Balanced Growth Theory

Saturday, May 28, 2011 9:08 AM

The balanced growth theory states that all industries are growing in the whole country or region at the same time. Also referred to as the "Big Push". It involves a simultaneous expansion of a large number of industries in all sectors of the economy. Its argument is "as a large number of industries develop simultaneously, they each generate a market for one another". If a large number of different manufacturing industries are created simultaneously, then markets are created for additional output or products. It is an extension of Say's Law: the demand for one product is generated by the production of others; or "supply creates demand". Note Say's Law is also called the Say's law of free markets

It is however argued that free markets are unable to deliver balanced growth because entrepreneurs: 1. Do not expect a market for additional output which is risking resources when sales are uncertain. 1. Require skilled workers to work in the additional markets but are not willing to hire and train unskilled staff because the trained staff may leave for other markets. 1. Do not anticipate the positive profit generated by the investment of other firms engaged in the expansion. 1. They may not be able to raise enough finances for those projects. Governments do not also agree that the balanced growth theory is possible because: 1. This kind of balanced growth requires serious planning and intervention by the government. They argue that it does not have the extra time and resources to do the planning. 1. They have no finances to train enough labor to work in these industries. 1. They dont have the time to plan and organize for the large scale investment program of such industries. 1. They instead will nationalize strategic industries and undertake infrastructure investments. 1. They will protect infant industries through tariffs and quota system policies. Some observers have also refused this theory because: 1. The strategy is beyond the resources for 3rd world countries. 1. Government planning results in government failure. Government intervention fails to bring about an efficient allocation of resources. This is possible because the planning process creates a beurocracy, most beurocratic plans do not end well.

1. LDCs(Lowly Developed Countries) policies focusing on import substitution, agricultural self sufficiency and state control of production yield poor growth.