VISITAS INSTITUCIONALES

A lively debate has taken place between the advocates of balanced and unbalanced growth as strategies for economic development in the 1950s and 1960s, though after numerous qualifications of both versions the merit of the initial debate and distinction has been considerably diminished. It now appears that both schools of thought have considerable grounds in common and the division between them is more apparent than real.

Here we shall first analyse the arguments of the proponents of balanced growth (BG) and this will be followed by analysis of the theory of unbalanced growth (UBG). In conclusion it will be argued that the two theories instead of being substitutes are really complementary to one another.

As one of the main champions of BG, it was Rosenstein-Rodan (1943) who was the first to point out the need to achieve growth by a ‘big-push’ in east and southeast Europe. His arguments mainly rest on the desirability of surmounting the indivisibilities in both demand and supply. The emergence of external economies from the use of ‘lumpy’ social capital helps to remove the indivisibilities on the supply side. The bottlenecks on the demand side imposed by the narrow size of the markets could be removed if a number of industries could be set up simultaneously, each catering for the other. In Figure 4.5 it is shown that, given the demand and average cost curves D_1, D₂, and C₁, C₂ respectively for two industries, a clear loss is indicated. But the establishment of the industries simultaneously helps to shift the demand curve to D′₁ and D′₂ and with given cost curves both of them would be viable. A ‘big-push’ or massive investment in many projects will enable the economy to remove the difference between social and private marginal product and the industries themselves, once set up, would be viable as they would not experience either supply or demand constraints. Nurkse (1953) has spoken about the case for BG mainly on grounds of demand creation since it is assumed that the LDCs would not be able to raise their exports substantially. Lewis (1955) has argued for BG mainly because he wanted to avoid excess capacities and waste. He has pointed out the need to maintain the terms of trade constant between different sectors so that the growth of any sector need not be adversely affected by an adverse movement of the terms of trade against it. The other point that Lewis has emphasized is that the relative rates of growth of each sector will be given by the income elasticities of the demand for their goods. Such a policy would overcome the bottlenecks that might emerge in the process of growth. Here Lewis has emphasized the vertical nature of production of the supply side while Rosenstein-Rodan and Nurkse have emphasized the horizontal interdependence of consumption (Mathur 1966).

The arguments against balanced growth

Several arguments have been advanced against the BG doctrine. Thus, Fleming (1955) has pointed out that if most industries expand at the same time, then assuming fixity of supply of factors and their full employment, inflation would take place. However, it may be mentioned that supply of factors may not remain fixed over time and in many countries labour is hardly fully employed and BG need not lead to inflation (Nath 1962).

Bauer and Yamey (1957) have also criticized the doctrine of BG on the grounds that it unrealistically assumes that the supply of food is elastic. But if BG means a balanced development of both industry and agriculture then the criticism will lose its strength. Bauer and Yamey have also argued that ‘any industry which is able to compete in the export market would be established independently of the schemes of balanced industrialization’. But this argument will be weakened if the external economies of production, which would emerge by setting up many industries to increase the competitiveness of the export industries, are taken into account (Nath 1962).

Other criticisms of the BG theory are advanced by Hirschman (1958b) and Streeten (1959) but these points of view could best be analysed in the context of the theory of UBG.

An evaluation of unbalanced growth theory

The case for UBG, according to its champions, rests primarily on the necessity to economize on the use of resources. For example, it is argued that since most LDCs experience a shortage of entrepreneurs, it is very difficult for them to attain BG (Bauer and Yamey 1957; Kindleberger 1956) and as such growth should be unbalanced because it helps the LDCs to economize ‘genuine decision-making’ (Hirschman 1958b: 63).

Next it is argued that growth should take place through shortages and excesses as it is assumed that every challenge would generate its own response. This is very much like the operation of Say’s law in reverse: that demand creates its own supply. In fact, Streeten (1959) argued that technical progress in economic history has taken place mostly as an answer to the bottlenecks generated in the path of economic progress. Next, it is said that the case for UBG rests on the strong positive correlation between growth rate of industrial output and that of its productivity (Scitovsky 1959; Streeten 1959). Assuming that such a correlation is present, a priori, such an event does not necessarily destroy the case for BG, nor does it support the case for UBG. It has also been argued that BG would require planning and most LDCs do not have either the required skill or the necessary reliable and adequate information to formulate such plans. Moreover, planning may involve huge costs in real terms (e.g. lengthy decision-making processes, ‘red tapeism’, favouritism) and monetary Figure 4.5

terms (e.g. the financial costs of setting up the whole planning department plus its operational costs).

