ECON213 Chapter Notes - Chapter 2: Lake Volta, Apotheosis, Walt Whitman Rostow
22 Oct 2015
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Ghana planned all these projects (transportation, aluminum smelter, industrialization, agriculture), but failed and spent way too much money for nothing. Restored democracy and then had a famine. Drought came and reduced lake volta waters, which reduced the hydro production of electricity, which in turn damaged the aluminum company. The differencebetween the required investment and the country"s own savings iscalled the financinggap. Private financing is assumed to be unavailable to fill the gap, so donors fill the financing gap with foreign aid to attain target growth. This is a model that promised poorcountries growth right away through aid- financed investment. Domar"s approach to growthbecamepopularbecause it hada wonderfully simple prediction: gdp growth will be proportional to the share of investment spending in gdp. Domarassumedthatoutput (gdp) is proportional to machines, so the change in output will be proportional to the change in machines, that is, last year"s invest- ment. So gdp growth this year is just proportional to last year"s investment/gdp ratio.
