Difference between Balanced Growth Doctrine and Unbalanced Growth Doctrine

This article will help you to learn about the difference between balanced growth doctrine and unbalanced growth doctrine.

Difference between Balanced Growth Doctrine and Unbalanced Growth Doctrine

Balanced Growth Doctrine:

The BG—the synchronized application of capital to a wide range of industries—advocates such as, R N. Rosenstein-Rodan, Ragnar Nurkse, Arthur Lewis recommend that the minimum size of investment programme must be made in various sectors of the economy to initiate the economic development.

Or, it may refer to the path of deve­lopment and the pattern of investment necessary to keep the different sectors of the economy in a balanced growth relationship with each other. An isolated effort is unlikely to fructify.

In other words, BG approach suggests that agriculture and industry should develop simulta­neously as there exists a complementary relation­ship between the two sectors. In addition to this complementary role played by agriculture and industry, Nurkse recommends for the expansion of selected industries with a bias towards consumer goods or light industry.

Most industries catering for mass consumption are complementary in the sense that they provide not only a market for each other but also support each other. To Nurkse, the case for BG rests on the need for a “balanced diet”. This BG doctrine thus involves the Chinese strategy ‘marching on two legs’—one being large industry and the other agriculture and light consumer goods industry; the best foot must be put forward first.

According to Ragnar Nurkse, the biggest bottleneck of development of LDCs is the small size of the market. It is because of low purchasing power underdeveloped countries suffer from limited size of the market. This then explains limited inducement to invest. What is required to break the vicious circle is the expansion of the size of the market.

Through the application of invest­ments in various industries, liberal trade policy, extension of infrastructural facilities, the general level of economic efficiency is raised and the size of the market is widened., A. W. Lewis suggests a ; strategy of balance between domestic and foreign trade also.

Before Nurkse, Rosenstein-Rodan also finds smallness of the market as an impediment to development and pleads for a scheme of planned concerted programme of industrialisation. Like Nurkse, the central idea here is the need to over- come the smallness of the size of the market created out of low per capita income and, hence, low purchasing power of people in LDCs.

He argues that a single shoe factory may fail when established on its own because of the smallness of the market for its output or the low volume of societal demand. The proposed solution to this problem is to build a number of industries that derive benefit from the simultaneous development of other complementary industries. In the process, what is seen is the growth of income and therefore the growth of demand/ purchasing power that provides a large market for each other.

The BG doctrine focuses on the indivisibility of supply of social overhead capital and indivisi­bility of demand. The BG doctrine refers to the scale of investment or big push to overcome indivisibilities on both the supply side and demand side of the development process. Indivisibilities on the supply side refer to the ‘lumpiness’ of capital (mainly social overhead capital like road, irrigation, electricity, a piped water supply, etc.) which is scarce.

Once these are developed it can take advantages of external economies. It may be noted that since these forms of investment are indivisible and have long gestation periods there must be a simultaneous development of a variety of consumer goods and producer goods industries so that the supply bottlenecks are removed and excess capacity generated by these capital is utilised.

Indivisibilities on the demand side in LDCs arise from the small size of the market created by low per capita income and, thus, low purchasing power. Now, if enough projects or economic activities are started simultaneously, each would provide a market for the other. Therefore, a big push is essential to enlarge the size of the market.

In the light of these demand and supply considerations, the authors of the BG doctrine recommended a massive investment programme to initiate a ‘big push’. ‘Proceeding “bit by bit” will not add up in its effects to the sum total of the single bits. A minimum quantum of investment is a necessary—though not sufficient—condition of success. This, in a nutshell, is the contention of the theory of big push.

An obvious question was raised by the authors of the BG doctrine: Who will provide all the capital which the BG demands? According to Rosenstein- Rodan, BG would require a ‘big push’ in the form of government action. Neither the private sector is capable of making such massive investment programrnes nor has it the incentive of attaining profitability. Profitability of immediate investment proposal is to be viewed in terms of ‘social marginal net product’, rather than ‘private marginal net product’. In other words, market forces may not lead to optional investment decisions. Rosenstein-Rodan argues that the rate of growth would be slow in the absence of a planning board/ central authority rather than innumerable private entrepreneurs. The BG doctrine thus makes a plea for large-scale state action.

