Balanced Growth Strategy

The Balanced Growth Theory may refer to the minimum size of investment programme required
to start economic development. It may also refer to the path of economic development and
pattern of investment necessary to keep different sectors of the economy in a balanced growth relation
with each other.
There are two fairly distinct versions of the balanced growth doctrine. One refers to the path of
development and the pattern of investment necessary for the smooth functioning of the economy.
The other version refers to the scale of investment necessary to overcome the indivisibilities in the
production process. Nurkse's views on balanced growth tend to embrace both versions, while
Rosenstein Rodan concentrates on the necessity for a 'Big Push'(in the form of a huge dose of
investment) to overcome those indivisibilities.
First Version: The earliest version of the Balanced Growth doctrine is found in P.N. Rosenstein
Rodan's well known article 'Problems of Industrialization of Eastern and South-Eastern Europe'
(1943). He had in mind the scale of investment necessary to overcome indivisibilities on both supply
and demand fronts.
Indivisibilities on the supply front refers to the lumpiness of capital (particularly the social overhead
capital), and the fact that only investment in a large number of activities simultaneously can take
advantage of various external economies of scale. Enterprises that do not appear to be profitable in
isolation, can become attractive to the private investors when considered as a part of a comprehensive
industrial expansion plan embracing several activities.
Indivisibilities on the demand front refer to the limitations imposed by the limited size of the market
on profitability; and hence on the feasibility of economic activities. It suggests that demand for various
complementary items is created simultaneously. For example, demand for motor vehicles also creates
demand for petrol or diesel and demand for various auto spare parts. It is in line with the Adam Smith's
famous dictum that division of labour is limited by the size of the market.
Rosenstein Rodan argued for setting up several factories producing consumer goods, so that between
them they create enough new employment and purchasing power to provide a sufficiently large market
for each other. Here it is assumed that with an enlargement of the total size of the market, the share of
the market accruing to each factory will also rise depending upon the income elasticity of demand for
each product. It aims at a horizontal balance between different consumer goods industries determined
by the pattern of expansion in consumer's demand.
Second Version: (All-or-nothing Approach) According to Hla Myint, the second version of Rodan's
Balanced Growth doctrine emphasized on the expansion of social overhead capital in less developed
countries. The 'technical indivisibilities' in the Social Overhead Capital (SOC) and the need to maintain
a balance between the 'infrastructure' sector and the consumer goods industries received importance in
this version. The technical indivisibility refers to the input-output relation among the industries in the
SOC sector (e.g., the output of the coal industry is the input of the thermal power generating industry).
Further, the capital-output ratio in the SOC sector also remains higher than the consumer goods sector.
So, an expansion of the SOC sector needs huge dose of capital investment.

Third version: The third version of Rodan's Balanced Growth doctrine emphasized on the need for a
huge dose of investment and it was named as 'Big Push' The lumpiness of the SOC, the higher capital-
output ratio of the SOC sector and the requirement for maintaining a balance between the SOC sector
and consumer goods sector necessitated this Big Push.
On the supply side the argument for a Big Push is based on the assumption of external economies of
scale. Actually, simultaneous establishment of different firms which are vertically integrated through
technical complementarities at different stages of production might generate such external economies.
Fourth version: The fourth version of the BG doctrine gives emphasis on the path of development
and the pattern of investment. This version stresses the need for a balance between different sectors of
the economy so that lack of development in one sector does not impede development in other sectors.
Ragner Nurkse and Arthur Lewis are among the foremost proponents of this version.
They particularly emphasized on achieving a balance between the agricultural sector and industrial
sector of the developing economies. Both of them recognized the interdependence of these two sectors
and the mutual assistance and stimulus that each could provide to the other for their development. This
balance between different sectors does not, however, mean that output in all the sectors should grow
at the same rate. Rather, it implies that the output in each sector should grow in accordance with the
income elasticity of demand for products so that supply equals demand.

Version of Balanced Proponent(s) Main theme

Growth Doctrine

1st Rosenstein Rodan Investment needed to overcome indivisibilities on

both supply and demand fronts.

2nd Rosenstein Rodan Emphasis on Social Overhead Capital (SOC) for

maintaining a balance between infrastructure
sector and consumer goods industries.

3rd Rosenstein Rodan Need for a ‘Big Push’ (orr a huge dose of
investment) to maintain a balance between SOC
sector and consumer goods sector.

4th Ragner Nurkse & A path of development and a pattern of investment

Arthur Lewis needed to maintain a balance between agriculture
and industrial sector.

Critical evaluation
(1) Some economists are of the opinion that the huge dose of investment as indicated by the ' Push'
is hardly feasible in any LDC If, however, the LDCs do possess the resources for such "Big Push', then
these countries should not be put into the category of LDC as such.
(2) Some economists have pointed out that while the expansion of several activities may improve the
profitability of each activity (assuming inter-industry linkage), the cost of factor inputs may rise. This
may offset the benefit of external economies of scale. It would then be a question of weighing the
benefits of external economies against the cost of factor inputs. So, the Big Push might enlarge the gap
between private return and social return.

