Unbalanced Growth Theory of Albert Hirschman

Introduction

Albert Hirschman's prominent work "The Strategy of Economic Development" (1958) based on his experiences in Colombia during the 1950s, illustrates the concept of unbalanced growth in development. Hirschman's perspective on development as a series of disequilibria has set a significant research agenda, albeit somewhat neglected today. Despite the evolution of development challenges since the 1950s, concepts like induced investment, complementarities, and linkages remain crucial in contemporary development patterns, especially for emerging economies. Hirschman's later works, including "Journeys toward Progress" and "Development Projects Observed," form a trilogy aiming to celebrate the epic adventure of development. While Hirschman ventured into various topics beyond development economics, his insights continue to resonate, particularly in understanding the dynamics of unbalanced growth and its contrast with the balanced growth doctrine. Hirschman's perspectives suggest potential avenues for further research, such as exploring market formation and consumption complementarities within developing economies, building upon Hirschman's focus on investment decisions and complementarities. He believed that the process of growth is intrinsically unbalanced, unlike Gunnar Myrdal’s Theory.

 

“Unbalanced growth is a better development strategy to concentrate available resources on types of investment, which help to make the economic system more elastic, more capable of expansion under the stimulus of the expanded market and expanding demand”- H.W. Singer.

 

Hirschman and Development Economics

Albert Hirschman occupies a unique position in the realm of development economics, straddling the boundaries between economic and political theory. Hirschman's exploration of the perception of obstacles, inspired by his encounter with François Perroux, and his reflection on the significance of "dangerous thoughts" drawn from Machiavelli's works, underscore the depth of his intellectual curiosity. In "The Strategy of Economic Development" (1958), Hirschman introduced the concept of unbalanced growth, which marked a seminal contribution to the field during its ascendancy in the post-World War II era. However, Paul Krugman attributes the decline of this "high development theory" to the profession's shift towards model building, rendering Hirschman's and Myrdal's theories less palatable to economists who favored formal models. Krugman's emphasis on Rosenstein-Rodan's Big Push argument as the quintessential high development model contrasts sharply with Hirschman's critique of the balanced growth doctrine, revealing divergent perspectives within the field.

 

Hirschman's Strategy:

• Focuses on creating imbalances in resource allocation for development.
• Prioritizes investment in strategic sectors with limited resources in developing economies.
• This strategy aims to leverage limited resources strategically to trigger a chain reaction of growth across interconnected industries.
• It contrasts with the balanced growth theory, which emphasizes proportional development across all sectors.

 

Benefits of Unbalanced Growth:

External Economies: Growth in one sector (A) creates positive spillover effects for others (B, C etc.) This can be through increased demand or reduced production costs. Essentially, growth in A creates favorable conditions for B and C to grow as well.

Complementarities: Growth in A creates demand for products from B and C, and may even lower their production costs due to technical synergies. This fosters the growth of interconnected industries.

 

 EXPLANATION OF THE THEORY:

1. Deliberate Imbalances for Accelerated Development: Hirschman proposes deliberately creating imbalances in underdeveloped countries to accelerate economic development. Rather than pursuing simultaneous development across all sectors, he advocates focusing on one or two strategic industries through substantial investment.
2. Capital Goods Industries Priority: Hirschman prioritizes capital goods industries over consumer goods industries, asserting that investment in the former drives overall economic development, subsequently leading to the growth of consumer goods industries.
3. Maintaining Tensions and Disequilibria: Hirschman emphasizes the importance of maintaining tensions, disproportions, and disequilibria within the economy to sustain its forward momentum. He views these conditions as necessary for continuous economic progress.

Process of Unbalanced Growth:

1. Breaking Low-Level Equilibrium: Unbalanced growth serves as a strategy to break the low-level equilibrium characteristic of underdeveloped countries. By deliberately introducing imbalances, countries can disrupt the equilibrium and stimulate economic growth.
2. Incentives for Inventions and Innovations: Shortages resulting from unbalanced growth create incentives for inventions and innovations, driving intense economic activity and progress.