Limitations of Balanced Growth Doctrine:

The major criticism of the BG doctrine is that it fails to suggest measures that can be taken to overcome the fundamental obstacle to growth—the shortage of productive resources. In fact, development in most of the LDCs is constrained by the inadequacy of resources, especially capital and entrepreneurs. Under the circumstance, the BG approach may not provide a sufficient stimulus to the spontaneous mobilisation of productive resources or the inducement to invest.

Secondly, given the paucity of investible resources in LDCs, it seems improbable that any LDC would be likely to have enough resources to carry through such massive programme of BG. One of the leading critics of the BG doctrine is Hans Singer. Singer argues that the BG doctrine fails to come to grips with the true problem of LDCs— the scarcity of resources.

‘Think Big’ is a sound advice for any poor country but ‘Act Big’ is unwise counsel. Singer and Albert O. Hirschman candidly argued that if a country were ready to apply the BG doctrine amidst paucity of resources, then it would not, in fact, be underdeveloped in the first place! Thus, the BG concept is an unrealistic one for such countries.

Thirdly, the most damaging criticism of the BG theory seems to be the fact that it fails as a theory of development. By development we mean transi­tion from one state of development to a higher one. But if BG doctrine were applied, it would usher in a dualistic pattern of development, as was elabo­rated by A. O. Hirschman—the main proponent of the UG doctrine.

The BG doctrine advocates that an extremely new self-contained modem industrial economy must be superimposed on the stagnant self-contained traditional stage of an economy. This transition from one stage of development to the modern state of development cannot be called a higher stage of development; it is simply a dualistic pattern of development.

Fourthly, critics like Hirschman articulate that the BG doctrine combines a defeatist attitude towards the capabilities of LDCs with completely unrealistic expectations about their creative abilities. Initiation of development process involves the simultaneous start of multiple activities at one instance. Being an underdeveloped economy, it experiences shortage of critical inputs like capital, technical knowhow, entrepreneurship, managerial skills, inefficient and imperfect institutions, etc. Such deficiencies cannot be overcome overnight. After a long time gap these deficiencies can be met. Thus the BG theory appears to be a contradiction in itself.

Fifthly, the strategy of BG, according to H. Singer, lacks historical sense. It assumes that an LDC starts from the scratch. In reality, it is not so but reflects previous investment decisions coupled with positive outcomes, that is, development.

Thus, at any point of time one finds that there are highly desirable investment programmes which are not in themselves balanced investment packages, but which represents unbalanced investment to com­plement existing imbalance. And once such investment is made, a new imbalance is likely to appear which will require still another ‘balancing investment and so on. Thus, historically speaking, “Growth does not take place in a balanced way but is unbalanced.” In other words, unbalanced growth is a natural path to development.

Conclusion:

Despite the above weaknesses and criticisms, the BG doctrine has certain role to play in the economic development of a nation. Recently, the doctrine has been modified in the light of an imperfectly competitive economy. It is argued that industries with large fixed costs generate pecuniary external economies. Once external economies accrue, an industrial firm can enlarge the market size of another firm through demand spill-overs. Through a big push, the limitations of the small size of the market can be overcome.

However, we can conclude here in terms of Singer’s comment: “The doctrine (theory) of balanced growth is premature rather than wrong in the sense that it is applicable to a subsequent stage of sustained growth rather than to the breaking of deadlock.”

Unbalanced Growth Doctrine:

Against this BG doctrine, a rival doctrine was suggested by A. O. Hirschman, Paul Streeten, H. Singer, etc., who pleaded for deliberate unbalan­cing of the economy in accordance with a pre­destined strategy to achieve economic growth.

Proponents of this doctrine of unbalanced growth argue that it is a state of unbalance or disequilibrium which sets in motion the forces which demand prompt action. If there is equili­brium or balance between demand and supply then decision-makers find no incentive to venture on new projects.

