Balanced Growth Theory

Balanced growth is a dynamic process and as such the meaning of balanced growth continues
changing.

The concept of balanced growth is subject to various interpretations by various authors. It was
Fredrick List who for the first time put forward the theory of balanced growth.

According to Fredrick List the theory of balanced growth is of great significance by which a
balance could be established between agriculture, industry and trade.

This concept was endorsed by Rosenstein Rodan in one of his articles titled Problems of
Industrialisation of Eastern and South Eastern Europe. Prof. Nurkse, Prof. Lewis and Stovasky have
examined this concept of balance of growth on different bases. In the words of Kindleberger, Balanced
Growth has so many meanings that it is in danger of losing them all.

Definitions:

1. U.N Publication, Balanced Growth refers to full employment, a high level of investment,
overall growth in productive capacity, equilibrium.

2. Alak Ghosh, Planning with balanced growth indicates that all sectors of the economy will
expand in same proportion, so that consumption, investment and income will grow at the same rates.

C/C = I/I = Y/Y

3. Benjamin Higgins, A wave of capital investment in a number of industries is called Balanced

Growth.

4. W.A. Lewis, In development programmes, all sectors of economy should grow simultaneously
so as to keep a proper balanced between industry and agriculture and between production for home
consumption and production for exports the truth is that all sectors should be expanded simultaneously.

5 C.P. Kindleberger, Balanced Growth implies that investment takes place simultaneously in all
sectors or industries at once, more or less along the lines of the slogan, You cant do anything until you
can do everything.

6. R.F. Harrod, Balanced Growth aims at equality between growth rate of income, growth rates of
output and growth rate of natural resources i.e. Gy = Gw = Gn

Here Gy stands for growth rate of income, G w stands for growth rate of output and G n stands for
growth rate of natural resources.

7. Mrs. Joan Robinsons concept of golden age also implies balanced growth. It states that there
must be equality between growth rate of capital and labour force i.e.
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It is, thus, confirmed that balanced growth is not a static term, but it refers to its dynamism.

Basis of the Theory:

The doctrine of balanced growth requires the balance of three types which is discussed below:

1. Supply Side:

Supply or production in an underdeveloped country is low. The reason behind it is that saving in
these countries is low because of low income. Low savings results in low investment. Low investment
leads to low capital formation and low productivity. Low productivity leads to low income, i.e.

Low IncomeLow SavingsLow InvestmentLow Capital FormationLow Productivity

Low Income:

So, it is imperative to increase investment in order to increase demand. But investment will
increase when the entrepreneurs will get impetus to invest. In other words, their products will sell and
they will earn profit. Therefore, it becomes essential that several industries are set up simultaneously.

Thus, the concept of balanced growth from the supply side is that various sectors of an
underdeveloped economy should be developed simultaneously so that no difficulty in the path of
economic development is created. For example, agriculture, industry, internal trade, transport, etc. should
be developed simultaneously. According to Prof. Lewis, The various sectors of the economy must go
with the right relationship to each other or they cannot go at all.

2. Demand Side:

In the underdeveloped countries, people have low purchasing power because of their low income.
So, their demand is also low. Low demand results in less expansion of market. Small market inspires low
investment i.e., Low Income Low Purchasing Power Low Investment Low Productivity

Therefore efforts should be made to increase the demand in these countries. The concept of
balanced growth from the demand side is that several industries should be developed simultaneously so
that all can be the customers mutually and the products of all can be sold. In this regard Rosenstein Rodan
has given an example. According to him, if a shore make industry is set up all people linked with it will
get income. But they will not spend all of their income only on buying shoes. They will buy goods
manufactured by other industries.

