Emerging economies: Balanced and unbalanced growth

There is a conflicting strategy of economic development with regard to the so called balanced versus unbalanced growth.

Whether or not there exists a low- level equilibrium trap which needs a ‘critical minimum efforts’ to overcome it, sound economic reasons can be advanced in support of a ‘big push’ taking the form of a planned large- scale expansion of a wide range of economic activities. The economic rationale for a ‘big push’ forms part of what has come to be known as the doctrine of balanced growth. Opposed to this thesis, however, is a school of thought that argues that a ‘big push’ is not feasible and that in any case development is best stimulated in developing economies by the deliberate creation of unbalanced environment.

In this regard balanced versus unbalanced growth is an issue of development strategy which may constrain the application of investment criteria. The term ‘balanced growth’ is used in many different senses, but the original exponents of the balanced growth doctrine had in mind the scale of investment necessary to overcome individualities on both demand and supply side of the development process. The doctrine of balanced growth has been extended to reflect the path of investment, necessary to keep different sectors of the economy in balance, so that lack of development in one sector does not impede development in others. This does not mean that output in all sectors should grow at the same rate, but rather in accordance with the income elasticity of demand for products so that supply equals demand.

Upon initial examination and analysis the comparative dissection of balanced and unbalanced growth strategies a logical question arises as to why of these two strategies of growth and development provide greater stimulus of economic growth? In this context the unbiased and impartial opinion is that there is no need to debate on the controversy. It is strictly based on empirical evidence and political motivation. While some economists contend that it is possible to reformulate the choice between balanced and unbalanced growth. On the other hand some economists argue that the balanced and unbalanced growth need not be mutually conflicting and an optimum strategy of development should combine some elements of balanced as well as unbalanced ones.

Both the theories are based on the theory of ‘Big Push’ which advocates investment to break the vicious circle of poverty. The balanced growth aims at the development of all sectors simultaneously but unbalanced growth recommends that the investment should be made only in the leading sectors of the economy. Underdeveloped economies have insufficient resources in men, materials and money for simultaneous investment opportunities in number of complementary industries. The investment made in selected sectors leads to new investment opportunities.

The aim is to keep alive rather than to eliminate the disequilibrium by maintaining tensions and disproportions.

On the other hand balanced growth aims at harmony, consistency and equilibrium whereas unbalanced growth suggests that the creation of disharmony, inconsistency and disequilibrium. The implementation of balanced growth requires huge amount of capital, whereas unbalanced growth requires less amount of capital, making investment in only leading sectors. Balanced growth is a long term strategy because the development of all sectors of the economy is possible only in the long run period. But the unbalanced growth is a short term strategy as the development of few leading sectors is possible in short span of time.

The doctrine of balanced and unbalanced growth have two common problems in relation to the role of the state and the role of supply limitations and supply inelasticity’s. The private enterprise is incapable of taking investment decisions in under- developed economies. As such balanced and unbalanced growth presupposes planning. In unbalanced growth strategy, the state plays a pioneer role in encouraging investment, thereby creating disequilibrium. If the developing economies start investment due to political pressure, the state is to undertake investment in State Owned Enterprises (SOE). The theory of balanced growth is mainly concerned with the lack of no demand and neglects the role of supply limitations. However, this is not true as under- developed country lacks in supply of capital, skill, infrastructure and other resources which are inelastic in supply. Strictly unbalanced growth doctrine neglects the role of supply limitations and supply inelasticity’s. Under such situations, a judicious compromise has to be made between the benefits from balanced growth and unbalanced growth.

It is not easy to evaluate the balanced versus unbalanced growth debate. For one thing, the theories cannot easily be tested empirically and for another the strategies are politically contentious. From the purely economic point of view, however, there is really no reason at all why balanced and unbalanced growth should be presented as alternatives in the first place. Several attempts have been made to present a reconciliatory view by a few economists. One step towards this reconciliatory approach is to treat unbalanced growth as a means of achieving the ultimate objective of balanced growth. A further step is to look for compatibilities in the two approaches. Since balanced growth is consistent with sectors growing at different rates, provided supply and demand are in balance, the distinctive feature of the alternative strategies must be the imbalance demand and supply. Unbalanced growth would concentrate resources in a few selected areas, creating shortage in other areas. As such there is no reason why development strategy should not draw on the strong points of both doctrines so that an optimum strategy of development combines some elements of balance as well as unbalance.

The writer is former Director General, Export Promotion Bureau. He can be contacted at hassan.youngconsultants@gmail.com