Unbalanced Growth Theory: Explanation, Process and Priorities | Economics Optional Notes for UPSC PDF Download

According to Hirschman, “Development is a chain of disequilibria that must be kept alive rather than eliminate the disequilibrium of which profits and losses are symptoms in a competitive economy.
If economy is to keep moving ahead, the task of development policy is to maintain, tension, disproportions and disequilibria.”

“Unbalanced growth is a better development strategy to concentrate available resources on types of investment, which help to make the economic system more elastic, more capable of expansion under the stimulus of expanded market and expanding demand”-H.W.Singer.

According to Alak Ghosh, “Planning with unbalanced growth emphasizes the fact that during the planning period investment will grow at a higher rate than income and income at a higher rate than consumption.”
It explains the unbalanced growth in terms of the growth rates of investment, income and consumption. If ∆I/I, ∆Y/Y and ∆C/C denote the rate of investment, income and consumption, then unbalanced growth implies
∆I/I > ∆Y/Y > ∆C/C
i.e., the growth rates are not uniform.

According to Benjamin Higgin, “Deliberate unbalancing of the economy, in accordance with a pre-designed strategy is the best way to achieve the economic growth.”

According to H.W.Singer, “Unbalanced growth is a better development strategy to concentrate available resources on types of investment, which help to make the economic system more elastic, more capable of expansion under the stimulus of expanded market and expanding demand.”

Meier and Baldwin are also of the opinion that “Planners should concentrate on certain focal points, so as to achieve the goal of rapid economic development. The priorities should be given to those projects which ensure external economies to the existing firms, and those which could create demand for supplementary goods and services.”

Explanation of the Theory

• Albert O. Hirschman in his strategy of economic development goes a step further from Singer when he says that for accelerating the pace of economic development in the underdeveloped countries, it is advisable to create imbalances deliberately. He also recognized the inter-relatedness of different economic activities as done by Ragnar Nurkse. But he asserts that investment in selected industries or sectors would accelerate the pace of economic development.
• He regarded, “Development is a chain disequilibria that must keep alive rather than eliminate the disequilibria, of which profits and losses are symptoms in a competitive economy”. There would be ‘seasaw advancement’ as we move from one disequilibrium to another new disequilibrium situation.
• Thus Hirschman argued that, “To create deliberate imbalances in the economy, according to a pre-designed strategy, is the best way to accelerate economic development.” Hirschman is of the confirmed view that underdeveloped countries should not develop all the sectors simultaneously rather one or two strategic sectors or industries should be developed by making huge investment. In other words, capital goods industries should be preferred over consumer goods industries.
• It is because capital goods industries accelerate the development of the economy, where development of consumer goods industries is the natural outcome. Hirschman has stated that, “If the economy is to be kept moving ahead, the task of development policy is to maintain tensions, disproportions and disequilibria.”

Process of Unbalanced Growth

The strategy of unbalanced growth is most suitable in breaking the vicious circle of poverty in underdeveloped countries. The poor countries are in a state of equilibrium at a low level of income. Production, consumption, saving and investment are so adjusted to each other at an extremely low level that the state of equilibrium itself becomes an obstacle to growth. The only strategy of economic development in such a country is to break this low level equilibrium by deliberately planned unbalanced growth.

Prof. Hirschman is of the opinion that shortages created by unbalanced growth offer considerable incentives for inventions and innovations. Imbalances give incentive for intense economic activity and push economic progress.
According to Prof. Hirschman, the series of investment can be classified into two parts:

1. Convergent Series of Investment:

It implies the sequence of creation and appropriation of external economies. Therefore, investment made on the projects which appropriate more economies than they create is called convergent series of investment.

2. Divergent Series of Investment:

• It refers to the projects which appropriate less economies than they create.
• These two series of investment are greatly influenced by particular motives. For instance, convergent series of investments are influenced by profit motive which are undertaken by the private entrepreneurs. The later is influenced by the objective of social desirability and such investment are undertaken by the public agencies.
• In the words of Prof. Hirschman, “When one disequilibrium calls forth a development move which in turn leads to a similar disequilibrium and so on and infinitum in the situation private profitability and social desirability are likely to coincide, not because of external economies, but because input and output of external economies are same for each successive venture.” Thus, growth must aim at the promotion of divergent series of investment in which more economies are created than appropriated.
• Development policy, therefore, should be so designed that may enhance the investment in social overhead capital (SOC) is created external economies and discourage investment in directly productive activities (DPA).

Unbalancing the Economy

Development, according to Hirschman, can take place only by unbalancing the economy. This is possible by investing either in social overhead capital (SOC) or indirectly productive activities (DPA). Social overhead capital creates external economies whereas directly productive activities appropriate them.

(i) Excess of investment in Social Overhead Capital:

• Social over-head capital are concerned with those series without which primary, secondary and tertiary services cannot function. In SOC we include investment on education, public health, irrigation, water drainage, electricity etc. Investment in SOC favorably affect private investment in directly productive activities (DPA).
• Investment in SOC is called autonomous investment which is made with the motive of private profit. Investment in SOC provide, for instance, cheap electricity, which would develop cottage and small scale industries. Similarly irrigation facilities lead to development of agriculture. As imbalance is created in SOC, it will lead to investment in DPA.

(ii) Excess of Investment in Directly Productive Activities:

Directly productive activities include those investments which lead to direct increase in the supply of goods and services. Investment in DPA means investment in private sector which is done with a view to maximize profit. In those projects, investment is made first where high profits are expected. In this way, DPA are always induced by profits.

Priorities: Excess SOC or Excess DPA

(a) Unbalancing the economy with SOC:

Imbalance can be created both by SOC and DPA. But the question before us is that in which direction the investment should be made first so as to achieve continuous and sustained economic growth. The answer is quite simple. The government should invest more in order to reap these economies, the private investors would make investment in order to enjoy profits. This would raise the production of goods and services. Thus investment in SOC would bring automatically investment in DPA.

(b) Unbalancing the economy with DPA:

In case investment is made first in DPA, the private investors would be facing a lot of problems in the absence of SOC. If a particular industry is setup in a particular region, that industry will not expand if SOC facilities are not available. In order to have SOC facilities, the industry has to put political pressure. That is really a tough job. Thus, excess DPA path is full of strains or pressure- creating whereas excess SOC path is very smooth or pressure relieving.