1. NS4053 Spring Term 2017 Balanced/Unbalanced Growth

2. Balanced/Unbalanced Growth I
Many contemporary disputes repeat themes from mid-twentieth-century debates, balanced growth versus unbalanced growth
Sometimes the debate is semantic – what is balance?
Rigid formula with all sectors growing at same rate?
More flexible that some attention be given to all major sectors?
Other issues in the debates
What are the relative merits of strategies of gradualism vs. a big push?
Is capital or entrepreneurship the major limitation to growth?

3. Balanced/Unbalanced Growth II
Synchronized application of capital to a wide range of different industries
One way of escaping from the vicious circle of poverty
Early theories were pessimistic about exports, so usually applied to sectors of the domestic economy
Big Push Thesis
Advocates of synchronized application of capital to all major sectors support the big push thesis
Argue a strategy of gradualism is domed failure
Substantial effort is essential to overcome the inertia inherent in a stagnant economy
Analogy to a car being stuck in snow – will not move with a gradually increasing push – needs a big push
Led Tony Blair to call for a big, big push forward in Africa

4. Balanced/Unbalanced Growth III
Early versions based on idea that the factors that contribute to growth like demand and investment in infrastructure do not increase smoothly, but are subject to sizable jumps or indivisibilities
Indivisibilities result from flaws created in investment market by external economies
Cost advantages rendered free by one producer to another
These benefits spill over to society as a whole or to some member of it rather than the investor concerned.
Example – increased production from investment in the steel industry will benefit other industries as well
Greater output stimulates demand for iron, coal and transport
Lower costs may make vehicles and aluminum cheaper
Other industries may benefit later by hiring laborers who acquired skills in the mills
Thus the social profitability of this investment exceeds its private profitability –
Unless government intervenes, total private investment will be too low

5. Balanced/Unbalanced Growth III
Indivisibility in Infrastructure:
Need whole system – cannot increase incrementally
Can’t build a smaller Aswan Dam or shorter Monterrey-Mexico City telegraph line
Indivisibility in demand
Arises from the interdependence of investment decisions Prospective investors uncertain whether output from project will find a market
The workers in an individual project will not buy all of that product
However investment in a wide variety of industries will create enough purchasing power to buy the available increase in supply
Return on individual project may be 5% with high uncertainty.
Investment on a broad front increased return to 15% with greater certainty
What is not true for the individual factory is true for the complementary system of many enterprises
The new producers are each other’s customers and create additional markets through increased incomes
Complementary demand reduces risk of not finding a market increases incentive to invest

6. Balanced/Unbalanced Growth IV
Possible Examples
Situations today where world trade is costly – landlocked countries like Bolivia
Domestic agriculture or exports may not be sufficient for industrialization
So economies need large domestic markets
Historic examples:
Colombia’s tobacco export boom failed to lead to widespread economic development as incomes went to a few plantation owners who spent on luxury imorts
Later from boom in coffee exports, grown on small family enterprises benefited large numbers who demanded domestic manufacturers
For industrialization, incomes from the leading sector must be broadly distributed, providing demand for manufacturing.

7. Balanced/Unbalanced Growth V
Critique Balanced Growth
Advocated of balanced growth emphasize a varied package of industrial investment often at the expense of investment in agriculture
Comparative advantage suggests that a country cannot grow rapidly if it fails to specialize where production is most efficient
Recent experience of developing countries suggests they cannot neglect agricultural investment if they are:
to feed their populations,
supply industrial inputs and
earn foreign currency

8. Balanced/Unbalanced Growth VI
Critique Balanced Growth cont.:
Infrastructure is not as indivisible as advocates imply.
Roads, rivers, canals, or air traffic can substitute for railroads
Roads my be dirt, graveled or paved and various widths
Power plants can differ greatly in size. Controversy in Iraq over state of art power grids or small generators
Large infrasture facilities, although perhaps economical at high leves of development are not essential for growth
Resources required for carrying out strategy vast
If country had these resources, probably wouldn’t be undeveloped
Where will country obtain the capital, skilled labor and materials needed for such an expansion
Although new industries may be complementary on the demand side, they are competitors for limited resources on the supply side.

9. Balanced/Unbalanced Growth VII
Advocates of balanced growth often assume the country starts from scratch
In reality every country starts from a position that reflects previous investment decisions
Thus at any time there are highly desirable investment programs that are not balanced in themselves but are well integrated with existing capital imbalances
The strategy was tarnished by the widespread evidence that developing countries have grown rapidly without any attempt at massive investments in the wide range of industries that advocates considered essential

10. Balanced/Unbalanced Growth VIII
Hirschman’s strategy of imbalance
Part of economic strategy for Iraqi reconstruction
Idea that unbalanced investment to complement existing imbalances.
He contends that deliberately unbalancing the economy, in line with a predesigned strategy is the best path for growth
Argues that the big push thesis may make interesting reading for economists, but most countries don’t have the skills or resources needed to launch such a massive effort
The major shortage in most developing countries is not the supply of savings but the decision to invest by entrepreneurs, the risk takers and decision makers
Hirschman believes poor countries need a development strategy that spurs investment decisions.
He suggests that because resources and abilities are limited, a big push is sensible only in strategically selected industries

11. Balanced/Unbalanced Growth IX
Hirschman’s Intentional Unbalancing Strategy

12. Balanced/Unbalanced Growth X
Growth then spreads from one sector to another – similar to Rostow’s concept of leading and following sectors
While Unbalanced Growth advocates usually stress the advantages of free markets, they often restrict this to areas outside of investment
Example – Profitability of projects a function of the order in which they are taken
Truck factory = return of 10% and steel factory 8%
If interest rate is 9% then invest in truck factory
Later as a result of this investment returns on the steel factory increase to 10% so investment then in that industry

13. Balanced/Unbalanced Growth XI
Or might get situation where:
Establishing a steel factory would increase the returns in the truck factory from 10% to 16%
Society would be better off investing in the steel sector first and the truck enterprise second rather than making independent decisions based on the market
Planners need to consider the interdependence of investment projects so that they maximize overall social profitability
Need to make the investment that spurs the greatest amount of new investment decisions
Investments should occur in industries that have the greatest linkages including backward and forward linkages

14. Balanced/Unbalanced Growth XII
Criticisms of unbalanced growth strategy
As in balanced growth case, many types of infrastructure – may be cheaper to have smaller projects utilized fully than large projects that are underutilized – white elephants
Assumes that there is a lack of decision making in the private sector, but that the government has no trouble in this regard
Japan grew through the reverse mechanism – entrepreneurs invested and then pressured the government to alleviate bottlenecks
However Mexico after the Revolution in the early 1900s found government unbalancing accelerated growth
Often not as clear cut where the greatest shortage of decision making lies – public or private sectors.
Eventually both strategies lead to balance