The prospects of economic growth in subsistence economies: an alternative view

In the neoclassical growth models, deferring current consumption and saving part of current income plays an important role in explaining the process of economic growth. In the case of subsistence economies, however, making such economic decisions are hardly possible [Myrdal, 1971]. The conventional models lead one to conclude the impossibility of endogenously driven growth in these economies. This notion implies that the poor tend to remain poor unless their economies are stimulated exogenously. After discussing this problem in detail, this paper attempts to develop a framework of analysis that relies partly on the effects of market failure factors and proposes the possibility of growth in subsistence economies as long as they have the capacity to manage and exploit factors of market failures. Empirical evidence obtained from panel data analysis supports this argument.