Similarly if only one sided development is made it will not succeed. Contrary to it, if several
industries are developed simultaneously and harmoniously, this difficulty can be removed. Therefore,
Prof. Nurkse says, Most industries catering for mass consumption are complementary in the sense that
they provide a market for and thus support each other.
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3. Sectoral Balance:

Sectoral balance means economic development of all the sectors in an economy. As agriculture and
industry are complementary to each other. Thus, expansion of industry will require expansion of
agriculture and vice-versa. Again expansion of industrial sector will raise the demand for raw-material
which will only be supplied by expanding of agricultural sector. Prof. Lewis maintained that if these
sectors are simultaneously developed, the relative price among them can be maintained.

There may be any unfavorable terms of trade among them. In the same manner, a balance between
domestic trade and foreign trade becomes essential during the process of economic development. Thus,
according to Prof. Lewis, the domestic sector must grow in balance with the foreign sector.

UNBALANCED THEORY OF GROWTH

Unbalanced growth is a better development strategy to concentrate available resources on types of

investment, which help to make the economic system more elastic, more capable of expansion under the
stimulus of expanded market and expanding demand-H.W.Singer.

According to Alak Ghosh,

Planning with unbalanced growth emphasizes the fact that during the planning period investment will
grow at a higher rate than income and income at a higher rate than consumption.

It explains the unbalanced growth in terms of the growth rates of investment, income and consumption.

Explanation of the Theory:

Albert O. Hirschman in his strategy of economic development goes a step further from Singer
when he says that for accelerating the pace of economic development in the underdeveloped countries, it
is advisable to create imbalances deliberately. He also recognized the inter-relatedness of different
economic activities as done by Ragnar Nurkse. But he asserts that investment in selected industries or
sectors would accelerate the pace of economic development.

He regarded, Development is a chain disequilibria that must keep alive rather than eliminate the
disequilibria, of which profits and losses are symptoms in a competitive economy. There would be
seasaw advancement as we move from one disequilibrium to another new disequilibrium situation.

Thus Hirschman argued that, To create deliberate imbalances in the economy, according to a
pre-designed strategy, is the best way to accelerate economic development. Hirschman is of the
confirmed view that underdeveloped countries should not develop all the sectors simultaneously rather
one or two strategic sectors or industries should be developed by making huge investment. In other
words, capital goods industries should be preferred over consumer goods industries.

It is because capital goods industries accelerate the development of the economy, where
development of consumer goods industries is the natural outcome. Hirschman has stated that, If the
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economy is to be kept moving ahead, the task of development policy is to maintain tensions,
disproportions and disequilibria.

Process of Unbalanced Growth:

The strategy of unbalanced growth is most suitable in breaking the vicious circle of poverty in
underdeveloped countries. The poor countries are in a state of equilibrium at a low level of income.
Production, consumption, saving and investment are so adjusted to each other at an extremely low level
that the state of equilibrium itself becomes an obstacle to growth. The only strategy of economic
development in such a country is to break this low level equilibrium by deliberately planned unbalanced
growth.

Prof. Hirschman is of the opinion that shortages created by unbalanced growth offer considerable
incentives for inventions and innovations. Imbalances give incentive for intense economic activity and
push economic progress.

In the words of Prof. Hirschman, When one disequilibrium calls forth a development move
which in turn leads to a similar disequilibrium and so on and infinitum in the situation private profitability
and social desirability are likely to coincide, not because of external economies, but because input and
output of external economies are same for each successive venture. Thus, growth must aim at the
promotion of divergent series of investment in which more economies are created than appropriated.

Development policy, therefore, should be so designed that may enhance the investment in social
overhead capital (SOC) is created external economies and discourage investment in directly productive
activities (DPA).

Unbalancing the Economy:

Development, according to Hirschman, can take place only by unbalancing the economy. This is
possible by investing either in social overhead capital (SOC) or indirectly productive activities (DPA).
Social overhead capital creates external economies whereas directly productive activities appropriate
them.

(i) Excess of investment in Social Overhead Capital:

Social over-head capital are concerned with those series without which primary, secondary and
tertiary services cannot function. In SOC we include investment on education, public health, irrigation,
water drainage, electricity etc. Investment in SOC favorably affect private investment in directly
productive activities (DPA).

