Theory of Balance Growth: Concept, Definition and Basis | Economics Optional Notes for UPSC PDF Download

Introduction

• Balanced growth is a dynamic process, and as such, its meaning continues to evolve.
• The concept of balanced growth is subject to various interpretations by various authors. Fredrick List was the first to put forward the theory of balanced growth.
• According to Fredrick List the theory of balanced growth is of great significance by which a balance could be established between agriculture, industry and trade.
• Rosenstein Rodan endorsed this concept in his article titled 'Problems of Industrialisation of Eastern and South Eastern Europe.” Professors Nurkse, Lewis, and Stovasky have examined this concept of balanced growth from different perspectives. Kindleberger observed, "Balanced Growth has so many meanings that it is in danger of losing them all."

Definitions

• "P.A. Samuelson: 'Balanced Growth implies growth in every kind of capital stock at constant rates.'"
• "U.N. Publication: 'Balanced Growth refers to full employment, a high level of investment, overall growth in productive capacity, and equilibrium.'"
• "Alak Ghosh: 'Planning with balanced growth indicates that all sectors of the economy will expand in the same proportion, so that consumption, investment, and income will grow at the same rates.'"
  It can be expressed as: 
  ΔC/C = ΔI/I = ΔY/Y
• Benjamin Higgins, “A wave of capital investment in a number of industries is called Balanced Growth.”
• W.A. Lewis, “In development programmes, all sectors of economy should grow simultaneously so as to keep a proper balanced between industry and agriculture and between production for home consumption and production for exports the truth is that all sectors should be expanded simultaneously.”
• C.P. Kindleberger, “Balanced Growth implies that investment takes place simultaneously in all sectors or industries at once, more or less along the lines of the slogan, ‘You can’t do anything until you can do everything.”
• R.F. Harrod, “Balanced Growth aims at equality between growth rate of income, growth rates of output and growth rate of natural resources i.e.
  G_y = G_w = G_n
  Here G_y stands for growth rate of income, G_w stands for growth rate of output and G_n stands for growth rate of natural resources.
• Joan Robinson's concept of the golden age also implies balanced growth. It states that there must be equality between the growth rate of capital and the labour force, i.e.,
  ΔK/K = ΔN/N.

Basis of the Theory

1. Supply Side

• Supply or production in an underdeveloped country is low. The reason behind this is that saving in these countries is low due to low income. Low savings result in low investment, leading to low capital formation and low productivity. Low productivity, in turn, leads to low income:
  Low Income—Low Savings—Low Investment—Low Capital Formation—Low Productivity—Low Income.
  It is imperative to increase investment to boost demand. Investment will increase when entrepreneurs are motivated to invest, i.e., when their products sell and they earn a profit. Therefore, it becomes essential to set up several industries simultaneously. 
• The concept of balanced growth from the supply side suggests that various sectors of an underdeveloped economy should be developed simultaneously to avoid difficulties in the path of economic development. For example, agriculture, industry, internal trade, transport, etc., should be developed simultaneously. According to Prof. Lewis,
  "The various sectors of the economy must go with the right relationship to each other, or they cannot go at all."

2. Demand Side

• In underdeveloped countries, people have low purchasing power due to their low income, resulting in low demand. Low demand leads to a less expanded market, inspiring low investment:

  Low Income → Low Purchasing Power → Low Investment → Low Productivity.

• Efforts should be made to increase demand in these countries. The concept of balanced growth from the demand side suggests developing several industries simultaneously so that all can be customers for each other, and the products of all can be sold. Rosenstein Rodan provides an example, stating that if a shoe manufacturing industry is set up, people linked with it will earn income but won't spend all of it only on buying shoes. They will buy goods from other industries.

• Similarly, if one-sided development occurs, it will not succeed. However, if several industries are developed simultaneously and harmoniously, this difficulty can be removed. Prof. Nurkse emphasizes,
  "Most industries catering for mass consumption are complementary in the sense that they provide a market for and support each other."

3. Sectoral Balance

• Sectoral balance entails the economic development of all sectors in an economy. Agriculture and industry are complementary to each other. Thus, the expansion of the industry will require the expansion of agriculture and vice versa. The expansion of the industrial sector will raise the demand for raw materials, which will only be supplied by expanding the agricultural sector. Prof. Lewis maintains that if these sectors are simultaneously developed, the relative price among them can be maintained.
• Unfavorable terms of trade among them may exist. Similarly, a balance between domestic trade and foreign trade becomes essential during the economic development process. Thus, according to Prof. Lewis, the domestic sector must grow in balance with the foreign sector.