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The ghost of financing gap : how the Harrod-Domar growth model still haunts development economics

  • Easterly, William

The Harrod-Domar growth model supposedly died long ago. But for more than 40 years, economists working on developing countries have applied -and still apply- the 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. The author 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."

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1807.

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Date of creation: 31 Aug 1997
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Handle: RePEc:wbk:wbrwps:1807
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  1. Easterly, William & Rebelo, Sergio, 1993. "Fiscal policy and economic growth: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 417-458, December.
  2. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June.
  3. Svensson, Jakob, 2000. "When is foreign aid policy credible? Aid dependence and conditionality," Journal of Development Economics, Elsevier, vol. 61(1), pages 61-84, February.
  4. Pritchett, Lant, 1996. "Mind your P's and Q's : the cost of public investment is not the value of public capital," Policy Research Working Paper Series 1660, The World Bank.
  5. Young, Alwyn, 1995. "The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 641-80, August.
  6. Romer, Paul, 1993. "Idea gaps and object gaps in economic development," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 543-573, December.
  7. Boserup, Mogens, 1969. "Warning against Optimistic ICOR Statistics," Kyklos, Wiley Blackwell, vol. 22(4), pages 774-76.
  8. Schmidt-Hebbel, K. & Serven, L., 1997. "Saving Across the World: Puzzles and Policies," World Bank - Discussion Papers 354, World Bank.
  9. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series 1777, The World Bank.
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