Investment in SOC is called autonomous investment which is made with the motive of private
profit. Investment in SOC provide, for instance, cheap electricity, which would develop cottage and small
scale industries. Similarly irrigation facilities lead to development of agriculture. As imbalance is created
in SOC, it will lead to investment in DPA.
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(ii) Excess of Investment in Directly Productive Activities:

Directly productive activities include those investments which lead to direct increase in the
supply of goods and services. Investment in DPA means investment in private sector which is done with a
view to maximize profit. In those projects, investment is made first where high profits are expected. In
this way, DPA are always induced by profits.

Priorities: Excess SOC or Excess DPA:

(a) Unbalancing the economy with SOC:

Imbalance can be created both by SOC and DPA. But the question before us is that in which
direction the investment should be made first so as to achieve continuous and sustained economic growth.
The answer is quite simple. The government should invest more in order to reap these economies, the
private investors would make investment in order to enjoy profits. This would raise the production of
goods and services. Thus investment in SOC would bring automatically investment in DPA.

(b) Unbalancing the economy with DPA:

In case investment is made first in DPA, the private investors would be facing a lot of problems in
the absence of SOC. If a particular industry is setup in a particular region, that industry will not expand if
SOC facilities are not available. In order to have SOC facilities, the industry has to put political pressure.
That is really a tough job. Thus, excess DPA path is full of strains or pressure- creating whereas excess
SOC path is very smooth or pressure relieving.

Critical Minimum Effort theory

The theory of critical minimum effort is associated with the name of Harvey Leibenstein. The
theory is based on the relationship between the three factors, viz. (i) per capita income, (ii) population
growth, and (iii) investment.

Leibenstein identified population also an income-depressing factor (or a), whereas investment is an
income-generating factor.

Growth in an economy is possible when the income- generating factors turnout to be more
powerful than the income-depressing factors. A small additional investment may generate a small income.

The additional income would be eaten up by the additions to the population which may come in the
wake of the additional income, and hence the effort may fail to generals a cumulative process of growth.

What is required is an initial substantially large volume of investment that may create conditions
which should outweigh the growth of population, i.e., if necessary it is necessary that the initial effort or
the initial series of efforts must be above a certain minimum magnitude.
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Suppose the level of per capita income is OA. This level is low as compares to the critical
minimum level it would fail to take the economy out of stagnation forced would be strong in relation to
the effect of income depressing forces would be strong in relation to the effect of income-generating
forces.

When level of income is raised to OB, the growth curve will follow the path BCR. It is evident that
per capita income is rising up to point C, and thereafter the per capita income is declining. It means, OB
level of income is insufficient to generate the growth momentum in the economy.

If sufficient investment is infected into the system to raise per capita income to OM, sustained
growth will occur and effort of stimulants would be relatively strong than that of shocks. There, any level
of investment lower that the critical cannot ensure stained growth.

The term 'critical' is indicative it the fact that the investment should at least be of such a level which
could raise per capita income to OM for achieving sustained growth. However, it would be with
convenient and cheaper to make the effort in two doses.

The initial infection of investment might be enough to raise per capita income to OB. Then at time
T, the second dose of investment could be infected to raise per capita income to OM, thereby taking the
economy to the critical minimum level of income required for sustained growth.

Reasons for critical minimum effort: Critical minimum effort, in Lebensteins opinion is
necessitated by the following factors:

One, some of the factors of production is indivisible, so that unless they are used in full or in
minimum amount, they will lead to internal diseconomies. To overcome these diseconomies, some
minimum critical investment may be necessary.

There is a sort of mutuality and interdependence between a number of firms and industries. As
these develop, there emerge external economies. Apparently, there economies can be reaped only when
there are at least those minimum numbers of industries operating which make these economies possible.
In their absence, these economies may not arise at all absence; these economies may not arise at all.

