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Balanced-Unbalanced Growth Theories

Balanced-Unbalanced Growth Theories

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Published by: Robin Joseph Thomas on Jan 14, 2011
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The Harrod-Domar model Harrod

Economic growth depends on three factors:  A. the saving rate  B. the capital/output ratio  C. the depreciation rate

Essentially all among classical economist, from Adam Smith onwards, in a single, simple equation: Growth depends on saving and efficiency, including depreciation

The Harrod-Domar model Harrod


Neither theory nor empirical evidence seemed to provide much support for the capital/output ratio as an exogenous behavioural parameter in the model a more elaborate formulation of the link between capital and output was called for The model did not leave much room for the other crucial factor of production, labour population or labour-force growth is absent from labourthe formula, which explains output growth solely by saving and efficiency   

except insofar as it mattered for technology Economic growth was considered immune to economic policy. exogenous from an economic point of view. saving behaviour was no longer relevant for long-run growth. the medium term    . hence. good or bad Even so.Solow  Since population growth is basically a demographic phenomenon and. that is. nor was efficiency in a broad sense.The second revolution: The neoclassical model . saving and efficiency play an important role for growth over long periods. it must follow that economic growth is also exogenous According to Solow.

is better viewed as an endogenous variable. rather than being exogenously fixed as in the Harrod-Domar model. all of which seemed to apply to the real world   . a constant rate of interest.Solow  Solow showed how the capital/output ratio. the long-run equilibrium is consistent with not only a constant capital/output ratio but also with a constant rate of growth of output per capita. and a constant distribution of national income between labour and capital. which moves over time and ultimately reaches long-run equilibrium Once attained.The second revolution: The neoclassical model .

Solow  If capital/output ratio is exogenous it is possible to view growth as an endogenous variable: growth adjusts to the exogenously given capital/output ratio Solow reversed the roles of the rate of growth and the capital/output ratio  He treated the capital/output ratio as an endogenous variable that adjusts over time to the exogenously given growth rate of output Growth is exogenous because its two main determinants.The second revolution: The neoclassical model . are exogenous . population growth and technological progress. progress.

believe in the inevitability of development as a Optimistic. more historical and theoretical. practical approach to the question of how to develop  Optimistic. linear process that all nations go through  Emphasize large-scale industrialization as the key to the largedevelopment process  Profound respect for market forces yet support largelargescale government intervention to force economic growth  Similar to Keynesians in regard to advocacy for government to intervention and also that poor economic performance reflects a lack of aggregate demand .Modern Theories of Econom c Development BASIC CHARACTERISTICS:  Post-WWII Pioneers of Development Economics Post Loose school of thought. less theoretical.

Modern Theories of Econom c Development LEADING THEORETICIANS:  Theory of the Big Push: Rosenstein-Rodan Rosenstein Theory of balanced growth: Ragnar Nurkse Unbalanced Growth: Hirschman Growth with Unlimited Supply of Labor: Lewis Stages of Growth Theory: Rostow    .

Theory of the Big Push Paul Rosenstein-Rodan (1948) Rosenstein  hidden potential in developing economies large-scale industrialization and infrastructural argedevelopment is key more investment is needed in many places at one time but this cannot be left to the market due to information and appropriation failures ( externalities ) the big push needs to come from the state to escape the low-level equilibrium trap low-    .

e. hence leading to:BALANCED GROWTH to:BALANCED    . production processes is the key to development hence need for domestic industrialization large scale industrial investments (i.Theory of balanced growth Ragnar Nurkse (1953)  export pessimism: exports cannot be depended pessimism: upon as the source of growth massive injection of new technology. machines. expanded supply) would also generate large scale demand.

this will initially result in unbalanced growth such that inducing development in key sectors first will create overcapacity here. industries. as electricity becomes cheaper this will stimulate investments in those sectors that use electric power in big amounts. hence initially unbalanced growth. the big push should be only for a limited no of industries. cheapening their output due to economies of scale. first. .     The key sectors for initial investment should be determined on the basis of industrial backward and forward linkages. oversupply electric power.Industrial Linkages & Unbalanced Growth Alfred Hirschman (1958)  Resource constraints in developing countries necessitate prioritization as to where to invest first. this will stimulate upstream investments: investments: eg.

Hidden potential of developing countries for growth pot gro lies in unlimited supplies of rural labor inherent in their large agricultural sector ready to lar be pulled into the modern urban sector.Growth with unlimited supply of labor Arthur Lewis  main difference between North and South: the relative weight of agricultural versus industrial production and employment.  .

Growth with unlimited supply of labor Arthur Lewis  in the South.e. surplus labor   trans transformation dynamic lies in the attraction of this rural surplus labor into the industry such that while industrial production increases. . but there is little connection between them between productivity in agricultural sector is so low that there is disguised unemployment. i. coexistence of the two sectors is dualistic such that:  agricultural sector provides labor to industry. and industry buys food from them. there is no change in agricultural agricu production.

but  only capitalist class is capable of savings and investment. A limit will be imposed on this growth process as L surplus is depleted and wages increase undesirable from Lewis perspective.Growth with unlimited supply of labor Arthur Lewis Distribution of Income:  Higher level of savings and investment in the industrial sector is key to development. Hence Lewis advocates income distribution in favor of the capitalist class and against labor.   .

Stages of Growth Theory Walt Whitman Rostow  The Rostowian take-off model claims to be a universal historical Rostow takemodel of economic growth which was developed on the basis of the economic history of Britain. Traditional society Preconditions for take-off takeTakeTake-off Drive to maturity Age of high mass consumption Rostow argues this is a universal historical categorization of stages of growth that all societies necessarily go through with similar experiences.   The model claims that economic modernization occurs in five basic stages. Britain. in changeable time period. .

Traditional Society   output consumed by producers rather than traded trade carried out by barter. labor-intensive laborresource allocation determined by traditional methods of production than scientific knowledge prepre-Newtonian or pre-scientific society predominated with a perspective of long-term longfatalism landholders plays a dominant and important role in the determination of political and economic power . goods exchanged for barter. other goods     agriculture dominating sector.

PrePre-conditions for Take-off Takedestruction of traditional society through outside forces such as colonialism   emergence of entrepreneurial and managerial class entrepreneurial managerial development of a financial sector and increase in investment infrastructural development modern business using new and sophisticated methods of using production emergence of reactive nationalism     .

    . production and employment switches from agriculture to switches manufacturing growth concentrated in a few regions of the country and in growth one or two manufacturing industries investment reaches over 10% of GNP evolution of new political and social institutions supporting supporting the industrialization growth becomes self-sustaining as investment leads to becomes selfincreasing incomes in turn generating more savings to finance further investment.TakeTake-off into sustained growth  increasing industrialization.

Drive to Maturity  the economy starts spreading into new areas technological innovation provides expanded range provides of investment opportunities.    . the economy starts producing a wide range of goods and services and there is less reliance on imports this diversity leads to greatly reduced rates of poverty and rising standards of living. as the society no longer needs to sacrifice its comfort in order to make certain sectors more productive.

and the enjoyments of the arts and leisure   . the pursuit of security.Age of High Mass Consumption  the economy is oriented towards mass consumption service sector becomes increasingly dominant society is now devoted to the pleasures of consumer choice.

no analysis of how the pre-conditions for pretaketake-off are to emerge empirically not validated    .Critics of the Stages of Growth Theory by Rostow  attempts to universalize the experience of a particular country (Britain) in a specific period of time (16th to 20th century) External factors such as colonization / imperialism can hinder the process of development in the colonized nations descriptive.

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