balanced_and_unbalanced_growth_theory_ppt.pptx

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Chapter Two
Models/Strategies of Economic Growth
By
Argachew Bochena(BSc.MBA, MA, PhD)
Argachew Bochena(MBA, MA PhD)

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INTRODUCTION
The development process in underdeveloped countries is very much
hindered by vicious circles of poverty.
By vicious circles, Nurkse means a circular assemblage of forces
tending to act and react upon one another in such a way as to keep a
country in a state of poverty.
There are two theories concerning strategy of economic development:
1.Theory of Balanced Growth: According to Rodan, Nurkse and
Lewis, these economies should make simultaneous investment in all
sectors to achieve balance growth.
2.Theory of Unbalanced Growth :According to Hirschman, Singer,
Fleming. These economies should create a situation of unbalance by
making large investment in anyone sector.

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Definition
 According to Lewis
 “Balanced growth means that all sectors of economy
should grow simultaneously so as to keep a proper
balance between industry and agriculture and between
production for home consumption and production for
exports. The truth is that all sectors should be expanded
simultaneously.”
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 Economic interdependence
 Thinly distribution of the resources among d/t sectors
 encourages equity
 advocates capital widening

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Basis of Theory of Balanced Growth
1. Supply Side
2. Demand Side

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Different Views Regarding Balanced Growth
1. Explanation of Nurkse Theory of Balanced Growth.
He believes that if countries adopt this strategy:
• Total savings and capital accumulation rise
• Backward and forward linkages are fostered. Balanced
growth can be managed with less resource. It heavily
depends on the mobilization of local resources.
• Balanced growth strategy breaks the vicious circle of
poverty; because it aims at benefiting the largest
section of society.
• Development finance is fairly distributed across sectors
and regions. This can lead to widespread employment
and spread of the fruits of development.
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Argachew Bochena(MBA, MA PhD) 7
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Nurkse’s Theory of Balance Growth..
 According to Nurkse in the development of underdeveloped
countries the greatest obstacle is Vicious Circle of Poverty.
 The Vicious Circle shows that income is low in
underdeveloped countries. Because of low income, saving is
low.
 Therefore, investment and output is low. Low output means
low income

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Lewis has given the following two
arguments in favour of balanced
growth:
In the absence of balanced growth,
price in one sector may be more than
the prices in others.
When the economy grows then several
bottlenecks appear in different sectors.
2. Explanation of Lewis’s Theory
of Balanced Growth

08/21/2025 Argachew Bochena(MBA, MA Ph
D)
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Balance among Different Sectors
 Balance between Agriculture and Industries
 Balance between Human and Physical Capital
 Balance between Domestic Trade and Foreign
Trade
 Role of Government in the Balance Growth

08/21/2025 Argachew Bochena(MBA, MA Ph
D)
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Essential conditions for BG
 The following conditions are essential for achieving
balanced growth(BG) among different sectors:
 State intervention
 Formulation and implementation of plans
 Coordination among d/t departments of the government
 Public cooperation

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Advantage of Theory of Balanced Growth
Large size of Market
External Economies
Balanced regional development
Better Division of Labour
Better Use of Capital
Encouragement of Private Enterprises
Breaking of Vicious Circle of Poverty
Creation of social overhead capital
Innovation and researches

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Criticism of Theory of Balanced Growth
This theory Criticized by Fleming, Singer,
Hirschman and Kurihara.
 Unrealistic or Ignores Scarcity of Resources
 Ignores the Need of Planning
 External Diseconomies
 Development from Scratch
 Not a Theory of Development
 Same Policy for Developed and Underdeveloped
countries
 Not supported by History
 Scarcity of Factors of Production
 Inflation
 Contrary to the Theory of Comparative Costs
08/21/2025 Argachew Bochena(MBA, MA PhD)

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Theory of Unbalanced Growth
 Hirschman, Rostow, Fleming, Singer have propounded
the concept of unbalanced growth as a strategy of
development for the underdeveloped nations.
 The theory focuses the need for investment in strategic
sectors of the economy, rather than in the all sectors
simultaneously.
 Unbalanced growth is a situation in which the
various sectors of a given economy are not growing at
a rate similar to one another

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Specific sectors of the economy will be growing at a
rapid rate, while other sectors are either stagnant or
experiencing a significantly reduced rate of growth.
When economic growth patterns such as unbalanced
growth appear, the phenomenon usually indicates that
major shifts in the overall economy are about to take
place.

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Explanation of the Theory of Unbalanced Growth
Hirschman states that creating imbalances in the system is
the best strategy of growth to maintain tension,
disproportions and disequilibria.
 Strategic sectors of the economy should get priority in
matters of investment based on comparative advantages
Real and monetary resources are the basis for decision
Strategic locations and cost advantage
Real linkages b/n sectors and industries will be fostered

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Feature of the Theory of Unbalanced
Growth
 Investment should first be made in the
key sectors of the economy.
 Based on the principle of inducement &
pressures.
 Big Push
 Real life observations
 Significance of the Public sector with
regard to SOC activities

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The following are the advantages of UBG:
 Creation of external economies
 Self-reliance-
 Generation of economic surplus
 Skill Formation
 Short-term strategy
 Practical policy
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Merits of the Theory of Unbalanced Growth

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Criticism of the Theory of Unbalanced
Growth
According to Paul Streeten
 Inflation
 Wastage of Resources
 No Mention of Obstacles
 Increase in Uncertainty
 Unbalance is not Necessary
 Neglect of Degree of Unbalance
 Lack of basic Facilities
 Disadvantages of Localization

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Balanced Growth Theory Vs.
Unbalanced Growth Theory
Dissimilarities
Unbalanced Growth Theory:
1. Focus is on the
comparative advantages
of sectors
2. The process of growth
through Imbalances in
the system.
Balanced Growth Theory:
1. Simultaneous growth of
entire sectors of the
economy.
2. Seeks to accelerate the
process of growth through
simultaneous investment
across all sectors of the
economy

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3. Requires lot of capital
investment right from
the beginning of growth
process.
4. A long period of
strategy of growth
5. Size of the market is the
principal limiting factor.
3. Requires relatively much
less investment.
4. A Short period strategy of
growth.
5. It is decision making and
entrepreneurial skill
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Similarities
1. Ignore the Role of the Government
2. Inelastic Supply of Factors

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Thank you for
attention!
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08/21/2025 Argachew Bochena(MBA, MA PhD)

balanced_and_unbalanced_growth_theory_ppt.pptx

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