Balanced & unbalanced growth

Balanced and Unbalanced growth

1. Balanced & Unbalanced growth Name - Siddhi Satish Nagardeolekar Roll no. - 1865 Subject - Growth and Development

2. Balanced Growth The theory of balanced growth states that there should be simultaneous and harmonious development of different sectors of the economy so that all sectors grow in unison. For this balance is required between the demand and supply side. The balanced growth has been advocated by Rosenstein- Rodan , Ragnar Nurkse, and Arthur Lewis.

3. Explanation of Theories 1. Rosenstein- Rodan Rosenstein- Rodan was the first economist who propounded the theory of balanced growth without using these words in 1943. His main contention is that “often Social Marginal Product (SMP) of an investment is different from its Private Marginal Product (PMP) and that when a group of industries is planned together in accordance with their SMP’s the rate of growth of economy is greater than it would have been otherwise”. He gives an example of Shoe Factory to explain the balanced growth.

4. 2. Ragnar Nurkse According to Nurkse, vicious circles of poverty are at work in underdeveloped countries which retard economic development. If they are broken, economic development will follow. The vicious circles operate both on the supply side and demand side. To break the vicious circles- a synchronized use of capital to a wide range of projects in different industries may rise the general level of economic efficiency and enlarge the size of 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. Agriculture and industry are complementary. A balance is also required between the domestic sector and foreign sector.

5. Criticisms of Balanced Growth Rise in costs No attention to Reducing costs Beyond the capabilities of Underdeveloped Countries Disproportionality in factors Shortage of resources Concept of Balanced Growth applicable to Developed countries. Other problems

6. Unbalanced Growth According to this concept investment should be made in selected sectors rather than simultaneously in all sectors of the economy. Thus the economy gradually moves from the path of unbalanced to that of balanced growth. Economist like Singer, Kindleberger , Streeten , etc. have expressed their views in favor of the unbalanced growth. However Hirschman has propounded the doctrine of unbalanced growth in a systematic manner.

7. Hirschman’s Strategy 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. According to Hirschman, “Development is a chain of disequilibria that must be kept alive rather than eliminate the disequilibrium of which profits and losses are symptoms in a competitive economy .

8. Unbalancing the economy with SOC Social overhead capital (SOC) has been defined as “comprising those basic services without which primary, secondary and tertiary productive activities cannot function .” A large investment in SOC will encourage private investment later in DPA (Directly Productive Activities) . For example , cheaper supply of electric power may encourage the establishment of small industries . T he SOC approach to economic development is to unbalance the economy so that subsequently investments in DPA are stimulated.

9. 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.

10. 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.” It is to be noted that development path via excess capacity of SOC is more continuous and smooth than the second path. It is in a way what Hirschman calls self-propelling.

11. Limitations Neglects Resistances. Beyond the Capabilities of Underdeveloped Countries . Lack of Basic Facilities . Lack of Factor Mobility . Emergence of Inflationary Pressures . Too much Emphasis on Investment Decisions.

12. Thank You