Abstract

Balanced growth has at least two different meanings in economics. In

macroeconomics, balanced growth occurs when output and the capital stock
grow at the same rate. This growth path can rationalize the long-run stability
of real interest rates, but its existence requires strong assumptions.
In development economics, balanced growth refers to the simultaneous,
coordinated expansion of several sectors. The usual arguments for this
development strategy rely on scale economies, so that the productivity and
profitability of individual firms may depend on market size.

In macroeconomics, balanced growth is usually associated with constant

returns to scale. For most development economists, the term is more strongly
associated with increasing returns, and a debate that began with Rosenstein-
Rodan (1943). He argued that the post-war industrialization of Eastern and
South-Eastern Europe would require coordinated investments across several
industries. The idea is that expansion of different sectors is complementary,
because an increase in the output of one sector increases the size of the
market for others. A sector that expands on its own may make a loss, but if
many sectors expand at once, they can each make a profit. This tends to
imply the need for coordinated expansion, or a “Big Push”, and potentially
justifies a role for state intervention or development planning.

Limitations:
• Although the balanced growth hypothesis has been widely discussed, it
has a number of limitations. The ideas are difficult to test empirically.
From a purely theoretical point of view, the argument does not
generalize straightforwardly to open economies. If firms can sell their
output abroad, the role of domestic market size appears much less
important.
• The balanced growth hypothesis then requires a more complex story,
perhaps one in which firms are especially reliant on domestic markets
in the early stages of their development.
• The ideas have also been criticized on other grounds. The most
prominent sceptic was Hirschman (1958), who argued that
simultaneous, coordinated investment asked too much of developing
countries. He regarded growth as a necessarily unbalanced dynamic
process, in which successive disequilibria create the conditions for
development in other sectors.
• Importantly, this process is seen as too complex and unpredictable to
lend itself readily to a government-inspired “Big Push”, partly because
governments may lack the relevant information, and partly because
simultaneous investment would place too many demands on limited
organizational resources. Hirschman summarized his objections by
saying: ‘if a country were ready to apply the doctrine of balanced
growth, then it would not be underdeveloped in the first place’
1.2.1 Theory of Balanced Growth
(NURSKE 20)

This theory sees the main obstacles to development in the narrow market
and, thus, in the limited market opportunities. Under these circumstances,
only a bundle of complementary investments realized at the same time has
the chance of creating mutual demand. The theory refers to Say's theorem
and requests investments in such sectors which have a high relation between
supply, purchasing power, and demand as in consumer goods industry, food
production, etc.

The real bottleneck in breaking the narrow market is seen here in the
shortage of capital, and, therefore, all potential sources have to be mobilized.
If capital is available, investments will be made. However, in order to ensure
the balanced growth, there is a need for investment planning by the
governments.

Development is seen here as expansion of market and an increase of

production including agriculture. The possibility of structural hindrances is not
included in the line of thinking, as are market dependencies. The emphasis is
on capital investment, not on the ways and means of achieving capital
formation. It is assumed that, in a traditional society, there is ability and
willingness for rational investment decisions along the requirements of the
theory. As this will most likely be limited to small sectors of the society, it is
not unlikely that this approach will lead to super-imposing a modern sector on
the traditional economy, i.e., to economic dualism.

Balanced Growth Theory

Balanced growth involves the simultaneous expansion of a large number of

industries in all sectors and regions of the economy. Balanced growth (or the
big push) theory argues that as a large number of industries develop
simultaneously, each generates a market for one another.

If a large number of different manufacturing industries are created

simultaneously then markets are created for additional output. For example,
firms producing final goods can find domestic industries that can supply them
with their inputs. The benefits of growth are spread over all sectors and,
ideally, regions.

Balanced growth theory is an extension of Say’s Law the demand for one
product is generated by the production of others

It is argued that free markets are unable to deliver balanced growth because
entrepreneurs:
- Do not expect a market for additional output – why risk resources when
sales are uncertain?

- Require skilled workers but are not willing to hire and train unskilled staff
who may then leave to work for rival firms – employers cannot ‘internalise
their positive externalities

- Do not anticipate the positive externalities generated by the investment of

other firms engaged in expansion

- Are unable to raise finance for projects

If government can co-ordinate simultaneous investment in many industries

one firm provides a market for another. This requires state planning and
intervention to:

-Train labour
- Plan and organize the large-scale investment programme
- Mobilise the necessary finance
- Nationalise strategic industries and undertake infrastructure investments eg
build roads
- Protect infant industries through tariff (tax on imports) and quota (limit on
quantity of imports) policies