What is nehru- mahalanobis model?

Question

What is nehru- mahalanobis model?

Answer 1

Model of economic development toward shift from capital goods to consumption goods - described Indian development in 1950-s~1960-s and was used in accompany with Harrod-Domar model.

http://en.wikipedia.org/wiki/Mahalanobis...

Answer 2

There is no Nehru-Mahalonobis model: there is Mahalonobis ( or, Feldman-Mahalanobis) Model. It is essentially a developmental plannibng model and not an economic growth model of the Harrod-Domar or Solow model variety. It is a model whose design was influenced by the totalitarian command, closed economic system of centralised planning that prevailed in the erstwhile Soviet Union in the 1940s/ 1950s. India adopted centralised planning in a so-called mixed economy but largely command economic set up fearful of free enterprise, market mechanism and  external trade. As part of economic planning, the issue of allocation of capital was to be solved in a manner that economic growth rate could be enhanced. The Indian planners felt that higher investment in heavy industries like steel making would generate adequate materials for augmenting caopital equipment and machinery that were necessary for rapid progress of industrialization. So, the Mahalonobis model, largely following the Soviet Union's strategy, provided a rationale for allocating a larger share of Govt. investment in the capital goods sector and a lower share of investment to the consumption goods sector. The model showed that, while the shortrun growth in consumption will be reduced, the long-run growth rate of consumption would be higher if greater investment share is allocated to capital goods sector and heavy industries. Soon followed a great large in Govt. investment in public sector steel plants. An unstated, but crucial assumption in this model is that there exists a sufficiently large surplus of wage goods in the final/agricultural sector for the wage goods constraint not to impose limitations on the industrialisation possibilities.

The Mahalanobis model is a model of economic development, created by Indian statistician Prasanta Chandra Mahalanobis in 1953. Mahalanobis became essentially the key economist of India's Second Five Year Plan, becoming subject to much of India's most dramatic economic debates.The essence of the model is a shift in the pattern of industrial investment towards building up a domestic consumption goods sector. Thus the strategy suggests in order to reach a high standard in consumption, investment in building a capacity in the production of capital goods is firstly needed. A high enough capacity in the capital goods sector in the long-run expands the capacity in the production of consumer goods. The distinction between the two different types of goods was a clearer formulation of Marx’s ideas in Das Kapital, and also helped people to better understand the extent of the trade off between the levels of immediate and future consumption. These ideas were however first introduced in 1928 by G.A. Feldman, a Soviet economist working for the GOSPLAN planning commission; presenting theoretical arguments of a two-department scheme of growth. There is no evidence that Mahalanobis knew of Feldman’s approach, being kept behind the borders of the USSR. Due to the similarity of the two theories, the model is often referred to as the Feldman-Mahalanobis model.

The model was created as an analytical framework for India’s Second Five Year Plan in 1955 by appointment of Prime Minister Jawaharlal Nehru, as India felt there was a need to introduce a formal plan model after the First Five Year Plan (1951-1956). The First Five Year Plan stressed investment for capital accumulation in the spirit of the one-sector Harrod-Domar model. It argued that production required capital and that capital can be accumulated through investment; the faster one accumulates, the higher the growth rate will be. The most fundamental criticisms came from Mahalanobis, who himself was working with a variant of it in 1951 and 1952. The criticisms were mostly around the model’s inability to cope with the real constraints of the economy; it’s ignoring of the fundamental choice problems of planning over time; and the lack of connection between the model and the actual selection of projects for governmental expenditure. Subsequently Mahalanobis introduced his celebrated two-sector model, which he later expanded into a four-sector version.

In the model the growth rate is given by both the share of investment in the capital goods sector, λk, and the share of investment in the consumer goods sector, λc. If we choose to increase the value of λk to be larger than λc, this will initially result in a slower growth in the short-run, but in the long run will exceed the former growth rate choice with a higher growth rate and an ultimately higher level of consumption. In other words, if this method is used, only in the long run will investment into capital goods produce consumer goods, resulting in no short run gains.

One of the most common criticisms of the model is that Mahalanobis pays hardly any attention to the savings constraint, which he assumes comes from the industrial sector. Developing countries however do not have this tendency, as the first stages of saving usually come from the agricultural sector. He also does not mention taxation, an important potential source of capital. A more serious criticism is the limitation of the assumptions under which this model holds, an example being the limitation of foreign trade. This cannot be justifiable to developing countries today. Also another criticism is that a country to use this model would have to be large enough to contain all the raw resources needed to be sustainable, so therefore this would not apply to smaller countries.

The Mahalonobis model strategy did result in a spurt in the growth of heavy industries in India in the second five yaer plan, but soon there would be severe food crisis and that followed a severe industrial, especially engineering industry, recession, India had to be content with very low rates of economic growth for long thanks to the closed economy totalitarian planning regime with overwhelming govt. control that provided the environment for developing Mahalonobis type of economic planning model and the dream of high longterm economic growth rate remained a dream for decades.  The whole excercise of economic planning initiated by Jaharlal Nehru, the first prime minister of independent India and his followers, delivered very little of the promises it generated by the rehetoric of socialism.

It is still a great embarrassment to answer foreigners' enquiry as to why for four decades 1950-1990, India performed so poorly in terms of economic growth, while much smaller and poorer countries in Asia marched miles and miles ahead of India.