Strategy of unbalanced growth
Encyclopedia
Unbalanced growth is a natural path of development. Undeveloped countries start from a position that reflects their predecessor's previous investment decisions and development. Accordingly at any point of time they are highly desirable investment programs which are not in themselves balanced investment packages, but which represent unbalanced investment to complement exiting imbalance. And once such an investment is made a new imbalance is likely to appear which will require still other balancing investment and so on. Therefore growth does not takes place in a balanced way but is unbalanced. The list of supporters of the unbalanced growth doctrine includes Albert O. Hirschman
, Hans Singer
, Paul Streeten
and Marcus Fleming
.
Path of unbalanced growth is described by three phases :-
1.Complementarity
2.Induced Investment.
3.External Economies.
Singer believed that at any point there are desirable investment programs within a country that are not balanced packages but they represent unbalanced investment to complement the already inherent imbalance. So with these investments a new imbalance will appear and then that will require another balancing investment so on and so forth. One sector will always grow faster than another therefore the need will always be there to have unbalanced growth because investments must complement existing imbalance. Hirschman states “If the economy is to be kept moving ahead, the task of development policy is to maintain tensions, disproportions and disequilibria”. This situation is for all societies developed or underdeveloped.
1.the services provided by the activity should facilitate a great variety of economic activities.
2.the services provided in all the countries should be subject to public control.
3.services cannot be imported.
4.the investment which is needed to provide services should be characterized by some lumpiness as well as by high capital output ratio.
1. development through shortage of SOC.
2. development throgh excess of SOC.
In the first case the country invests in direct productive activities(DPA). Direct Productive Activity expands and due to such investment, the pressure on SOC builds up. This induces investment. In the second case Social Overhead Cost expands which reduces the cost of services and this induces investment in DPA.
Cost of producing any unit of output any outputof DPA is higher the more inadequate SOC of the economy. Economy's major objective is to attain increasing output of DPA.
One of the paradoxes of development is that poor countries cannot afford to be economical. According to Hirshman there is no scarcity of resources but there inability to put those resources into best usage. To explain unbalanced growth Hirschman assumes that either the underdeveloped country invests in DPA or SOC. Both the paths of development set up incentives and pressures and an evaluation of their respective efficiency depends on two things first the strengths of entrepreneurial motivations and second the response to public pressure of the authorities responsible for SOC. The major characteristics of the two paths of development is that they yield extra dividend. Excess capacity of SOC building aheadof demand creates this demand by making a country more attractive to DPA investors. If DPA is ahead of SOC then strong pressures are set up for SOC. Balanced growth of DPA and SOC is not achievable in underdeveloped countries but it is not a desirable policy which would be adopted in that sector as it does not set up the incentives and the pressure that make for this dividend of induced investment decisions.
Most of the underdeveloped countries are agrarian in nature. Agriculture in such country is very primitive in natureand hence does not possess any forward or backward linkage asthelarge proportion of output is used up as consumption or exports, another important part is subjected to some processing indstries. Therefore itis said that underdeveloped countries are weak in the form of interdependance and linkages.It is mainly on the effect of weak linkage effect of agriculture underdeveloped countries have opted for industrialization.
According to Hirshman when an industry fulfills the final demand then industrialization starts .
It is possible to set up only two industries.
(1) those that transform domestic or imported primary products into goods needed by final demand.
(2) those that transform imported semi-manufacturers into good needed by final demand.
These are referred to as "encla
In the present day underdeveloped countries industrialization takes place through the second manner, through plants that perform the final touches to the finished industrial products imported from abroad. Metal fabricating industries, the pharmaceutical laboratories, assembling and mixing plants are some of the examples. This trend has many advantages as it often provide an investment outlet for small amount of capital that might not easily become available otherwise and it makes it possible to start industrial undertakings without the heavy risk that comes in underdeveloped countries for having to rely on the output of unreliable domestic producers. Therefore underdeveloped countries set up "last industries" first which are also termed as "enclave import industries".. The most important advantage of these industries is that they set up backward linkages of practically infinite range and depth. Colombia , Brazil and Mexico are set examples of this contention.
Protection and subsidization of import replacing industries should come but at the correct later stage of development. The Last Industry Strategy has disadvantages. It can stem the creation of domestic production. Industrialists who have begun working on imported materials will develop hostility towards domestic products that may put his sector out of demand. First the domestic products may not be as quality, second he may become depending on one domestic supplier rather than having an international market base, finally the location may be incorrect when the source of supply of material is altered. Creating last industries first can create loyalty toward foreign products and distrust to domestic products and their quality. Banks get used to making credit for short term financing needs on import trade and countries where imports originate may develop influence on the politics and economy of the domestic country.
