Balanced

and
Unbalanced
Growth
Vaibhav
Learning Outcomes

• Understand the meaning of Balanced Growth Strategy (BGS)

• Learn Approaches to Balanced Growth Strategy (BGS)

• Know the Merits of Balanced Growth Strategy (BGS)

• Know the demerits of Balanced Growth Strategy (BGS)

• Understand the concept of Unbalanced Growth Strategy (UGS)

• Know the merits of Unbalanced Growth Strategy (UGS)

• Know the demerits of Unbalanced Growth Strategy (UGS)

• A major development debate from the 1940s to the 1960s
concerned balanced growth versus unbalanced growth. Some
of the debate was semantic, as the meaning of balance can vary
from the abrupt requirement that all sectors grow
simultaneously and at the same rate to the more simple plea
that same attention be given to all major sectors—industry,
agriculture and services.

• In contrast, A. O. Hirschman develops the idea of unbalanced

investment to complement existing imbalances. A broad choice
of development strategy is between Ragnar Nurkse’s theory of
balanced growth (BG) and A. O. Hirschman’s theory of
unbalanced growth (UG).
• LEADING THEORETICIANS:

• Theory of the Big Push: Rosenstein-Rodan Rosenstein (1948)

• Theory of balanced growth: Ragnar Nurkse (1953)

• Unbalanced Growth: Hirschman (1958)

• Growth with Unlimited Supply of Labor: Lewis

• Stages of Growth Theory: Rostow

Introduction
In order to get rid of vicious circle of poverty, underdeveloped countries
need investment on a large-scale. There are two theories concerning
strategy of economic development:

1.Theory of Balanced Growth: According to Rodan, Nurkse and

Lewis, economic development these economies should make
simultaneous investment in all sectors to achieve balance growth.

2.Theory of Unbalanced Growth :According to Hirschman, Singer,

Fleming. These economies should create a situation of unbalance by
making large investment in anyone sector.
Theory of Balance Growth

• Fredrick List was first put forward the theory of

balance growth. According to him a balance
could be established among agriculture,
industries and trade.
• In the year 1928, Arthur Young gave the concept
of different industries were mutually
interdependent, then all of them should be
developed simultaneously.
 A strategy of growth with an equal emphasis
on agriculture and industry. Agricultural
development provides the food required and
releases labour from the land to engage in
industry. Industrial wealth stimulates markets
for agricultural growth or such is the theory.
Unbalanced growth denotes a strategy which
focuses on agriculture or industry alone.
Definition

• According to Lewis

“Balance growth means that all sectors of

economy should grow simultaneously so as to keep
a proper balance between industry and agriculture
and between production for home consumption
and production for exports. The truth is that all
sectors should be expanded simultaneously.”
Basis of Theory of Balanced Growth
1. Supply Side

Low Income Low Saving Low investment Low productivity Low Income--------

2. Demand Side

Low Income Low Purchasing capacity Low investment Low productivity-------

Different Views Regarding Balanced Growth
1. Explanation of Rodan’s Theory of Balanced Growth.
According to an article ‘Notes on Big Push’(1957) by Rodan,
indivisibilities of supply side are concerned with social overhead
capital. Indivisibilities of demand side means restricting the
desirability and profitability of economic activities due to the
narrow extent of the market.
Rodan has referred to three kinds of indivisibilities:
(i) Indivisibility in the production function or in the supply of social
overhead costs
(ii) Indivisibility of Demand
(iii) Indivisibility of Supply of savings
2. Explanation of Nurkse’s Theory of Balance Growth

According to Prof. Nurkse in the development of

underdeveloped countries the greatest obstacle is Vicious
Circle of Poverty. The Vicious Circle shows that income is
low in underdeveloped countries. Because of low income,
saving is low. There for investment and output is low. Low
output means low income.

(i) Complementarity of Demand

(ii) Intervention by the Government
(iii) External Economies
(iv) Accelerated Rate of Growth
 3. Explanation of Lewis’s Theory of Balanced Growth

Lewis has given the following two arguments in favour of

balanced growth:

(i) In the absence of balanced growth, price in one sector may

be more than the prices in others.

