Balanced Growth Theory of Economic Development (Criticisms) | Economics Optional Notes for UPSC PDF Download

Introduction

Salvation of under developed countries lies in the theory of growth.
As a matter of fact, the doctrine of balanced growth has been strongly criticized by Prof. Hirschman, Singer, Kurihara, and many other economists.
“Balanced growth can neither solve the problem of underdeveloped countries, nor do they have sufficient resources to achieve balanced growth”-Prof. Singer.

The points of criticism are given as under

1. Wrong Assumptions:

Prof. Singer argues that the doctrine of balanced growth is based on wrong assumptions. Every underdeveloped country starts from a position that reflects previous investment decisions—and previous development. The theory of balanced growth requires balanced investment to meet the growing demand and as a result there is existence of increasing returns. If simultaneous investments are made in all related fields, bottlenecks arise, due to the shortage of raw materials, prices, factor shortages etc. There is ever likelihood of operating decreasing returns.

2. Administrative Difficulties:

The principle of balanced growth overlooks the inefficient administrative capacity of underdeveloped countries. The administrative machinery is overloaded which causes maladjustment in the smooth functioning of the economy.

3. Rise in Costs:

The foremost, drawback of the concept is that the establishment of number of industries will raise the real and money cost of production. It is economically unprofitable to operate in the absence of sufficient capital equipment, skills, cheap power, finance and other necessary raw materials.

4. Against the Capabilities of Underdeveloped Countries:

According to Hirschman, “The doctrine combines a defeatist attitude towards the capabilities of underdeveloped economies with completely unrealistic expectations about their creative abilities.” It involves the simultaneous start of several productive activities at one instance. But in an underdeveloped country, there is an acute shortage of capital resource, technical and managerial skills etc. The whole system is self-contradictory.

5. Danger of inflation:

Balanced growth doctrine advocates simultaneous investment in a number of industries. As such when demand increases owing to huge investment outlays made in different sectors and corresponding supply fails to cope up with it, resulting in inflation. Thus, under these inflationary situations, balanced growth fails to deliver fruitful results.

6. Factors Disproportionalities:

Another drawback of the theory is disproportionality in the factors of production due to deficiency of capital and surplus manpower. In some less developed countries too much labour is employed against too little capital. In such countries, labour is in abundance but capital and entrepreneurial skill are scarce. This disproportionality in factors of production creates several practical hindrance in the implementation of successful operation of balanced growth theory.

7. Ignores potentialities of Foreign Market:

Prof. Nurkse’s principle of balanced growth is based on the fact that inducement to invest is limited by the size of the market. According to him, size of the market can be enlarged through simultaneous and uniform growth of complementary industries. In this way, he ignores potentialities of foreign market. Furthermore, this is against the principle of comparative advantage where one country enjoys the benefits of specialization over the other country.

8. Planning Aspect is not given Due Consideration:

The theory of balanced growth is mainly concerned with private enterprise economy where the need of planning does not occur. Thus, it ignores the role of planning in an underdeveloped country where simultaneous investment in every sector needs planning, direction and co-ordination by government.

9. Based on Say’s Law of Markets:

Prof. Nurkse’s balanced growth is based on the famous doctrine of J.B. Say’s ‘Supply creates its own demand.’ But after world depression of the thirties, this principle lost its validity. Moreover, supply of complementary factors is generally inelastic in underdeveloped countries and it faces many serious bottlenecks. Thus, demand cannot be made effective.

10. More Suitable to Advanced Countries:

Balanced growth theory is more suitable to the well advanced countries as these countries possess sufficient resources, machines and entrepreneurs. Thus, underdeveloped economies are not safer for balanced development on account of scarcity of basic pre-requisites and infrastructures.

11. Deficiency of Capital:

In the path of balanced growth huge amount of capital investment is required. While UDCs cannot afford such heavy capital due to low savings and market imperfections etc. Thus, the doctrine of balanced growth becomes an exercise in futility.

12. Lacks Historical Sense:

Prof. Singer also argues that the theory of balanced growth lacks historical sense in underdeveloped countries. A study of economic history of developed nations reveals that the process of economic growth in almost all countries was initiated the of rough development of few sectors. Benjamin Higgins stated that “Growth does not take place in a balanced way but in unbalanced ones. When one sector proceeds faster the other sectors then try to catch up”. Thus, the need is to try to make unbalanced investment to complement existing imbalance.

13. Role of State:

The doctrine of balanced growth in also criticised as against its role assigned to state. However Prof. Nurkse maintains that inducement to invest is relevant primarily to a private enterprise. But economists like Hirschman, Singer and Kurihara firmly believe that the state has a positive role in controlling the private enterprises and planning various strategies for development.

14. Development from Zero Level:

• According to Fleming and Singer, balanced growth is based on the assumption that in the underdeveloped countries, the development starts from a zero level. But in reality it is not so. Each underdeveloped country starts from a point where some economic development has already taken place. Thus, it is not essential to give equal importance to all the sectors. If we make equal investment in all the sectors, it will result into big difference in the development of different sectors.
• Further even if we accept that economic development starts from a scratch in UDCs even then more and heavy investment will be made in the most urgent sectors which is contrary to the strategy of balanced growth. Thus, we find that the theory of balanced growth is based on unrealistic assumption that the economic development starts from zero level of economic development.

15. Represents only Gloomy Picture:

Another attack is made by H.W. Singer and Kindleberger who claims that Prof. Nurkse’s fundamental concept is nothing but represents only gloomy picture. In fact, underdeveloped countries lack in the basic skill for development which puts ceiling on the number of projects to be undertaken simultaneously.

16. Not a Theory of Development:

• Prof. Hirschman is of the view that the strategy of balanced growth is not a theory of economic development. By development, we mean to change the economy from one type to another type which is more advanced. But under balanced growth, there would be altogether a new industrial sector over the existing traditional sector.
• It will give birth to dual economy. This does help in the acceleration of economic development. This will not be called development but only a transformation from backward to modern economy. In this way, we cannot call it a theory of development at all.