Three, at any time the economy may be subjected to autonomously generated income depressing
factors and at the same time be subject to depressants induced by some aspect of the process of growth. A
certain minimum investment is necessary to overcome there and to initiate sustained growth.

Four, there are some attitudes which are to be developed for growth. Among those, more important
are: "Western Market Incentives" implying a strong profit incentive,

A willingness to accept entrepreneurial risks, and

An eagerness to promote scientific and technical process. These attitudes come in only when the
economy undertakes same level of investment.
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The above factors make it necessary that some minimum level of investment is undertaken in an
economy to make it possible for the growth promoting forces to set in. The investment must be made in
sizeable lump, and not through marginal increments that result from a set of unrelated individual
decisions.

The theory is more realistic that Rosenstein-Rodan's "big push" theory because critical minimum
effort can be broken up into a series of smaller efforts which can be properly times to put the economy on
the path of sustained growth.

However, the theory is open to criticisms on the following grounds: One, Leibenstein assumes that
population increases as the income rises above the subsistence level. Beyond a particular level of income,
population declines.

This assumption implies that rise in income has a direct bearing on the growth of population. But,
in reality, this relation is not so simple. Growth of population is influenced by social attitudes, customs
traditions of the people, and not merely by the per capita income.

Two, according to Myint, the functional relation between per capita income and income growth rate
is not as simple as assumes by Leibenstein. It is complex and has two stages.

In the first stage, the level of per capita income influences the rate of saving and investment which,
in turn, depends on the pattern of income distribution and the effectiveness of financial institutions in
mobilising saving.

In the second stage, the relation between investment and resultant output depends upon the
economic and social system of the country. The relationship can be improved through innovations.

The meaningful innovation is possible when updated technology, skilled labour and necessary
infrastructure in the country. However, these are not available in the initial phase of development, and the
critical minimum runs into difficulties.

Three, in underdeveloped countries external forces play an important role in the initial stages of
development. This theory does not explain clearly the role of external forces like foreign capital, foreign
trade, international economic relations, etc. These forces exert a vital impact on development and these
factors play an important role in the development process.

Notwithstanding the above shortcomings, the theory shows the way for breaking visions circle of
poverty. The path of sustained growth is not even and smooth. It is rather difficult and complex one.

Minimum efforts are essentially required to overcome the difficulties and achieve sustained growth,
which is the ultimate objective of a development strategy.
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Dualistic Theories:

There are different theories which are of the view that the poverty and underdevelopment of poor
countries is attributed to their dualistic character.

(1) Social Dualism, (2) Technological Dualism and (3) Financial Dualism.

(1) Social Dualism or Sociological Dualism:

Definition and Explanation:

J.H. Boeke is a Dutch Economist who studied Indonesian Economy and presented his theory of social
dualism. He maintains that there are three characteristics of a society in the economic sense. They are as:

(i) Social Spirit (ii) Organizational Form (iii) Techniques Dominating Them.

Their inter-relationship and interdependence is called the social system or social style. A society is
homogeneous if there is only one social system in the society. But the society which has two or more
social systems is known as dual or plural society.

Dr. Boeke says that the dual society is a society which has two full grown social styles which represent
pre-capitalism and post-capitalism. Such a dual society is furnished with the existence of an advanced
imported western system on the one side and endogenous pre capitalistic agricultural system on the other
side. The former is under the western influence which uses the advance techniques and where standard of
living is high. The later is native and it is furnished with the outdated techniques and low social and
economic life. This is called social or sociological dualism and these two systems are clashing. The
imported social system is highly capitalistic and it may be socialistic as well as communistic system.

Characteristics of Dualistic Society:

On economic basis the dualistic society is classified as by giving the names:

(i) Eastern Sector and (ii) Western Sector.