It inhibits the setting up of domestic production as domestic demand passes the threshold of minimum economic size. This is because industrialist who workrd with imported material will often be hostile to the establishment of domestic industries on account of the following reasons.
1.fear that the domestic good will not be of uniform and good quality as the imported good. 2. dependency on single domestic supplier. 3.domestic competition will bwcome more activeonce the basic ingridients are producedwithin the country. 4. location may be wrong once the source of supply of the material he uses is throughly altered
From the national point of view also this strategy might not be right as this will lead to a higher level of loyalities towards the foreign articles among consuming public. Banks will become used to extending credits for short term financing needs of the import trade, countries whrer the imports originate acquire the power to exertpolitical or economic pressures on domestic economy.Imports createv powerfull economic interstsbent on perpetuating so highly profitable a business.
It pays insufficient attention to critical question regarding the precise composition, direction and timing of imbalances. What is the optimum degree where imbalance should be created wwhere and how much in order to accelerate growth. This theory leaves too much chances. There is little discussions on how to overcome discrepencies between private and social profitabilities of development projects. Agriculture has been neglected in this theory. In overpopulated and agricultural based countries neglection of agriculture could be suicidial. Shortage of agricultural good can emerge as a serious constraint to the industrialiazation process, unless income in agricultural goods expands the market for industrial products will remain limited. This can also lead to emergence of infaltionary pressures in the economy as shortage of agricultures comodities will push up the prices. This theory is useful in those countries where there is excessive state control. For instance in socialistic countries this strategy is followed with remarkable success. In a socialistic society the consumption of all people is maintained at a modest level thus pressures for raising the output of consumer good is not presentr to any great extent. State in this situation can freely afford to invest. However in mixed economies this strategy is restricted because state control is limited .
Streeten, Paul (1959) Unbalanced Growth, Oxford Economic Papers New Series, Vol. 11, No. 2 (Jun., 1959), pp. 167–190
Albert O. Hirschman
Albert Otto Hirschman is an influential economist who has authored several books on political economy and political ideology. His first major contribution was in the area of development economics. Here he emphasized the need for unbalanced growth...
, Hans Singer
Hans Singer
Sir Hans Wolfgang Singer was a development economist best known for the Singer-Prebisch thesis, which states that the terms of trade move against producers of primary products. He is one of the primary figures of heterodox economics.-Biography:Singer was born in Elberfeld, Germany in 1910...
, Paul Streeten
Paul Streeten
Paul Streeten is an economics professor. He was a professor at Boston University, USA until his retirement. He has been a distinguished academic working on development economics since the 1950s.-Biography:...
and Marcus Fleming
Marcus Fleming
John Marcus Fleming was Deputy Director of the research department of the International Monetary Fund for many years; he was already a member of this department during the period of Mundell's affiliation. At approximately the same time as Mundell, Fleming presented similar research on...
.
Introduction
This theory is generally associated with Albert O. Hirschman. He presented a complete theoretical formulation of unbalanced growth strategy. Underdeveloped countries maintain common characteristics. Low levels of GNI per capita and slow GNI per capita growth, larger income inequalities and widespread poverty, low levels of productivity, great dependence on agriculture with a backward industrial structure, high proportion of consumption and low savings, high rates of population growth and dependency burdens, high unemployment and underemployment, technological backwardness, and dualism. These issues within a developing or underdeveloped country lead to a scarcity of resources or a lack of infrastructure to reach these resources and expand them. With lack of investors and entrepreneurs cash flows cannot be directed into various sectors influencing balanced economic growth. Here comes in to play the strategy of unbalanced growth. Hirschman contends that deliberate unbalancing of the economy according to the prior strategy is the best method of development, and if the economy is to be kept moving ahead the task of development policy is to maintain tension, disproportions and disequilibrium. Balanced growth should not be aimed at, but rather existing imbalances— whose symptoms are profit and losses—must be maintained. Therefore the sequence that leads away from equilibrium is precisely an ideal pattern for development. Unequal development of various sectors often generates condition for rapid development. The situation that some industries are more developed than others provides an inducement to grow to undeveloped industries. Hence development of underdeveloped countries should be based on this strategy.Path of unbalanced growth is described by three phases :-
1.Complementarity
2.Induced Investment.
3.External Economies.
Singer believed that at any point there are desirable investment programs within a country that are not balanced packages but they represent unbalanced investment to complement the already inherent imbalance. So with these investments a new imbalance will appear and then that will require another balancing investment so on and so forth. One sector will always grow faster than another therefore the need will always be there to have unbalanced growth because investments must complement existing imbalance. Hirschman states “If the economy is to be kept moving ahead, the task of development policy is to maintain tensions, disproportions and disequilibria”. This situation is for all societies developed or underdeveloped.
