'Unbalanced' Growth is hypothesized when

Correct — D, (d) Active sectors need to, and do energize sluggish sectors.

The hypothesis of unbalanced growth is associated above all with Albert O. Hirschman, whose ‘The Strategy of Economic Development’ appeared in 1958 with ‘Unbalanced Growth’ as its working title. His argument was that a poor country cannot advance on every front at once, and should not try. What it is short of is not only capital but the capacity to take decisions and to organise; so development policy should deliberately create disequilibria, investing in a few strategic sectors and letting the pressures those investments generate pull the rest of the economy forward.

The mechanism is linkage. An investment has backward linkages when it creates demand for the output of other industries that must now be supplied, and forward linkages when its own output becomes an input that invites new industries to use it. A sector chosen for its linkages does not merely grow itself; it puts other sectors under a pressure they must respond to — shortages, bottlenecks, unmet demand, visible profit — and those responses are the growth of the rest of the economy. Hirschman’s point was that in a country short of entrepreneurship, such induced pressure is a more reliable prompt to action than an exhortation to invest across the board.

That is exactly what the keyed option describes: the active sectors need to, and do, energise the sluggish ones. The word ‘need to’ is doing real work in it — the whole strategy depends on the leading sector making demands that the lagging sectors are obliged to meet.

One printing note: the option as set carries an odd comma, ‘need to, and do energize sluggish sectors’, exactly as reproduced above from the booklet.

Why the others are wrong

• (a)Expansion can take place simultaneously on several growth routes — ‘Expansion can take place simultaneously on several growth routes’ is the balanced-growth thesis, which is the very position Hirschman wrote against. In that account, developed in different forms by Rosenstein-Rodan and by Nurkse, the obstacle to development in a poor economy is the smallness of the market: no single industry is worth starting because there are not enough customers for its output. The remedy is a big push — investment across many industries at once, so that the workers of each become the customers of the others and demand is created simultaneously. The option is therefore not a vague wrong answer but the precise antithesis of the term in the stem, which is what makes it the strongest distractor here. A candidate who remembers that both theories exist, and cannot recall which name attaches to which, has an even chance of losing the item.
• (b)Supply of labour is fixed — ‘Supply of labour is fixed’ belongs to a different discussion altogether. Development economics in this period generally assumed the opposite for poor agrarian economies: that labour was abundant, that a great deal of it was underemployed in agriculture, and that industry could draw on it for a long time without wages having to rise. Nothing in the unbalanced-growth argument depends on the labour supply being fixed, and the hypothesis is about where investment should be placed and how the resulting pressures spread, not about the elasticity of labour. The option is offered because it sounds like a technical assumption of the sort a growth model might make, and an assumption stated in that register can pass for the right answer if the term in the stem is only half-remembered.
• (c)Supply of capital is unlimited — ‘Supply of capital is unlimited’ inverts the premise on which the whole hypothesis rests. Hirschman’s argument begins from scarcity — not merely of capital but of the ability to make and carry out investment decisions — and unbalanced growth is a strategy for making the best of that scarcity by concentrating resources where they will induce the largest response elsewhere. If capital were unlimited there would be no need to choose between sectors and no reason to prefer an unbalanced path; the balanced-growth programme of investing everywhere at once would simply be affordable. The option is a useful test of whether a candidate has understood the reasoning rather than memorised a phrase: a theory built on the need to economise cannot presuppose that the resource is free.

The debate between balanced and unbalanced growth was one of the central arguments of development economics in the 1950s, and questions on it usually ask which position a description belongs to.

The balanced-growth case, associated with Paul Rosenstein-Rodan and Ragnar Nurkse, begins from the size of the market. In a poor country each industry considered by itself is unprofitable because there is nobody to buy from it, so investment must be made simultaneously across a wide range of industries — a big push — with each providing the demand for the others.

The unbalanced-growth case, associated with Albert O. Hirschman, begins from the scarcity of decision-making capacity. Trying to do everything at once assumes an administrative and entrepreneurial ability that a developing country does not have. Better to invest in a few sectors chosen for their linkages, accept the resulting imbalance, and let the tensions it produces — shortages here, unexploited opportunities there — induce the investment that follows.

The vocabulary to carry away is ‘linkage’. Backward linkage is the demand a new industry creates for inputs; forward linkage is the opportunity its output creates for industries that will use it. Hirschman’s advice to choose projects with strong linkages is still the language in which industrial policy is discussed.

Both positions are prescriptions about sequencing rather than about ends, and both accept that a poor economy cannot simply wait for market forces to produce industrialisation.

Key facts

• The unbalanced-growth strategy is associated with Albert O. Hirschman, whose ‘The Strategy of Economic Development’ was published in 1958 and had ‘Unbalanced Growth’ as its working title.
• Hirschman argued that disequilibria should be encouraged to stimulate growth and mobilise resources, and that developing countries are short of decision-making skills.
• The key to his strategy was to encourage industries with many linkages to other firms — backward linkages creating demand for inputs, forward linkages creating opportunities to use the output.
• He argued against ‘big push’ approaches to development such as those advocated by Paul Rosenstein-Rodan.
• The balanced-growth thesis holds that expansion must proceed on many fronts at once so that each industry provides a market for the others.
• Option (d) is printed with an unusual comma — ‘need to, and do energize sluggish sectors’ — exactly as it appears in the booklet.

Common traps

• Selecting the balanced-growth description, which is the first option and the exact opposite of the term in the stem.
• Assuming a growth theory must rest on an assumption about the supply of labour or capital, and choosing the option that states one.
• Forgetting that the argument begins from scarcity, so that unlimited capital would remove the reason for the strategy altogether.
• Attaching the wrong economist to the theory; Rosenstein-Rodan and Nurkse belong to the position Hirschman was writing against.

• practice — not a real PYQ

  The ‘big push’ approach to development, which holds that investment must be made simultaneously across many industries to create a market for each, is associated with

  • (a)Albert O. Hirschman
  • (b)Paul Rosenstein-Rodan
  • (c)W. Arthur Lewis
  • (d)Simon Kuznets

  Answer(b) Paul Rosenstein-Rodan — the big push is the classic statement of the balanced-growth position, and Hirschman wrote against it in arguing for unbalanced growth. Lewis is associated with the model of development with unlimited supplies of labour, and Kuznets with the study of national income and the inverted-U hypothesis on inequality.

• practice — not a real PYQ

  In development economics, the demand that a new industry creates for the products of the industries supplying its inputs is called

  • (a)a forward linkage
  • (b)a backward linkage
  • (c)an external economy of scale
  • (d)a demonstration effect

  Answer(b) a backward linkage — it runs back down the chain to the suppliers of inputs, while a forward linkage runs on to the industries that will use the new output. An external economy of scale is a benefit arising from the growth of an industry as a whole, and the demonstration effect concerns consumption habits copied from richer societies.