Theory of Unbalanced Growth

Introduction

• Topic of Development Economics.
• Difference from Balanced Growth Theory (previous video by the speaker).
• Key figures discussed: Rosenstein-Rodan, NERCS, Lewis.

Basic Concept

• Definition: Investment in important sectors leads to growth in other sectors through pressure and linkage effects.
• Example: Development of infrastructure encourages industries to set up in those areas.

Key Proponents

• Influenced by economists:
  • Hirschman
  • Rostow
  • Flaming

Main Ideas of the Theory

• Investment should focus on strategic sectors rather than all sectors simultaneously.
• Linkage Effect: Investment in key sectors will stimulate growth in other sectors through indirect benefits.
• Development as a chain of disequilibria:
  • Development requires maintaining tensions and disproportions in the economy.

Definitions

• Disequilibrium: Necessary for development; must be maintained to allow growth.
• External Economies: Growth in one industry stimulates growth in others.
• Complementarity: Growth of one industry creates demand for products from other industries.

Factors Influencing Growth

1. External Economies
   • One sector's growth creates opportunities in related sectors.
2. Complementarity
   • Increased output in one industry reduces costs and increases demand in others.

Types of Investment

• Social Overhead Capital (SOC):
  • Infrastructure development (roads, irrigation, power).
  • Investment generates more economies than the projects themselves.
• Direct Productive Activities (DPA):
  • Investments that directly produce goods and services.
  • Conducted by private entrepreneurs.

Investment Strategy

• In underdeveloped countries, resources are scarce; investment should focus on either SOC or DPA.
• Development via SOC:
  • Investment in infrastructure stimulates DPA.
  • E.g., availability of cheap electricity encourages small industries.
• Development via DPA:
  • Direct investment in industries pressures SOC to improve.
  • E.g., new industries increase demand for infrastructure.

Diagram Representation

• Equiproduct Curves:
  • Graphical representation of combinations of SOC and DPA.
  • Higher curves represent higher levels of output.

Linkages

• Backward Linkage:
  • Growth of industries supplying raw materials stimulates related industries.
• Forward Linkage:
  • Industries using produced goods increase demand for raw materials.

Features of the Theory

• Emphasizes investment in key sectors for accelerated growth.
• Based on inducement and pressure principles.
• Recognizes the role of public sector in SOC.

Merits of the Theory

• Realism: Focused on appropriate use of scarce resources.
• Importance of Basic Industries: Encourages growth of consumer goods by supporting basic industries.
• Economies of Scale: Large-scale production benefits from strategic investments.
• Innovation: Generates pressure for new inventions and innovations.
• Economic Surplus: Increases overall surplus through capital goods emphasis.
• Short Term Strategy: Effective for short-term production and employment increases.

Criticisms of the Theory

• Inflation Risks: Emphasizes industrialization at the risk of neglecting agriculture.
• Resource Wastage: Concentrating on a few industries may misuse resources.
• Lack of Consideration for Obstacles: Doesn't address difficulties in establishing key industries.
• External Dependencies: Relies on trade and foreign aid which may not be reliable.
• Neglect of Existing Imbalances: Underdeveloped countries already have inherent imbalances.
• Unspecified Degree of Unbalance: Doesn't clarify how much imbalance is necessary.

Conclusion

• The theory of unbalanced growth provides insights into economic development strategies but faces several criticisms regarding its assumptions and practical implementation.
• Next topic: Comparison between balanced growth and unbalanced growth.