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Working Paper 57 - Exorcism of the Ghost: An Alternative Growth Model for Measuring the Financing Gap


In 1997, William Easterly authored an intriguing paper on “The Ghost of Financing Gap: How the Harrod-Domar Model Still Haunts Development Economics”. He concluded that the Harrod-Domar model “was not intended as a growth model, made no sense as a growth model, and was repudiated as a growth model forty years ago by its creator”. His empirical examination shows that the model fails drastically in explaining the performance of investment and growth. Yet, the ghost of the Harrod-Domar model still haunts the living minds of development economists. Easterly reveals that the Harrod-Domar growth model is still used by the leading international and regional organizations to measure foreign resource requirements, allocate aid resources and provide advice on economic policy

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