Why Harrod-Doamr Model is not Applicable to UDCs? (10 Reasons)

The following points highlight the ten reasons why the Harrod-Domar model is not applicable to Under-Developed Countries (UDCs).

1. Government Intervention:

Harrod-Domar model is based on the assumption that there should be no intervention at the behest of government.

But this assumption is not applicable in under-developed countries as state plays a pioneer role as a sole entrepreneur in starting basic and key and heavy industries.

They also help to regularise the unorganised private sector to induce investment to generate the tempo of economic development. This means that role of the government is essential and compulsory.

2. No Closed Economy:

This model is based on the assumption of closed economy. But under-developed countries have open economies where in foreign trade and aid play a vital role in the pace of economic development.

3. Structural Unemployment:

In the opinion of Prof. Kurihara, Harrod-Domar model fails to solve the peculiar problems of structural unemployment in under-developed countries. It can only tackle the problem of Keynesian unemployment which arises due to deficiency of effective demand and under-utilization of capital.

As the population grows more rapidly than accumulation of capital in an UDC, structural unemployment will rise due to lack of capital equipment.

4. Disguised Unemployment:

Harrod-Domar models start with full employment level of income but such level does not exist in under-developed countries. In fact, these countries face the chronic problem of disguised unemployment while this model cannot solve such active problems in UDCs. Due to this reason, it is claimed by some economists that Harrod-Domar model cannot be applicable to meet with the problems of UDCs.

5. Institutional Changes:

Harrod-Domar model assumes institutional factor to be fixed. But without the changes in institutions, no economic development is possible in under-developed countries.

6. Constant Prices:

These models are based on unrealistic assumption of constant prices. In fact, change in price level is a natural phenomena which is inevitable with the pace of development.

7. Capital Output Ratio:

It is difficult to make a correct estimate of capital output ratio due to various bottlenecks in under-developed countries. If these are removed, there will be notable increase in the productivity of invested capital. Prof. A. Ghosh has rightly observed that capital output ratio and income saving ratio are assumed to be steady which is not practicable, as in UDC this ratio specially has been changing.

8. Saving Ratio:

Harrod-Domar model assumed high saving ratio. Generally, decision to save and invest is taken by the same group of persons because majority of the people are living on subsistence level and thereby these are not in a position to save much.

9. Full-Employment:

Harrod-Domar starts with the assumption of full-employment in the short-run period. But in the context of under-developed countries, they are facing cyclical fluctuations in the business activities and due to over population; there exists the chronic problem of unemployment.

10. Different Conditions:

Harrod-Domar analysis was evolved to the conditions of industrially advanced western countries who want to prevent themselves from secular stagnation. This model never intended to provide any sort of guidance to the backward and under-developed economies to promote its industries.

Another distinguishing characteristic of these economies is that advanced countries simply want to maintain the full-employment while the UDCs are interested in attaining the level of full-employment. Therefore, the limitation of this growth model, as applied to such economies goes away from reality.