Theory of Balanced Growth

A strategy of growth with an equal emphasis (simultaneous, coordinated expansion) on agriculture and industry. Agricultural development provides the food required and releases labour from the land to engage in industry. Industrial wealth stimulates markets for agricultural growth. Unbalanced growth denotes a strategy which focuses on agriculture or industry alone. A balanced growth occurs if consumption, investment, and capital grow at a constant rate while hours of work per time period stays constant.

Linkages: How does growth in one region or sector of a country

stimulate growth in another sector or region?

Theory of Balanced Growth

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.

The Balanced Growth Controversy

Rosenstein-Rodan a successful development strategy needed to attack on all fronts, that is aim for increases in productivity and investment in all sectors of the economy at once. Hirschman it was better to focus on a few key industries. These would create demand for inputs (backward linkages) and serve as inputs to other industries themselves (forward linkages) and would spur development economy wide.

Both are essentially models of investment driven development. The Big Push model rely on economies of scale and strategic complementarities to generate poverty traps and where a coordinated action by the government can push the economy out of the trap and into a better, higher growth equilibrium. Other factors (institutions, political systems, geography) are more important. It isnt capital accumulation that drives growth - labor saving productivity advances or innovations happening in a sector, manipulate the leading sectors.

Theory of Unbalanced Growth

(Hirschman)

The real bottleneck is not the shortage of capital, but lack of entrepreneurial abilities. Growth in one sector or region reduces (not stimulate) growth in the other sector or region. Potential entrepreneurs are hindered in their decision-making by institutional factors: group considerations, personal gains at the cost of others and are thus equally detrimental to development. Investments should not be spread evenly but concentrated in such projects in which they cause additional investments because of their backward and forward linkages without being too demanding on entrepreneurial abilities. Manufacturing industries and import substitutions are relevant examples. These first investments initiate further investments which are made by less qualified entrepreneurs. Overcomes the bottleneck of entrepreneurial ability.

Theory of Unbalanced Growth

Unbalanced growth recognized both backward (inputs create demand for other products) and forward (inputs to other industries).

Backward Linkages The inputs which are used in this product must be produced by another industry - this product creates demand from another industry.

Forward Linkages

LEADING SECTOR

The products produced by this industry are used as inputs for other industries

Theory of Unbalanced Growth

State support was seen as investment in a leading sector. external economies to induce which would in turn stimulate and entrepreneurship. needed to initiate large-scale This would create the necessary supplying and client industries a secondary wave of investment

Questions?
Can poor nations grow faster by concentrating on the development of either industry or agriculture alone, or by striving to develop both sectors in balance? Why to have economic integration of previously separate regions or countries?

Why should liberalization of foreign trade lead to a transition from a lower to a higher steady state growth rate? Is it appropriate if one region is allowed to decline and provide a source of cheap labor for the other region?
How sectors or regions interact out of steady state through product, labor, and capital markets? What if the former interaction dominates the growth of one sector and 'pulls along' the growth of the other? How the latter interactions booms one sector while the other declines? What should be the proper government policy to make a poor country industrialize?