15 Major Drawbacks of Harrod-Domar Model

Harrod and Domar models are the pioneer in the field of economic growth.

The fifteen major drawbacks of the Harrod-Domar model are:  1. Unscientific Assumption, 2. Natural Growth Rate is Open to Objection, 3. Variables Expressed in Real Terms, 4. Study of Non-Economic Factors Neglected, 5. Not Empirically True, 6. Not Study of Technical Change, and Others.

Drawback # 1. Unscientific Assumption:

The foremost drawback of these growth models is that they are based on unrealistic and unscientific assumptions.

They have assumed the key determinants such as propensity to save and capital output ratio remains constant.

But in reality, they are likely to change over a long period. The changes in these ratios are the essential requirement of steady growth.

Further, it is also assumed that production function is fixed and the factors of production cannot be substituted for each other, which is not possible for the steady growth of the economy. In fact, technological and organisational changes bring out the shifts in production function to a greater extent. Thus, these assumptions are not in the tune of economic development.

Drawback # 2. Natural Growth Rate is Open to Objection:

L.B. Yeager criticised the concept of natural growth rate in Harrod’s model. According to him, the ceiling limit to growth is not only determined by the available labour and natural sources as suggested by Harrod but also by the production techniques employed. Even if it is assumed that labour and natural resources are fixed, then output can be raised by combining these resources with better techniques of production.

Thus, Harrod’s version of putting ceiling to the total output due to fixity of resources does not hold good. Likewise, Prof. Yeager also doubted about the concept of warranted growth rate (Gw) as it has not been properly explained by Harrod. For clear understanding, it is a pre-requisite to be familiar to the determinants of Gw.

Drawback # 3. Variables Expressed in Real Terms:

The various variables used in Harrod and Domar models, are non-monetary in character. Due to this, effect of monetary factors on investment, saving and demand cannot be studied properly. In fact, investment, saving and productivity of capital variables serve as a useful tool in growth process if they are expressed in monetary terms.

The operation of trade cycle depends upon these monetary factors. Therefore, the study of growth models become insignificant in case these variables are expressed only in real terms.

Drawback # 4. Study of Non-Economic Factors Neglected:

The Harrod-Domar models lay undue emphasis on economic parameters only. On the other hand, non-economic factors like social, political, religious etc. have not been accounted for. The non-economic factors act as catalyst to maintain the stable growth while economic factors simply initiate the process of development.

Drawback # 5. Not Empirically True:

Harrod-Domar models are not empirically true. Herrick and Kindleberger remarked, The model has also shortcomings on narrower empirical grounds. Observed growth has been faster than can be accounted for by the rate of physical capital formation and a fixed capital output ratio. The theory could be saved by allowing capital output ratio to change but then it ceases to be a theory and lapses into the category of tautology.

Drawback # 6. Not Study of Technical Change:

Another objection raised against Harrod and Domar model is that they did not study the effects of technological change. In the present dynamic world technological changes are taking place at a faster rate. Without the study of technological change it loses its ground.

Drawback # 7. Assumption of Laissez-Faire is Unwarranted:

Harrod-Domar models are based on the assumption of Laissez-Faire. In the present era of development planning, the policy of Laissez-Faire is not suitable for solving the problems of economic growth. So these models can hardly fit in the frame-work of planned development following the assumption of Laissez-Faire.

Drawback # 8. Over-emphasis on Instability:

These models are highly aggregative in explaining the instability. They have unnecessarily stressed that once the path of steady growth is disturbed or disequilibrium sets in, instability gets momentum which further creates the state of either secular inflation or secular over production. But modern economists disagree with this opinion.

They firmly believe that the main reason of instability is entrepreneurial behaviour and the lag between investment decision and capital outlays. According to R.M. Solow, who argues that instability can easily be reduced if we follow the variability in the factor proportions.

Drawback # 9. Limited Application to UDC:

These models are also criticized on the ground that they have limited application in underdeveloped countries. These models are based on Keynesian economics which deals with the problem of capitalist world. These models try to solve the problem of economic instability and neglect the problems of development which are the core theme of under-developed countries.

Drawback # 10. Macro-Aspect of Models is Subject to Objection:

The variables used in this model are macro in character which hardly explains the relation among inter sectors of the economy. As such, it neglects the structural changes which are essential for economic development of an under-developed country.

It does not take into account the growth requirements of individual sectors of an economy. Disharmony and inconsistency in any form among the different sectors is not conducive for the steady growth of an economy.

Drawback # 11. Restricted Scope:

Harrod-Domar model has a restricted scope as it is only applicable to the process where saving income ratio and capital output ratio remain constant. But, on the contrary, this model is not applicable in a case where the growth is unbalanced and discontinuous.

It has been noticed that in planning with unbalanced growth, heavy industries grew at a faster rate than the rest of the economy. In such a situation, investment will increase at a more higher rate than the rest of the economy. In such a situation, investment will increase at a more higher rate than income and consumption. Therefore, this model lacks wider scope.

Drawback # 12. No Study of General Price Level:

Another point of criticism against these two models is that they fail to consider the changes in general price level. Price changes always occur over time and may stabilize otherwise unstable situation.

Drawback # 13. Interest Rate not Constant:

Another serious drawback of Harrod-Domar Model is that it considers rate of interest as constant which is absolutely irrelevant in the changing environment of the economy. Although investment, yet it is true that during the phase of over-production, downward direction of interest rate will certainly induce the demand for capital and thereby provides a solution to the problem of excess supplies of goods.

Drawback # 14. Ignore the Effect of Government Programmes on Economic Growth:

Harrod-Domar models fails to study the effect of government programmes on economic growth. For instance, the government undertakes a programme of economic development, the Harrod-Domar analysis does not provide us with casual (functional) relationship.

Drawback # 15. Study of Technical Change Ignored:

Harrod-Domar models ignored the study of technical change which in the present economic world is a must. In fact, technological changes are taking place at a fast rate in the modern economic world. Without the study of technological change it loses relevancy.

Despite the above criticisms and objections, it can be safety argued that these models have stressed the basic factors involved in the growth of capitalist countries. The main factors which help in the growth of advanced countries can also act as the force bearer for less developed countries if they are modified and suitably adjusted.