P A RT - I I I

SOME GROWTH MODELS

CHAPTER

34
Harr The Harrod-Domar Models
INTRODUCTION
The Harrod-Domar models of economic growth are based on the experiences of advanced economies. They are primarily addressed to an advanced capitalist economy and attempt to analyse the requirements of steady growth in such economy.

REQUIREMENTS OF STEADY GROWTH

Both Harrod and Domar are interested in discovering the rate of income growth necessary for a smooth and uninterrupted working of the economy. Though their models differ in details, yet they arrive at similar conclusions. Harrod and Domar assign a key role to investment in the process of economic growth. But they lay emphasis on the dual character of investment. Firstly, it creates income, and secondly, it augments the productive capacity of the economy by increasing its capital stock. The former may be regarded as the demand effect and the latter the supply effect of investment. Hence so long as net investment is taking place, real income and output will continue to expand. However, for maintaining a full employment equilibrium level of income from year to year, it is necessary that both real income and output should expand at the same rate at which the productive capacity

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of the capital stock is expanding. Otherwise, any divergence between the two will lead to excess or idle capacity, thus forcing entrepreneurs to curtail their investment expenditures. Ultimately, it will adversely affect the economy by lowering incomes and employment in the subsequent periods and moving the economy off the equilibrium path of steady growth. Thus, if full employment is to be maintained in the long run, net investment should expand continuously. This further requires continuous growth in real income at a rate sufficient enough to ensure full capacity use of a growing stock of capital. This required rate of income growth may be called the warranted rate of growth or the full capacity growth rate. ASSUMPTIONS The models constructed by Harrod and Domar are based on the following assumptions: (1) There is an initial full employment equilibrium level of income. (2) There is the absence of government interference. (3) These models operate in a closed economy which has no foreign trade. (4) There are no lags in adjustments between investment and creation of productive capacity. (5) The average propensity to save is equal to the marginal propensity to save. (6) The marginal propensity to save remains constant. (7) The capital coefficient, i.e., the ratio of capital stock to income is assumed to be fixed. (8) There is no depreciation of capital goods which are assumed to possess infinite life. (9) Saving and investment relate to the income of the same year. (10) The general price level is constant, i.e., the money income and real income are the same. (11) There are no changes in interest rates. (12) There is a fixed proportion of capital and labour in the productive process. (13) Fixed and circulating capital are lumped together under capital. (14) There is only one type of product. All these assumptions are not necessary for the final solution of the problem, nevertheless they serve the purpose of simplifying the analysis.

THE DOMAR MODEL

Domar1 builds his model around the following question: since investment generates income on the one hand and increases productive capacity on the other at what rate investment should increase in order to make the increase in income equal to the increase in productive capacity, so that full employment is maintained? He answers this question by forging a link between aggregate supply and aggregate demand through investment. Increase in Productive Capacity. Domar explains the supply side like this. Let the annual rate of investment be I, and the annual productive capacity per dollar of newly created capital be equal on the average to s (which represents the ratio of increase in real income or output to an increase in capital or the reciprocal of the accelerator or the marginal capital-output ratio). Thus the productive capacity of I dollar invested will be I.s dollars per year. But some new investment will be at the expense of the old. It will, therefore, compete with the latter for labour markets and other factors of production. As a result, the output of old plants
1. Evsey Domar, "Expansion and employment" in A.E.R., March 1947, and Essays on the Theory of Economic Growth, 1957.

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will be curtailed and the increase in the annual output (productive capacity) of the economy will be somewhat less than I.s. This can be indicated as I , where (sigma) represents the net potential social average productivity of investment (= Y/I). Accordingly I is less than I.s. I is the total net potential increase in output of the economy and is known as the sigma effect. In Domar's words, this is the increase in output which the economy can produce, it is the supply side of our system. Required Increase in Aggregate Demand. The demand side is explained by the Keynesian multiplier. Let the annual increase in income be denoted by Y and the increase in investment by I and the propensity to save by (alpha) (=S/ Y). Then the increase in income will be equal to the multiplier (1/) times the increase in investment:

