Balanced and Unbalanced Growth

The Doctrine of Balanced Growth

• Meaning of Balanced Growth:

The doctrine of balanced growth has several authors who
interpret it in their own way. To some it means investing in a
laggard sector or industry so as to bring it abreast of others. To
others, it implies that investment takes place simultaneously in
all sectors or industries at once. Still to others, it means
balanced development of manufacturing industries and
agriculture.
 The Doctrine of Balanced Growth

• Explanation of The Theory:

Rosenstein-Rodan was the first economist who propounded
the theory of balanced growth without using these words in his
1943 article. He argued that the whole of the industry to be
created in eastern and south-eastern Europe should be treated
and planned like one huge firm or trust. His main contention is
that “often SMP (Social Marginal Product) of an investment is
different from its PMP (Private Marginal Product) and that
when a group of industries is planned together in accordance
with their SMPs, the rate of growth of the economy is greater
than it would have been otherwise”.
 The Doctrine of Balanced Growth

• According to Nurkse, vicious circles of poverty are at work in

underdeveloped countries which retard economic
development. If, however, they are broken, economic
development will follow. The vicious circles operate both on
the supply side and the demand side.
• A synchronized use of capital to a wide range of projects in
different industries may raise the general level of economic
efficiency and enlarge the size of the market. “A frontal attack
of this sort–a wave of capital investments in a number of
different industries”— has been called by Nurkse, balanced
growth.
 The Doctrine of Balanced Growth

• The doctrine of balanced growth requires a balance between

different sectors of the economy during the process of
economic growth. There should be proper balance between
investment in agriculture and industry. Agriculture and industry
are complementary.
• A balance is also required between the domestic sector and the
foreign sector. “Export revenue is an important source for
financing development; imports rise as production and
employment expand; and domestic trade itself requires
increasing imports of necessary materials and equipment.
Nurkse observes, “Balanced growth is a good foundation for
international trade, as well as a way of filling the vacuum at the
periphery,”.
 The Doctrine of Balanced Growth

• To sum up in the words of Lewis, “In development programes

all sectors of the economy should grow simultaneously, so as to
keep a proper balance between industry and agriculture and
between production for home consumption and production for
export... the logic of this proposition is as unassailable as its
simplicity.”
 Criticism of The Doctrine of Balanced Growth
1. Rise in Costs.
2. No Attention to Reducing Costs.
3. Other Problems.
4. Fails as a Theory of Development.
5. Beyond the Capabilities of Underdeveloped Countries.
6. Disproportionality in Factors.
7. Shortage of Resources.
8. Wrong Assumption of Increasing Returns.
9. Capital Lumpiness not Essential for Development.
10. Balanced Growth not Essential for Induced Investment.
11. Does not Consider Planning.
12. Concept of Balanced Growth Applicable to Developed Countries.
13. Scarcities and Bottlenecks Encourage Growth.
 The Theory of Unbalanced Growth

• HIRSCHMAN’S STRATEGY:
The concept of unbalanced growth has been popularized by
Hirschman. It is his contention that deliberate unbalancing the
economy according to a pre-designed strategy is the best way
to achieve economic growth in an underdeveloped country.
According to Hirschman, investments in strategically selected
industries or sectors of the economy will lead to new
investment opportunities and so pave the way to further
economic development.
 The Theory of Unbalanced Growth

• In practice, development policy should aim at -

(i) the prevention of convergent series of investments which
appropriate more external economies than they create; and
(ii) the promotion of divergent series in which more
economies are created than are appropriated.
Development can only take place by unbalancing the
economy. This is possible by investing either in social
overhead capital (SOC) services or in directly productive
activities (DPA). The former create external economies while
the latter appropriate external economies.
 The Theory of Unbalanced Growth
• Unbalancing the Economy with SOC:
Social overhead capital has been defined as “comprising those basic
services without which primary, secondary and tertiary productive
activities cannot function.” In SOC are included investments on
education, public health, communications, transportation and
conventional public utilities like light, water, power, irrigation and
drainage schemes, etc.
• Unbalancing the Economy with DPA:
An imbalance can also be created via DPA. A government might
directly or indirectly invest in DPA instead of investing in SOC. If DPA
investment is undertaken first, the shortage of SOC facilities is likely
to raise production costs substantially. In course of time, political
pressures might stimulate investment in SOC also. Investment
sequences are generated by profit expectations and political
pressures. Profit expectations generate the sequence from SOC to
DPA and political pressures from DPA to SOC.
 The Theory of Unbalanced Growth
• The Path to Development.
Hirschman calls the first sequence (from SOC to DPA)
“development via excess capacity of SOC” and the second
sequence (from DPA to SOC) “development via shortage of
SOC.” As to which sequence should be followed first for
economic development, Hirschman prefers that sequence
which is “vigorously self-propelling.”
• Hirschman makes two assumptions:
firstly, that SOC and DPA cannot be expanded simultaneously,
and secondly, that sequence of expansion should be adopted
which maximizes induced decision making.
 The Theory of Unbalanced Growth
• Linkages:
Having studied the virtues of specific imbalance, the problem is one
of finding the kind of imbalance that is likely to be most effective.
Any investment may have both forward linkage and backward
linkage effects. Forward linkage effects encourage investment in
subsequent stages of production, and backward linkage effects in
earlier stages of production. Development should aim at
discovering projects with the largest total linkage.
• Last Industries First:
Hirschman, therefore, advocates the setting up of “last stage
industries first.’” In making industrial products, a developing
country need not undertake all the stages of production
simultaneously. It can begin with the manufacture of durable
consumer goods at the final stages of production. It can import
many converting, assembling and mixing plants for final touches to
almost finished products.
Criticism of The Theory of Unbalanced Growth
1. Inadequate Attention to the Composition, Direction and
Timing of Unbalanced Growth.
2. Neglects Resistances.
3. Beyond the Capabilities of Underdeveloped Countries.
4. Lack of Basic Facilities.
5. Lack of Factor Mobility.
6. Emergence of Inflationary Pressures.
7. Linkage Effects not Based on Data.
8. Too much Emphasis on Investment Decisions.
 BALANCED Vs . UNBALANCED GROWTH

