CHAPTER

28
Growth The Doctrine of Balanced Growth
MEANING OF BALANCED GROWTH
The doctrine of balanced growth has several authors who interpret it in their own way. To some it means investing in a laggard sector or industry so as to bring it abreast of others. To others, it implies that investment takes place simultaneously in all sectors or industries at once. Still to others, it means balanced development of manufacturing industries and agriculture.1 Balanced growth, therefore, requires balance between different consumer goods industries, and between consumer goods and capital goods industries. It also implies balance between industry and agriculture, and between the domestic and export sector. Further, it entails balance between social and economic overheads and directly productive investments, and between vertical and horizontal external economies. In fine, the theory of balanced growth states that there should be simultaneous and harmonious development of different sectors of the economy so that all sectors grow in unison. For this, balance is required between the demand and supply sides. The supply side lays emphasis on the simultaneous development of all inter-related sectors which help in increasing the supply of goods. It includes the simultaneous and harmonious development of intermediate
1. See. C.P. Kindleberger, op. cit., Ch 9 for different interpretations.

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goods, raw materials, power, agriculture, irrigation, transport, etc., and all industries producing consumer goods. On the other hand, the demand side relates to the provision for larger employment opportunities and increasing incomes so that the demand for goods and services may rise on the part of the people. The demand side is related to supplementary industries, consumer goods industries, especially agriculture and manufacturing industries. When with the simultaneous setting up of all types of industries, large number of people are employed, they create demand for each others goods. In this way, all goods will be sold out. The doctrine of balanced growth has been advocated by Rosenstein-Rodan, Ragnar Nurkse, and Arthur Lewis. Let us examine the concept in detail with reference to Rodans and Nurkses formulations. EXPLANATION OF THE THEORY Rosenstein-Rodan was the first economist who propounded the theory of balanced growth without using these words in his 1943 article.2 He argued that the whole of the industry to be created in eastern and south-eastern Europe should be treated and planned like one huge firm or trust. His main contention is that often SMP (Social Marginal Product) of an investment is different from its PMP (Private Marginal Product) and that when a group of industries is planned together in accordance with their SMPs, the rate of growth of the economy is greater than it would have been otherwise. This is because an individual entrepreneur is interested only in the PMP of investment and is not likely to have an accurate assessment of its SMP. In support of his argument, Rosenstein Rodan gives a number of examples where the SMP of an investment is greater than its PMP. It is complementarity of different industries which leads to the most profitable investment from the standpoint of the society. He gives the example of the shoe factory. Suppose a large shoe factory is started in a region where 20,000 unemployed workers are employed. If these workers spent all their wages on shoes, a market for shoes would be created. But the trouble is that the workers will not spend all their wages on shoes. If instead, a whole series of industries were started which produce the consumption goods on which workers would spend all their incomes, all the industries would expand via the multiplier process. The planned creation of such a complementary system of industries would reduce the risk of not being able to sell their products and would lead to a large scale planned industrialisation. This very idea has been developed and elaborated by Ragnar Nurkse in his thesis. According to Nurkse,3 vicious circles of poverty are at work in underdeveloped countries which retard economic development. If, however, they are broken, economic development will follow. The vicious circles operate both on the supply side and the demand side. On the supply side, there is the small capacity to save resulting from low real income. The low real income is due to low productivity which in turn is due to deficiency of capital. The deficiency of capital is the result of low capacity to save. On the demand side, inducement to invest is low because of low demand which is due to low level of real income of the people. The inducement to invest is, therefore, limited by the size of the market which in turn depends upon productivity because the capacity to buy is in fact the capacity to produce. And productivity depends on the amount of capital used in production. But for an individual entrepreneur, the use of capital
2. Problems of Industrialisation of Eastern and South-Eastern Europe, in op. cit. (ed.) Aggarwal and Singh. 3. Problems of Capital Formation in Underdeveloped Countries, Ch. 1.