 

 UNBALANCING THE ECONOMY: Types of Investment.

Development through Unbalancing: Hirschman asserts that development can only occur through deliberately unbalancing the economy. This is achieved by investing in either social overhead capital (SOC) or directly productive activities (DPA).

1.  Excess Investment in Social Overhead Capital (SOC):

·         SOC encompasses essential services without which primary, secondary, and tertiary sectors cannot function effectively. This includes investments in education, public health, irrigation, electricity, etc.

·         Investment in SOC creates external economies that positively influence private investment in DPA. Such investment, driven by profit motives, is termed autonomous investment.

For example, investment in cheap electricity can foster the development of cottage and small-scale industries, while irrigation facilities can boost agricultural productivity. An imbalance in SOC leads to subsequent investment in DPA.

Unbalancing with SOC:

• The government should initially invest more in SOC to stimulate the economy, as it generates external economies that attract private investment in DPA.
• Investment in SOC sets in motion a chain reaction, prompting subsequent investment in DPA by private investors seeking profits.

2.  Excess Investment in Directly Productive Activities (DPA):

·         DPA refers to investments that directly increase the supply of goods and services, typically undertaken by the private sector to maximize profits.

·         Investors prioritize projects with high-profit potential, leading to an inducement of investment in DPA.

Unbalancing with DPA:

• If investment is prioritized in DPA, private investors may encounter challenges due to the absence of necessary SOC.
• Industries may face constraints in expansion without essential SOC facilities, leading to the need for political pressure to secure them.
• Excess DPA investment is characterized by pressure and strain, while excess SOC investment offers a smoother path with pressure relief.

 

 PATH OF DEVELOPMENT:

Growth Process: The growth process can be explained in two ways:

1. Development via Excess Capacity of SOC:

SOC-Driven Development:

• Increased investment in SOC (infrastructure) creates excess capacity (lower costs) in transportation, power, etc.
• Lower infrastructure costs encourage investment in Directly Productive Activities (DPA) like manufacturing or agriculture.

Development Path:

• The economy follows a path like DEGHK:
• DE: Increase in SOC investment.
• EF: Induced increase in DPA investment due to cheaper infrastructure.
• FG: Continued DPA investment until a new equilibrium is reached at G.
• Point G represents a higher level of output (indicated by the equal-product curve BB).

 

2. Development via Shortages of SOC:

DPA-Driven Development:

• Investment starts in Directly Productive Activities (DPA), leading to increased production.
• Rising production puts pressure on existing Social Overhead Capital (SOC) infrastructure, causing bottlenecks and higher costs.

Development Path:

• The economy follows a path like DFGJK:
• DF: Increase in DPA investment.
• FG: Production increase strains SOC, leading to a realization of the need for more infrastructure investment.
• GE: Increase in SOC investment to address bottlenecks.
• Point G represents a new equilibrium on the equi-product curve BB (higher output than starting point D).
• Further investment in DPA from G to J creates a new pressure for SOC investment.
• JH: Increased SOC investment to accommodate further DPA growth.
• Point K represents a new, even higher equilibrium on a higher iso-product curve CC (highest output).

 

 BACKWARD AND FORWARD LINKAGE:

Identifying activities to create imbalances in the economy requires an understanding of the inter-linkages across different sectors. Hirschman categorizes these linkages into two types: backward linkages and forward linkages.

1. Backward Linkages:

·         Backward linkages occur when the growth of certain industries stimulates the growth of those supplying raw materials or inputs.

·         For instance, establishing a steel plant would increase the demand for steel scrap, coal, and other related goods. Consequently, the production of these goods would also increase to meet the growing demand.

2. Forward Linkages:

·        Forward linkages occur when the growth of certain industries leads to the growth of the downstream industries that utilize their products as inputs.

