Relevant economic
theory
In
relation to the topic above, the most appropriate economic theory is the linear
stages of growth theory. This school of economic thought was developed in the
1960s and remains useful today when it comes to the search for economic
development in the developing world (Foster, 2007). This economic thought
describes a number of models which aim at outlining the process of economic
development which is viewed as a sequential sequence. Rostow’s Stages of Growth
Model is one of the models in this theory.
In the first stage, the country is
likened to the traditional society which is agrarian based (Foster, 2007). The
country then makes efforts to strengthen its institutional infrastructure.
Education and understanding of science is also enhanced. In the third stage,
economic growth starts backed by organised economic systems and this is
followed by incremental diversification of the economy and less dependence on
agriculture (Martini, 2010). In the fifth stage, the economic development is
realised characterised by better distribution of wealth and higher living
standards. Savings and investment are crucial to facilitate this development.
Additional resources can also be derived from foreign aid to fast track
development of the relevant institutions and spur economic growth.
The Harrod-Domar Growth Model
complements the model above. In terms of the elements that generate economic
growth, national savings and investments are the motivating factors (Hussein
and Thirlwall, 2000). Foreign aid substitutes or complements national savings.
This means that economic growth is spurred by foreign aid, and when the same is
accompanied by structural and systemic changes as recommended in Rostow’s
model, economic development is realised. The relevance of Harrod-Domar Growth
Model is enhanced by the fact that economic development is dependent on
economic growth rates (Hussein and Thirlwall, 2000). The model for economic
growth is discussed in latter sections of this paper.
Key variables for topic
The
dependent factor is economic
development. This is because the paper shall focus on evaluating the rate
of economic development corresponding to the foreign aid trends for the country
under study.
The independent factors are: foreign
aid’s influence on economic growth, foreign aid’s influence on institutional
development, and economic focus. The fast factor on economic growth is based on
the premise that, since foreign aid substitutes or complements national savings
in determining economic growth, it is bound to impact economic growth (Martini,
2010). Sustained economic growth then lays the foundation for economic
development.
The second independent factor
relates to institutional strength. According to Rowstow’s model, development of
institutional strength is crucial in the process of enhancing development. This
variable makes non-financial contributions relevant to the question. For
instance, aid can be specific for strengthening certain institutions and this
can contribute to economic development (Foster, 2007). This is related to the
third factor: focus of the economy. Seeking to diversify economies away from
dependence on agriculture is crucial for economic development.
Estimating equation
Economic
development depends on sustained high rates of economic growth. The relevant
equation is described in Harrod-Domar Growth Model: GDP growth rate (g) depends
on the national saving ratio (s) and inversely on national output/capital ratio
(k) as adjusted for depreciation (d). The equation is as below:
[g
= (s/k)-d]
The
relevance of foreign aid in the equation is determined by its ability to reinforce
savings (s). Foreign aid either replaces or adds to national savings. This
means that there is a direct relationship between GDP growth rate and national
saving. Since development is dependent on sustained economic growth, sustained
foreign aid can lead to development provided that other non-financial factors
are fulfilled.
References
Foster,
J.B., 2007. The Imperialist World System: Paul Baran's Political Economy of
Growth after Fifty Years. Monthly Review
59(1), pp. 1-16
Hussein,
K., Thirlwall, A.P., 2000. The AK model of "new" growth theory is the
Harrod-Domar growth equation: Investment and growth revisited. Journal of Post Keynesian Economics
22(3), pp. 427-435
Martini,
E.A., 2010. America's Rasputin: Walt Rostow and the Vietnam War. The Journal of American History 97(3),
pp. 858-859
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