Theory of Balanced Growth

• Basic tenet same as the theory of big push• Need to make simultaneous investments in a

number of industries as this would enlarge the size of the market

• Rosenstein Rodan, Ragnar Nurkse, W. A. Lewis were the proponents of this theory, in different forms

• We discuss Nurkse’ interpretation of the doctrine of balanced growth

• Vicious circles of poverty are at work in underdeveloped countries which retard economic development

• The vicious circle operate both on the supply and demand side

• Supply side: low per capita income – low savings –low investment – deficiency of capital – low productivity – low per capita income

• Demand side: low income per capita – low purchasing power – low demand – less incentive to invest – low investment – low per capita income

• Inducement to invest is therefore limited by the size of the market

• So the question is, how can the market be enlarged ?• Size of the market can be expanded by monetary

expansion, by salesmanship and advertising, abolishing trade restrictions or expanding economic infrastructure

• It can also be widened by a reduction in prices (money incomes remaining constant) or by an increase in money incomes (keeping prices constant)

• Implies increase in productive efficiency or real income• But underdeveloped countries constrained for both

• Therefore the only way out of this impasse according to Nurkse is ,“more or less synchronized application of capital to a wide range of different industries. People working with more and better tools in a number of complementary projects become each others’ customer”

• Investment in a wide range of industries lead to vertical and horizontal integration of industries, a better division of labour, a common source of raw materials and technical skill, better utilisation of social overhead capital

• This is Nurkse’ concept of balanced growth• Private enterprise in an underdeveloped country is incapable of

taking advantage of these external economies because of its incapacity to start a wave of capital investments on a wide range of projects

• The doctrine of balanced growth requires a balance between different sectors of the economy during the process of economic growth

Balance between agriculture and industry• increase in industrial output – increase in

industrial employment – increased demand for food

• Increase in industrial output – increased demand for raw materials

Balance between domestic and foreign sector• Imports of equipments and necessary inputs

rise as production and employment expand• To pay for these imports, exports must rise• Thus the domestic sector must grow in

balance with the foreign sector