Ragnar Nurkse's balanced growth theory
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The balanced growth theory is an
Nurkse was in favour of attaining balanced growth in both the industrial and agricultural sectors of the economy.[3] He recognised that the expansion and inter-sectoral balance between agriculture and manufacturing is necessary so that each of these sectors provides a market for the products of the other and in turn, supplies the necessary raw materials for the development and growth of the other.
Nurkse and Paul Rosenstein-Rodan were the pioneers of balanced growth theory and much of how it is understood today dates back to their work.[4]
Nurkse's theory discusses how the poor size of the market in underdeveloped countries perpetuates its underdeveloped state.[5][6] Nurkse has also clarified the various determinants of the market size and puts primary focus on productivity.[3][7] According to him, if the productivity levels rise in a less developed country, its market size will expand and thus it can eventually become a developed economy. 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.[1] No importance should be given to promoting exports.[8]
Size of market and inducement to invest
The size of a market assumes primary importance in the study of what induces investment in a country. Ragnar Nurkse referenced the work of
According to Nurkse, underdeveloped countries lack adequate
The size of the market determines the incentive to invest irrespective of the nature of the economy.
Private entrepreneurs sometimes resort to heavy advertising as a means of attracting buyers for their products. 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.[5] Clearly, this is not a long-term solution.
Ragnar Nurkse concluded,
"The limited size of the domestic market in a low income country can thus constitute an obstacle to the application of capital by any individual firm or industry working for the market. In this sense the small domestic market is an obstacle to development generally."[3]
Determinants of size of market
According to Nurkse, expanding the size of the market is crucial to increasing the inducement to invest. 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:
Money supply
Nurkse emphasised that
Population
Nurkse argued against the notion that a large population implies a large market.[5] Though underdeveloped countries have a large population, their levels of productivity are low. 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
Nurkse also refuted the claim that if a country's geographical area is large, the size of its market also ought to be large.
Transport cost and trade barriers
The notion that transport costs and trade barriers hinder the expansion of the market is age-old. Nurkse emphasised that
Sales promotion
Often, it is true that a company's private endeavour to increase the demand for its products succeeds due to the extensive use of advertisement and other sales promotion technique. However, Nurkse argues that such activities cannot succeed at the macro level to increase a country's aggregate demand level.[7] He calls this the "macroeconomic paradox".[7]
Productivity
Nurkse stressed productivity as the primary determinant of the size of the market. 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.[3]
For example, in most underdeveloped economies, the technology used to carry out agricultural activities is backward. There is a low degree of mechanisation coupled with rain dependence. So while a large proportion of the population (70-80%) may be actively employed in the agriculture sector, the contribution to the Gross Domestic Product may be as low as 40%.[7] This points to the need to increase output per unit input and output per head. 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
"In underdeveloped areas there is generally no '
deflationary gap' through excessive savings. 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."[3]
Export pessimism
Citing the limited size of the market as the main impediment in economic growth, Nurkse reasons that an increase in productivity can create a
However, Nurkse clarified that the finance for this development must arise to as large an extent as possible from the underdeveloped country itself i.e. domestically.[
In fact, if such a strategy of financing development from outside the home country is undertaken, it creates a number of problems.[
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.
Thus, for a large-scale development to be feasible, the requisite capital must be generated from within the country itself, and not through export surplus or foreign investment.[6] Only then can productivity increase and lead to increasing returns to scale and eventually create virtuous circles of growth.[8]
Role of state
After
Reactions
Ragnar Nurkse's balanced growth theory too has been criticised on a number of grounds. His main critic was
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.[7] Thus, to hypothesise that an underdeveloped nation can undertake large scale investment in many industries of its economy simultaneously is unrealistic due to the paucity of resources.[12] To quote Hirschman,
"If a country were ready to apply the doctrine of balanced growth, then it would not be underdeveloped in the first place."[12]
Hans Singer asserted that the balanced growth theory is more applicable to cure an economy facing a
Another contention was Nurkse's approval of
Nurkse states that if demand for the output of one sector rises, due to the complementary nature of demand, the demand for the output of other industries will also experience a rise.
Hans Singer suggested that Nurkse's theory makes dubious assumptions about the underdeveloped economy.[7] For example, Nurkse assumes that the economy starts with nothing at hand.[5] However, an economy usually starts at a position which reflects the previous investment decisions undertaken in the country,[7] and at any given moment, an imbalance already exists. So the logical step would be to take on those investment programmes which complement 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 "balancing investment" to bring equilibrium, and so on and so forth.[7]
Hirschman believed that Nurkse's balanced growth theory wasn't in fact a theory of growth.[1] Growth implies the gradual transformation of an economy from one stage to the chronologically next stage. It entails the series of actions which leads the economy from a stage of infancy to that of maturity.[7] However, the balanced growth theory involves the creation of a brand new, self-sufficient modern industrial economy being laid over a stagnant, self-sufficient traditional economy. Thus, there is no transformation.[12] In reality, a dual economy will come into existence, where two separate economic sectors will begin to coexist in one country. They will differ on levels of development, technology and demand patterns. This may create inequality in the country.[12]
See also
References
- ^ ISBN 978-0-415-77104-7.
- ISBN 0-19-927271-9.
- ^ a b c d e Nurkse, Ragnar (1961). Problems of Capital Formation in Underdeveloped Countries. New York: Oxford University Press. p. 163.
- ISBN 0-444-70337-3.
- ^ ISBN 81-85431-54-X.
- ^ ISBN 978-0-19-564900-0.
- ^ ISBN 978-81-8488-829-4.
- ^ a b c d e Rainer Kattel; Jan A. Kregel; Eric S. Reinert (March 2009). "The Relevance of Ragnar Nurkse and Classical Development Economics" (PDF). Working Papers in Technology Governance and Economic Dynamics No. 21.
- ISBN 0-415-19155-6.
- ^ "Measures for the Economic Development of Underdeveloped Countries, Report by a Group of Experts appointed by the Secretary-General of the United Nations". May 1951.
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(help) - ^ ISBN 81-7596-335-2.
- ^ a b c d Hirschman, Albert O. (1969). "Strategy of Economic Development". Yale University Press (New Haven, London): 53–4.
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(help) - ^ L. Anderson, William. Say's Law: Were (Are) The Critics Right? (PDF). Ludwig Von Mises Institute. p. 27.
External links
- "Some reflections on Nurkse's Patterns of Trade and Development by Deardorff and Stern" (PDF). University of Michigan, 27 August 2007.
- "TDESA Working Paper No. 53-Industrial Policy and Growth by Helen Shapiro" (PDF). Economic and Social Affairs.
- "The Doctrine of Market Failure and Early Development Theory by Jeannette C. Mitchell" (PDF). History of Economics Review.
- "Positional Goods, Conspicuous Consumption and the International Demonstration Effect Reconsidered by Jefferey James". World Development, Vol. 15, No. 4, pp. 49–462,1987.
- "Ragnar Nurkse's Rule-Based Approach to International Monetary Relations: Complementarities with Chicago" (PDF). University of Auckland and the Australian National University.
- "The life and time of Ragnar Nurkse" (PDF). Conference on "Ragnar Nurkse (1907–2007): Classical Development Economics and Its Relevance for Today" ,Tallinn, 31 August – 1 September 2007.
- "Ragnar Nurkse's Development Theory" (PDF). Bremen University of Applied Sciences.
- "Dr.Robert E. Looney's Homepage" (PDF). Dr.Robert E. Looney.
- "Development Economics: Previous Studies".