1 Equilibrium. To maintain full employment equilibrium level of income, aggregate demand should be equal to aggregate supply. Thus we arrive at the fundamental equation of the model: Y = I 1 = I Solving this equation by dividing both sides by I and multiplying by we get: I
I = I This equation shows that to maintain full employment, the growth rate of net autonomous investment (I/I) must be equal to (the MPS times the productivity of capital). This is the rate at which investment must grow to assure the use of potential capacity in order to maintain a steady growth rate of the economy at full employment. Domar gives a numerical example to explain his point: Let =25 per cent per year, =12 per cent and Y =150 billion dollars per year. If full employment is to be maintained, an amount equal to 150 12/100 =18 billion dollars should be invested. This will raise productive capacity by the amount invested times, i.e., by 150 12/100 25/100 = 4.5 billion dollars, and the national income will have to rise by the same amount. But the relative rise in income will equal the absolute increase divided by the income itself, i.e.,

12 25 100 100 = 12 25 = = 3 per cent 150 150 100 100 Thus in order to maintain full employment, income must grow at the rate of 3 per cent per annum. This is the equilibrium rate of growth. Any divergence from this golden path will lead to cyclical fluctuations. When I/I is greater than , the economy would experience boom and when I/I is less than , it would suffer from depression.

THE HARROD MODEL

R.F. Harrod2 tries to show in his model how steady (i.e., equilibrium) growth may occur in the economy. Once the steady growth rate is interrupted and the economy falls into disequilibrium,
2. R.F. Harrod, Towards a Dynamic Economics, 1948.

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cumulative forces tend to perpetuate this divergence, thereby leading to either secular deflation or secular inflation. The Harrod model is based upon three distinct rates of growth. First, there is the actual growth rate represented by G which is determined by the saving ratio and the capital-output ratio. It shows short-run cyclical variations in the rate of growth. Second, there is the warranted growth rate represented by Gw which is the full capacity growth rate of income of an economy. Third, there is the natural growth rate represented by Gn which is regarded as the welfare optimum by Harrod. It may also be called the potential or the full employment rate of growth. The Actual Growth Rate. In the Harrodian model the first fundamental equation is: GC = s ....(1) where G is the rate of growth of output in a given period of time and can be expressed as Y/Y; C is the net addition to capital and is defined as the ratio of investment to the increase in income, i.e., I / Y and s is the average propensity to save, i.e., S/Y. Substituting these ratios in the above equation we get:

Y I S I S = or = or I = S Y Y Y Y Y The equation is simply a re-statement of the truism that ex-post (actual, realized) savings equal ex-post investment. The above relationship is disclosed by the behaviour of income. Whereas S depends on Y, I depends on the increment in income (Y), the latter is nothing but the acceleration principle. The Warranted Rate of Growth. The warranted rate of growth is, according to Harrod, the rate at which producers will be content with what they are doing. It is the entrepreneurial equilibrium; it is the line of advance which, if achieved, will satisfy profit takers that they have done the right thing. Thus this growth rate is primarily related to the behaviour of businessmen. At the warranted rate of growth, demand is high enough for businessmen to sell what they have produced and they will continue to produce at the same percentage rate of growth. Thus, it is the path on which the supply and demand for goods and services will remain in equilibrium, given the propensity to save. The equation for the warranted rate is GwCr = s ...(2) where Gw is the warranted rate of growth or the full capacity rate of growth of income which will fully utilize a growing stock of capital that will satisfy the entrepreneurs with the amount of investment actually made. It is the value of Y/Y. Cr, the capital requirements, denotes the amount of capital needed to maintain the warranted rate of growth, i.e., required capital-output ratio. It is the value of I/ Y, or C and s is the same as in the first equation, i.e., S/Y. The equation, therefore, states that if the economy is to advance at the steady rate of Gw that will fully utilize its capacity, income must grow at the rate of s/Cr per year, i.e., Gw=s/Cr. If income grows at the warranted rate, the capital stock of the economy will be fully utilised and entrepreneurs will be willing to continue to invest the amount of saving generated at full potential income. Gw is therefore a self-sustaining rate of growth and if the economy continues to grow at this rate, it will follow the equilibrium path. Genesis of Long-run Disequilibria. For full employment growth, the actual growth rate G must equal Gw, the warranted rate of growth that would give steady advance to the economy, and C (the actual capital goods) must equal Cr (the required capital goods for steady growth). If G and Gw are not equal, the economy will be in disequilibrium. For instance, if G exceeds Gw,

