Balanced Versus Unbalanced Growth - Essay Example

Balanced versus unbalanced growth Table of Contents Introduction 3 Literature Review 4 Theoretical Background 6 Limitations of balanced growth strategy 7 Limitations of unbalanced growth strategy 8 Conclusion: Balanced versus Unbalanced Growth 9 Bibliography 10 Introduction Developmental economics addresses mainly two types of growth theories, namely – balanced and unbalanced growth strategies. Though the latter was developed in fierce criticism to the former, it had been found in many instances that the two are suited for different perspectives, and in most of the cases they are found to be mutually exclusive. The underlying idea behind balanced growth strategy is an equilateral growth process in the economy via a parallel growth in a number of sectors. The advocate of the balanced growth strategy, Rosenstein and Rodan pointed out that, in order to attain an equitable growth in the economy, it was important to infuse a ‘big-push’ into the economy. A big-push implies a lumpsum effort to revive the society from the clutches of underdevelopment, where the lumpsum effort indicates a simultaneous thrust on more than one sectors in a country. Conversely, the fundamental picture behind unbalanced growth strategy is to inject the growth stamina in a selected sector from which the mechanism will trickle-down to a number of others. The main advocates of unbalanced growth strategy were Hirschman, Nurkse and Streeten, who pointed out that the framework in a developing nation is mainly an unbalanced one, and thus, it is important to inject an unbalanced growth strategy to improvise or rather balance the scenario. Literature Review Balanced growth was the first one out of the two alternative strategies to have come across the minds of economists in an effort for the upliftment of the financially depressed regions on earth and thus to raise the global economic scenario. The main proponent of the strategy was, Rosenstein and Rodan, who in 1943 noted that if the additional labour employed in the agrarian sectors of developing nations or rather the nations deeply inflicted by the war, switched over to the manufacturing segments, there could be an equalised distribution of labour over the economy, and thus, an equilateral growth throughout the economy. He mainly focussed upon the Eastern and South-Eastern Europe instance in the post-war period. Adopting this strategy could stimulate growth and production in a large number of sectors in the economy without having to raise the labour wages, so that even the cost of production remains unchanged. According to Rosenstein-Rodan, from the perspective of a less developed economy, it is very important to have increasing returns to scale in at least one of the sectors or industries in the nation. The higher that the production in this sector is, there will be an increased demand for raw materials and thus the concerned industries will develop as well. This way, an all-round development might be attained in the economy. The following pair of diagrams illustrate a similar situation where the initial demand in either of the firms were lower than the marginal cost of operation, making the entire production process a loss-making mechanism. But as soon as there was a rise in the aggregate demands in one of them, there appeared to be a subsequent rise in the other one, so that both the industries now enjoy a simultaneous growth in their production process. If this mechanism is followed in each and every sector of the economy, there will be an unprecedented growth in the economy. Lewis in 1955, too argued in favour of balanced growth strategy, but it came from a different dimension. While Rosenstein and Rodan reflected upon the horizontal dimension, the latter was mainly concerned about the vertical integration of the production mechanism. The idea as well as the underlying assumptions of balanced growth strategy was supported by Fleming in his paper published in 1955 as well as by Scitovsky in 1954, though the latter raised some doubts regarding the applicability of the strategy. Scitovsky noted that Rosenstein-Rodan assumed the presence of too many externalities in the market to make the balanced growth strategy possible, that often sound hypothetical. It was actually the criticisms of the balanced growth strategy that gave rise to the unbalanced growth theory of development for the LDCs around the world. Bauer and Yamey in 1957 raised the argument that in case that a less developed nation aims to develop itself based on export-led growth strategy, it needs to be separated from the balanced growth doctrine and must operate on the basis of an increasing returns to scale to ensure competitiveness in the world market. On the other hand Fleming in 1955, argued that in case of balanced growth strategy, if all industries are found to be expanding simultaneously at the same pace, then, assuming a fixed supply of the factors of production, there will be a severe inflationary pressure on the economy. However, the main advocate of unbalanced growth strategy, Hirschman, in 1953 pointed out that the Rosenstein-Rodan’s balanced growth strategy would need good managerial skills in a large number of industries, which is almost unviable for the developing or less developed nations. This is because these nations lack the stock of good and effective resources – both economical and human – which is why they lag backwards from their counterparts. But despite being an underprivileged nation, there remain certain rare qualities or rather resources that could be considered as specifically innate to the particular nation. Hirschman viewed the utilization of these resources as the source behind development for these backward nations. Theoretical Background From the arguments for and against balanced and unbalanced growth strategies raised by eminent observers and economists, it is quite certain that both of them are quite vital and suitable under different perspectives. Balanced growth strategy though sounds to be quite feasible due to an overall development in the economy, it often seems impossible