The Optimal Growth Path for an Underdeveloped Economy

In the course of practical planning in underdeveloped countries there arises at some point the question of what the rate of saving should be. This may be, and probably usually is, solved by pushing it as high as is politically feasible. As an answer this indicates a serious theoretical lacuna, apart from other more concrete shortcomings. The rate is ordinarily much too low and can only be raised gradually. But how rapidly should it be raised and how high? Should the savings rate continue to rise, level off or even ultimately be reduced? As time passes the policies become easier to carry out, but the prescriptions become more disputable. A related question is ‘In what proportion should net capital formation be divided between capital goods industries and consumer goods industries’, and it was discussed in this form in the early days of planning in the U.S.S.R. Increasing capital-goods capacity has great attractions, since machines to make machines involve growth in a way that machines to make, say, textiles do not. In fact, it is not difficult to show that by putting more capital into capital goods, consumption will ultimately benefit, even though at first it will be reduced; i.e. by shifting resources from the one to the other we will at first have less, and then later more consumption, in perpetuity, than if we did not. Yet this proves too much, because then we can always use promised future consumption as a reason for not consuming now, which does not provide a satisfactory basis for policy.