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then C will be less than Cr. When G>Gw, shortages result. There will be insufficient goods in the pipeline and/or insufficient equipment. Such a situation leads to secular inflation because actual income grows at a faster rate than that allowed by the growth in the productive capacity of the economy. It will further lead to a deficiency of capital goods, the actual amount of capital goods being less than the required capital goods (C<Cr). Under the circumstances, desired (ex-ante) investment would be greater than saving and aggregate production would fall short of aggregate demand. There would thus be chronic inflation. This is illustrated in Fig. 1 (A) where the growth rates of income are taken on the vertical axis and time on the horizontal axis. Starting from the initial full employment level of income Y0, the actual growth rate G follows the warranted growth path Gw up to point E through period t2. But from t2 onward G deviates from Gw and is higher than the latter. In subsequent periods, the deviation between the two becomes larger and larger. If, on the other hand, G is less that Gw, then C is greater than Cr. Such a situation leads to secular depression because actual income grows more slowly than what is required by the productive capacity of the economy leading to an excess of capital goods (C>Cr). This means that desired investment is less than saving and that the aggregate demand falls short of aggregate supply. The result is fall in output, employment, and income. There would thus be chronic depression. This is illustrated in Fig. 1 (B) when from period t2 onward G falls below Gw and the two continue to deviate further away.
(A) Growth Rates (B)

G Gw E E Y0

Gw

Y0

t1

t2

t3

t4

Time Fig. 1.

t1

t2

t3

t4

Harrod states that once G departs from Gw, it will depart further and further away from equilibrium. He writes: Around that line of advance which if adhered to would alone give satisfaction centrifugal forces are at work, causing the system to depart further and further from the required line of advance. Thus the equilibrium between G and Gw is a knife-edge equilibrium. For once it is disturbed, it is not self-correcting. It follows that one of the major tasks of public policy is to bring G and Gw together in order to maintain long-run stability. For this purpose, Harrod introduces his third concept of the natural rate of growth. The Natural Rate of Growth. The natural rate of growth is the rate of advance which the increase of population and technological improvements allow. It depends on the macro variables like population, technology, natural resources and capital equipment. In other words, it is the rate of increase in output at full employment as determined by a growing population and the rate of technological progress. The equation for the natural rate of growth is

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Gn. Cr= or # s Here Gn is the natural or full employment rate of growth. Divergence of G, Gw and Gn. Now for full employment equilibrium growth Gn=Gw = G. But this is a knife-edge balance. For once there is any divergence between natural, warranted and actual rates of growth conditions of secular stagnation or inflation would be generated in the economy. If G>Gw, investment increases faster than saving and income rises faster than Gw. If G<Gw, saving increases faster than investment and rise of income is less than Gw. Thus Harrod points out that if Gw>Gn, secular stagnation will develop. In such a situation, Gw is also greater than G because the upper limit to the actual rate is set by the natural rate as shown in Fig.2(A). When Gw exceeds Gn, C > Cr and there is an excess of capital goods due to a shortage of labour. The shortage of labour keeps the rate of increase in output to a level less than Gw. Machines become idle and there is excess capacity. This further dampens investment, output, employment and income. Thus the economy will be in the grip of chronic depression. Under such conditions saving is a vice.
(A) Gw Growth Rates Gn E Y0 O t1 t2 t3 Time t4 Fig. 2. G Growth Rates (B) G Gn

Gw Y0 O t1 E t2 t3 t4 Time

If Gw<Gn, Gw is also less than G as shown in Fig. 2(B). The tendency is for secular inflation to develop in the economy. When Gw is less than Gn, C< Cr. There is a shortage of capital goods and labour is plentiful. Profits are high since desired investment is greater than realised investment and the businessmen have a tendency to increase their capital stock. This will lead to secular inflation. In such a situation saving is a virtue for it permits the warranted rate to increase. This instability in Harrods model is due to the rigidity of its basic assumptions. They are a fixed production function, a fixed saving ratio, and a fixed growth rate of labour force. Economists have attempted to relieve this rigidity by permitting capital and labour substitution in the production function, by making the saving ratio a function of the profit rate and the growth rate of labour force as a variable in the growth process. The policy implications of the model are that saving is a virtue in any inflationary gap economy and vice in a deflationary gap economy. Thus in an advanced economy, s has to be moved up or down as the situation demands.

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A COMPARATIVE STUDY OF THE TWO MODELS Points of Similarity. The following are the points of similarity in the two models. The Domar Model The Harrod Model GC = s

= =

Y I S Y

I = I

G= C=

Y Y I Y S Y

I S Y = I Y I
I S = I I I=S

or

Y I S = Y Y Y = I S = Y Y
I=S

s=

or

or

Given the capital-output ratio, as long as the average propensity to save is equal to the marginal propensity to save, the equality of saving and investment fulfils the conditions of equilibrium rate of growth. Looked at from another angle, the two models are similar. Harrods s is Domars . Harrods warranted rate of growth (Gw) is Domars full employment rate of growth (). Harrods Gw = s/Cr Domars .

