Analysis of the idea of Unbalanced Growth

Do you feel that a less developed /developing country should always follow the road of balanced growth? If yes, why and if not why not? Substantiate your arguments with the examples drawn from activities of development in developing countries.

Answer:

When Rostow was making attempts to put economic development in just a progressive framework, it lead to a debate in the 1950's and the 1960's which was mostly fixated on whether development efforts should focus on specific economical sectors within the countries or whether it should be carried out in all major sectors of the economy namely the manufacturing sector, agriculture and the service sectors.

In this very context, economist Ragnar Nurkse propounded that development efforts should make synchronized use of capital in order to develop an extensive range of industries in the nations. According to his beliefs, an Intensive overall effort was of utmost importance, which would eventually drive the developing or the underdeveloped nations from the vicious circle of poverty where the limited supply of capital started in the first place, due to the low saving rates. In underdeveloped countries, the vicious circle of poverty is responsible for the small size of the market for his or her goods. Nurkse was an "export pessimist" and he believed that the finances required to commit in less developed countries should result from their own domestic territories. He didn't give any importance to the promotion of exports. The balanced growth approach also supports the best push theory which promotes the channeling of bulk capital to all or any the sectors simultaneously owing to the belief that gradual investment in the sectors is not reasonable. Investments should be carried out in several industries that mutually support each other, in order to enlarge how big is the marketplace. Investments in the sectors should be made simultaneously such that it brings about an optimistic drive to overcome the significant barriers to development. Along with the adoption of the strategy, there emerges new opportunities to distribute the fruits of development more evenly throughout the society and also to cure the plights of inequality, inflation and unemployment of resources. On the other hand, the theory of balanced growth has been largely criticized as it ignores the economic notions of all round benefits ensuing from specialization in production and development processes. Since it takes place within the closed economy and does apply predominantly to an exclusive enterprise system rather than specialization and trade, the doctrine contradicts the whole principle of comparative advantage. Also, it emphasizes on the complementarity of markets for final goods and primary consumer goods as a stimulus to get and ignores the immediate goods market. It has been stated to be unrealistic as it expects a country which is developing or is underdeveloped to make bulk investments in every the sectors simultaneously without taking into consideration the aspect that in case a country had enough resources to purchase all the sectors of the economy all at once, it could not classify as underdeveloped or developing in the first place. Also, the theory makes an impractical assumption that nations would start from the same zero point, whereas in reality such is false. Certain economies are bound to have certain historical strengths and different investment capacities which may vary. This theory has been massively dismissed, when in the 1960's and 1970's the actual progress of LDC's reflected growth without any significant try to synchronize the simultaneous investments in all the sectors consequently of which these nations continued to stay comparatively underdeveloped.

Contrary to the theory, some theorists also advocated a technique of investment only in selective sectors as an effort towards encouraging growth in the developing countries. Economist Albert O. Hirschman put forth the thought of adopting unbalanced investments in specific monetary sectors in order to complement the imbalances that already may actually exist within the economy of a nation therefore. The unbalanced growth strategy aims at eradicating the scarcities in underdeveloped nations by adopting induced investment decision making. Hirschman contradicted the total amount growth theory and argued against it, stating the most obvious that the LDC'S don't have access to enough resources to look at and implement balanced, big push investment strategy. Instead, he proposes that investments should be completed in strategically selected monetary areas, in a way that there is certainly growth in other sectors owing to the backward and forward linkages that are established, that will further lead to new investment opportunities, thereby paving the road for further economic development. Backward linkages lead to new investments in the input industries, whereas forward linkages do the same in the sectors that purchase the output of the selected industry. Deliberate unbalance, tensions, disproportions and disequilibria caused throughout the market is the most effective strategy to achieve economic growth in an underdeveloped or developing country. Thus the economy is able to slowly but surely move from the an eye on an unbalanced growth pattern compared to that of balanced growth. Acknowledging all the benefits of the unbalanced growth strategy, this theory also offers its shortcomings. The idea makes an inherent assumption that the success of the growth process can be traced right down to external trade and foreign aids. This further upsurges the uncertainty of the growth process. The idea is also seen to emphasize on development through industrialization without considering the significance of agriculture. Being concentrated on a couple of industries, there could be situations where the resources are not appropriately utilized. Also, some sectors of the economy will be witnessed to grow at a faster rate while other sectors will remain neglected. This raises a question as to whether investment has been carried out in the right sectors owing to the aspect that the sectors of the economy are not invested upon. Therefore, in this particular scheme careful understanding of the situation of each country must be carried out, to be able to know what investment in which sector should take place as means to reach an ultimate balance among all the investment sectors throughout the market.

