1.1.1. Relevance of Harrod-Domar Model for Developing Countries

Harrod-Domar model was formulated primarily to protect the developed countries from chronic unemployment and they were not meant to provide guidelines to the developing economies in their economic development. Since they were formulated primarily for the developed countries they were based on high propensity to save and a correct estimate of the capital-output ratio, which should remain fixed over time. On the other hand, the main problems of the under-developed countries is to raise their propensity to save because it is generally low in these countries. Nor is it possible to assume a fixed value of the capital-output ratio. This ratio happens to be very high in these countries. Thus the two important bases of the Harrod-Domar model are non-existent in the case of developing economies.

Thus the peculiar conditions prevailing in the developing countries e.g. disguised unemployment, low propensity to save and low productive capacity makes the Harrod-Domar model inapplicable to them. Also, this model assumes no government intervention, fixed prices and no institutional changes. All these assumptions too make it inappropriate.

However, we should not reject this model wholesale and emphasize their inapplicability to developing economies. With slight modifications and reinterpretation they can be made to furnish suitable guidelines even for the developing economies. In some cases, it is only a question of changing the emphasis. For instance, Domar’s model recognizes the capacity creating role of investment. But it is intended to increase effective demand in developed countries, while in developing countries, the capacity creating role of investment is to be seen as a means of overcoming the problem of unemployment. Hence, to make the model applicable to the developing countries, it has to be suitably reinterpreted.