Balanced versus Unbalanced Growth: Nature and Limitations.

Define the terms in question, consider the underlying economic logic of each approach, and identify the major criticisms of either. Can a case be made for a strategy based on one rather than the other?

At the end of the Second World War, economists turned the direction of their work from formulating methods to further enrich the Northern Hemisphere and combat communism, to instead trying to achieve economic development in less developed regions such as Africa, Asia and Latin America. A school of thought emerged, veering away from common economic theory, instead focusing on practical ideas, based from a historical prospective. This school all agreed on industrialization as being the engine for economic growth. Economists like Roseinstein-Rodan and Nurkse put forward a case for Balanced Growth strategies, whereas Hirschman and Streeten argued for Unbalanced Growth strategys to achieve development and growth. In this essay I shall outline both of these ideas, why they were favoured, and their limitations. In conclusion I shall look at cases for implementing one over the other and its implications and merits. Nurkse, like Roseinstein-Rodan emphasized above all the need for a co-ordinated increase in the amount of capital utilized in a wide range of industries if the critical threshold of industrialization was to have a chance of being achieved. (Nurkse: Process of Economic Development.1962) The main contributors for Balanced Growth were Roseinstein-Rodan and Nurkse. They both shared similar ideas, in that they argued for simultaneous investment across the economy to encourage growth through output being consumed domestically. Balanced Growth can be plainly seen as when a country implements policies to induce growth on industries, so that they grow at the same pace to create markets for the goods and services produced. Roseistein-Rodan introduced the theory of The Big Push. The big push he argued was necessary in countries that didnt have the framework for spontaneous economic growth. From his research in Eastern and South Eastern Europe, he observed that a big push or critical minimum effect was believed to be necessary to break out of a low level equilibrium trap. (Meier: Leading Issues in Development. 1995). He saw this as the best and most efficient way to encourage industrialization. It must be noted however that these ideas stemmed from Europe, and didnt symbolise the modern Third World (Africa and Asia), and he admits that he used European countries as they were similar, but vitally not identical models. He later studied that Latin American countries, but mainly India that it would be easier to identify causes and effects by studying countries/regions by groups and not individually. A minimum quantum of investment is a necessary-though not sufficient-condition of success. (Roseistein-Rodan: Natura Facit Sultum, Analysis of Disequilibrium growth process.1957) Roseistein-Rodan stated that through the big push of concurrent industrial investments, the phenomena of virtuous circles would arise and diffuse rapidly diffuse into the economy. Nurkse stressed the importance of virtuous circles in growth and development. Virtuous circles arise when large-scale investments in one sector i.e. petroleum, impacted positively on other industries. Investment on

petroleum such as research would lead to more efficient and cheaper fuel, which benefited haulage firms. Firms would become more efficient and provide cheaper prices through lower costs from better fuel. Price reductions would be passed onto the consumer, who would have more disposable income which can be spent on locally produced goods. This would provide a vast network across the economy, which would induce cheaper prices, increase efficiency, increase output, and increase incomes, which would increase aggregate growth. It was to this that Roseistein-Rodan likened such a process to an aeroplane, which needs to surpass a critical speed before it can take off. Countries similarly needed to surpass a stage and build up momentum for growth to occur; a bit by bit approach he stressed would not achieve meaningful growth. Roseistein-Rodan also tackled the issue of an excess agrarian population, which was disguised unemployment and underemployment. Evidence for this stems from the past 150 years in which the total world population had doubled, but 66% of it occurred in the third world. Nurkse argued that in these countries, agriculture was culturally integral to these regions, thus them being having agriculture based economies. Thus an increase in population, space on the land fell. This excess labour manifested itself through underemployment of peasant cultivators due to small allotments. Roseistein-Rodan stressed that this was a problem as these people received little or no income, and the higher the population, the less output produced. This labour should have been used for industrialization, specifically labour intensive methods of industrialization focused on consumption industries, whilst simultaneously importing heavy industry products. The labour could earn an income, which could be used to buy local goods from industrialization. This concept was also shared by Lewis in his Two Sector model of development.