Authors of this doctrine do not deny the need for a ‘big push’ as recommended by the BG advocates. Like Ragnar Nurkse, these authors emphasise complementarity among industries. UDCs are handicapped by not only shortage of capital resources, but also by the lack of skills and knowledge of human labour as well as entrepreneurial/managerial skills. How then can a big push work? Hirschman argues for a big push in strate­gically selected industries or sectors of an economy through the creation of tensions and disequilibria.

Given the limited amount of investible resources, Hirschman emphasise on concentration of investment in important industries that provide stimuli for further development. Initial primary investment gives birth to induced investment. Such investment in leading sectors lead to disequilibrium and imbalance in other industries and so on ad infinitum. Development of key sectors will call for development of other sectors in the long run. In Hirschman’s words: “If such a chain of unbalanced growth sequences could be set up, the economic policymakers could just watch the proceeds from the side-lines.”

Unequal development of leading sectors often generates conditions for rapid growth. Hirschman argues that there are two ways of creating imbalance in the economy. To this end, Hirschman divides initial investment into two related activities: social overhead capital (SOC) and directly productive activities (DPA).

SOC is defined as those basic services without which primary, secondary and tertiary activities cannot function. It includes many forms of infras­tructure like education, public health, public utilities like water, power, irrigation, transportation, communication, etc.

These basic services are provided by the state agencies both for the promo­tion of social welfare and for the encouragement of DPA like setting up of industries (both heavy and light), commerce, trade, etc. SOC investments provide stimuli for trade, agriculture, industry, etc., and, hence, a great stimulus for investment in DPA. In other words, SOC is thought to be as a pre­requisite of DPA.

However, imbalances in an economy may also be created by making investment in DPA at the first instance. Initial investment on DPA may reflect poor growth of the economy due to the shortage of SOC. However, faced with the inadequacy of SOC, the pressure on SOC starts building up. Thus, initial investment on DPA induces investment on SOC.

In Hirschman’s scheme of things, we thus have two paths of development: The first path (from SOC to DPA) is designated as ‘development via excess capacity’, while the second path (from DPA to SOC) is called as ‘development via shortages’. It may be noted that both these paths create inducements and pressures required for develop­ment. But which sequence should be adopted by the policymakers can’ be analysed in terms of Fig. 2.1 where we measure cost of SOC on the horizontal axis and cost of DPA on the vertical axis.

The negatively sloped convex curves Q₁, Q₂, etc., are the isoquants representing different levels of DPA output from a successively higher investment in DPA. Higher curves represent higher levels of output. A line OE has been drawn in such a way that the optimal points fall on this line. This efficient expansion path A→ B→ C thus describes the BG path between SOC and DPA.

In his doctrine of UG, Hirschman assumes that SOC and DPA cannot be developed simultaneously. This means that a UDC may either choose SOC over DPA or DPA over SOC.

If the country chooses the path of development via excess capacity (i.e., preference of SOC over DPA), the development path of the economy would be AA₁ BB₂C. When the economy increases SOC form A to A₁, this induces investment in DPA. The induced investment in DPA accelerates to B until balance between SOC and DPA is restored. Meanwhile, the economy is on a higher growth path. Now SOC is increased further to B₂ which induces further investment in DPA until balance is restored at C.

If the economy follows the path of develop­ment via shortage of SOC, that is, more investment is made on DPA over SOC, the development path would be AB₁BC₁C. When DPA is accelerated to B₁, DPA will have to shift to B₁, and then to B. When DPA is enhanced further to C₁, this again creates pressure for more investment in SOC until balance is restored at C.

The next important issue is the choice of selecting the kind of imbalance that becomes highly effective (i.e., highest profitability of investment). This necessitates the knowledge of interlink ages across different sectors of the economy. Hirschman introduces the concept of forward’ and backward linkages.