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is inhibited by the small size of the market which in turn is limited by low productivity. Thus the vicious circle is complete. How to Break these Circles? Individual investment decisions cannot solve the problem. Nurkse cites Rosenstein-Rodans famous example of the shoe factory to substantiate his argument. Suppose, a shoe industry is set up. If in the rest of the economy nothing is done to increase productivity and purchasing power, the market for the additional shoe output is likely to be deficient. People engaged in the industry will not like to spend all their income on shoes, human wants being diverse. Nor will the people outside the new industry buy a pair of shoes every year when they do not have enough to meet their bare necessities. Thus, the new industry is likely to fail for want of the adequate market. How Can the Market be Enlarged? The size of the market can be enlarged by monetary expansion, by salesmanship and advertising, by abolishing trade restrictions and by expanding the economic infrastructure. It can also be widened either by a reduction in prices (money incomes remaining constant), or by an increase in money incomes while keeping prices constant. This implies increase in productive efficiency and in real income. But in underdeveloped countries market is not large enough to permit production on a scale that may lead to reduction in costs. Moreover, inelastic consumer demand, technical discontinuities and lack of enterprise keep down the demand for capital. Therefore, the only way out of this impasse, according to Nurkse, is more or less synchronized application of capital to a wide range of different industries. Here is an escape from the deadlock, here the result is an overall enlargement of the market. People working with more and better tools in a number of complementary projects become each others customers. Most industries catering for mass consumption are complementary in the sense that they provide a market for, and thus support each other. The case for balanced growth rests on the need for a balanced diet. Nurkse takes the cue for the notion of balanced growth from Says Law and cites Mills formulation of it: Every increase of production, if distributed without miscalculation among all kinds of produce in the proportion which private interest would dictate, creates or rather constitutes, its own demand. But a substantial use of capital by an individual entrepreneur in any particular industry may be unprofitable due to the small size of the market. On the contrary, a synchronized use of capital to a wide range of projects in different industries may raise the general level of economic efficiency and enlarge the size of the market. A frontal attack of this sorta wave of capital investments in a number of different industrieshas been called by Nurkse, balanced growth. The way to do this is by a simultaneous wave of new plants composed in such a way that full advantage is taken of complementaries and external economies on the supply side and of the complementaritities of markets on the demand side. Investment in a wide range of industries leads to vertical and horizontal integration of industries, a better division of labour, a common source of raw materials and technical skill, an expansion of the size of the market and better utilization of social and economic overhead capital. Investment in productive equipment and in human capital should be simultaneous, for investment in the former would be useless unless people are educated and healthy to operate it. Nurkse pleads that social and economic overhead facilities should be created ahead of demand to stimulate and support the various sectors of the economy. Private enterprise in an underdeveloped country is incapable of taking advantage of these external economies because of its incapacity to start a wave of capital investments on a wide range of projects. But Nurkse believes that private enterprise can achieve the desired

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effect under the stimulus of certain incentives.4 He pleads that ordinary price incentives may bring about balanced growth in a small degree. However, a wave of new applications of capital over a wide range of different industries can be promoted by the monetary effects of the initial investment and other effects. The doctrine of balanced growth requires a balance between different sectors of the economy during the process of economic growth. There should be proper balance between investment in agriculture and industry. Agriculture and industry are complementary. An increase in industrial output requires an expansion of agricultural output. If employment increases in the industrial sectors, it will lead to an increase in the demand for foodstuffs. Supplies of food must, therefore, be raised. Similarly supplies of raw materials should also rise with the expansion of the industrial sector.5 It is imperative that the agricultural sector must also develop along with the industrial sector otherwise inflation will set in. A balance is also required between the domestic sector and the foreign sector. Export revenue is an important source for financing development; imports rise as production and employment expand; and domestic trade itself requires increasing imports of necessary materials and equipment. To pay for these rising imports, and to allow exports to finance development as much as possible, the country cannot expand its domestic trade at the expense of its foreign trade. The domestic sector must grow in balance with the foreign sector.6 Nurkse observes, Balanced growth is a good foundation for international trade, as well as a way of filling the vacuum at the periphery,. He underlines the importance of improvement in transport facilities and advocates reduction in transport costs, abolition of tariff barriers and creation of custom unions to enlarge the market in the economic and geographic sense. In this way, developing countries would become each others customers, increase their per capita consumption of agricultural and manufactured goods with the increase in their income elasticity of demand. Nurkse does not advocate autarky. With the increase in domestic production, the domestic as well as the foreign market is likely to expand. But even if foreign trade shrinks due to restrictions imposed by other countries, the best way is to expand its output for domestic consumption, thereby increasing employment and income in the economy. To sum up in the words of Lewis, In development programmes all sectors of the economy should grow simultaneously, so as to keep a proper balance between industry and agriculture and between production for home consumption and production for export.. . the logic of this proposition is as unassailable as its simplicity.7
4. In his first Istanbul Lecture (1958), Nurkse said, According to some writers the balanced growth argument implies that the market mechanism is eliminated and that investments must be effected according to a coordinated plan. This opinion...seems to me dubious. As a means of creating inducements to invest, balanced growth can be said to be relevant primarily to a private enterprise system. State investment can and often does go ahead without any market incentives. Planning authorities can apply capital, if they have any, in whatever they may choose...It is private investment that is attracted by markets and that needs the inducement of growing markets. It is here that the element of mutual support is so useful and, for rapid growth, indispensable (Equilibrium and Gowth in the World Economy). This is not a correct view, for the price mechanism alone is not capable of producing the simultaneous and mutually supporting wave of investments required by balanced growth. It is only deliberate planning and coordination whether private or governmental that can do the trick. 5. Nurkses entire argument relates to final consumer goods. So far as intermediate products are concerned, he favoured vertical imbalance in his second Istanbul Lecture (1961). Following Hirschman, he said that it is SOC investment that provides the necessary inducements leading to DPA investment. 6. Meier and Baldwin, op. cit., p. 348. 7. W.A. Lewis, op.cit., p. 283.