• Differences:
(i) The case for balanced growth rests on the fact that vicious circles of
poverty are at work in underdeveloped countries which are
responsible for the small size of the local market for their goods.
The solution lies in a balanced pattern of investment in a number of
mutually supporting different industries so that the size of the
market is enlarged.
(ii) Its critics argue that an underdeveloped country does not possess
sufficient resources in men, materials and money for simultaneous
investments in a number of complementary industries. Another
serious weakness of this doctrine is that it emphasises the
complementarity of markets for final goods, primarily consumer
goods as an inducement to invest and leaves out intermediate
goods markets.
 BALANCED Vs . UNBALANCED GROWTH

• Differences:
(iii) Proponents of unbalanced growth strategy favour investments in
selected sectors rather than simultaneously in all sectors of the
economy. Investments in selected sectors lead to new investment
opportunities. This is possible by deliberately unbalancing the
economy. The aim is to keep alive rather than eliminate the
disequilibria by maintaining tensions, disproportions and
disequilibria.
(iv) The strategy of unbalanced growth aims at removing scarcities in
underdeveloped countries by induced investment decision-making.
Critics point out that in such countries decision-making itself is
scarce along with other resources. Moreover, creating imbalances
within the economy by making investments in strategic sectors in
the face of acute shortage of resources leads to inflationary
pressures and balance of payments difficulties in underdeveloped
countries.
 BALANCED Vs . UNBALANCED GROWTH

• Differences:
(v) Despite these differences in approaches, the doctrines of
balanced and unbalanced growth have two common
problems: one , relating to the role of the state, and two , the
role of supply limitations and supply inelasticities.
(vi) Nurkse believes that balanced growth is relevant primarily to
a private enterprise system. “It is private investment that is
attracted by markets and that needs the inducement of
growing markets. It is here that the element of mutual
support is so useful and, for rapid growth, indispensable.” But
critics point out that private enterprise alone is incapable of
taking investment decisions in underdeveloped countries.
Therefore, balanced growth presupposes planning.
 BALANCED Vs . UNBALANCED GROWTH

• Differences:
(vii) On the other hand, in Hirschman’s unbalanced growth strategy,
the state plays an important role in encouraging SOC investments
thereby creating disequilibria. If development starts via investment
in DPA, political pressures force the state to undertake investments
in SOC. Thus unbalanced growth also requires state planning.
(viii) Since both balanced growth and unbalanced growth involve
lumpy investments in complementary activities, they require state
planning. In order to get investment decisions implemented and to
benefit from complementarities, coordination between the private
and public sectors is essential in an underdeveloped country,
whether it adopts the strategy of balanced growth or unbalanced
growth.
 BALANCED Vs . UNBALANCED GROWTH

• Differences:
(ix) The other problem concerning the two strategies is the role of
supply limitations and supply inelasticities. Nurkse’s theory of
balanced growth is mainly related to the lack of demand, and
neglects the role of supply limitations. This is not a correct view
because underdeveloped countries woefully lack in the supply of
capital, skills, economic infrastructure and other resources which
are inelastic in supply. But the demand for final goods can be
created by import restrictions and export promotion without
recourse to the strategy of balanced growth.
(x) The unbalanced growth doctrine also neglects the role of supply
limitations and supply inelasticities. Though it emphasises the
scarcity of decision making, yet it ignores the scarcity of physical,
human and financial resources in an underdeveloped country.
 BALANCED Vs . UNBALANCED GROWTH

• Similarities:
First , both believe in the existence of a private enterprise system
based on market mechanism under which they operate. At the
same time, they imply the operation of state planning.
Second , both ignore the role of supply limitations and supply
inelasticities.
Lastly , both the doctrines assume interdependence, but of different
degrees. In balanced growth, the development of one sector is
dependent on the development of other sectors. On the other
hand, under unbalanced growth, the economy gradually moves on
the path of economic development via tensions, disproportions and
disequilibria, and ultimately reaches balanced growth.
Thus both the strategies involve interdependence among different
sectors of the economy, but the interdependence is of different
degrees.
 Warning!

• Never use these slides as a substitute of your text books.

• These slides should help to keep you on track, as a guiding
assistance of reading text books that has come to you along
with these slides.
• Please use the relevant sections of the following text books in
reading the slides.
• The Economics of Development and Planning - M. L. Jhingan
• Economic Development in the Third World – M. P. Todaro