Further, given the scarcity of resources in LDCs, all waste or external diseconomies should be minimized as far as possible. Thus, development via the creation of excess capacities in social capital in comparison with the output produced by direct productive activities is regarded as wasteful and the balance between the growth of output and social capital is regarded as irrelevant as it reduces induced investment (Hirschman 1958b).

Hirschman has obviously considered the growth path via ‘shortages’ (i.e. where output from direct productive activities is rising faster than social capital) as more efficient as it is likely to achieve greater induced investment.

The need to minimize external diseconomies is evident in LDCs. But Hirschman’s analysis does not provide a convincing case for maximizing induced investment. It is known, as in Italy, that the creation of social capital is not enough to promote growth. Nor is it certain that induced private investment would be forthcoming, particularly in the creation of social capital whenever there are shortages (Thirlwall 1974). It is much more difficult to say, with empirical evidence, that the choice of UBG path is ‘efficient’ or optimal in terms of resource use. The strength of the UBG theory rests on the implicit assumption of elastic supply for many LDCs but this is not a very realistic assumption. Next, the lack of balance between demand and supply could easily lead to inflation, with all its undesirable consequences (e.g. devaluation and its unfavourable impact on the balance of payments when the marginal propensity to import is high, the price and income elasticities of demand for exportables are low and there are regressive effects on income distribution). Again, following the UBG theory, if resources are concentrated on the production of only a few commodities, the effects may not always be desirable. For example, from the standpoint of the balance of payments, there is always the danger of putting ‘all the eggs in one basket’ and thereby suffering due to the lack of trade diversification. Finally, although it is possible to cite forward linkages (percentage of output used as inputs in other activities) and backward linkages (percentages of output bought from other sectors) in the manufacturing sector of the LDCs, such linkages are few between industry and agriculture in many poor countries.⁴

A reconciliation between BG and UBG theories

The above discussion shows that the two theories cover a lot of common ground and, if several qualifications of the different arguments of these two schools are taken into consideration, it is possible to suggest that the two theories, instead of being substitutes, are really complementary to one another. This is clearly reflected in the statement of Streeten (1959):

choose projects which, (i) while advancing some sectors, concentrating the pressure or unbalance on groups and sectors whose response to a challenge is likely to be strongest; (ii) while creating bottlenecks also break them; (iii) while providing products and services for industry, agriculture and consumers, also induce new developments to take place in other directions, directly and indirectly related to them; (iv) while providing a new product or service require consequential investment in other lines.

Again, to reap the benefits of externalities, it may be necessary to undertake large investments and this approach need not be inconsistent with the idea of concentrating resources in a few sectors. If unbalanced growth is defined not so much in terms of shortages as in terms of concentration on certain activities, according to comparative advantage or the existence of increasing returns, balanced and unbalanced growth can be complementary strategies (Thirlwall 1974). Similarly, the economies mainly dominated by private

enterprises also recognize the need to strike a balance between present and future demand and supply and use planning and programming tools to obtain such balance. Although the concept of planning is normally associated with the doctrine of balanced growth, such a concept by itself need not mean total state control and ownership as planning may involve licensing, the issue of directives and the offer of subsidies to private enterprises. Historically, although economic development followed an uneven path, the need to obtain BG as an objective was seldom refuted. The supporters of BG theory would not find it difficult to accept that the differences in demand and supply of goods could be partially adjusted by the differences in elasticities in demand with respect to prices, and producers do respond in some cases to relative output and input prices.

As regards the desirability of creating social overheads, it is interesting to point out that both Streeten and Nurkse have emphasized the need to build up supply in excess of demand and, here again, the difference between the two schools is negligible.

NOTES

1 Note that the traditional theory may incorporate some time dimension.

2 The implication here is that maximizing the capital-labour ratio is the same as adopting capital goods industries.

This need not be the case. It has been argued that capital goods industries could be relatively more labour intensive than some other forms of industries (see Pack and Todaro 1969).

3 In an open economy it is not necessarily a question of allocating resources for the production of consumer and investment goods: rather, it could be a problem of allocating expenditure on such goods.

4 However, in both China and Taiwan, there are important links between the agricultural sector and rural industry.

APPENDIX 4

THE DICHOTOMY BETWEEN SAVINGS AND OUTPUT MAXIMIZATION