Balanced vs Unbalanced Growth

4168 Words Mar 21st, 2013 17 Pages
Balanced versus Unbalanced Growth: Nature and Limitations. (68)
Define the terms in question, consider the underlying economic logic of each approach, and identify the major criticisms of either. Can a case be made for a strategy based on one rather than the other?
After the Second World War, theorists began to analyse how less economically developed regions could become more developed. The most notable original theories of development were of balanced and unbalanced growth. These strategies posited two different approaches as to how a developing economy can become developed. Ragnar Nurkse and Paul Rosenstein-Redan were the pioneers of the balanced growth theory which hypothesised that in order for development to occur, the government
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As a result, following market forces, there will be an increase in price in the industries who cannot meet demand. To prevent this situation from arising, investment has to be spread out amongst different industries. The final indivisibility is that in the supply of savings. Domestic savings are vital in a developing economy where high investment is needed. In developing countries however, there is a low marginal propensity to save as the population are likely to have low incomes. Thus higher investment is needed to boost incomes and increase the marginal propensity to save. These indivisibilities have provided the force behind the theory of balanced growth put forward by Ragnar Nurkse.
Nurkse favoured attaining balanced growth in both the agricultural sector and the industrial sector of the economy# theorising that both of these sectors would complement each other by providing the markets for each other and also supplying the raw materials for the growth and development of the other. He posited that investment was limited to the size of the market, and in developing countries the market needed to be expanded in order to achieve investment and eventually economic growth. Because underdeveloped countries lack the necessary purchasing power,# the demand for commodities and capital is low. Entrepreneurs would