The Contributions of Endogenous Growth Theory to the Analysis of Development Problems: An Assessment

Abstract

The `old' growth theory influenced the theory of economic development in several ways. Starting with the basic Harrod—Domar structure of capacity growth, development economists paid attention to the constraints posed by savings and the efficiency with which savings are utilised. The basic model was extended to incorporate structural rigidities constraining the capacity to convert exportables into imports of capital and intermediate goods (leading to the foreign exchange gap as an additional constraint) and the capacity to shift once-installed capital intersectorally (leading to a growth premium on investment allocation in favour of machine-making as in the Fel'dman—Mahalanobis planning model). The optimum growth literature led to a sophisticated discussion of terminal capacity constraints and social time discount rates in the context of development planning. Given the persistence of unemployment and underemployment, and the precapitalist organisation of production in some sectors, the classical growth model (to which Arthur Lewis had drawn attention) was often considered to be more appropriate than the Solow—Swan neoclassical growth model for studying development problems.