An industry is said to have forward linkage effects if it prompts the setting up of new industries using its output. For example, the setting up of a steel factory results in an expansion of a variety of steel-using industries, like automobile, cycle industries. On the other hand, industries with backward linkages make use of inputs from other industries. For example, the setting up of a steel mill will create demand for coal, iron ore, and blast furnace. Usually, for consumer good industries forward linkage is rather weak while agriculture has some sort of backward linkages. In general, intermediate industries have the most linkages.

Thus these linkages are stimuli to expansion and growth. The aim of development policy should be not to push forward simultaneously on all fronts but to select and concentrate on particular ‘strategic sectors of the economy where these interdependent linkage effects may be expected to be the most linkages.

The chief merit of this UG doctrine is that it is a more realistic approach as far as LDCs are concerned. This is because that this approach recognises the scarcity of productive resources as an obstacle of development, rather than small-sized market as BG theorists emphasise. Secondly, it attaches importance to the creation of SOC by state intervention. Thirdly, this doctrine does not abandon the role of market mechanism. Above all, the experience of the erstwhile USSR is a pointer the LDCs as this country witnessed a massive growth following the adoption of this growth strategy. India, too, followed this strategy during ±c Second Five Year Plan (1956-1961) when emphasis was given to the development of basic and key industries.

Limitations of Unbalanced Growth Doctrine:

Despite these merits, lie UG doctrine is not free from defects and weaknesses as evident:

First, this doctrine recommends creation of deliberate imbalance for economic development, but remains silent on the degree of unbalance among the various sectors. The doctrine does not specify at all where to unbalance and how much in order to accelerate growth. Truly speaking, the doctrine does not talk about the composition, direc­tion, degree, and the timing of unbalanced growth.

Secondly, the UG doctrine concentrates too much on stimuli to expansion but tends to neglect or minimise resistances caused by unbalanced growth. However, resistance may occur in many ways and in many forms. For instance, institutional bottlenecks or unsophisticated entrepreneurial attitudes often act as drag on development.

It may also happen that some decision-takers may make mistakes in uncertain circumstances associated with imbalances. This may result in bad investment in spite of good linkage effects. How to overcome such resistances or obstacles has not been given importance in this doctrine.

Thirdly, the strategy of UG pays less attention to agriculture. This may be suicidal to the overpopulated agricultural countries. Shortage of agricultural goods (particularly, wage-goods) can emerge as a serious constraint to the industria­lisation programme of a country.

Fourthly, Hirschman emphasises on linkages as the criteria of development. But in LDCs one finds lack of interdependence between different sectors. In other words, there may be limited backward and forward linkages, thereby slowing down the process of development. Above all, linkage effects are not based on statistical data pertaining to LDCs.

Fifthly, imbalances can be a powerful source of inflationary pressure in a poor LDC where massive investments are undertaken in selected strategic sectors. Such cost and price increases, in turn, produce detrimental effects on the balance of payments of a nation, particularly if goods are price inelastic and income elastic in demand. If inflationary control measures are adopted it may cause emergence of some other untoward developments like worsening of supply position in the shortage sectors, rising bogey of unemploy­ment, currency exchange depreciation, etc.

Finally, the UG doctrine may be of a great help if the state exercises effective control over the country. This theory then has the greater applica­bility in socialist countries where state directs all resources according to societal needs and invests in socially desired lines.

But such is not true in an economy where control of the state over resources and investment is left with the private sector along with the government. It is because of the limited government control it cannot create right type of imbalances or disequilibria between different sectors of the economy. This then hampers the process of economic development.

Conclusion:

There can be no end to this sort of debate and thus there are difficult to evaluate. Neither of the two doctrines is an unfailing pres­cription for development as these theories cannot be tested empirically. From a purely economic point of view, these two growth strategies must not be viewed as alternative’s.

So what is needed is the reconciliatory approach—an approach that emphasises both the BG and the UG approaches. In other words, one step towards this reconciliatory approach is to pursue unbalanced growth as a means of achieving the ultimate objective of balanced growth. An optimum strategy of development should combine some elements of both balances and imbalances.