There are certain characteristics of eastern sector of a dualistic economy which distinguishes it from
western sector. They are as:

(i) The needs of eastern sector are limited. People pass a contented life.

(ii) People work for social needs rather for economic needs. For example, if a three acres are enough to
supply the needs of a household he will not cultivate six acres.

(iii) Goods are cultivated according to their prestige value rather on their use value.
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(iv) As a result of all above, the eastern economies are characterized with backward bending supply
curves of effort and the risk taking.

(v) The native industries have neither organization nor capital and they are ignorant of modern technology
and market conditions.

(vi) People are indulged in speculative activities rather in business enterprises.

(vii) They do not take risk by making productive investment.

(viii) They lack the initiative and organizational skill which is a feature of western sector of dual
economy.

(ix) Labor is unorganized, passive and unskilled. They are reluctant to leave their village and community.
They are fatalist.

(x) The urban development takes place at the cost of rural life.

(xi) Exportation is the main objective of foreign trade in the eastern sector while the western sector
believes in imports.

Due to these features of eastern society the western economic theory is not applicable as far as UDCs arc
concerned.

The western economic theory is meant to explain capitalistic society whereas eastern sector is pre
capitalistic. The western sector or society is based upon unlimited wants and money economy etc.
Moreover. The MP theory cannot be applied in UDCs for resource allocation and distribution of income
because of immobility of resources. Thus Boeke says:

We should not try to transplant the delicate houseplant of western theory to tropical soils where an early
death awaits for it. If the pre-capitalistic agricultural sector of eastern sector is attempted to develop along
western lines it will create retrogression. The modern agricultural techniques can not be applied how-long
the mental attitudes of the farmers are not changed, otherwise the increase in wealth following modern
technology will result in further growth of population. Moreover, in case of failure of modern technology,
the indebtedness of the country will increase. Therefore it is better that these existing agricultural systems
should not be disturbed.

As far as industrial field is concerned the eastern producers cannot follow the western technology on the
basis of economic and social reasons. He says that the adoption of western technology to industrialize
Indonesian economy has moved the goal of self sufficiency farther and ruined its small industry.
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Boeke refers to five kinds of unemployment in UDCs:

(i) Seasonal, (ii) Casual, (iii) Unemployment of regular workers, (iv) Unemployment of white collard
class, (v) Unemployment of Eurasians.

According to Boeke the govt., is unable to remove such unemployment because of the reason that it will
require the funds which the govt. cannot avail. Booke says that limited wants and limited purchasing
power in eastern sector hamper economic development. If the food supply is increased or industrial goods
are increased, it will bring a glut of commodities in the market. The prices will fall and economy will face
depression.

But this does not mean that Boeke is against industrialization, and agricultural improvement. Rather he is
in favor of slow process of industrialization and agricultural development on small scale which could
have an adaptability with the dualistic structure of eastern society. The urge for development should come
from the people themselves. New leaders must emerge who should work for the goal of development with
faith, charity and patience.

Criticism:

Professor Bengmin Higgins has criticized the social dualistic theory on the following grounds:

(i) Wants are not Limited: If we analyze "Indonesia's life" we do not find that the desires of the people
are limited because here the values of MFC and MPM are higher. This is the reason that the govt. has to
impose import restrictions. Moreover, whenever the harvest is good the farmers become prosperous and
the demand for luxurious goods rises.

(ii) Casual Labor are not Unorganized: Boeke presented the version that casual workers are
unorganized and passive. But this may be true as far as agricultural sector is concerned but they are not
unorganized in coffee, tea, rubber and plantation etc.

(iii) Eastern Labor is not Immobile: Boeke thought that eastern labor is immobile. It is not so because
of attraction of modern facilities of life in the urban areas. Moreover the high income incentives force the
labor to move from rural areas to urban areas.

(iv) Dualistic Theory is not Particular To UDCs Only: The eastern society, according to Boeke, only
exists in UDCs. It is not true. It does exist in Canada, Italy and even in the United States.

