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Feldman–mahalanobis model

What Is Feldman–Mahalanobis model?

The Feldman–Mahalanobis model is a two-sector economic development model that emphasizes prioritizing investment in capital goods industries to achieve long-term economic growth and rapid industrialization. It belongs to the broader field of development economics and is a theoretical framework for central planning in an economy. The core idea behind the Feldman–Mahalanobis model is that a higher allocation of resources to the production of machinery and equipment (capital goods) will ultimately lead to a greater capacity for producing consumption goods in the future, thereby raising living standards. This model became particularly influential in guiding the economic policies of developing nations, notably India.

History and Origin

The Feldman–Mahalanobis model was independently developed by two distinct individuals: Soviet economist Grigory Feldman in 1928 and Indian statistician Prasanta Chandra Mahalanobis in 1953. Feldman, working for the Soviet planning commission Gosplan, presented theoretical arguments for a two-department growth scheme, drawing from Marxist ideas on the distinction between capital and consumer goods. There is no evidence that Mahalanobis was aware of Feldman's work, which remained largely confined within the USSR at the time.

Mahalanobis formulated his model as an analytical framework for India's Second Five-Year Plan (1956–1961), under the leadership of Prime Minister Jawaharlal Nehru. After In38, 39dia's First Five-Year Plan focused primarily on agriculture, there was a recognized need for a more formal economic strategy to foster rapid industrialization. Mahalano36, 37bis, a close associate of Nehru and founder of the Indian Statistical Institute, played a crucial role in shaping India's post-independence economic policies, with his model forming the basis for the Second Five-Year Plan's emphasis on heavy industries and the public sector. The plan32, 33, 34, 35's objective was to achieve a 25% increase in national income through accelerated industrialization.

Key 31Takeaways

  • The Feldman–Mahalanobis model is a two-sector economic growth model focusing on investment allocation between capital goods and consumption goods sectors.
  • It advocates for prioritizing investment in capital goods to enhance future production capacity for consumer goods.
  • The model was independently developed by Grigory Feldman (1928) and Prasanta Chandra Mahalanobis (1953).
  • It served as the theoretical foundation for India's Second Five-Year Plan (1956–1961), aiming for rapid industrialization.
  • Key criticisms include its neglect of agriculture, savings constraints, and potential for inflation and inefficiencies due to centralized planning.

Formula and Calculation

The Feldman–Mahalanobis model can be represented by equations that allocate total investment between the capital goods sector and the consumption goods sector. The model focuses on how this allocation impacts the long-run growth rate of the economy.

Let:

  • ( Y_t ) = National income at time ( t )
  • ( K_t ) = Capital stock at time ( t )
  • ( I_t ) = Total investment at time ( t )
  • ( I_k ) = Investment in the capital goods sector
  • ( I_c ) = Investment in the consumption goods sector
  • ( \alpha_k ) = Share of total investment allocated to the capital goods sector ( ( I_k / I_t ) )
  • ( \alpha_c ) = Share of total investment allocated to the consumption goods sector ( ( I_c / I_t ) )
  • ( \beta_k ) = Output-capital ratio in the capital goods sector ( ( \Delta K / I_k ) or ( \Delta Y_k / I_k ) )
  • ( \beta_c ) = Output-capital ratio in the consumption goods sector ( ( \Delta Y_c / I_c ) )

The basic formulation of the model focuses on the growth rate of capital stock, which drives the growth of national income. The increase in capital stock ( ( \Delta K ) ) is determined by investment in the capital goods sector:
ΔK=Ikβk\Delta K = I_k \beta_k
Since ( I_k = \alpha_k I_t ) and assuming investment is a function of total output, the model connects the growth of capital goods production to the overall economic growth. The Feldman–Mahalanobis model highlights that the growth rate of the capital goods sector, in turn, depends on the proportion of total investment allocated to it and the output-capital ratio in that sector.

Interpreting30 the Feldman–Mahalanobis model

Interpreting the Feldman–Mahalanobis model revolves around understanding its central tenet: the trade-off between immediate consumption and future productive capacity. By allocating a larger share of current investment to the capital goods sector, the model posits that a country can accelerate its long-term growth potential, even if it means sacrificing some immediate availability of consumption goods. This strategy aims to build a robust industrial base that can sustain higher levels of output across all sectors in the long run.

The model suggests that a nation's ability to achieve self-reliant economic growth depends on its capacity to produce its own capital goods, reducing dependence on foreign imports. A higher investment 29in heavy industries like steel and machinery is seen as foundational, allowing the economy to mechanize not just industry but also sectors like agriculture, thereby increasing overall productivity. The Feldman–Mahalanobis model thus provides a framework for policymakers to evaluate the strategic allocation of scarce resources in pursuit of rapid economic transformation, particularly in developing countries.

Hypothetical Example

Imagine a newly independent nation aiming for rapid industrialization. Its economy is primarily agrarian, with limited industrial capacity. The government adopts a strategy inspired by the Feldman–Mahalanobis model.

Scenario:
The country has an annual total investment capacity of $10 billion. The government decides on an allocation strategy:

  • Capital Goods Sector: 60% of investment ($6 billion)
  • Consumption Goods Sector: 40% of investment ($4 billion)

The output-capital ratio (efficiency of investment) in the capital goods sector is estimated to be 0.2 (meaning $1 of investment in capital goods increases capital stock by $0.2 per year). In the consumption goods sector, it's 0.3.