(ii) When the economy grows then several bottlenecks appear

in different sectors.
Balance among Different Sectors

Balance between Agriculture and Industries

Balance between Human and Physical Capital
Balance between Domestic Trade and
Foreign Trade
Role of Government in the Balance Growth
Advantage of Theory of Balanced Growth
Large size of Market
External Economies
Horizontal Economies
Vertical Economies
Better Division of Labour
Better Use of Capital
Rapid Rate of Development
Encouragement of Private Enterprises
Breaking of Vicious Circle of Poverty
Encouragement of International Specialization
Development of Social Overhead Costs
Criticism of Theory of Balanced Growth
This theory Criticized by Fleming, Singer, Hirschman and Kurihara.
• Unrealistic or Ignores Scarcity of Resources
• Ignores the Need of Planning
• External Diseconomies
• Development from Scratch
• Not a Theory of Development
• Same Policy for Developed and Underdeveloped countries
• Not supported by History
• Scarcity of Factors of Production
• Inflation
• Contrary to the Theory of Comparative Costs
Theory of Unbalanced
Growth
Hirschman, Rostow, Fleming, Singer have propounded
the concept of unbalanced growth as a strategy of
development for the underdeveloped nations. The
theory stresses the need for investment in strategic
sectors of the economy, rather than in the all sectors
simultaneously.
Unbalanced growth is a situation in which the various
sectors of a given economy are not growing at a rate
similar to one another
 Specific sectors of the economy will be
growing at a rapid rate, while other sectors
are either stagnant or experiencing a
significantly reduced rate of growth. When
economic growth patterns such as
unbalanced growth appear, the
phenomenon usually indicates that major
shifts in the overall economy are about to
take place.
• 1. External Economies:– Unbalanced growth according to Prof. Hirschman
generates externalities. Further explaining, we could say that the growth of
industry A leads to or stimulates the growth of industry B and C and so on,
similarly the growth of industry B and C will lead to the subsequent growth of
industries E and F. Thus, the growth of a strategic industries apart from providing
the benefits belonging to itself also stimulates the growth of other set of
industries. The existing externalities are explored, and fresh ones generated.
• 2. Complementaries:– Growth of output of industry A may generate the demand
for the products of B and C and also may reduce the marginal cost of production in
these industries. There are technical complimentaries which stimulate the growth
of related industries, following the strategy of unbalanced growth.

Thus states Prof. Hirschman, “Economic growth follows the course of imbalances
in the system. Competitions, tensions as well as inducements are the inevitable
outcome of the unbalanced growth, and more these are, greater the prospects of
growth.”
Unbalanced Growth
Prof.Hirschman states in his book,”Strategies of Economic
Development”, that creating imbalances in the system is the best
strategy of growth.
Accordingly , strategic sectors of the economy should get priority in
matters of investment:
• External Economies
• Compementries
• Social Overhead Capital or (SOC)
• Direct productive Activities or (DPA)
• Unbalancing the Economy through (SOC)
• Unbalancing the Economy with direct productive Activities(DPA)
Path of Development
• Development via excess capacity of SOC
• Development via shortages of SOC

• (A) Social Overhead Capital or SOC: Social overhead capital

comprises of those basic devices without which primary, secondary
and tertiary activities cannot function. This includes in it the
expenditure on roads, irrigation works, power, transport and
communications. The investment on these projects create more
economies and this is called divergent series of investment. Such
investments are undertaken by Public agencies.

• (B) Direct Productive Activities or DPA: These are those activities

which are a consequence of some investment, add to the flow of
final goods and services. It is called convergent series of investment
because these project appropriate more economies than they have
created. These series of investments are undertaken by private
entrepreneurs. Thus investment in agriculture or industry would be
deemed as that belonging to Direct Productive Activities.
Forward and Backward Linkages
1.Backward linkages
2.Forward linkages
Creating unbalances are a pre-requisite of economic growth, according to Hirschman.
However the question arises, how to identify the activities with which to create imbalances
in the system. This necessitates the knowledge of inter linkages across different sectors of
the economy.
The following are classified as linkages by Hirschman:
Backward linkages- growth of a set of industries stimulates the growth of those which
supply raw materials. Setting up a steel plant for example, would stimulate the demand for
steel scrap, coal and other related goods. Production of these goods will accordingly
increase.

Forward linkages- Forward linkages refer to the growth of certain industries owing to the
initial growth of those which supply raw materials. Expansion of steel industry, for example,
will encourage industries making machine, tools, etc. using steel as their basic input.
Study of these linkages facilitates the choice of activities through which growth with
imbalances should be generated in the system. Industries with maximum linkages ought to
be developed first.
Feature of the Theory of Unbalanced Growth

Investment should first be made in the key

sectors of the economy.
Based on the principle of inducement &
pressures.
Big Push
Real life observations
Significance of the Public sector with regard to
SOC activities
Merits of the Theory of Unbalanced Growth

Realistic Theory

More Importance to Basic Industies

Economies of Large Scale Production

Encouragemence to New Inventions

Self-Reliance

Economic Surplus
Criticism of the Theory of Unbalanced Growth
According to Paul Streeten

• Inflation

• Wastage of Resources

• No Mention of Obstacles

• Increase in Uncertainty

• Unbalance is not Necessary

• Neglect of Degree of Unbalance

• Lack of basic Facilities

• Disadvantages of Localisation
 Dissimilarities
Balanced GrowthTheory: Unbalaced Growth Theory:
1. Simultaneous growth of all 1. Focuses is on the growth
sectors of the economy.
of certain key sectors of
2. Seeks to accelerate the the economy
process of gowth through
simultaneous investment 2. The process of growth
across all sectors of the through Imbalances in
economy the system.
3. Requires lot of 3. Requires relatively
capital investment much less investment.
right from the
beginning of growth 4. A Short period
process. strategy of growth.
4. A long period of
strategy of growth
5. Size of the market is 5. It is decision making
the principal limiting and entrepreneurial
factor. skill
Similarities

1. Ignore the other Role of the Government

2. Inelastic Supply of Factors

References
Economic development: principles, problems, and policies.
Author(s): Benjamin Higgins

Growth and Development: With special reference to developing economies

A. P. Thirlwall