The Ghost of Financing Gap: How the Harrod-Domar Growth Model Still Haunts Development Economics

30 Pages Posted: 6 Jan 2005

See all articles by William Easterly

William Easterly

New York University - Department of Economics

Date Written: July 1997

Abstract

The ghost of a long-dead growth model still haunts aid to developing countries. The Harrod-Domar growth model supposedly died long ago. But for more than 40 years, economists working on developing countries have applied- still apply- Harrod-Domar model to calculate short-run investment requirements for a target growth rate. They then calculate a financing gap between the required investment and available resources and often fill the "financing gap" with foreign aid. Easterly traces the intellectual history of how a long-dead model came to influence today's aid allocation to developing countries. He asks whether the model's surprising afterlife is attributable to consistency with the 40 years of data that have accumulated during its use. The answer is "no." This paper-a product of the Development Research Group-is part of a larger effort in the group to study the determinants of economic growth.

JEL Classification: N01, O11

Suggested Citation

Easterly, William, The Ghost of Financing Gap: How the Harrod-Domar Growth Model Still Haunts Development Economics (July 1997). World Bank Policy Research Working Paper No. 1807. Available at SSRN: https://ssrn.com/abstract=11020

William Easterly (Contact Author)

New York University - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

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