(v) Applicability to Western Society: According to Professor Higgins most of the characteristics of
eastern society given by Boeke are present even in the western societies. For example, during hyper
inflation, speculation is preferred to investment. This means, the people in the western countries also have
a strong desire to keep their capital safe and in liquid form, The western society also believes in
conspicuous consumption as discussed by Veblin and Snob effects. The backward bending supply curve
of efforts has been experienced by Australia during post war period and by US in the fifties.
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(vi) Not a Theory But a Description: It is objected that the Boeke's dualistic theory is merely a
description rather than a theory. His findings are based upon neo-classical theory which has the limited
applicability in the western world.

(vii) Does not Provide Solution to the Problem of Unemployment: Boeke's dualism centers more on
socio-cultural aspects rather on economic. He only says that govt. is not in a position to remove
unemployment. Moreover, he does not mention the situation of under employment. Therefore his theory
is full of shortcomings.

Conclusion:

The main problem of dualistic economies is to provide employment opportunities and Boeke theory fails
to do it. Therefore, Prof. Higgins has developed the theory of technological dualism.

(2) Technological Dualism:

Definition and Explanation:

Professor Higgins has developed the theory of Technological Dualism. By this we mean:

"The use of different production functions in the advance sector and in the traditional sectors of UDCs".

The existence of such dualism has increased the problem of structural or technological unemployment in
the industrial sector and disguised unemployment in the rural sector. Higgins theory of technological
dualism incorporates the factor proportion problem as discussed by K.S. Eckaus, which is related to
limited productive employment opportunities found in the two sectors of a UDCs because of market
imperfections, different factor endowments and different production functions.

The UDCs are characterized with structural disequilibrium at the factor level. This arises, because a single
factor gets different returns in different uses or because price relationship among factors are out of line
with factor availabilities. Such disequilibrium leads to unemployment or underemployment in two ways.
It is as:

(i) Imperfection of price system.

(ii) Structure of demand which results in surplus labor in overpopulated backward country.

Thus the technological unemployment in UDCs is because of surplus labor which results from
misallocation of resources and structure of demand.

Higgins constructed his theory by assuming two goods; two factors and two sectors and their factor
endowments and production functions. Of these two sectors the industrial sector is engaged in plantation,
mines, oil field and large scale industry. It is capital intensive and characterized by fixed technical
coefficients that is, the factors have to be combined in a fixed proportions.
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While the rural sector is engaged in producing food stuffs, handicrafts and very small industries. It has
changeable technical coefficients of production. Hence it has different alternative combinations of labor
and capital.
Thus, according to Higgins, because of different production functions the unemployment and
underemployment comes into being in UDCs. According to Higgins the industrial sector uses capital
intensive techniques and fixed technical coefficients and it is not in a position to create employment
opportunities at the same rate at which population grows. Rather, the industrialization reduces the
employment in this sector. Therefore, the rural sector is an alternative for the surplus labor.

In the beginning it is possible to absorb the additional labor by bringing more lands under cultivation.
This leads to optimal combination of labor and capital. Eventually good lands become scarce. The ratio of
labor to capital in that sector rises and the techniques become increasingly variable in this sector.
Ultimately all available lands is cultivated by high labor intensive techniques and MP of labor becomes
zero and negative. Thus with the growth of population disguised unemployment begins to appear. Under
these circumstances farmers have no incentives either to invest more capital or to introduce labor saving
techniques. As a result the techniques of production, the productivity of labor and socio-economic life is
remained at low level in the rural sector.

In the long run the technological progress does not help in removing the disguised unemployment. Rather
it tends to increase the number of disguised unemployed. The situation is further aggravated by keeping
wage rates artificially high by trade unions or by govt. policies. For high industrial wages relative to the
productivity provide an incentive to the producers for introducing labor saving techniques and thereby it
diminishes the further capacity of the industrial sector to absorb surplus labor. Accordingly these factors
increase the technological dualism in UDCs.

