Unbalanced growth strategy: - Weebly
Unbalanced growth strategy:
In the last two decades a lot has been discussed about the strategies which can be adopted by underdeveloped countries in the initial stages of economic development. Among these discussions the debate on balanced growth versus unbalanced growth is an important one. Economists like Arthur Lewis, Rodan, and Ragnar Nurkse have advocated the strategy of balanced growth for underdeveloped countries. But criticizing this strategy Hirschman published his ’strategy of economic development’ in 1958, in which he has strongly advocated the strategy of unbalanced growth.
Unbalanced growth strategy:
According to the unbalanced growth strategy the creation of the deliberate and preplanned imbalances in the economy is the best way to achieve economic growth in underdeveloped economy. Hirschman regards development as a chain of disequilibria that must be kept alive. If the economy is to be kept moving ahead, the task of development policy is to maintain tensions, disproportions and disequilibria. In other words imbalances and tensions should be created in an economy for attaining an accelerated economic development. Hirschman believes that underdeveloped countries are not capable of developing the different sectors simultaneously because of the paucity of resources and necessary infrastructure. So he argues that investment should be made in the strategic industries or leading sectors of the economy. Such an investment will create more investment opportunities and pave the way for further economic development.
To make the above argument clear Hirschman divides the economy into two parts, namely, 1, social overhead capital(SOC) and 2. Directly productive activities (DPA). SOC refers to power, transport and communication, financial institutions, education etc. These services have occupied a central place in development. Without SOC, primary and secondary sectors cannot develop. Giving priorities to develop SOC will create imbalances and stimulate investment in DPA. This may bring about some balance between SOC and DPA in the economy. But the strategy requires that more should be invested again in the SOC sector. This will once again create imbalances in the economy and encourage DPA. Thus according to Hirschman, “development via excess capacity of SOC” is an important way of achieving rapid development of an underdeveloped economy.
Another way of creating the imbalances in the economy, according to Hirschman, is to make investment first of all in DPA. If investment is first made in DPA industries run into difficulties because of shortage of SOC. This will stimulate and encourage investment in SOC.
As investment in DPA expands still more activities which expand SOC will be encouraged and stimulated. This technique of encouraging and stimulating economic development and planning of the economy is known as” development via shortage of Social overhead capital”.
The two techniques of unbalanced growth mentioned above will speed up economic development. Each type of imbalance builds up certain pressures in the economy for making investments and thereby increases productivity and output. However the question of deciding what kind of imbalance is likely to be most effective is an important problem of economic planning.
Linkage effects:
The establishment of a project leads to the establishment of project lead to the establishment of projects which use its products or the projects which supply essential things needed by it. This is called ’Linkage effects’. The modern production system has innumerable stages right from the production of raw materials to the production of final consumer goods. Investment in a particular stage of production stimulates investment both in subsequent stages of production and the earlier stages of production. Accordingly two types of linkages effects are distinguished by Hirschman. That investment which encourages investment in the subsequent stages of production is referred to as”forward linkage effect”. That investment which encourages investment in the earlier stages of production is called”backward linkage effect.” Every investment has generally these two effects. But the magnitude of linkage effects of every investment will not be the same. To make the policy of imbalanced growth effective, the emphasis should be laid on those projects which can ensure the maximum total linkage. The task of finding out the projects with greatest total linkage is not an easy one. Such projects can be described only on the basis of empirical studies conveying input-output analysis.
Generally, linkage effects will be weak in underdeveloped countries on account of the pre-dominance of the primary sector, existence of imperfectly competitive market conditions and other socio-economic conditions. All this indicates that the underdeveloped countries should not take investment decisions taking into consideration the linkage effects existing in developed countries. Every country has to find out the linkage effects in the light of its own special characteristic features. This type of study is an important part of economic planning. On the whole, the examination of linkage effects is useful to adopt the most effective unbalanced growth technique.
Balanced growth technique:
Arthur Lewis, Ragnar Nurkse, Rosenstein Rodan and several other economists have advocated the technique of balanced growth for underdeveloped countries. Balance growth implies that there should be simultaneous development of agriculture, Industry, trade and commerce. For this, balance is required between demand and supply. This is nothing but balanced sectoral development. Secondly, it implies balanced regional development. Thirdly, it implies balance in the balance of payment of a country and this may also be called ’external balance’.
