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
Hirschman

:Albert

O.

Definition & Features of BGTs and

UBGTs

Balanced growth, according to

Nurkse, doesnt meanequal
growth in all sectors, rather it
means growth equal to their
respective natural growth rate.
Balance wasnt restricted to
sectoral growth; it was called for
between these three economic
variables investment, income
and consumption.

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 .

Economic
Planning
and
Implementation was completely
handled by private players

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 cant afford Balanced growth

Reliance on foreign aid is disproportionate. And doesnt justify pushing the
country into a crisis situation
Intellectual capital scarcity prevailed
Private sector cant 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 doesnt 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

Hirschmans 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 werent 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 interindustry 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 Needs

by Paul Streeten
Invest in Industries that increase productivities of the poor
1) Education and Health
2) Investments relating to Human Resource Development
3) 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

Rostows 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 aschange 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