Ragnar Nurkse's balanced growth theory. The balanced growth theory is an economic theory pioneered by the economist Ragnar Nurkse (1. The theory hypothesises that the government of any underdeveloped country needs to make large investments in a number of industries simultaneously.
What is the Theory of Unbalanced Growth? That a simultaneous investment in a number of complementary industries according to the programme of balanced growth. Having critically examined the comparative analysis of balanced and unbalanced growth strategies. Unbalanced Growth for Economic Development. 12 Advantages of the Unbalanced Growth Theory. Apart from this, Nurkse has been nicknamed an export pessimist, as he feels that the finances to make investments in underdeveloped countries must arise from their own domestic territory. Ragnar Nurkse referenced the work of Allyn A. Young to assert that inducement to invest is limited by the size of the market. If the money income were low, the problem could easily be overcome by expanding the money supply; however, since the meaning in this context is real income, expanding the supply of money will only generate inflationary pressure. Neither real output nor real investment will rise. It is to be noted that a low purchasing power means that domestic demand for commodities is low. ![]() Balanced growth In macroeconomics. A contribution to the theory of economic growth. Quarterly Journal of Economics 70, 65-94. Economic growth and capital accumulation. Balanced Scorecard giving us deeper and broader insights into its power and potential. During the next 15 years, as it was adopted by thousands of private, public. Apart from encompassing consumer goods and services, this includes the demand for capital as well. The size of the market determines the incentive to invest irrespective of the nature of the economy. For example, if an automobile manufacturer is trying to decide which countries to set up plants in, he will naturally only invest in those countries where the demand is high. Although this may lead to a rise in demand for that entrepreneur's good or service, it does not actually raise the aggregate demand in the economy. The demand merely shifts from one provider to another. In this sense the small domestic market is an obstacle to development generally. Only then can the vicious circle of poverty be broken. He mentioned the following pertinent points about how the size of the market is determined. Determinants of size of market. Theory Of Balanced Growth Pdf To Excel![]() ![]() Money supply. Thus, merely increasing the supply of money will not expand the market but will in fact cause inflationary pressure. Population. This results in low levels of per capita real income. Thus, consumption expenditure is low, and savings are either very low or completely absent. ![]() On the other hand, developed countries have smaller populations than underdeveloped countries but by virtue of high levels of productivity, their per capita real incomes are higher and thus they create a large market for goods and services. Geographical area. In contrast, a country may cover a huge geographical area but its market may still be small. This may occur if a large part of the country is uninhabitable, or if the country suffers from low productivity levels and thus has a low National Income. Transport cost and trade barriers. Nurkse emphasised that tariff duties, exchange controls, import quotas and other non- tariff barriers to trade are major obstacles to promoting international cooperation in exporting and importing. As a result, the amount of capital accumulation remains small. To address this problem, the United Nations produced a report in 1. They suggested that they can expand their markets by forming customs unions with neighbouring countries. Also, they can adopt the system of preferential taxation or even abolish customs duties altogether. The logic was that once customs duties are removed, transport costs will fall. Consequently, prices will fall and thus the demand will rise. However, Nurkse, as an export pessimist, did not agree with this view. However, Nurkse argues that such activities cannot succeed at the macro level to increase a country's aggregate demand level. An increase in productivity (defined as the output per unit input) increases the flow of goods and services in the economy. As a response, consumption also rises. Hence, underdeveloped economies should aim to raise their productivity levels in all sectors of the economy, in particular agriculture and industry. There is a low degree of mechanisation coupled with rain dependence. So while a large proportion of the population (7. Gross Domestic Product may be as low as 4. This can be done if the government provides irrigation facilities, high- yielding variety seeds, pesticides, fertilisers, tractors etc. The positive outcome of this is that farmers earn more income and have a higher purchasing power (real income). Their demand for other products in the economy will rise and this will provide industrialists an incentive to invest in that country. Thus, the size of the market expands and improves the condition of the underdeveloped country. Nurkse is of the opinion that Say's Law of markets operates in underdeveloped countries. Thus, if the money incomes of the people rise while the price level in the economy stays the same, the size of the market will still not expand till the real income and productivity levels rise. Production creates its own demand, and the size of the market depends on the volume of production. In the last analysis, the market can be enlarged only through all- round increase in productivity. Capacity to buy means capacity to produce. The increase in demand for one industry will lead to an increase in demand for another industry due to complementarity of demands. As Say's Law states, supply creates its own demand. In reality, the so- called . The point Nurkse was trying to make was that USA was rich in resource endowment as well as labour force. The labour force had merely migrated from Britain to USA, and thus their level of skills were advanced to begin with. This situation of outward led growth was therefore unique and not replicable by underdeveloped countries. In fact, if such a strategy of financing development from outside the home country is undertaken, it creates a number of problems. This would in turn limit that economy's ability to diversify, especially if natural resources were plundered. This may also create a distorted social structure. People would try to imitate Western consumption habits and thus a balance of payments crisis may develop, along with economic inequality within the population. Another reason exports cannot be promoted is because in all likelihood, an underdeveloped country may only be skilled enough to promote the export of primary goods, say agricultural goods. For Nurkse, then, exports as a means of economic development are completely ruled out. Nurkse believed that the subject of who should promote development does not concern economists. It is an administrative problem. Further, the gestation period of such lumpy investments is usually long and private sector entrepreneurs do not normally undertake such high risks. His main critic was Albert O. Hirschman, the pioneer of the strategy of unbalanced growth. Singer also criticised certain aspects of the theory. Hirschman stressed the fact that underdeveloped economies are called underdeveloped because they face a lack of resources, maybe not natural resources, but resources such as skilled labour and technology. Hirschman also stated that during conditions of slack activity in developed countries, the stock of resources, machines and entrepreneurs are merely unemployed, and are present as idle capacity. So in this situation, simultaneous investment in a large number of sectors is a well- suited policy. The various economic agents are temporarily unemployed and once the inducement to invest starts operating, the slump will be overcome. However, for an underdeveloped economy, where such resources are absent, this principle doesn't fit. However, Keynes stated that Say's Law is not operational in any country because people do not spend their entire income - a fraction of it is saved for future consumption. Thus if the state pumps in large investments into the car industry, for example, it will naturally lead to a rise in the demand for petrol. But if the state makes large scale investments in the coffee sector of a country, the tea sector will suffer. Hans Singer suggested that Nurkse's theory makes dubious assumptions about the underdeveloped economy. So the logical step would be to take on those investment programmes which compliment the existing imbalance in the economy. Clearly, such an investment cannot be a balanced one. If an economy makes the mistake of setting out to make a balanced investment, a new imbalance is likely to appear which will require still another . It entails the series of actions which leads the economy from a stage of infancy to that of maturity. Thus, there is no transformation. They will differ on levels of development, technology and demand patterns. This may create inequality in the country. The Process of Economic Development (3rd Revised ed.). Development economics: from the poverty to the wealth of nations (3, illustrated ed.). Oxford University Press. Problems of Capital Formation in Underdeveloped Countries. New York: Oxford University Press. Handbook of Development Economics, Vol. Development and Planning. University of Michigan: Sarap & Sons. Development Economics. Oxford University Press. Economics Of Development And Planning. Himalaya Publishing House. Working Papers in Technology Governance and Economic Dynamics no. London and New York: Routledge. Introductory Macroeconomic Theory - A Textbook For Class XII. New Delhi: Cambridge University Press India. Published by social. Yale University Press (New Haven, London): 5. Ludwig Von Mises Institute.
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