Complementarity
It is a situation where increased production of one thing builds up the pressure for increasing the available supply of second commodity. When the second product is a privately produced goods and services, this pressure will lead to imports or higher production domestically of the second product as it will be in the interests of the producers of second commodity to do so. But when it is not privately produced, the presssure does not transmute itself into pecuniry self-interest and will take form of the political pressures for the provision of second commodity. This in case for such public services such as law and order, education, water, electricity etc. Complementarity then manifests itself in the form of complaints about shortages, bottlenecks and obstacles to development. Action in this case does not take place through the operation of the profit motive, but through group pressure on public authorities and agencies.Induced Investment
Because of complementarity investment in one industry or sectors induces investment in other industry or sectors. This concept of induced investment is much like multiplier because each investment leads to a series of another set of subsequent events and there is an element of convergence as the 'output' of external economies diminishes at each step.Growth sequences tent to move towards convergence or divergence and the policy is usually concerned with preventing to rapid of convergence and the promotion of the possibilities of divergence.External Economies
New projects often appropriate external economies created by preceding ventures and create external economies that may be utilized by subsequent ones. Sometimes the project undertaken create external economies and therefore there private profit falls short of their social desire. The reverse is also possible.Some ventures have a larger input of external economies than the output. Therefore Hirshman says" the projects that falls into this category must be net beneficiaries of external economies".Social Overhead Capital versus Directly Productive Activities.
Social overhead capiatl(SOC) is defined as basic services without which primary, secondary and tertiary productive activities cannot function. This can be applied in both wider sense and narrower sense. In narrower sense Social Overhead Capital is defined to include transportaion and power while in a wider sens it includes all public services from law and order through education system etc. There are some conditions for including an activity under Social Overhead Capital:-1.the services provided by the activity should facilitate a great variety of economic activities.
2.the services provided in all the countries should be subject to public control.
3.services cannot be imported.
4.the investment which is needed to provide services should be characterized by some lumpiness as well as by high capital output ratio.
Development via Shortage and via Excess Capacity of SOC
The strategy of unbalanced growth has been discussed under two heads:-1. development through shortage of SOC.
2. development throgh excess of SOC.
In the first case the country invests in direct productive activities(DPA). Direct Productive Activity expands and due to such investment, the pressure on SOC builds up. This induces investment. In the second case Social Overhead Cost expands which reduces the cost of services and this induces investment in DPA.
Cost of producing any unit of output any outputof DPA is higher the more inadequate SOC of the economy. Economy's major objective is to attain increasing output of DPA.
One of the paradoxes of development is that poor countries cannot afford to be economical. According to Hirshman there is no scarcity of resources but there inability to put those resources into best usage. To explain unbalanced growth Hirschman assumes that either the underdeveloped country invests in DPA or SOC. Both the paths of development set up incentives and pressures and an evaluation of their respective efficiency depends on two things first the strengths of entrepreneurial motivations and second the response to public pressure of the authorities responsible for SOC. The major characteristics of the two paths of development is that they yield extra dividend. Excess capacity of SOC building aheadof demand creates this demand by making a country more attractive to DPA investors. If DPA is ahead of SOC then strong pressures are set up for SOC. Balanced growth of DPA and SOC is not achievable in underdeveloped countries but it is not a desirable policy which would be adopted in that sector as it does not set up the incentives and the pressure that make for this dividend of induced investment decisions.
Backward and Forward Linkages
Hirshman introduces the concept of backward and forward linkages . If investment in the particular project encourages investment in subsequent stages of production than we have forward linkage and onthe other hand if the project encourages investment in earlier stages of production then we have backward linkage.Normally any project wiould have both foeward linkage and backward linkages. Investment should be made in that project that have total number of greatest linkages.Projects with total number of great linkages will vary from country to country and this knowledge can be obtained with the help of input and output studies.Most of the underdeveloped countries are agrarian in nature. Agriculture in such country is very primitive in natureand hence does not possess any forward or backward linkage asthelarge proportion of output is used up as consumption or exports, another important part is subjected to some processing indstries. Therefore itis said that underdeveloped countries are weak in the form of interdependance and linkages.It is mainly on the effect of weak linkage effect of agriculture underdeveloped countries have opted for industrialization.
Backward and Forward Linkages and Last Industries
The development of an economy using the unbalanced method depends on the backward and forward linkages between the sectors with investment. A developing country should create investments that induce other investment decisions in more productive sectors, and create growth therein. If investment in a project induces investment in the following stages of production this is called forward linkage. A backward linkage is a creation of investment in the stages of production leading up to the final product. Therefore investment should be pushed into a project that maintains he highest number of total linkage investments. Hirschman argues that underdeveloped countries struggle with weakness in having industries that maintain backward and forward linkages. Because underdeveloped countries are mainly agricultural based backward linkages are nonexistent and forward linkages are limited to mostly consumption and export. He suggests that he best track is to induce industrialization. This type of development will create more backward and forward linkages and should be the first step taken.According to Hirshman when an industry fulfills the final demand then industrialization starts .
