What is the Theory of Unbalanced Growth?

Prof. Hirschman, the leading exponent of the theory of unbalanced growth argues that a deliberate unbalancing of the economy in accordance with predesigned strategy is the best way to achieve economic growth. “An ideal situation obtains when one disequilibrium calls forth a development move which in turn leads to. a similar disequilibrium and soon ad-infinitum”.

He observes that development has proceeded in this way with “growth being communicated from the leading sectors of the economy to the followers, from one industry to another, from one firm to another.” Development process is a chain of disequilibrium that must be kept alive and the task of development policy is to maintain tension, disproportions and disequilibria.

Hirschman’s theory of unbalanced growth is based on the following propositions:

(a) That technical complementarity is found among the various industries but in the case of some of them the degree of complementarity is more than the other. Therefore, the programme for economic development should aim at the establishment of those industries where these complementarities happen to be the greatest.

(b) That a simultaneous investment in a number of complementary industries according to the programme of balanced growth may achieve a once for all increase in national income. But after this, the economy will become stabilised at a higher level without any movement forward.

The objective of development is not only to achieve a once for all increase in national income, rather this process of income propogation must continue year after year. In order to see that the development process moves on continuously, it is necessary to create and maintain deliberate imbalances in the economy. To create these imbalances Hirschman suggests investment either in Social Overhead Capital (SOC) or in Directly Productive Activities (DPA).

Social Overhead Capital is defined as “comprising all those basic services without which primary, secondary and tertiary productive activities cannot function”. This includes investment in education, public health, transport and communications, irrigation, drainage etc.

Large investment in SOC will encourage investment in DPA by providing cheap inputs to agriculture and industry e.g., cheap electricity and power supply may encourage the development of industries both large and small and may stimulate activity in other sectors as well. To quote Hirschman “Investment in SOC is advocated not because of its direct effect on final output, but because it permits and infact invites DPA to come in some SOC investment as a prerequisite of DPA investment.”

Imbalances in the economy can also be created by investment in directly productive activities such as investment in manufacturing industries and constructional activities. Expansion in investment in DPA without the corresponding expansion in SOC will lead to increase in cost of production in view of inadequate availability of overhead facilities.

In such a situation, pressures are likely to be exerted and the government may step in and undertake investment in SOC for creating the necessary infrastructure which would lead to an all-round development of the economy.

The sequence of development from SOC to DPA is known as development via excess capacity. The second sequence viz from DPA to SOC is called development via shortages. Development via excess capacity of SOC is more continuous and smooth than development via shortages of SOC. According to Hirschman, “development via shortages is an instance of disorderly compulsive sequence while that with excess SOC capacity is essentially permissive.”

Every investment project has both forward linkages (it may encourage investment in subsequent stage of production) and backward linkages (it may encourage investment in earlier stages of production) and the task of development policy is to find out projects with the maximum total linkage. Hirschman has worked out the forward and the backward linkage in case of number of industries and on the basis of that, the maximum linkage exists in the case of intermediate manufacturing industries. Therefore, if investment is made in such industries, it is bound to affect the demand and supply positions in other sectors of the economy and thus leading to their expansion as well.