Criticism:

Professor Higgins has attempted to present how disguised unemployment gradually rises in the rural
sector of dualistic society. But the theory has following defects:

(i) Assumption of Fixed Technical Coefficient: Higgins wrongly assumes fixed technical coefficient in
the industrial sector without any empirical verification.

(ii) Factor Prices do not Entirely Depend Upon Factor Endowment: This theory indicates how the
factor endowment and different production functions result in disguised unemployment. So disguised
unemployment is connected with the factor prices. But it has been found out that the factor endowments
do not entirely determine the factor prices.

(iii) Ignoring The Institutional Factors: There are many institutional and psychological factors which
have been ignored by Higgins in connection with their effect on factor proportion.

(iv) Ignoring the Use of Labor Absorbing Techniques: According to Higgins that industrial sector
employs highly capital intensive techniques which are imported. But practically we find that all imported
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techniques are not labor saving. For example, Japan's agricultural development is not due to capital
intensive techniques.

(v) Size and Nature of Disguised Unemployment is not Assessed: Higgins does not clarify the nature of
disguised unemployment in the rural sector and excess labor supply in the industrial sector. Moreover, he
does not tell about the extent of disguised unemployed due to technological dualism.

(3) Financial Dualism:

Professor Hala Myint has developed the theory of financial dualism. Such dualism rises because of
division of money markets in unorganized and organized money markets in LDCs. The rate of interest in
unorganized market is higher than the rate of interest in organized money market which is concerned with
modern sector. The unorganized money market consists of village money lenders, landlords, arties. They
charge the high interest because of the following reasons.

(i) The lenders have monopoly and position of the borrowers is very weak.

(ii) There is a shortage of savings in the traditional sector because most of the savings are made in terms
of land or gold.

(iii) Due to natural calamities etc. the risk attached with such lending are very high.

Thus we find that the high interest rate which the farmers have to pay not only consists of formal interest
charges but also the concealed charges obtained through under pricing the grains purchased by the
farmers.

On the other hand, in the organized markets of LDCs the interest rates are low and credit facilities are
abundant. The loans are advanced to manufactured sector, export industry and modern commerce sector.

Professor Myint says that there was an old financial dualism which used to exist in the open economy of
colonial period and the financial dualism which now exists.

Under colonial system there was perfect convertibility at fixed exchange rate. Consequently there was no
shortage of foreign exchange and there were no BOP problems. But now a days the LDC's have to face
internal as well as external balance. Thus the poor traders and small peasants not only have to face high
interest rates, but also the shortage of foreign exchange. Then they are not in a position to get advanced
machinery etc.
Under colonial system organized money market of LDCs is consisted of the branches of western
commercial banks which were linked with international financial market. In colonial system the modern
sector consisting of mines, plantation and foreign trade borrowed at low interest rates both from western
banks and the world capital markets. But the present LDCs have attained monetary independence by
establishing their own central banks. They have introduced the exchange control.
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As a result, the organized money market of the LDCs have been separated from the world capital market.
Hence, their central banks are following the cheap monetary policy even when they are having shortage
of funds. They are maintaining over-valued exchange rate on the ground that devaluation will create
inflation. On the other hand there is chronic excess demand for foreign exchange in these poor countries.
To meet this situation, these countries depend upon exchange controls, direct controls, monetary and
fiscal policies. This has led to enhance the economic dualism between the traditional sector and modern
industrial sector. The cheap monetary policy by maintaining artificial low interest rates has become
helpful for the large industrial sector. The low interest rates have discouraged the flow of funds from
abroad and savings from within the country. But it has created an excess demand for loans. Thus the
major part of domestic savings are flowing towards industrial sector. This has reduced the capital to
traditional and agriculture sector which have to get at higher interest rate.

