ABSTRACT
In seeking the more important factors on which growth depends, R. F. Harrod and E. D. Domar isolated two: firstly, the addition to output as a result of an increment in the capital stock - the incremental capital/output ratio, and secondly, the marginal propensity to save out of income. The success of the scheme led some economists, including the growing breed of “aid-experts” to advocate aid tied to physical capital as the most important factor in promoting growth in the developing countries. The usual procedure is to set a target rate of growth for the economy and to divide that figure by an estimated capital-output ratio, obtaining the required savings ratio. The economics of the 1950s was obsessed by balanced growth, arguing that development of industry alone would be constrained by the farmers’ poverty, and that development of agriculture alone would turn the terms of trade against agriculture and bankrupt the farmers.
