Unbalanced Growth Theories

15/PECA/002

Definition & Features of BGTs and UBGTs

Balanced Growth Theories

• BGTs require under developed economies to make large investments in several industries in order to attain self perpetuating growth.

• Main argument: Sustainability of growth can be achieved through balanced growth, solution to the vicious cycle of poverty that haunts underdeveloped economies.

• Major Proponent: Ragnar Nurkse

Unbalanced Growth Theories

• UGBTs argue that deliberate unbalancing of the economy by way of investing in a few leading sectors that in turn induce investments in other sectors.

• Main argument: Historical evidence, scarcity of capital (including intellectual)

• Major proponents :Albert O. Hirschman

Definition & Features of BGTs and UBGTs

• Balanced growth, according to Nurkse, doesn’t mean- equal growth in all sectors, rather it means growth equal to their respective natural growth rate.

• Balance wasn’t restricted to sectoral growth; it was called for between these three economic variables – investment, income and consumption.

• Economic Planning and Implementation was completely handled by private players

• Imbalance in growth of various industries is considered an absolute necessity for growth took take place.

• Professor Alak Gosh claims that initially investment grows at a higher rate than income and income at a higher rate than consumption,

change in I/I > change in Y/Y> change in C/C .

• Government plays an important role in economic planning and implementation of plans. It chooses and invests in the lead sectors.

Drawbacks of Balanced Growth theory

• Underdeveloped countries can’t afford Balanced growth• Reliance on foreign aid is disproportionate. And doesn’t justify pushing the country into a

“crisis situation”• Intellectual capital scarcity prevailed• Private sector can’t internalize the positive externalities of certain sectors such as education,

healthcare, hydroelectric plants etc• It is in contrast to suggestions made by the theory of comparative costs• BG theory wrongly assumes that the underdeveloped nation starts from scratch• Inflation • The theory lacks historical sense• BG theory is the application of a strategy, originally meant for an underemployment

situation- Keynes• He also suggests that BG is not desirable as it doesn’t accelerate growth

Major Exponents of Unbalanced Growth Theory

• Albert O. Hirschmenn• Walt Whitman Rostow• Hans Singer• Paul Streeten• Marcus Fleming• Mohalanobis• Alak Ghosh• Meier• Baldwin

Hirschman’s Unbalanced Growth Theory

• The first economist to ever suggest the concept of “unbalanced investments” was Prof Hans Singer. He suggested that a “big push” in strategically selected industries can gradually lift the underdeveloped economy from depression

• Hirschman picked up from this idea, put forth by Singer and presented a complete theoretical formulation of the strategy

• This theory states that deliberate unbalancing of the economy, according to a predesigned strategy is the best way to accelerate economic development.

• Hirschman further stated that to keep moving ahead, the task of development policy is to maintain tensions, disproportions and disequilibria.

• Resources should be directed in those lines of production which have the highest possible returns, both direct and indirect

Important concepts of UBG

• Externalities• Complementarities • Induced Investments• Convergent & Divergent Series of Investments• Social Overhead Costs (SOC) and Direct Productive Activities• Linkages• Forward Linkages & Backward Linkages• Last Industries

Process of Unbalanced Growth

• Unbalancing the economy with SOCs- requires the government/policy maker to make investments in SOCs such as schools, other educational institutions, transportation, public health etc. This increase in supply of SOCs would bring the prices down, thereby inducing private investment (DPAs) in industries that have a high dependence on SOCs; as these sectors now have higher profit potential.

• Unbalancing the economy with DPAs- When investment is first directed in

DPAs, there is an increase in demand for skilled workers, certain infrastructure like- road ways/railways/airlies/waterways are also demanded as these ensure access to raw material and final market. The initial shortage of SOC raises cost of production and price levels. Increases in price level creates uncertainty and an unfavorable climate for fresh investments.

