THEORY OF UNBALANCED GROWTH

THEORY OF UNBALANCED GROWTH

ALBERT O. HIRSCHMAN

    The strategy of unbalanced growth is most suitable in breaking the vicious circle of poverty in underdeveloped countries. 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.” He asserts that industries with maximum linkages ought to be developed first, investment in these selected industries or sectors would accelerate the pace of economic development.

Premise:

• The degree of technical complementarity is different among the industries. Therefore, the programme for economic development should aim at the establishment of those industries where these complementarities happen to be the greatest.
• Simultaneous investment in a number of complementary industries according to the programme of balanced growth may achieve a once for all increase in national income.

    But after this, the economy will become stabilized at a higher level without any movement forward.

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. The objective of development is not only to achieve a once for all increase in national income, rather this process of income propagation must continue year after year. In order to see that the development process moves on continuously, it is necessary to create and maintain deliberate imbalances in the economy. 

    To create these imbalances Hirschman suggests investment either in Social Overhead Capital (SOC) "comprising all those basic services without which primary, secondary and tertiary productive activities cannot function". This includes investment in education, public health, transport and communications, irrigation, drainage etc. Large investment in SOC will encourage investment in Directly Productive Activities (DPA) by providing cheap inputs to agriculture and industry e.g., cheap electricity and power supply may encourage the development of industries both large and small and may stimulate activity in other sectors as well. Expansion in investment in DPA without the corresponding expansion in SOC will lead to increase in cost of production in view of inadequate availability of overhead facilities. In such a situation, pressures are likely to be exerted and the government may step in and undertake investment in SOC for creating the necessary infrastructure which would lead to an all-round development of the economy.

Pros:

i. Realistic Theory

    The theory of unbalanced growth is a realistic theory. The theory suggests appropriate utilization of the scarce resources in less developed countries. The theory considers all aspects of growth planning.

More Importance to Basic Industries: The theory underlines the significance of basic industries in the process of growth. This will automatically press for the growth of consumer-goods industries. 

ii. Economies of Large Scale Production

    The strategy of unbalanced growth generates economies of large scale production. Establishing key industries calls for the establishment of ancillaries, generating all round increase in income and employment.

iii. Encouragement to New Inventions

    Unbalanced growth generates pulls and pressures in the system, calling for new inventions and innovations.

iv. Self-reliance

    It is the under-current of the theory of unbalanced growth. It starts with the realistic assumption of chronic scarcity of resources in less developed countries and contemplates to initiate and accelerate the process of growth in accordance with the needs and means of the country concerned.

v. Economic surplus

    The strategy of unbalanced growth is expected to generate greater surplus in the system. This is because of its emphasis upon the capital-goods industries. This strategy is also expected to produce a very strong multiplier effect in the system, stimulating income and employment. 

Criticism:

i. Inflation

    The theory gives undue emphasis to development through industrialization, notwithstanding the significance of agriculture. Because of long gestation lags in industries, flow of goods is expected to be constricted during the short period, causing inflation.

ii. Wastage of Resources

    Being concentrated on a couple of industries, resources may not be appropriately utilized. Some sectors of the economy will grow at a faster rate while other sectors will remain neglected. 

iii. No mention of obstacles

    The theory only mentions the establishing key industries presses for the establishment of other industries. But the theory is oblivious to the possible difficulties in establishing key industries to begin with. It is not an easy task to establish key industries right at the beginning of a development programme. 

iv. Increase in uncertainty

    The theory inherently assumes that the success of the growth process depends on external trade and foreign aids. This increases uncertainty of the growth process. 

v. Unbalance is not necessary

    The critics are of the opinion that deliberately introducing unbalances in the system is not so much needed in the less develop countries. These imbalances are caused on their own due technical indivisibility and uncertain behaviour of demand and supply forces.

vi. Neglect of the degree of unbalance

    How much to imbalance and where to imbalance are not known by the theory of unbalanced growth. It only tells of the need to imbalance. 

vii. Linkages effect are not based on empirical data

    Prof. Hirschman has advocated to start only those industries that have maximum linkages effect. But these effects are not based on statistical data pertaining the less developed countries.

viii. Lack of basic facilities

    ‘Unbalanced Growth Theory’ assumes the availability of certain basic facilities in terms of necessary raw materials, technical know-how and developed means of transport. However, in less developed countries mostly these are insufficient.