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
1. Rise in costs
2. No attention to Reducing costs
3. Beyond the capabilities of Underdeveloped Countries
4. Disproportionality in factors
5. Shortage of resources
6. Concept of Balanced Growth applicable to Developed
countries.
7. 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.
• The 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
1. Neglects Resistances.
2. Beyond the Capabilities of Underdeveloped Countries.
3. Lack of Basic Facilities.
4. Lack of Factor Mobility.
5. Emergence of Inflationary Pressures.
6. Too much Emphasis on Investment Decisions.

12. Thank You