Solow Versus Harrod-Domar: Reexamining the Aid Costs of the First Millennium Development Goal

By Carl-Johan Dalgaard, Lennart Erickson

December 1, 2006

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Carl-Johan Dalgaard, and Lennart Erickson. Solow Versus Harrod-Domar: Reexamining the Aid Costs of the First Millennium Development Goal, (USA: International Monetary Fund, 2006) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The First Millennium Development Goal (MDG#1) is to cut the fraction of global population living on less than one dollar per day in half, by 2015. Foreign aid financed investments may contribute to the attainment of this goal. But how much can aid be reasonably expected to accomplish? A widespread calibration approach to answering this question is to employ the so-called development planning technique, which has the Harrod-Domar growth model at its base. Two particularly problematic assumptions in this sort of analysis are the absence of diminishing returns to capital input and an infinite speed of adjustment to steady state after a shock to the economy. We remove both of these assumptions by employing a Solow model as an organizing framework for an otherwise similar analysis. We find that in order to successfully meet the MDG#1 in the context of the currently proposed aid flows, these flows will have to be accompanied by either an acceleration in the underlying productivity growth rate or a major boost to domestic savings and investment in sub-Saharan Africa. In the absence of such changes in the economic environment, the MDG#1 is unlikely to be reached.

Subject: Aid flows, Income, Poverty, Poverty reduction, Productivity

Keywords: Capital goods, Mover accent, Production function, WP

Publication Details

Pages:

40
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2006/284
Stock No:

WPIEA2006284
ISBN:

9781451865448
ISSN:

1018-5941

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