FSince Gw = Y
Y

To prove it =

S or S = Y Y

...(1) ...(2) [ S = Y] ...(3)

Y or Y = I I Since S = I, and substituting S for I in equation (2), we have Y = Y =

or

Y = Y
Gw =

We have proved mathematically that Harrods Gw is the same as Domars . But, in reality, Domars rate of growth s is Harrods Gw, and Domars is Harrods Gn. In Domars model, s is the annual productive capacity of newly created capital which is greater than which is the net potential social average productivity of investment. It is the lack of labour and other factors of production which reduces Domars growth rate from s to . Since labour is involved in , therefore Domars potential growth rate resembles Horrods natural rate. We may also say that the excess of s over in Domars model expresses the devise of Gw over Gn in Harrods model. Points of Difference. There are, however, important differences in the two models. (1) Domar assigns a key role to investment in the process of growth and emphasises on its dual character. But Harrod regards the level of income as the most important factor in the growth process. Whereas Domar forges a link between demand and supply of investment. Harrod, on the other hand, equates demand and supply of saving. (2) The Domar model is based on one growth rate . But Harrod uses three distinct rates of

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growth: the actual rate (G), the warranted rate (Gw) and the natural rate (Gn). (3) Domar uses the reciprocal of marginal capital-output ratio, while Harrod uses the marginal capital-output ratio. In this sense Domars = I/Cr of Harrod. (4) Domar gives expression to the multiplier but Harrod uses the accelerator about which Domar appears to say nothing. (5) The formal identity of Harrods Gw equation and Domars equation is maintained by Domars assumption that / = Y/Y. But Harrod does not make such assumptions. In Harrods equilibrium equation Gw = s/Cr, there is neither any explicit or implicit reference to I or I. It is, however, in his basic equation G=s/C that there is an implicit reference to I, since C is defined as I/Y. But there is no explicit or implicit reference to I. (6) For Harrod the business cycle is an integral part of the path of growth and for Domar it is not so but is accommodated in his model by allowing (average productivity of investment) to fluctuate. (7) While Domar demonstrates the technological relationship between capital accumulation and subsequent full capacity growth in output, Harrod shows in addition a behavioural relationship between rise in demand and hence in current output on the one hand, and capital accumulation on the other. In other words, the former does not suggest any behaviour pattern for entrepreneurs and the proper change in investment comes exogenously, whereas the latter assumes a behaviour pattern for entrepreneurs that induces the proper change in investment.

LIMITATIONS OF THESE MODELS

Some of the conclusions depend on the crucial assumptions made by Harrod and Domar which make these models unrealistic: (l) The propensity to save ( or s) and the capital-output ratio () are assumed to be constant. In actuality, they are likely to change in the long run and thus modify the requirements for steady growth. A steady rate of growth can, however, be maintained without this assumption. As Domar himself writes, This assumption is not necessary for the argument and that the whole problem can be easily reworked with variable and . (2) The assumption that labour and capital are used in fixed proportions is untenable. Generally, labour can be substituted for capital and the economy can move more smoothly towards a path of steady growth. Infact, unlike Harrods model, this path is not so unstable that the economy should experience chronic inflation or unemployment if G does not coincide with Gw. (3) The two models also fail to consider changes in the general price level. Price changes always occur over time and may stabilize otherwise unstable situations. According to Meier and Baldwin, If allowance is made for price changes and variable proportions in production, then the system may have much stronger stability than the Harrod model suggests. (4) The assumption that there are no changes in interest rates is irrelevant to the analysis. Interest rates change and affect investment. A reduction in interest rates during periods of overproduction can make capital-intensive processes more profitable by increasing the demand for capital and thereby reduce excess supplies of goods. (5) The Harrod-Domar models ignore the effect of government programmes on economic growth. If, for instance, the government undertakes a programmes of development, the Harrod-Domar analysis does not provide us with causal (functional) relationship. (6) It also neglects the entrepreneurial behaviour which actually determines the warranted growth rate in the economy. This makes the concept of the warranted growth rate unrealistic.

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(7) The Harrod-Domar models have been criticised for their failure to draw a distinction between capital goods and consumer goods. (8) According to Professor Rose, the primary source of instability in Harrods system lies in the effect of excess demand or supply on production decisions and not in the effect of growing capital shortage or redundancy on investment decisions. Conclusion. Despite these limitations, Harrod-Domar growth models are purely laissez-faire ones based on the assumption of fiscal neutrality and designed to indicate conditions of progressive equilibrium for an advanced economy. They are important because they represent a stimulating attempt to dynamize and secularise Keynes static short-run saving and investment theory," according to Kurihara.