(3) This doctrine puts greater stress on the simultaneous establishment of vertically and horizontally
integrated industrial units for the expansion of the market. However, there are alternative ways through
which market can be widened. The improvement in transport and communication facilities offers
tremendous scope for the expansion of the market. Again, this doctrine may lose much of its force in
the context of an open economy because involvement in international trade can lead to an expansion
of market for the domestic products. If the exportables are not sufficiently price and income elastic in
the international market, then export promotion measures might also expand the market for domestic
products.
(4) It is true that certain investments must be of a minimum size to become economically worthwhile.
It is uneconomical to build roads, railways and power stations merely to meet the current demand.
Ideally, the SOC of this type must be planned and built on a large-scale to achieve long-run economy
in the use of resources. But this argument hardly qualifies for any special label like 'Balance Growth'.
(5) The critics of the Balanced Growth (BG) doctrine do not deny the importance of a large-scale
investment programme and the expansion of complementary activities. Their argument is simply
that sufficient resources, specially capital and risk-taking entrepreneurs, are not available in LDCs. So,
in that case, striving for BG may not provide sufficient stimulus to the spontaneous mobilization of
resources or inducement to invest.
Unbalanced Growth strategy
Hans Singer and Albert Hirschman are the main proponents of the Unbalanced Growth (UBG)
doctrine. According to Singer, with a very meagre amount of available fund in most of the less
developed countries (LDCs), it is almost impossible for any LDC to follow Rodan-Nurkse pattern of
Balanced Growth (BG) path. He also opines that the theory of BG is a premature theory. It is applicable
to a subsequent stage of self-sustained growth rather than to an earlier stage of breaking the deadlock.
For breaking the deadlock, better results are expected if investments are concentrated only on some
chosen fields having maximum development potential.
Prof. Hirschman agreed with BG theorists about the importance of technical complementarities
between industries at different stages of production which he calls 'vertical linkages' but according to
him, (a) the degree of such complementarities is stronger between some particular groups of industries
than others, and (b) the BG strategy results in an once for-all increase in national income when the
economy ultimately rests in the BG equilibrium position. But Hirschman points out that the
development should proceed through a 'chain of disequilibria'.
When emphasis is given only on some judiciously selected industries, there will emerge non-
availability of certain complementary goods. This will exert strong pressures for developing the
industries that produce those complementary goods. As a result, there arises strong incentive for
investment in those complementary sectors. This, however, depends upon the responsiveness of private
enterprise in the LDCs to such a disequilibrium situation with profitable opportunities of increasing
investment.
Hirschman distinguished between two types of investment choices:
(1) Substitution choice and (2) Postponement choice.
The first involves a decision as to whether project A or B should be undertaken while the postponement
choice implies the sequence of those projects, i.e., which should precede the other. Hirschman is
mainly concerned with postponement choice. His fundamental thesis is that the question of priority
must be resolved on the basis of a comparative appraisal of the strength with which progress in one
investment project will induce progress in other.
Any particular investment project may have both ‘forward linkage’ (i.e., it may encourage investment
in its subsequent stages of production) and ‘backward linkage’ (i e., it may encourage investment in
its earlier stages of production).
Development of iron ore industry
Backward linkage effect
Development of Iron & Steel industry
Forward linkage effect
Development of railway wagon industry

Again, a new project would both appropriate and create external economies. While it appropriates
external economies set forth by previously established projects (e.g., the iron & steel industry
appropriates external economies in the form of transport and communication facilities already in
existence), it also creates new external economies for projects which are established subsequently.
Some projects appropriates more external economies than they create. They may be called ‘pressure
creating’ projects. On the other hand, some projects create more than they appropriate, and are called
‘pressure relieving’ project. While the former may have greater private profitability than social
desirability, the latter may have greater social desirability than private profitability.
The efficient sequence of projects will necessarily vary from region to region and from country to
country depending upon the nature of obstacles to development. But the basic approach remains the
same, i.e., to economize on decision making. Preference should be given to that sequence which
maximizes ‘induced’ decision making.
Hirschman illustrates his argument by dividing the initial investment into two related activities:
(a) Directly Productive Activities (DPA) and
(b) Social Overhead Capital (SOC).