In the discussion of development technique balance is taken to mean ‘sectoral balance’. ‘External balance’. Balanced growth is not development of different sectors of the economy at the same rates of development. Balanced growth implies as Arthur Lewis has said growth in the proportions dictated by the different rates of growth of demand. This means that incomes generated by the growth of different sectors should be distributed on products produced in these sectors. So, in considering balance we have to take into consideration income elasticity of demand. Nurkse has pointed out that taking due account of this income elasticity of demand, selecting those rates of growth for the different sectors of the economy which would bring about a balance between new aspects and new incomes is the problem of balanced growth technique. Allocation of investment among different sectors so as to bring about balance between demand and supply is the gist of balanced growth technique.
To indicate the necessity of sectoral balanced growth. Arthur Lewis has described the interrelationships between the agricultural and industrial sectors as follows. Let us suppose that modernization advances in the field of agriculture. If the industrial sector also expands in the appropriate proportion, at the same time, the demand for the increased supply of agricultural product increases and the labourers released from the agricultural sector also get employment opportunities in the industrial sector. Otherwise the effects will be bad, because the labourers released from the agricultural sector will remain unemployed, as agricultural output increases; it results in a fall in prices of agricultural products, which will lead to a fall in farm income. In this situation agricultural development also cannot continue.
Economic development which gives importance to industrial development and which ignores agricultural development will face a lot of difficulties. Expansion of industries and rise in incomes of the people in urban areas bring about rise in the demand for both raw materials and food products. As agricultural production remains unchanged, the increasing demand for food and raw materials remain unsatisfied. As a result of this, prices of food products rise, bringing about a rise in other prices and ultimately strengthen inflationary forces in the economy. In this situation workers agitate for higher wages. This is not favourable to industrial development. Moreover, the demand for industrial products does not expand since the income of the farmers does not increase. If there are no opportunities for exporting their products to other countries. Industries will not be producing according to the new productive capacity. As a result of this, industrialists suffer losses. Hence, the simultaneous development pf agriculture and industry is an essential pre-requisite to the doctrines of balanced growth.
The doctrine of balanced growth not only implies the balance between agriculture and industry, but also balances among all the sectors of the economy- agriculture, industry, trade, commerce and other services. Growth which implies a balance between demand and supply of all these various sectors is known as,” growth with sectoral balance”. Thus a properly integrated growth of agriculture, industry, power, trade and commerce and other services, export and import can be called “Balanced growth”.
Critical appraisal:
According to Hagen complete balance among different sectors of the economy is impossible and unnecessary. The adoption of balanced growth techniques depends upon several conditions. The doctrine of balanced growth runs into difficulties because of the deficiency of capital in the underdeveloped countries. The simultaneous development of different sectors requires huge amount of capital investment and less developed countries cannot mobilize necessary capital in the early stages of development, because of the existence of vicious circle of poverty which results in low income, low savings and low investment. In this condition, Singer holds that it would be better for the underdeveloped country to utilize its limited capital resources in certain strategic sectors.
Prof. Fleming has shown that the feasibility of the technique of balanced growth is based on certain conditions like, easy availability of capital, effectively checking the demand for workers for higher real wages, readiness of surplus labour existing in the field of industry, profitability of investment in one-sector of industry depending on the growth of some other industry existence of scope for economies of scale which accompany large-scale organisation in basic industries etc.
It should be noted that the underdeveloped countries will be having sectoral imbalance before setting their foot on the road to development. It is universally agreed that the ultimate aim of underdeveloped countries is to overcome this imbalance. The main point of discussion is whether maintaining deliberately planned imbalance through out is good for achieving development or attempting to maintain balance throughout is good for promoting development. While unbalanced growth technique lays stress on the linkage effects, the balanced growth technique emphasizes the existence of interrelationship among different investments. Presently, it is widely admitted that both these techniques are necessary in formulating development policies and programmes.
Rostow’s theory or classification of stages:
Many economists think that economic development takes place by certain well-defined stages. However, different economists have classified stages differently. But, in the study of economic development, stages of economic growth presented by W.W. Rostow have acquired great importance.