APPLICATION OF HARROD-DOMAR MODELS TO UNDERDEVELOPED COUNTRIES

Growth theory in advanced economies has been associated with three principal concepts: the saving function, autonomous vs induced investment, and the productivity of capital. The HarrodDomar models are based on these concepts and were primarily developed in order to illuminate secular stagnation that was threatening the advanced economies in the post-war period. The application of these models has now been extended to the development problems of underdeveloped economies. As Hirschman writes: The Domar model, in particular, has proved to be remarkably versatile, it permits us to show not only the rate at which the economy must grow if it is to make full use or the capacity created by new investment but inversely, the required savings and the capital-output ratios if income is to attain a certain target growth rate. In such exercises, the capital-output ratio is usually assumed at some value between 2.5 and 5; sometimes several alternative projections are undertaken; with given growth rates, overall or per capita, and with given population projections, in the latter case, total capital requirements for five- or ten-year plans are then easily derived.3 Let us see, how these models can be used for planning of underdeveloped countries. Suppose the capital-output ratio is assumed to be 4:1 and the full capacity growth rate or the warranted growth rate is estimated at 3 per cent per annum for the economy. By applying either the Harrod or the Domar formula, the planners can find out the saving-income ratio required to sustain the growth rate of 3 per cent per annum. In Harrods model: Gw.Cr=s and by applying the assumed rates we get, 3/100 4/1=12/100 or 12 per cent which is the saving-income ratio. Similarly, in Domars model: Y/Y= = 3/100 4/1 = 12/100 or 12 per cent ( being the reciprocal of Harrods Cr). Thus, if the capital-output ratio is assumed as 4: 1 in an economy, the community will have to save 12 per cent of its annual income, if its annual growth rate of output is to be 3 per cent. Let us work it out in practice. Given the saving ratio and the capital-output ratio, the Harrod formula for calculating the growth rate is Gw=s/Cr If s is 12 per cent and the value of Cr 4, then Gw=12/4 =3 per cent. Sir Roy Harrod in the Second Essay in Dynamic Theory has tried to make his model more applicable to underdeveloped countries. He has elaborated the supply side of his fundamental equation
3. A.O. Harschman, op. cit., pp. 31-32.

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by introducing the role of interest rate in determining the supply of savings and the demand for savings. The natural rate of interest rn defined as the ratio of the natural growth rate of per capita output, Pc and the natural growth rate of income, Gn to the elasticity of diminishing utility of income e.Thus

Taking the values of Pc and Gn as given, the natural rate of interest depends on the value of e which is assumed to be less than unity, r n and e are inversely related to each other. When e is small, rn is high and vice versa. The capital requirements, Cr, depend on the rate of interest, Cr=f(rn). Rather, Cr is a decreasing function of rn. The higher the rate of interest, the lower the capital requirements, and vice versa. The savings requirements Sr, like Cr, are also of much importance in underdeveloped countries. But the average propensity to save s is not necessarily equal to social requirements of savings, Sr. The actual savings S may be greater or less than Sr, i.e., S = Sr. If S>Sr then Gw> Gn which means that actual savings being larger in the community, entrepreneurs would desire to invest more. In the long run, however, Gw cannot continue to be greater than Gn which is the highest growth rate that can be attained. In such a situation, the actual growth rate would attain full employment and will be less than Gw, i.e., G<Gw. This will lead to depression in the economy. On the contrary, if S<Sr, then Gw<Gn. It implies that actual savings being less than the required savings in the community, there would be fall in investment. In the long run, it would lead to a fall in the warranted growth rate below the actual growth rate, i.e., Gw<G and the level of investment would increase. Ultimately there will be chronic inflation. Since low savings, high level of investment and chronic inflation are some of the features of underdeveloped countries, Harrod suggests the financing of large investments through the expansion of bank credit and automatic investment of inflationary profits in the capital markets. But there are no organised capital markets in such economies. Therefore, expansion of bank credit is the only way to finance investments and generate economic growth. Low savings in an underdeveloped country are responsible for its low rate of growth and the existence of mass unemployment and underemployment. Thus the actual level of savings should be raised to the level of required rate of savings by a compulsory levy or a surplus budget so that S = Sr. Besides, Harrod also emphasizes the need for changes in the social and institutional factors in such economies. For social and institutional obstacles may be the cause of a low growth rate rather than the lack of savings in underdeveloped countries. Under the circumstances, Sr will also be low and S may approximate to it. LIMITATIONS OF THESE MODELS FROM THE STANDPOINT OF UNDERDEVELOPED COUNTRIES The Harrod-Domar models are not applicable to underdeveloped countries for the following reasons: 1. Different Conditions. The Hariod-Domar analysis was evolved under different set of conditions. It was meant to prevent an advanced economy from the possible effects of secular stagnation. It was never intended to guide industrialization programmes in underdeveloped economies. The limitations of these growth models as applied to such economies, therefore, stem from this fact. 2. Saving Ratio. These growth models are characterized by a high saving ratio and a high capital-