·        For example, the expansion of the steel industry would encourage the growth of industries manufacturing machinery and tools that use steel as their basic input.

 

 Features of the Theory of Unbalanced Growth:

Focus on Key Sectors: Investment is prioritized in strategic sectors with the potential to drive growth across the economy.

Inducement and Pressure: Initial investments create imbalances that "induce" or put "pressure" on other sectors to invest and catch up.

Big Push: Supports the idea of a substantial initial investment to break out of stagnation.

Real-World Relevance: Based on practical observations of development patterns.

Importance of Public Sector: Recognizes the critical role of public investment in building Social Overhead Capital (SOC) like infrastructure.

This effectively summarizes the core principles of unbalanced growth. Here are some additional points you might consider:

• Linkages: Hirschman emphasizes the importance of linkages (backward and forward) between sectors to maximize the impact of unbalanced growth strategies.
• Disequilibrium vs. Equilibrium: Unbalanced growth thrives on creating imbalances, contrasting with balanced growth models that aim for equilibrium across all sectors.
• Specificity: The theory doesn't prescribe a single "best" sector for investment, but advocates for a strategic selection based on linkages and potential for growth inducement.

 

 Merit of the Theory of Unbalanced Growth:

Realism: Acknowledges resource limitations in developing economies and advocates for strategic allocation.

Focus on Basic Industries: Prioritizes investment in foundational industries with a ripple effect on other sectors.

Economies of Scale: Encourages large-scale production in key industries, leading to cost efficiencies.

Innovation: The pressure created by imbalances can stimulate new inventions and technological advancements.

Self-Reliance: Promotes development based on a country's own resources and capabilities.

Economic Surplus: Emphasis on capital goods industries can lead to a higher economic surplus for further investment.

Multiplier Effect: The strategy has the potential to create a multiplier effect, boosting income and employment.

 

 Criticism of the Unbalanced Theory of Growth:

Inflationary Pressures: Focus on heavy industries can lead to shortages of consumer goods, pushing up prices.

Resource Misallocation: Concentrated investment might neglect agriculture or other crucial sectors, leading to inefficiencies.

Obstacles in Establishing Key Industries: The theory doesn't adequately address the challenges of initiating large-scale industrial projects.

Increased Uncertainty: Heavy reliance on external trade and foreign aid can introduce uncertainty into the development process.

Unnecessary Imbalances: Critics argue that imbalances might occur naturally due to indivisibility and market forces.

Unclear Degree of Imbalance: The theory doesn't provide guidance on the optimal level or target sectors for creating imbalances.

Limited Data on Linkages: Emphasis on maximizing linkage effects might not be fully supported by empirical data in developing economies.

Assumption of Basic Facilities: The theory might not account for the lack of basic resources, infrastructure, and expertise in some developing countries.

 

 CONCLUDING REMARKS:

Beyond Balanced Growth: Hirschman's theory of development as a chain of disequilibria offers a departure from the traditional model of balanced growth. There is a need to further explore and understand the implications of this alternative framework for development theory and practice.

Market Formation and Development: The relationship between investment and the expansion of domestic markets is crucial in today's context of transformation in emerging economies. Research should delve into consumption complementarities, evolving consumption patterns, and the emergence of new markets to grasp the dynamics of development.

Development Trends and Globalization: With globalization affecting virtually every corner of the world, the distinction between developed and undeveloped regions becomes blurred. A new research agenda should focus on the interaction between development and underdevelopment, considering the complexities brought about by globalization.

Revisiting the Concept of Dependency: Hirschman's perspective does not extensively address the concept of dependency, which remains relevant in today's globalized world. There is a need to reevaluate and integrate the concept of dependency into development discourse, considering its implications for contemporary development challenges.

In essence, Hirschman's framework provides a rich foundation for further exploration and research into the complexities of development in a rapidly changing global landscape. By embracing the dynamics of disequilibria and market formation, researchers can uncover new insights and develop innovative strategies to address the multifaceted challenges of development.