The theory of unbalanced growth is apparently an excellent strategy proposed by Hirschman at pointing out the ways to accelerate financial development in developing and underdeveloped nations regardless of all its flaws and disadvantages. As we know, with unplanned unbalanced growth there is absolutely no assurance against unemployment, inflation and unequal distribution of income and the strategy is recognized as a doctrine of laissez-faire, which indicates that there surely is an absence of safeguards against the socially divisive consequences of change. Howsoever, it still appears to be more realistic and feasible than the balanced growth strategy as it tries to take into account almost all when aspects of development planning. As a matter of fact, even the various inducements, obstacles and resistances to development are taken into account in their appropriate perspectives. Unbalanced growth generates externalities. The existing externalities are explored while generation of the new ones happen. It promotes the growth of strategic industries and thereby, stimulates the growth of other industries. Also, there are technical complementaries which stimulate the growth of related industries along the lines of this strategy. Since investments by means of Social Overhead Capital (SOC) and Direct Productive Activities (DPA) cannot be taken into account simultaneously in less developed or developing countries, owing to the obvious lack of resources, the idea proposes that focus should be established on either one of the two, and therefore of which the other one would be automatically stimulated. In order to achieve this, the growth of the economy should happen either by unbalancing the economy through SOC; by promoting the growth of SOC which would stimulate investment in DPA, or by unbalancing the economy with DPA; in a way that the investment manufactured in DPA would eventually press for investment in SOC. It is through this technique of linkages often called the "linkage effect", that the monetary growth will finally happen. Development should progress with the goal of targeting projects that will have the major total linkage. However, the main problem can be narrowed right down to figuring out the sort of imbalance that is expected to be the very best depending upon the economy of the nation.

Hirschman pin points the absence of interdependence and linkage in less developed countries consequently of which the principal production activities for exports have hardly any development effects on the economy of underdeveloped country. He therefore puts forth a tactic and advocates the setting up of "last stage industries first" in order to resolve the issue. He stresses on export promotion and import substitution and favors a mixed economy due to the fact that unless the SOC pathway of monetary development is adopted by the state, you won't encourage any form of private investment in DPA, as private investments in underdeveloped countries fail to create the necessary economic surplus that is clearly a prerequisite for development to continue and even for the sustenance of losses.

It has been seen, that regardless of the weaknesses of the unbalanced growth strategy as illustrated in the very beginning of the report, the technique has become recognized as well suited for the introduction of underdeveloped and developing countries. When Joseph Stalin ruled developing Russia, it was one of the first countries to look at this strategy and by implementing this system it succeeded in accelerating its monetary growth rate within an extremely short period of energy. In the current scenario Russia is regarded as a developed country. Over the same lines, India adopted this plan with the Second Five-Year Plan. In India, investments in heavy industries were kept at a higher level through the five year plans and simultaneously there have been consistent efforts made towards stepping up the production of consumer goods. But there was no attempt made to keep the levels of consumption lower in order to produce a large economical surplus. Also, there is evidence which implies that India did not follow the typical pattern of industrialization. High technology industries flourished as opposed to the growth in the essential manufacturing sector which was lagging. The promotion of the high technology sector has had a negative impact on the manufacturing sector as well as on the aggregate income of the country. Instead if resources were directed towards infrastructure, it would have yielded benefits for any sectors and could have increased the aggregate income as well. Therefore, the unbalanced growth strategy in India didn't talk with great success.

Even China adopted the unbalanced growth strategy as a matter of fact China's unbalanced growth is an investment driven model due to which it's been predicted that growth in china will not be sustainable unless it adopts a far more consumption driven model. China's growth pattern apparently mirrors that of other successful emerging South East Asian economies namely Japan, South Korea, Taiwan and Singapore. These countries were successful in the last fifty years in progressing from the middle income group to advanced economies. This transformation was seen as a very long periods of high degrees of investment after their economic take off, which corresponds to China's growth trajectory. Unfortunately, lots of the other developing economies didn't make it to the upper stage of development or are caught up in the "middle class trap". But due to China's high levels of investments within the last couple of years which had were able to reach an even, higher than that of any nation, it would appear that China should adopt a rebalancing growth strategy, like other the countries after their considerably lengthy periods of high investment, which would mark the end of its period of unbalanced growth. However, it appears like China must go quite a distance in order to catch up with the economies of the advanced countries in terms of productivity.

