Theory of Balance Growth: Concept, Definition and Basis

Balanced growth is a dynamic process and as such the meaning of balanced growth continues changing.

The concept of balanced growth is subject to various interpretations by various authors. It was Fredrick List who for the first time put forward the theory of balanced growth.

According to Fredrick List the theory of balanced growth is of great significance by which a balance could be established between agriculture, industry and trade.

This concept was endorsed by Rosenstein Rodan in one of his articles titled “Problems of Industrialisation of Eastern and South Eastern Europe.” Prof. Nurkse, Prof. Lewis and Stovasky have examined this concept of balance of growth on different bases. In the words of Kindleberger, “Balanced Growth has so many meanings that it is in danger of losing them all.”

Definitions:

1. P.A Samuelson, “Balanced Growth implies growth in every kind of capital stock constant rates.”

2. U.N Publication, “Balanced Growth refers to full employment, a high level of investment, overall growth in productive capacity, equilibrium.”

3. Alak Ghosh, “Planning with balanced growth indicates that all sectors of the economy will expand in same proportion, so that consumption, investment and income will grow at the same rates.”

It can be expressed as:

∆C/C = ∆I/I = ∆Y/Y

4. Benjamin Higgins, “A wave of capital investment in a number of industries is called Balanced Growth.”

5. W.A. Lewis, “In development programmes, all sectors of economy should grow simultaneously so as to keep a proper balanced between industry and agriculture and between production for home consumption and production for exports the truth is that all sectors should be expanded simultaneously.”

6. C.P. Kindleberger, “Balanced Growth implies that investment takes place simultaneously in all sectors or industries at once, more or less along the lines of the slogan, ‘You can’t do anything until you can do everything.”

7. R.F. Harrod, “Balanced Growth aims at equality between growth rate of income, growth rates of output and growth rate of natural resources i.e.

G_y = G_w = G_n

Here G_y stands for growth rate of income, G_w stands for growth rate of output and G_n stands for growth rate of natural resources.

8. Mrs. Joan Robinson’s concept of golden age also implies balanced growth. It states that there must be equality between growth rate of capital and labour force i.e.

∆K/K =∆N/N

Conclusion:

From the above cited definitions, we stand by the views of Kindleberger who rightly observed that “balanced growth has so many meanings that it is in danger of losing them all.” However, the most widely discussed and accepted meaning of balanced growth is that there should be simultaneous and harmonious development of different sectors of the economy, so as to make available a ready market for the products of different sectors. It is, thus, confirmed that balanced growth is not a static term, but it refers to its dynamism.

Basis of the Theory:

The doctrine of balanced growth requires the balance of three types which is discussed below:

1. Supply Side:

Supply or production in an underdeveloped country is low. The reason behind it is that saving in these countries is low because of low income. Low savings results in low investment. Low investment leads to low capital formation and low productivity. Low productivity leads to low income, i.e.

Low Income—Low Savings—Low Investment—Low Capital Formation—Low Productivity—Low Income:

So, it is imperative to increase investment in order to increase demand. But investment will increase when the entrepreneurs will get impetus to invest. In other words, their products will sell and they will earn profit. Therefore, it becomes essential that several industries are set up simultaneously.

Thus, the concept of balanced growth from the supply side is that various sectors of an underdeveloped economy should be developed simultaneously so that no difficulty in the path of economic development is created. For example, agriculture, industry, internal trade, transport, etc. should be developed simultaneously. According to Prof. Lewis, “The various sectors of the economy must go with the right relationship to each other or they cannot go at all.”

2. Demand Side:

In the underdeveloped countries, people have low purchasing power because of their low income. So, their demand is also low. Low demand results in less expansion of market. Small market inspires low investment i.e.,

Low Income → Low Purchasing Power → Low Investment → Low Productivity

Therefore efforts should be made to increase the demand in these countries. The concept of balanced growth from the demand side is that several industries should be developed simultaneously so that all can be the customers mutually and the products of all can be sold. In this regard Rosenstein Rodan has given an example. According to him, if a shore make industry is set up all people linked with it will get income. But they will not spend all of their income only on buying shoes. They will buy goods manufactured by other industries.

Similarly if only one sided development is made it will not succeed. Contrary to it, if several industries are developed simultaneously and harmoniously, this difficulty can be removed. Therefore, Prof. Nurkse says, “Most industries catering for’ mass consumption are complementary in the sense that they provide a market for and thus support each other.”

3. Sectoral Balance:

Sectoral balance means economic development of all the sectors in an economy. As agriculture and industry are complementary to each other. Thus, expansion of industry will require expansion of agriculture and vice-versa. Again expansion of industrial sector will raise the demand for raw-material which will only be supplied by expanding of agricultural sector. Prof. Lewis maintained that if these sectors are simultaneously developed, the relative price among them can be maintained.

There may be any unfavorable terms of trade among them. In the same manner, a balance between domestic trade and foreign trade becomes essential during the process of economic development. Thus, according to Prof. Lewis, the domestic sector must grow in balance with the foreign sector.