The theory of ‘Balanced Growth’ has been put forward as a solution to the problem of vicious circle of poverty that afflicts the demand side of capital formation. To break this vicious circle, the theory of balanced growth advocates a simultaneous setting up of a large number of mutually complementary industries that would generate demand for each other’s products and thus expand the size of the market and increase inducement to invest.
Rosenstein Rodan gave the earliest version of the balanced growth theory. He observed that in underdeveloped countries, no new industry has a chance to survive due to limited size of market demand.
Thus, if for example, a shoe factory is set up employing a hundred workers, the chances are that it would soon close down due to lack of demand for shoes. But if in place of one factory, we simultaneously set up, say, one hundred factories employing thousands of workers, the chances are that all these factories would survive.
This is because the additional income in the hands of these workers arising from their employment, will create additional demand in the market as they spend money on various products produced by these industries.
Thus demand for shoes, as well as for goods produced by other industries increases that enables all of them to survive and grow. Nurkse agreed with Rosenstein Rodan and
put forward the balanced growth theory on similar lines but enlarged the scope of the balanced growth programme to include many more industrial sectors.
According to Nurkse, the only way to remove the obstacles arising out of the small size of the market is “more or less synchronised application of capital to a wide range of different industries. Here is an escape from the dead lock, here the result is an overall enlargement of the market … most industries catering for mass consumption is complementary in the sense that they provide a market for and thus support each other.”
The people working in these industries will be buyers of each others produce. Accordingly, each individual industry shall create a demand for the goods of the others. The essence of Nurkse’s theory is that if large investment is undertaken in the mutually dependent industries, the vicious circle of poverty can be broken and the country can look forward to the economic advancement.
Weaknesses of the Theory of Balanced Growth
The Theory of Balanced Growth suffers from inherent weaknesses. Singer has expressed his doubts about the practicability of balanced growth doctrine. According to him, if underdeveloped countries are to launch a large investment package in industries without paying much attention to agriculture, they are bound to run into difficulties.
To avoid food and raw material shortage, the big push in industry will have to be accompanied by a big push in agriculture as well. But when we think of such a large and varied package of industrial investment and investment in agriculture at the same time, it creates serious doubts about the capacity of the underdeveloped countries to follow the path of balanced growth.
As he says, “The resources required for carrying out the policy of balanced growth are of such order of magnitude that a country disposing of such resources would infact not be underdeveloped.”
In underdeveloped countries there is an acute shortage of capital and other resources. To suggest that they can move on the path of economic progress by massive investment simultaneously in all sectors appears totally impractical. Infact, the balanced growth doctrine requires huge amounts of precisely these resources whose limited availability is the basic characteristic of the underdeveloped economies.