It is possible to set up only two industries.
(1) those that transform domestic or imported primary products into goods needed by final demand.
(2) those that transform imported semi-manufacturers into good needed by final demand.
These are referred to as "encla
In the present day underdeveloped countries industrialization takes place through the second manner, through plants that perform the final touches to the finished industrial products imported from abroad. Metal fabricating industries, the pharmaceutical laboratories, assembling and mixing plants are some of the examples. This trend has many advantages as it often provide an investment outlet for small amount of capital that might not easily become available otherwise and it makes it possible to start industrial undertakings without the heavy risk that comes in underdeveloped countries for having to rely on the output of unreliable domestic producers. Therefore underdeveloped countries set up "last industries" first which are also termed as "enclave import industries".. The most important advantage of these industries is that they set up backward linkages of practically infinite range and depth. Colombia , Brazil and Mexico are set examples of this contention.
Protection and subsidization of import replacing industries should come but at the correct later stage of development. The Last Industry Strategy has disadvantages. It can stem the creation of domestic production. Industrialists who have begun working on imported materials will develop hostility towards domestic products that may put his sector out of demand. First the domestic products may not be as quality, second he may become depending on one domestic supplier rather than having an international market base, finally the location may be incorrect when the source of supply of material is altered. Creating last industries first can create loyalty toward foreign products and distrust to domestic products and their quality. Banks get used to making credit for short term financing needs on import trade and countries where imports originate may develop influence on the politics and economy of the domestic country.
Import and Protection.
Import fulfill the very important function of demand formationand demand reconnassiance for the country's entrepreneurs. Enclave import industries promote the development of industries in earlier stages and should theerefore be decried upon underdeveloped countries unnecessarily. Cutting down of exports too severly at a early stage would result in a self-defeating policy adopted by the country. The conclusion is that protection or subsidization of the import replacing industry should be done at the right stage of development. Too early replacement of the industries would retard the process of industrialization as the country will loose advantages of backward linkages of enclave import industry. It is only when the market has grown to sufficiently full size the country should jump into production of imported goods.Disadavantages of Last Industry Strategy.
Though industrialization in this fashionby giving the last touches to imported goods is advantageous for the underdeveloped countries as iyt permits the industries yo be started even in the areas where the market is small, the technical and the organizational know-how is defecient. There are disadvantages too attatched to this strategy.It inhibits the setting up of domestic production as domestic demand passes the threshold of minimum economic size. This is because industrialist who workrd with imported material will often be hostile to the establishment of domestic industries on account of the following reasons.
1.fear that the domestic good will not be of uniform and good quality as the imported good. 2. dependency on single domestic supplier. 3.domestic competition will bwcome more activeonce the basic ingridients are producedwithin the country. 4. location may be wrong once the source of supply of the material he uses is throughly altered
From the national point of view also this strategy might not be right as this will lead to a higher level of loyalities towards the foreign articles among consuming public. Banks will become used to extending credits for short term financing needs of the import trade, countries whrer the imports originate acquire the power to exertpolitical or economic pressures on domestic economy.Imports createv powerfull economic interstsbent on perpetuating so highly profitable a business.
Critical Appraisal.
As the underdeveloped countries face scarcity of resources the doctrine of unbalanced growth seems highly attractive. However this theory also is not free from defcts because of the following reasons.It pays insufficient attention to critical question regarding the precise composition, direction and timing of imbalances. What is the optimum degree where imbalance should be created wwhere and how much in order to accelerate growth. This theory leaves too much chances. There is little discussions on how to overcome discrepencies between private and social profitabilities of development projects. Agriculture has been neglected in this theory. In overpopulated and agricultural based countries neglection of agriculture could be suicidial. Shortage of agricultural good can emerge as a serious constraint to the industrialiazation process, unless income in agricultural goods expands the market for industrial products will remain limited. This can also lead to emergence of infaltionary pressures in the economy as shortage of agricultures comodities will push up the prices. This theory is useful in those countries where there is excessive state control. For instance in socialistic countries this strategy is followed with remarkable success. In a socialistic society the consumption of all people is maintained at a modest level thus pressures for raising the output of consumer good is not presentr to any great extent. State in this situation can freely afford to invest. However in mixed economies this strategy is restricted because state control is limited .
Other sources
Hirschman, Albert O. (1958). The Strategy of Economic Development. New Haven, Conn.: Yale University Press. ISBN 0-300-00559-8Streeten, Paul (1959) Unbalanced Growth, Oxford Economic Papers New Series, Vol. 11, No. 2 (Jun., 1959), pp. 167–190