When Japan and Korea internalized the unbalanced growth strategies, they concentrated their national resources on some strategically chosen industries and targeted principally for import substitution. Japan's economic growth picked up pace, led by the electronics industry, heavy and chemical industries. As a matter of fact, both Japan as well as Korea, witnessed the growth of an independent national economy through the implementation of import substitution in the heavy and chemical industries as well as the 'high tech' industries.

This strategy was adopted by just one more developing country in Africa called Zambia. Zambia's excessive dependence on its mining exports is an apt instance of unbalanced growth which eventually proved to be more of a higher risk strategy and therefore, was not sustainable. Therefore, Zambia inherited an economy that took to the unbalanced growth strategy, but was unsuccessful in balancing it within the right timeframe.

We see, that most of these developing countries adopted the unbalanced growth strategy, but just a few met with success. However, in this respect the balanced growth strategy with its limitations should not be completely dismissed as both these strategies may actually converge at certain points. Both the strategies consider the existence of an exclusive enterprise system that is heavily grounded on market mechanism under which they function. Both theories disregard the importance of supply limitations and supply inelasticities. Also, both doctrines assume interdependence which vary in their degrees. This interdependence is seen in balanced growth, when the development of one sector is heavily reliant on the development of the other sectors whereas, in unbalanced growth strategy the economy progresses towards economic development by the creation of tensions, disproportions and disequilibria thereby attaining balanced growth. Thus, both these strategies derive from the interdependence that is set up among the different sectors of the economy.

The choice between adopting the balanced growth strategy and the unbalanced growth strategy is a hard one. None of the strategies are perfect and both have their own advantages and limitations. Although, keeping in mind the scarcity of resources that a developing country faces, common knowledge directs the developing or underdeveloped nation to adopt and implement the strategy of unbalanced growth. Even under this strategy, it is effective if the country invests on the SOC first, which will subsequently encourage investments in DPA, which would direct the economy further towards the path of balanced growth. In the Indian context itself we can see that unless SOCs such as power, transportation irrigation etc. are developed, the development in the industrial, agricultural and commercial sectors will automatically be retarded. When this strategy has been adopted by developing countries, it is very important that they should try their best to control the evils of inflation and balance of payments.

Nevertheless, we see these strategies should not be looked at instead of the other, as they seem to complement each other. By implementing the unbalanced growth strategy as the means, the developing or the less developed nations can attain balanced growth, which is the ultimate aim.

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References:

  1. Balanced and Unbalanced Growth- Robert B. Sutcliffe, The Quarterly Journal of Economics, Vol. 78, No. 4 (Nov. , 1964), pp. 621-640.
  2. The Theory of Balanced Growth- S. K. Nath, Oxford Economic Papers, New Series, Vol. 14, No. 2 (Jun. , 1962), pp. 138-153.
  3. Unbalanced growth and dependency theory in Zambia: A post-independence survey- Mark Ingle.
  4. Growth and Development with special mention of developing economies- A. P. Thirwall, Fifth Edition.
  5. Theories of Underdevelopment, Balanced versus Unbalanced Growth- Higgins.
  6. Is the Elephant Stepping on its Trunk? The issue of India's Unbalanced Growth- Robin Douhan and Anders Nordberg.
  7. Balanced Growth: An Interpretation- Jose Maria Dagnino Pastore, Oxford Economic Papers, New Series, Vol. 15, No. 2 (Jul. , 1963), pp. 164-176.
  8. Theory of Unbalanced Growth, chapter 29.
  9. China: Rebalancing Economic Growth, Chapter 1- Nicholas R. Lardy.
  10. The Unbalanced Growth Hypothesis and the Role of the state of hawaii: the situation of China's State-owned Enterprises- Carsten A. Holz.
  11. Restructuring 'Korea Inc. ':FINANCIAL MELTDOWN, Corporate Reform, and Institutional Transition- Jang-Sup Shin, Ha-Joon Chang.
  12. Towards more balanced growth strategies in developing countries: issues related to advertise size, trade balances and purchasing power- J¶rg mayer.
  13. China's unbalanced growth compared with Japan and South Korea- FTAlphaville.
  14. African Journal of Business- Review.

Tata Institute of Social Sciences. Name: Prakriti Dasgupta. Roll No. : H2013BAMA28. Subject: Developmental Economics, DC7. Teacher: Dr. Poulomi Bhattacharya. BA 2nd Year, Semester: III.

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