The foreign exchange control to correct deficit in BOP has also benefited the modern industrial sector
against the traditional sector. It is because that the major share of available foreign exchange is allocated
to the industrial sector to import capital intensive goods. On the other hand, the agricultural and small
scale sector fail to get foreign exchange and import permits because of red-tapism and corruption in the
LDCs.

The most of the UDC's have established agricultural banks and cooperative societies. But these
institutions have been found providing loans to the influential people and to the model villages.

All this has led to misallocation of resources between the modern and traditional sector. So money
markets in the LDCs remain backward. Domestic inflation along with over-valued exchange rate have
encouraged flight of capital. The countries where this is checked, the capital moved in the purchase of
gold, jewellery, real estates and other speculative activities. This is because of low rate of interest against
investment. Hence the money market remains ineffective.

Govt. controls over the scarce supply of capital have also retarded the growth of financial intermediaries
in the LDCs. These controls favor the large manufacturing units and the banks. They discriminate against
the small borrowers and the money lenders who provide credit to the small borrowers. In the LDCs govts.
believe that capital funds invested in durable capital goods are productive while those invested in
financing agriculture and trading activities are unproductive.

According to Myint the cheap and easy credit to the traditional sector is not provided because of
following:

(i) The high over head costs and salaries of officials of commercial banks in the rural areas.

(ii) The red-tapism in dealing with small borrowers according to the rigid rules.

(iii) The lack of coordination between the head office and the branches.

(iv) Lack of subsidized loans supplied by the agricultural banks etc.

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Professor Myint suggest two types of policies to reduce financial dualism in LDCs:

(i) The official interest rate in the organized capital market be increased. This will attract the savings both
from the country and out of the country. It will also create an equilibrium between the demand for loan
able funds and supply of loan able funds.

(ii) There should be free access on equal terms to capital funds by modern and traditional sector. This will
reduce misallocation of resources between the two sectors.

Theory of Big Push

The theory of big push is a modern version of an old idea of external economies. It is better that
the idea of external economies can be illustrated with the help of an example.

The theory of "bigh push' is associated with the name of Professor Paul N. Rosenstein-
Rodan. This theory is needed in the form of a high minimum amount of investment to overcome
to obstacles to development in an underdeveloped economy and to launch it in the path of
progress.

Rosenstein-Rodan distinguishes between three different kinds of indivisibilities and

external economies. One, indivisibilities in the production function, especially the indivisibility
of the supply of social overhead capital; two, indivisibility of demand; and three, indivisibility in
the supply of savings.

Suppose, there are two industries A and B. If industry A expands in order to overcome the technical
divisibilitys, it shall derive certain internal economies.

It results in lowering the price for the product of industry A. If As output is used as input for
industry B, the profit of As internal economies shall be passed on to B in the form of pecuniary external
economics. Thus, the profits of industry B created by the lower prices of factor A, will call for
investment and expansion in industry B, one result of which will be an increase in industry Bs demand
for industry As product. This, in turn, will give rise to profits and call for further investment and
expansion of industry A. Therefore, external economies and indivisibilities flowing are significant
determinants of economic development in an economy.

The theory is based on the assumption that an industrial economy enjoys large many external
economies. To enjoy these economies, a massive investment is necessary in the development of several
industries at the same time.

Main Features of the Theory of Big Push:

The principal features of the theory of Big Push are given below:

1. Massive Investment:
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The theory of big push envisages massive investment at the very outset of the process of growth. In
its absence, the process of growth may not be self-sustaining.

2. Investment in Different Sectors:

The theory envisages the need for investment across different channels of growth so that each
channel sustains the growth of other by providing the necessary demand-base. Thus, it leads towards the
Balanced Growth of the system.

3. Planned Industrialisation:

The theory stresses the need for planned industrialisation of under developed countries where
agriculture is the dominant sector which is backward and riddled with poverty. A big-push to
industrialisation is expected to place the system on sound footing, staving-off the uncertainties of
agricultural production.