, thus even though government expenditure might have increased in order to procure such items, the money spent would not have completely been for technological innovation and instead middlemen could have pocketed it.

Developing countries did not have a reliable finance and transport system. It experienced less financial inclusion which led to poor people spending more on higher credit interest rates, thereby reducing the savings rate in the economy. They also lacked in transportation facilities available to them for ease of doing business, thereby impacting productivity and growth.