Year 1:

  • Investment in Capital Goods: $6 billion
  • Increase in Capital Stock: $6 billion * 0.2 = $1.2 billion
  • Investment in Consumption Goods: $4 billion
  • Increase in Consumption Goods Output: $4 billion * 0.3 = $1.2 billion

Interpretation:
In Year 1, while there's an increase in consumption goods, the primary focus is on expanding the productive base by building more factories and infrastructure through the capital goods investment. This initial phase might not lead to a dramatic increase in consumer welfare immediately.

Year 2 and Beyond:
The $1.2 billion increase in capital stock from Year 1 means the country now has a larger capacity to produce both capital goods and consumption goods in subsequent years. This expanded capacity allows for potentially greater future production of consumer goods, even if the same allocation percentage is maintained, because the total capital base has grown. The Feldman–Mahalanobis model implies that this continued emphasis on the capital goods sector will lead to an accelerating rate of economic growth in the long term, as the ability to create more productive assets domestically grows exponentially.

Practical Applications

The Feldman–Mahalanobis model has primarily found its practical application in the context of economic planning and strategies for industrialization, particularly in developing countries. Its most notable real-world implementation was in India's Second Five-Year Plan (1956–1961), where it guided the allocation of significant investment towards heavy industries.

Governments adopting the Feld26, 27, 28man–Mahalanobis model aimed to build a self-sufficient industrial base through import substitution, reducing reliance on foreign goods and fostering domestic manufacturing capabilities. This approach involved substanti24, 25al public sector participation in key industries like steel, machinery, and power generation. The model's emphasis on capital accumulation as a driver of growth aligns with the objectives of many nations undergoing structural transformation, shifting resources from traditional, low-productivity activities (like agriculture) to more modern, higher-productivity sectors. Institutions like the Internatio22, 23nal Monetary Fund (IMF) and World Bank also engage with various strategies for economic development and structural change in their member countries, often observing the challenges and successes of different policy approaches, including those that involve significant state intervention and sectoral allocation of resources.

Limitations and Criticisms

20, 21Despite its influence, the Feldman–Mahalanobis model has faced significant criticisms and exhibited several limitations in practice. One major critique is its heavy emphasis on capital goods and neglect of the consumption goods sector and agriculture. Critics argued that this imbalance17, 18, 19 could lead to shortages of essential consumer items, potentially causing inflation and neglecting the immediate welfare of the population.

Another significant drawback iden16tified was the model's assumption that savings would naturally originate from the industrial sector, without explicit measures to increase household savings. This often led to deficit financ15ing to meet investment targets, which further fueled inflationary pressures. The model was also criticized for 14its limited consideration of foreign trade, assuming a largely closed economy. In reality, developing countries often face external constraints, such as limited foreign exchange reserves, which can hinder the import of necessary capital goods if domestic production is insufficient or inefficient.

Furthermore, the centralized plan13ning inherent in the Feldman–Mahalanobis model could lead to inefficiencies and misallocation of resources, as government-led investments in heavy industries did not always yield expected returns. The "heavy industry-first" strategy,11, 12 while aiming for long-term self-reliance, also failed to create adequate employment opportunities in some contexts, particularly if labor-intensive sectors were neglected. The Indian experience with the Secon10d Five-Year Plan, guided by this model, encountered problems such as rising inflation and a fall in foreign exchange reserves, leading to modifications and eventual abandonment in favor of subsequent plans.

Feldman–Mahalanobis model vs. Harrod–Domar Model

The Feldman–Mahalanobis model and the Harrod–Domar model are both foundational models in macroeconomics that aim to explain economic growth through investment and capital accumulation. However, they differ significantly in their focus and complexity.

The Harrod–Domar model is a simpler, single-sector growth model that posits that the rate of economic growth is directly proportional to the saving rate and inversely proportional to the capital-output ratio. Its primary insight is that for steady growth, the actual growth rate must equal the warranted growth rate, implying a necessary balance between savings, investment, and capital efficiency. It focuses on the aggregate level of capital accumulation and its impact on the national income.

In contrast, the Feldman–Mahalanobis model is a two-sector model that disaggregates the economy into a capital goods sector and a consumption goods sector. Its central contribution is exploring the optimal allocation of investment between these two sectors. While the Harrod–Domar model stresses the overall rate of investment, the Feldman–Mahalanobis model emphasizes that the composition of investment matters for long-run growth, particularly the priority given to the capital goods sector to expand future productive capacity. The Mahalanobis model essentially builds upon the Harrod–Domar framework by adding a crucial layer of sectoral allocation, making it more prescriptive for central planning in economies aiming for rapid industrialization.

FAQs

Q: What is the primary objective of the Feldman–Mahalanobis model?
A: The primary objective of the Feldman–Mahalanobis model is to achieve rapid industrialization and long-term economic growth by strategically allocating a larger share of investment to the production of capital goods.

Q: Why is it called a "two-sector" model?
A: It is called a two-sector model because it divides the economy into two distinct sectors: one that produces capital goods (machinery, equipment, infrastructure) and another that produces consumption goods (items for immediate consumption by households). This distinction helps in analyzing the inter-sectoral allocation of resources.

Q: Where was the Feldman–Mahalanobis model famously applied?
A: The Feldman–Mahalanobis model was famously applied as the theoretical basis for India's Second Five-Year Plan (1956–1961), which aimed for accelerated industrialization through a focus on heavy industries.

Q: What are the main criticisms of the model?
A: Main criti8, 9cisms include its potential neglect of the agriculture and consumption goods sectors, its optimistic assumptions about savings, its limited consideration of foreign trade, and the potential for inflation and inefficiencies arising from centralized resource allocation.

Q: How does this model relate to central planning?
A: The F7eldman–Mahalanobis model provides a framework for central planning by guiding how a government can direct investment and resources across different sectors of the economy to achieve specific long-term development goals, such as building an industrial base.

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