Growth Paths of Balanced & Unbalanced Growth

Process of Unbalanced Growth

• Balanced Growth Path- O--- A --- B--- C

• Unbalanced Growth Path 1: O --- A----A1----B----B2----C ( growth via excess soc capacity)

• Unbalanced Growth Path 2: O----A1---B1----B-----C1----C (growth via shortage of SOC capacity)

Development via Excess Capacity of SOC vs. via Shortages of DPA

• Excess SOC & Scarce SOC : Of these two investment strategies, Hirschman favored the former as he believed the inducement strength of investment in DPAs is low

• He believed that investments in DPA weren’t enough to induce private sector to invest in SOCs as they see lesser benefit in it.

Forward and Backward Linkages & Maximum Total Linkage

• To decide on the industries which could be most effective in increasing growth, we first need to understand the concept of “Linkage Effects”.

• There are two types of Linkage Effects- Forward and Backward Linkage Effects

• Forward Linkage refers to investment that encourage subsequent stages of production

• Backward Linkage refers to investments that encourage earlier stages of production

• Now, according to Hirschman, to make the policy of imbalance of growth effective, emphasis should be laid on those projects that can ensure “maximum total linkage”. Ex: Iron and Steel Industry

Pursuing Industries with Maximum Total Linkage

• Empirical Studies that involve “input-output analysis” and “inter-industry analysis” help determine these maximum linkage industries.

• A difficulty arises with applying this to underdeveloped economies, they have lesser-interdependence of industries.

• Projects with maximum total linkages vary from country to country, time to time depending on the socio-economic conditions

• However, Hirschman determined industries placed in the middle of the production process to have higher linkages than industries placed at the beginning or end of the production process.

• His empirical studies also relieved that in several countries, iron and steel had the highest linkage scores. And that agriculture and mining sectors had some of the least scores.

What Other Economists had to say?

• W.W. Rostow• Paul Streeten• Hans Singer• Walter Whitman • Alak Ghosh

First Things First: Meeting Basic Human Needsby Paul Streeten

Invest in Industries that increase productivities of the poor1) Education and Health2) Investments relating to Human Resource Development3) Greater production of wage goods and the expansion and redistribution

of public services become essential if basic needs of the majority of the population are to be met

Rostow’s Five Stages of Growth

Definition• Rate of productive investment must be raised from 5% or less to 10 % or more

of the National Income.• Productive investment must be made for the development of the leading

sectors of the economy

5 stages of Development– Traditional Society– Preconditions to Take-off– Take off– Drive to Maturity– Age of High Mass Communication

Hans Singer

• He opines that unbalanced growth is a better development strategy as it helps to make the economic system more elastic; more capable of expansion.

• He also states that investment in Social Overhead Capital and removal of specific bottlenecks would make the economic system more elastic.

Alak Gosh

• According to professor Alak Gosh, during the initial period of UBG (the planning stage), investment will grow at higher rate than income, and income will grow at a higher rate than expenditure

• The mathematical representation of this can be given as- change in I/I > change in Y/Y> change in C/C Which shows that the growth rates are not uniform

• Therefore, there should be imbalance in the growth rates of the above mentioned development parameters.

Historitcal Evidence of Unbalanced Growth

• Prof. P C Mahalanobis India• Brazil, Columbia & Mexico• Great Britain • USA• Russia

Positives

• Economies • Self-Reliance• Generation of Economic Surplus• Skill Formation• Short-term Strategy• Practical Policy• Suitable for Industrial development• Better use of resources• Expansion of SOC

Negatives

• Degree of Imbalance not discussed• Neglect of Resistances• Lack of basic facilities• Disadvantages of Localization• Danger of inflation• Linkage effect not empirically tested• Unsuitable for democratic countries• Paucity of Capital• Neglect of Agriulture• Absence of advanced information

Conclusion

“The Theory of Unbalanced Growth is a strategy for the Short run and the Theory of Balanced Growth a theory for the Long run”