Strategies of growth: balanced versus unbalanced growth

1. The problem both answer

A developing country has scarce capital and a small market. Where should it invest first? The two strategies give opposite answers: everywhere together, or a few strategic places first.

2. Balanced growth

The idea comes from P.N. Rosenstein-Rodan (“Problems of Industrialisation of Eastern and South-Eastern Europe”, Economic Journal, 1943) and was developed by Ragnar Nurkse (1953), with contributions from Arthur Lewis and Tibor Scitovsky.

The argument

Nurkse started from the demand side of the vicious circle of poverty: the inducement to invest is limited by the size of the market. A single shoe factory fails because its workers cannot buy all the shoes, and others are too poor to buy them. But if investment takes place simultaneously in a wide range of consumer goods industries, the workers of each become customers of the others. In Nurkse’s words, there must be “a more or less synchronised application of capital to a wide range of different industries”, so that the market is enlarged all round. This is Say’s law working in a group: supply of many goods together creates its own demand.

Forms of balance

• Horizontal balance among consumer goods industries (Nurkse’s emphasis).
• Vertical balance between consumer goods, capital goods and infrastructure.
• Balance between agriculture and industry: industry needs food and raw materials from agriculture, and agriculture needs a market in industry (Lewis).
• Balance between domestic and foreign sectors.

Advantages

1. Widens the market and so breaks the demand-side vicious circle.
2. Creates external economies: industries reduce each other’s costs through shared infrastructure, trained labour and supply of inputs.
3. Avoids bottlenecks and shortages, because supply in every sector expands together.
4. Reduces the risk of each investment, since its market is assured.
5. Brings about all-round development and reduces sectoral and regional imbalance.
6. Mobilises surplus labour into many lines of production at once.
7. Reduces dependence on foreign trade for market expansion.

Criticism

1. Resources. Hirschman’s main point: if a country had the capital, entrepreneurs and skills to invest in everything at once, it would not be underdeveloped. The theory asks for what is missing.
2. Hans Singer: balanced growth is appropriate to a later stage, when a country already has resources; for the poor country it is premature.
3. Rising costs: simultaneous demand for scarce inputs pushes up prices.
4. It ignores foreign trade as a way of widening the market.
5. It needs heavy state planning and administrative capacity.
6. Historical experience: no country has developed in a perfectly balanced way.

3. Unbalanced growth

Albert O. Hirschman set out the strategy in The Strategy of Economic Development (1958); H.W. Singer and Paul Streeten supported it.

The argument

The real scarcity in a poor country is not capital as such but the ability to take investment decisions. Development should therefore proceed through a chain of disequilibria. Invest deliberately in a few key sectors; the resulting shortages, price rises and profit opportunities in related sectors act as “inducement mechanisms” that pull further investment. As Hirschman put it, the task is to keep alive rather than eliminate the disequilibria of which profits and losses are symptoms.

Social overhead capital and directly productive activities

• SOC — roads, power, water, ports, education, health. Its creation leads to development via excess capacity: cheap power and transport invite private industries to come up.
• DPA — factories and farms producing goods. Investing here first leads to development via shortage: industries press for power and roads, forcing the State to supply SOC.

Hirschman preferred the route that maximises induced decisions, which often meant DPA first.

Linkages

• Backward linkage: an industry creates demand for its inputs. A steel plant encourages coal and iron ore mining.
• Forward linkage: an industry supplies inputs that make new using industries possible. Steel encourages engineering and automobiles.

Priority should go to industries with the strongest combined linkages, usually basic and capital goods industries.

Merits

1. Realistic: uses scarce resources where they have most effect.
2. Economises on decision-making capacity.
3. Induces private investment through shortages and profit signals.
4. Encourages basic and heavy industry, which supports long-run growth.
5. Broadly matches the historical path of many countries.

Criticism

1. Shortages and bottlenecks may cause inflation rather than induced investment.
2. The response to imbalance is not automatic; private entrepreneurs may not respond.
3. It may widen regional and sectoral inequality.
4. Neglect of agriculture can create food shortages.
5. Identifying the key sectors with the strongest linkages is difficult.

4. Comparison and reconciliation

How this is examined

“Critically explain the unbalanced theory of economic growth” (June 2025) and “Explain the unbalanced growth theory of economic development” (August 2024) as essays; “Balanced growth theory” as a short note (June 2025); “Advantages of the theory of balanced growth” (January 2026, 100-mark, Q.9). For any of these, name the author and book, give the argument, then merits and criticism, and finish with the reconciliation.