Balanced vs Unbalanced Growth

Topics: Economics, Investment, Economic development Pages: 12 (4157 words) Published: March 9, 2013
Balanced versus Unbalanced Growth: Nature and Limitations. (68) Define the terms in question, consider the underlying economic logic of each approach, and identify the major criticisms of either. Can a case be made for a strategy based on one rather than the other? After the Second World War, theorists began to analyse how less economically developed regions could become more developed. The most notable original theories of development were of balanced and unbalanced growth. These strategies posited two different approaches as to how a developing economy can become developed. Ragnar Nurkse and Paul Rosenstein-Redan were the pioneers of the balanced growth theory which hypothesised that in order for development to occur, the government needed to make large investments in several industries simultaneously which would consequently enlarge the market size and provide an incentive for the private sector to invest. An important assumption of this theory is that the agricultural and industrial sectors of the economy provide a market for the products that each sector produces, thus enabling supply to create its own demand. The theory of unbalanced growth developed through the criticisms of the balanced growth theory. Its proponents, Albert Hirschman and Paul Streeten, argued that the balanced growth theory had unrealistic assumptions and expectations. They instead proposed that imbalances of growth in the economy must be maintained because unequal development of various sectors generated conditions for rapid growth. This occurs through backward and forward linkages. Both strategies of growth have their strengths and weaknesses. In this essay I will discuss the underlying economic assumptions of each strategy, highlight their criticisms and analyse whether one in particular is more suited for application to developing regions.

In 1943 Rosentein-Redan developed the ‘Big-Push’ model which was a concept that emphasised the need for large scale investments to allow the economy to develop in countries where the economy was stagnant or backwards. He argued that small investments would not be sufficient and would even result in wastage of resources. He thus claimed that the entire industry which was to be created was to be treated as a massive entity, much like a firm or a trust. He supported this argument by claiming that the social marginal product of investment is always different from the private marginal product, so when industries are planned according to their social marginal product, the rate of growth in the economy is greater than it would have otherwise been.# According to Rosenstein-Redan, there existed three indivisibilities in the economy which justified this ‘big-push’. The first of these was the indivisibility in the production function which would lead to economies of scale. This required an optimum size of a firm in each industry which would in turn require a large and lumpy investment in social overhead capital covering investment in all the basic industries like power and transportation. The role of the state is pivotal in providing investment for this reason. These large-scale investments are beyond the means of the private sector as the investment in infrastructure has long gestation periods and profitability is low. Because of this there are no incentives for entrepreneurs to invest.# The second was the indivisibility or complementarity of demand. As developing countries are characterised by low per-capita income and low purchasing power, markets are generally small. An increase in investment in one industry would increase output however this output would fail to find a market. As a result, a large investment needs to be made in a number of industries simultaneously so that the market of one industry can be found by those employed in another industry. Thus there is complementary demand. Rosenstein-Redan portrays this using an example of a shoe industry that receives large investments. Due to these investments...
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