on account of lack of ample resources for development. On the other hand, unbalanced growth might sound viable from this viewpoint as it accounts for the dearth in resources in the underdeveloped nations, but it suffers from its own limitations as well. The respective benefits and limitations of both the strategies made prominent by a number of economists over the years have been pointed out underneath. Limitations of balanced growth strategy 1. Despite the fact that the balanced growth strategy argues against low market equilibrium as the prime reason behind low growth rate in less developed nations, and argues in favour of all round development, there are loopholes in the implementation of the same. For instance, it is due to the lack of ample resources that the nations are underdeveloped in the first case. This is the reason why it is said that the more urgent is the need for economic growth, the lower is the suitability of the doctrine, while the lower the urgency is, more is the appropriateness of the same. 2. Again, assuming a fixed supply of factors of production, a balanced growth in an underdeveloped economy might lead to a rise in the price of the final commodities and thus inflation. The mechanism pointed out by Lewis in his paper is that, according to the balanced growth doctrine, a growth process triggered in one sector leads to a rise in the productivity of a number of related sectors and thus, given fixity in the supply of factors, there tends to be an inflationary pressure in the economy. 3. Thirdly there lies the problem of choosing the probable sector for investment, i.e., selecting the appropriate sectors for the initial thrust. 4. A serious drawback of the balanced growth doctrine is that, it is severely against the strategy of edging competitiveness on the basis of comparative advantages, unlike the theory of international trade popularised by Ricardo. Since it is quite evident that development in a protected or non-liberalised framework is impossible, the balanced growth strategy can be considered to have a significant difference with reality. 5. In order to avoid a chaotic situation, there must be a governing body that decides upon the appropriate sectors to be concentrated upon. But with intervention from an administrative body, there will be a loss of the competitive edge in the market and thus the doctrine of balanced growth will be lost as a whole. It is on account of the above criticisms that the unbalanced growth doctrine assumed so much popularity. Yet, the latter too is not free from its respective limitations which have been discussed in the subsequent section. Limitations of unbalanced growth strategy Unbalanced growth strategy is found to be covering or rather correcting most of the loopholes of balanced growth strategy. The most important one, as pointed out by Hirschman is that, unlike for balanced growth, there need not be abundance in the supply of management skills in the economy to assure development. This is because unbalanced growth focuses on uplifting any one of the most significant sectors in the nation, or rather the one which has a comparative advantage over the rest of the industries. Despite the advantage, there are a large number of limitations that the strategy suffers from as well. 1. Unbalanced growth strategy is suited for industrialised nations rather than for the agrarian societies, i.e., in context of overpopulated economies. This is because unbalanced growth theory aims at improvising the situation in those sectors where technology is one of the most important factors of production. Agriculture in labour-intensive nations is not at all a technological issue which is why it is completely ruled out from the segments having a potential for development. 2. Unbalanced growth can lead to inflationary pressures in an economy with the production for a few commodities rising and most others remaining low. If the price elasticity of goods and services is low or absent in the nation and income elasticity for the same is very high, there will be a rise in the demand for the commodities with an increasing income level in the economy. On the other hand, this increase in demand will not lead to any increase in supply, thus leading to a hike in the general price level in the economy. 3. In a constrained framework where the LDCs have to operate, there is a large amount of risk linked up with producing more than the market demand. If the excess supply goes undemanded for and the nation is also unable to trade them across international frontiers, then there is a sheer loss of potentials, that could have been used up to built the growth inertia in some other sector. Conclusion: Balanced versus Unbalanced Growth Both balanced and unbalanced growth strategies have their respective advantages and disadvantages with their position complying with certain economic situations while going against another. Apparently, unbalanced growth sounds to be more logical than balanced growth in context of developing nations, with the strongest point led by Hirschman, about the dearth in management skills to infuse into a large number of sectors to help them grow simultaneously. However, it must also be noted that there lies a huge difference between the natures of the two strategies in context of the background. For instance, balanced growth sounds to be more logical in perspective of agrarian societies, since such economies are generally found to be over-populated and have a huge capacity of labour that must be taken care of. There must be ample employment opportunities in such nations which is why equitable investments must be made in a large number of sectors simultaneously. Again, unbalanced growth is arguably the better one out of the two in case of a scarcely populated economy, since such a region can easily adopt itself to technological improvements. But one point that must be emphasised upon is that, it was out of criticisms for balanced growth that led to the birth of unbalanced growth theories. Bibliography Todaro, M. P. & Smith, S. C. (2003) Economic development (8th Edition) USA: Pearson Education. Read More