Rostow’s classification of stages:
W.W.Rostow has classified the following five stages of economic growth:
1. Traditional Society
2. Pre-conditions for the take-off
3. Take-off into self-sustained growth
4. Drive to maturity
5. Age of high mass consumption
Rostow has explained these stages with historical references and has also indicated the date for the crucial stage of economic growth for several countries.
1. Traditional Society:
According to W.W.Rostow, in the traditional society the knowledge and the fruits of modern science are either absent or it is not used and hence the level of productivity is low. The economic activities in such a society are carried on with simple tools and implements. In a society of this kind, about 75% of the labour force would be engaged in food production. The landlords have the most honored place in society. The economic activities are determined by traditional customs. Family plays an important role in economic life. Savings arising in society is generally spent on unproductive items. On the whole, the traditional society is one which is caught up in the low level equilibrium trap.
2. Pre-conditions for take-off (Transitional society):
Many changes should take place in society to alter the low productivity situation and take the economy along the path of progress. A few changes occur in political, economic and social fields in the traditional society. These changes generally occur gradually. The idea that economic progress and a rise in productivity are possible, people are filled with new enthusiasm for achieving these. This is an important feature of this stage. In the economic field, enterprising men come forward and innovate. Utilization of savings for productive purposes will take place. Profit motive begins to stimulate economic activities. Competition and contract slowly take the place of traditional customs and conventions. New industrial units adopting modern techniques of production come into existence. The society based on rural self-sufficiency will undergo certain changes and will have national and inter-national relations. During this transitional stage the importance of agriculture begins to decline and the importance of industry and service sector begins to increase. Important changes take place in the field of agriculture resulting in increase in agricultural productivity. The agricultural sector’s capacity to supply food products to the growing population and raw-materials to industries increases. This is one of the important developments of this stage. SOC should be established, which depends on the role of the government. The establishment of effective government is one of the pre-conditions for the take-off. Thus a variety of changes occur in this stage, all of which create an atmosphere favourable to development and prepare the ground for the take-off stage.
3. Take-off stage:
The duration of the take-off stage is about 2 or 3 decades. During this short period, obstacles to steady growth are overcome and the economy starts moving on the road to self-sustained growth. According to Rostow’s description this stage has chiefly the following features:
a. Assuming an annual rate of growth of population as 11/2percent and capital-output ratio as 3:1 the rate of investment should be over 10% of net national income.
b. One or two substantial manufacturing sectors with a high growth rate should be established these sectors will guide and stimulate other enterprises. This sector may be called ‘leading sector’.
c. Take-off requires the emergence of new political, economic, social and institutional frame-work conducive to economic development. People should welcome modern ideas.
The society which has the above features can be said to have reached the stage of ’take-off’ into self-sustained growth with the take-off stage.
4. Drive to maturity:
Following take-off comes the stage of what Rostow has called ’drive to maturity’. The modernization process which grows out of the previous two stages of growth becomes complete when the economy reaches the stage of maturity. The different parts of the economy will be reorganized in such a way so as to obtain the advantages of the existing state of technology. The leading sectors spread to all sectors of the economy, that means as Rostow, says, the take-off stage spreads through-out the nation the modern ideas and modern methods of production spread to all parts of the economy. Some changes occur in the characteristic of industrial leadership and in the structure of labour force. In this stage experienced specially trained industrial leaders acquire greater prominence than the hereditary industrial leaders, and skilled workers, white collar workers together become a large part of the labour class. Trade union’s strength grows incomes of workers rise.
5. Age of high mass consumption:( Post Maturity stage)
After a country reaches the stage of maturity, second thoughts arise about the modern industrial civilization itself. People begin to re-think about the basic aims and values of human life. The question of the objectives for which the newly developed efficient economic machinery should be used arises. Rostow suggests four objectives which the advanced nations are trying to harmonize. Achieving a prominent place in the world and engaging in military enterprises is one objective. Establishing a welfare state, providing high standards of living to the common people is the third objective. Reducing the working hours for labourers and thereby securing them greater leisure and lightening the burden of their work constitute the fourth objective.
After reaching the stage of ‘high mass consumption’ the question, ‘what next’, arises. This question is related to world peace and world economic prosperity.
Appraisal of Rostow’s analysis:
Rostow’s study of stages is not merely descriptive; his aim is to throw light on the problem of development and to construct a theory of economic growth on the basis of history. He himself has pointed out that
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