An underdeveloped country may follow the method of unbalanced growth by undertaking either DPA
(say, investment in industries producing iron & steel, cement, machine tools, etc.) or SOC (e.g.,
investment in transport & communication, electricity generation, etc.) at the initial stage of
development. If SOC precedes DPA, it is called ‘development via excess capacity of SOC’. For
instance, provision of rail-road links and power supply at cheaper rates will promote induced
investment in small enterprises. However, when DPA precedes SOC, it is called ‘development via
shortage of SOC’ (in this case, the government is compelled to make investment in near future under
public pressure). Both these sequences create inducements and pressures conducive to development.
Now, the question is which of those sequences should be followed? This is illustrated with the help of
the following diagram:

Fig. – 1

In Fig.- 1, curves PP, P1P1 and P2P2 show different levels of DPA output from successively higher
investment in DPA. Any given level of full-capacity DPA output is a function of the availability and
cost of SOC. The minimum SOC required for the PP level of DPA output is denoted by K 0. These
curves are negatively sloped and convex to the origin because DPA costs decline as the availability of
SOC rises. The objective of the economy may obtaining maximum DPA output with minimum use of
resources devoted to both SOC & DPA. In Fig,-10, A, B, and C show such optimal points and 0X
represents the expansion path or the Balanced Growth path with simultaneous rise in DPA and SOC.
However, in any less developed country (LDC), both DPA and SOC cannot be expanded
simultaneously. Therefore, a direct movement from point A to B or from B to C is impossible.
Now, if the initial expansionary step is taken through the expansion of the SOC then the possible
sequence of growth path is denoted by A→A1→B→B1→C, i.e., development via excess capacity of
SOC. On the other hand, if the initial expansionary step is taken through the expansion of DPA output
then the possible sequence of growth path is A→B2→B→C1→C, i.e., development via the shortage
of SOC.
The traditional view is that the SOC should precede DPA for smooth progress of the developmental
process. But this cannot ensure the subsequent rise in private investment for the growth of DPA output.
Hirschman admits that a minimum amount of SOC is a prerequisite to the establishment of DPA but
as far as induced decision making is concerned, the most efficient sequence would be where DPA
precedes SOC because it compels the government to invest in SOC.
Critical Evaluation:
There are several criticisms to the unbalanced growth doctrine.
(1) If there is strong social and economic resistance to change, construction of SOC may not provide
much impetus to development process.
(2) It is admitted that a minimum amount of SOC is needed for the establishment of DPA. But if that
minimum amount is too large then it may contradict the argument that SOC should precede DPA.
Again, once DPA is established, there is no guarantee that SOC would be provided subsequently.

(3) Hirschman suggested that within the DPA sector, only those activities having highest linkage
effect are to be encouraged. But one of the typical characteristics of the LDCs is a lack of
interdependence between activities. For example, primary activities in agriculture have very limited
backward and forward linkage effects.
(4) The basic weakness of this approach is that it gives attention only on the technically possible
linkages between the quantities of inputs and outputs without explicitly considering the economic
feasibility (that depends on the costs of inputs and the prices of outputs). For example, a new industry
would generate sufficient linkage effects within the country only if locally produced inputs were
cheaper than the imported inputs and if domestic market could provide more profit than export market.
(5) The inherent danger of unbalanced growth is that it leaves too much on chance. It is due to the
fact that in this model the pace of development depends to a large extent on the whims of the individual
entrepreneurs.
(6) This growth strategy may lead to the concentration of production in one or two commodities. But
if the demands for such goods are price and income inelastic in nature in the overseas market, it would
generate a harmful impact on the balance of payments of the country.

(7) Again, imbalance may also cause an inflationary pressure within the economy. Though the
government can undertake some control measures, there are several limitations in their applicability
in any less developed country.
Balanced Vs unbalanced growth: A Debate
It is not easy to resolve the controversy or the debate between the balanced and unbalanced growth.
This is due to the fact that these theories cannot easily be tested empirically and these strategies depend
to a large extent on political motivations.

While the doctrine of balanced growth is consistent with the idea of Big Push, unbalanced growth also
benefits from such dose of investment in some judiciously selected sectors. The doctrine of balanced
growth presupposes that there should be continuous equilibrium between demand and supply to
prevent shortages or bottlenecks in an economy. The question that immediately arises is whether
shortages are desirable for achieving economic growth or not. If the answer is in affirmative then does
it imply a victory for unbalanced growth and that balanced growth should be discarded? If unbalanced
growth is defined not so much in terms of shortages as in terms of concentration on certain activities
(based on comparative advantage), then balanced growth and unbalanced growth can be regarded as
complementary strategies. Resources may tend to be concentrated in some selected sectors but within
these sectors, the investment programme may attempt to maintain an inter-industry balance.
Necessity of Planning: It seems that the doctrine of balanced growth is closely associated with the
concept of economic planning and unbalanced growth does not require any planning as such. But
unbalanced growth does not actually preclude the planning process. The decisions regarding the
selection of sectors for initial concentration of investment and for the allocation of resources
accordingly, require proper planning. In fact, with unplanned unbalanced growth, there is no guarantee
against unemployment, inflation and inequality in income distribution. Left to itself, unbalanced
growth is essentially a doctrine of laissez faire, with no safeguards against its socio-economic
repercussions. Hence, unbalanced growth strategy also requires planning.