0.5 Perspectives on the role of capital in development: physical  (Page 7/10)

Example:

• The U.S., Canada and Australia faced very favorable initial conditions in 18th and 19th century. There was an abundance of land, fairly temperate climates, and good endowments of natural resources. But the initial conditions facing most (not all) poor countries were much less favorable and many had to cope with the damages left by centuries of colonialism, in Africa and Latin America. In the great majority of cases, colonialism was especially damaging to institutions, to soils, to system of governance etc.

So, it is evident that “one size never fits all” , even as between poorer countries as a group, there are just too many differences in initial conditions and subsequent conditions. However, early 20 ^th century models of economic growth were based on the idea that one size fits all

Let us also consider generalizations about development. The first important generalization. It is very difficult to make defensible generalization about economic development. We are, after all, talking about 160/170 odd nations that are conventionally called emerging, or less developed and 40 countries that are called nearly developed .

In fact, there are as many differences between individual developing countries as there are differences between developing countries and developed ones. This is not surprising given vast difference between developing countries. These include differences in:

• Cultures
• Natural resource endowment
• Climate ( 500 years ago tropical regions were richer then in Northern climates)
• Colonial Past ( Much of sub-Sahara Africa’s lower per capita GDP stem from its colonial heritage )
• Ideological Differences
• Leadership Differences

Growth models- old and new

Let us examine some 20th century models in Growth and Development. Not 30 years ago most courses on economic and development spent at least a month focused on models purporting to capture the essence of growth and development.

In this book we will spend only a few hours on them, mostly as a place-marker in the history of economic thought.

First was the Harrod-Domar Model a widely taught (circa 1950-55) model (see Chapter 4, textbook). Harrod-Domar This model was developed by Roy Harrod and Evsey Domar in the 1950s. The model is single-mindedly focused on investment in physical capital (the concept of human capital was not formal until the sixties). was concerned exclusively with rule of Physical capital accumulation in economic growth. This is an extremely simple model, formulated by desk-bound professors and taught by desk-bound professors to other desk-bound economists.

This model led to shallow thinking and more importantly, to some misapplied policies. The author remembers clearly the Vice President of the World Bank, Hollis Chenery, in 1975 lecturing to the Indonesian Ministers of Finance and Planning on the singular importance of Physical capital accumulation.

As one result of the dominance of this approach, there was a widespread tendency to think of the structure of the Harrod-Domar model as a reflection of the real world. Many then viewed parameters of Harrod-Domar as actually pertaining to world experience. A list of disastrous policies by aid donors and recipient governments attributed to thinking fostered by misuse of variants of the Harrod-Domar model, presented below: A more detailed presentation of the Harrod-Domar model may be found in Dwight Perkins, Stephen Radelet and David Lindauer , Economics of Development, (6th edition 2006, Chapter 11).