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CRITICISMS OF THE DOCTRINE OF BALANCED GROWTH The doctrine of balanced growth has been severely criticised by Hirschman, Singer, Kurihara and others on the following grounds: 1. Rise in Costs. Simultaneous establishment of a number of industries is likely to raise money and real costs of production and so make them economically unprofitable to operate in the absence of sufficient capital equipment, skills, cheap power, finance and other necessary raw materials. 2. No Attention to Reducing Costs. Kindleberger observes that instead of starting with new industries, Nurkses theory does not consider the possibility of cost reduction in existing industries. 3. Other Problems. Granted that it is within the competence of an underdeveloped country to establish new industries, a number of other problems are likely to arise. When the new industries are established, the demand for the products of the existing firms will decrease and make them unprofitable. At the same time the demand for factors of production will rise which is likely to raise the prices of factors of production in all industries. As J. Marcus Fleming has said, Whereas the balanced growth doctrine assumes that the relationship between industries is for the most part complementary, the limitation of factor supply ensures that the relationship is for the most part competitive.8 4. Fails as a Theory of Development. According to Hirschman9 the doctrine of balanced growth fails as a theory of development. Development implies the process of change from one type of economy into another more advanced type. But the doctrine of balanced growth would involve the superimposition of an entirely new self-contained modern industrial sector upon the stagnant and equally self-contained traditional sector. Hirschman opines, This is not growth, it is not even the grafting of something new on to something old; it is a perfectly dualistic pattern of development. 5. Beyond the Capabilities of Underdeveloped Countries. Again, according to Hirschman, the doctrine combines a defeatist attitude towards the capabilities of underdeveloped economies with completely unrealistic expectations about their creative abilities. On the one hand, officials in underdeveloped countries lament that the necessary skills and other resources for development are lacking in the economy. On the other hand, the protagonists of the balanced growth doctrine assume that persons lacking in skills and entrepreneurial ability become omniscient overnight and are in a position to start a chain of new industries. The whole doctrine thus appears to be a contradiction in itself. It seems strange that what cannot be done piecemeal, can be done in a big way and is considered to be within the physical and intellectual competence of an underdeveloped country. It is as if a builder, not in a position to construct the ground floor, were advised to build the next two floors instead. As Dr Singer has stated, The advantages of multiple development may make interesting reading for economists but they are gloorny news indeed for the underdeveloped countries. The initial resources for simultaneous developments on many fronts are generally lacking.10 If a country possesses enough skills and resources, she would not be underdeveloped in the first instance. 6. Disproportionality in Factors. Another problem in underdeveloped countries is the disproportionality in the factors of production. In some countries, labour is in abundance but
8. J.M. Fleming, External Economies and Balanced Growth, in Aggrawal and Singh, (ed.) op. cit., p. 279. 9. A.O. Hirschman, The Strategy of Economic Development, p.52. 10. H.W. Singer, Economic Progress in Underdeveloped Countries, pp. 7-8.