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output ratio. In an underdeveloped economy, however, decisions to save and invest are generally undertaken by the same group of persons. The vast majority of the people live on the margin of subsistence and thus very few are in a position to save. 3. Capital-Output Ratio. Similarly, it is difficult to have a correct estimate of the capital-output ratio where normal productivity is often inhibited by shortages and bottlenecks. When they are removed, there is considerable increase in the productivity of already invested capital. Such an economy, therefore, would have either to increase its saving ratio or capital-output ratio by improving methods of production arid removing the various obstacles to investment. Prof. Hirschman is of the view their the predictive and operational value of a model based on the propensity to save and on the capital-output ratio is low and is bound to be far less useful in underdeveloped than in advanced economies. 4. Structural Unemployment. According to Prof. Kurihara, the Harrod-Domar growth rate of investment fails to solve the problem of structural unemployment to be found in underdeveloped countries. It can tackle the problem of Keynesian unemployment arising out of deficiency of effective demand or due to under-utilization of capital. But when population grows faster than accumulation of capital in an underdeveloped country, structural unemployment will arise due to lack of capital equipment. 5. Disguised Unemployment. These models start with the full employment level of-income but such a level is not found in underdeveloped countries. There exists disguised unemployment in such countries which cannot be removed by the methods suggested by Harrod-Domar. Thus the main assumption of the Harrod-Domar models being absent in underdeveloped countries, these models are not applicable to them. 6. Government Intervention. The Harrod-Domar models are based on the assumption that there is no government intervention in economic activities. This assumption in not applicable to underdeveloped countries because they cannot develop without government help. In such countries, the role of the state as pioneer entrepreneur in starting large industries and in regulating and directing private enterprise has been increasingly recognised. 7. Foreign Trade and Aid. The Harrod-Domar models are based on the assumption of a closed economy. But underdeveloped countries are open rather than closed economies where foreign trade and aid play very crucial roles in their economic development. Both these factors are the bases of their economic progress. 8. Price Changes. These models are based on the unrealistic assumption of a constant price level. But in underdeveloped countries price changes are inevitable with development. 9. Institutional Changes. Institutional factors have been assumed to be given in these models. But the reality is that economic development is not possible without institutional changes in such countries. Therefore, these models fail to apply in underdeveloped countries. Conclusion. Thus it appears from the above discussion that the Harrod-Domar models, based as they are on unrealistic assumptions, have little practical application in underdeveloped countries, Hirschman, therefore, suggests that economics of development, like the underdeveloped countries themselves, must learn to walk on its own feet, that is, it must work out its own abstractions.4
4. Hirschman, op. dt., p. 33. Professor S. Chakravarty in his book, The Logic of lnvestment Planning, (p. 43), regards these models as a very rough tool in itself and not too much should be expected from it. The great service that these models perform is to indicate very roughly the dimensions of the problem involved in raising the per capita income level in an underdeveloped country. Their highly aggregative nature, however, prevents them from being used as a tool in detailed quantitative policy making and conceals many structural aspects of the problem of a steady rate of growth.

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But Kurihara is of the view that though their policy implications are very opposite of what one might expect of an underdeveloped economy, yet the growth models have this positive lesson for underdeveloped economies, that the state should be allowed to play not only a stabilizing role but also a development role, if these economies are to industrialize more effectively and rapidly than the now industrialized economies did in conditions of laissez-faire. He further opines that because of the universal character of saving-income ratio and capital-output ratio (or its reciprocal) as measurable strategic variables, the growth mechanism discussed by Harrod and Domar is applicable to all economic systems, albeit with due modification. That is why, these growth models are applicable to those underdeveloped countries in which the technique of planning with balanced growth is adopted because under this technique saving-income ratio and capital-output ratio remain constant during the plan period.5

5. Kurihara, op. cit., Chapters 9 and l1.