Hirschmans strategy of unbalance

Hirschman’s strategy of unbalance

The doctrine of unbalanced growth was propounded by Hirschman in a systematic manner. The economists like Singer, Kindleberger, Streeten etc have also expressed views in favour of this theory. Considering the limited capital and other resources possessed by a country, investment should be made in a few selected sectors. The returns accruing from them should then be ploughed-in to develop the other sectors. Hirschman opined that the theory of balanced growth can be pursued only by developed countries and if a country were willing to apply the doctrine of balanced growth, it would not be underdeveloped in the first place. He advocated unbalanced growth on the grounds of shortages of capital, capital goods, skilled persons and essential raw materials. Hirschman regards balanced growth unattainable and undesirable.

Some theorists have advocated a strategy of selective investment as the engine of growth in developing countries. Hirschman promulgated the idea of making unbalanced investments in economic sectors to complement the imbalances that already exist within the economy of a nation. Hirschman argued that LDCs do not have access to build a balanced big-push investment strategy. Investments should be made instead in strategically selected economic areas in order to provide growth in other sectors through backward and forward linkages. Backward linkages spur new linkages in input industries while forward linkages do so in those sectors that buy the output of the selected industry. Thus in Hirschman’s scheme, careful analysis must be made of the situation in each country as to what investment constitutes the best means to reach an ultimate balance among all investment sectors.

Forward and Backward Linkages

Creating imbalances is the prerequisite of economic growth. However, the main question is to identify the activities in which to create imbalances. This necessitates the knowledge of inter-linkages across different sectors of the economy. Hirschman classifies these linkages as forward and backward linkages.

Backward Linkages: The growth of a set of industries stimulates the growth of those industries which supply raw materials Eg. Setting up a steel plant would increase demand for steel scrap and coal thus increasing the production of these commodities.

Forward Linkages: refer to growth of certain industries which utilize the output of the proposed activity. For example, expansion of steel industries would encourage industries making machine tools etc. which use steel as their basic input.

Features of the Theory of Unbalanced Growth

1. To accelerate the process of growth, investments should be made in key sectors of the economy.

2. It is the inducement or pressure generated by the initial investment that calls for subsequent investment in other activities.

3. The theory corroborates the hypothesis of ‘Big Push’.

4. The theory is based on real life observations.

5. The theory recognizes the importance of public sector.

Hirschman bases his theory on the argument that the ability to invest is one serious bottleneck in underdeveloped countries and also that the ability to invest depends mainly on the investment that has already been made.

Therefore, he contends that deliberate unbalancing the economy according to a pre-designed strategy is the best way to achieve economic growth in an underdeveloped country. However, the investments have to be in strategically selected industries or sectors of the economy which will lead to new investment opportunities and hence further economic development.

He regards development as a chain of disequilibria that must keep alive rather than eliminate the disequilibria. When investments are made in selected sectors, they appropriate external economies created by previous investments and also create external economies that can be exploited by new sectors. There are certain sectors that appropriate more external economies than they create.

Such investments/ sectors are called convergent series of investments. There are other sectors which create more external economies than they appropriate. These are called divergent series of investments. A good development policy should aim at prevention of convergent series of investment and promotion of divergent series of investment. Development can take place only by balancing the economy which can be done by

1. Investing in social overhead capital (SOC)
2. Investing in directly productive activities (DPA)

SOC as a Means of Unbalancing the Economy Social overhead capitals are those services which are essential for the functioning of primary, secondary and tertiary productive activities eg. Investments in education, public health, communications, transportation, light, water, power, irrigation, drainage etc. Investments in these sectors today will encourage private investments in DPA later. For instance cheap supply of electric power may encourage establishment of new industries. Green revolution in agriculture happened when government subsidized power and chemical fertilizers and plant protection chemicals. Thus the SOC approach to unbalance the economy stimulates investments in DPA.

DPA as a Means of Unbalancing the Economy

Another way of creating unbalance in the economy is through DPA. If DPA investments are undertaken first, the shortage of SOC facilities is likely to raise the production cost. With the production prices going high, in course of time, political pressures might stimulate investment in SOC also. Thus profit expectations generate the sequence of investment from SOC to DPA and political pressures from DPA to SOC.

Linkages: The problem with Hirschman’s theory lies in identifying the kind of imbalance that is likely to be most effective. Any investment may have forward or backward linkage effects. Forward linkage effects encourage investment in subsequent stages of production and backward linkages affects in earlier stages of production. Development should aim at discovering projects with the largest total linkages. According to Hirschman, iron and steel industry has the highest combined linkage score but industrial development cannot start in every country with an iron and steel industry due to lack of linkages in developing countries.

Last Industry First: Hirschman advocates the setting up of last stage industries first. He suggests that a developing country can begin with the manufacture of durable consumer goods at the final stages of production. The country can import converting, assembling or mixing plants and can produce finished consumer goods that it was earlier importing. The country may further move on to intermediate goods and machines through backward linkage effects. Hence, when the demand for import replacing commodities increases, it justifies some domestic last stage production.

Thus when demand of a product reaches a certain threshold it is advantageous to manufacture the product at home. So long as the threshold is being reached, it pays to import the product. When the threshold is reached, Hirschman suggests subsidies or protection to import replacing industries. Hirschman calls last stage industries as import enclave industries. There are also export enclave industries which produce products only for exports and in LDCs the export enclave industries are generally those engaged in minerals. The exports of LDCs do not expand and fail to create forward linkage effects. Hrischman suggests export promotion via import substitution which is the only way of achieving industrialization.

Limitations of Hirschman’s Theory

There are certain limitations to the doctrine of unbalanced growth which are listed as follows:

1. Lack of clarity on the composition, direction and timing of unbalanced growth: Paul Streeten criticized the theory of unbalanced growth stating that in this theory, the crucial question is not whether or not to create imbalance but what is the optimum degree of imbalance, where and how much to imbalance so as to accelerate the growth.

2. Neglects resistance: Streeten also criticizes the theory stating that Hrishman neglects the resistance created due to imbalances. When there is an imbalance in the economy, the business attitudes change due to shortages and tensions, and there is lot of hostility and opposition from the existing institutions where the imbalance has not favoured.

3. Beyond the capabilities of underdeveloped countries: It is also argued that the pressures and tensions caused due to induced imbalances may actually hamper the process of development.

4. Lack of basic facilities: Even if the imbalance is to favour a certain sector of the economy, the developing countries may lack in basic facilities like power and transport and even an adequate domestic or foreign market for the products produced by these sectors.

5. Lack of factor mobility: Imbalanced growth is possible only where there is internal flexibility to move the resources from one sector to another which is not a possibility in undeveloped countries.

6. Emergence of inflationary pressures: When large amount of investments are being done in certain sectors of the economy, it raises the income and thus demand for consumer goods in relation to their supply. This inflationary rise in prices becomes difficult to control in underdeveloped countries.

7. Linkage effects not based on data: Hrishman’s analysis of the linkage effects is not backed by data pertaining to an underdeveloped country where social overhead facilities are not fully developed.

8. Too much emphasis on investment decisions: Hrishman in his theory lays too much emphasis on investment decisions as compared to other equally important decisions needed for development like administrative, managerial and policy decisions.

Leave a Reply