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capital and entrepreneurial skill are scarce. While in others, labour and capital are scarce but other resources are in abundance. This is a great hindrance to the practical application of the concept of balanced growth. 7. Shortage of Resources. The doctrine fails to solve the problem of shortage of resources. It is based on Says Law that supply creates its own demand. But supply of goods refers to the demand for factors, especially for capital which does not create its own supply. When investments are being made simultaneously in a number of new industries, the demand for factors would become competitive. But the supply of factors is inelastic in underdeveloped countries. Thus the main argument of the theory breaks down. Nurkse, however, assumes that resources are available for net investment and a given labour force is being equipped with an increasing stock of capital. But the problem of allocation of the increasing stock of capital still remains. In such a situation, writes Dr Singer, perhaps guerilla tactics are more suitable for the circumstances of underdeveloped countries than a frontal attack. 8. Wrong Assumption of Increasing Returns. The doctrine of balanced growth pre-supposes the need for balanced investment to provide a growing demand, and the existence of increasing returns. But these two forces pull in opposite directions. If returns increase considerably, an underdeveloped country would not like to invest in a railway line and a roadway between the same points, and it will have to choose, for instance, between an oil refinery and a steel mill. If simultaneous investments are made in all related fields, the appearance of bottlenecks, raw materials, prices, factor shortages, etc., will lead to decreasing returns. Thus decreasing and not increasing returns favour balanced growth. 9. Capital Lumpiness not Essential for Development. Although capital lumpiness of many social and economic overheads is often given as a reason for investing larger sums of money immediately, yet the experience of many developed countries suggests that many services can be provided initially at low investment costs. For example, there are other ways of generating electricity than by damming a big river, diesel-generating sets or thermal plants can be installed. If capital is extremely scarce, a low investment-low cost technique with a quick fruition-lag is more economical. As Dr Singer says, Think Big is sound advice to underdeveloped countries but Act Big is unwise counsel if it spurs them to do more than their resources permit.11 10. Balanced Growth not Essential for Induced Investment. According to Kurihara, Balanced growth is not, as Nurkse supposes, to be desired to induce private investment but to be desired for its own sake, as far as an underdeveloped country is concerned. Nurkses complaints about an underdeveloped economys restricted markets and low real income tending to inhibit the private inducement to invest would be unnecessary if autonomous public investment of a capacity increasing as well as income generating nature was allowed to play a greater role. 11. Does not Consider Planning. The Nurkesian doctrine of balanced growth is primarily related to private enterprise economy where the need for planning does not arise. In fact, simultaneous investment in all sectors requires planning, direction and coordination by the government. As aptly pointed out by Myrdal, Nurkse did not explain how his limited desideratum of balanced growth of different industries.... should be fitted into the type of comprehensive planning that
11. Professor J.K. Galbraith has stressed the same point in Economic Development in Perspective (p. 25). He says, Not long ago, in a neighbouring Asian country where there is much unemployment and scarcity of capital, I saw expensive automatic gates imported from abroad, being installed at the railroad crossing. These are a necessary development in those countries where no one is any longer available for the effective life of a railway gateman. But not here...and considerable money would have been saved and utilized elsewhere. Italics mine.

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is the declared policy in all South Asian countries and that has a strong rationale in their actual situation.12 12. Concept of Balanced Growth Applicable to Developed Countries. Further, the balanced growth doctrine is in fact the application of Keynesian underemployment situation to an underdeveloped economy. According to the Keynesian theory, simultaneous multiple development during the upswing of the trade cycle can lead to a balanced recovery of economic activity for the industries, machines, managers, and workers as well as consumption habits, are all there, only waiting to resume their temporarily suspended functions and roles. But in an underdeveloped economy, this is not so whether the state lends a helping hand or not.13 Because in such economics there is no temporary suspension of economic activity. Economic activity is static. Capital, skills, factor supplies and economic infrastructure are woefully lacking. It is, therefore, wrong to apply a theory applicable to a developed economy on an underdeveloped economy. 13. Scarcities and Bottlenecks Encourage Growth. According to Paul Streeten, historically it was not balanced growth but scarcities and bottlenecks that provided the stimulus to the inventions that revolutionized Englands and the worlds economic system, and that inventions in turn created new scarcities and bottlenecks. Had the world depended on balanced development, it would have reduced or even eliminated the incentives for discoveries, or at any rate for their application. Thus it is on unbalanced growth that the history of technological progress rests. Conclusion. We may conclude with Dr Singer that the doctrine of balanced growth is premature rather than wrong in the sense that it is applicable to a subsequent stage of sustained growth rather than to the breaking of a deadlock.14

12. G. Myrdal, Asian Drama, 1968. 13. A.O. Hirschman, op. cit., p. 54. 14. Hans W. Singer, International Development, Growth and Change, 1964.