Unbalanced Growth Theory by Albert Hirschman

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In unbalanced growth theory, Hirschman argued that certain places are naturally endowed with natural resources whereas some places are resource scarce. Therefore, it is inevitable that the growth will take place at fewer places. Hence, he believed that the process of growth is intrinsically unbalanced unlike Gunnar Myrdal’s Theory.

Similarity to Cumulative Causation Theory

Hirschman’s theory of economic transmission is similar to Myrdal’s Cumulative Causation Theory in many ways as mentioned below.

  • The composition of economic space is similar i.e. a developed core and underdeveloped periphery.
  • Cumulative Causation takes place in circular manner i.e. investment-profit-reinvestment.
  • Cumulative causation leads to agglomeration of economic activities due to internal and external economies.
  • The transmission of economic growth takes place as mentioned by Myrdal but Hirschman uses different terminologies. He uses Trickle Down Effect for Spread Effect and Polarization Effect for Backwash Effect.

    • Trickle Down Effect

      • The Trickle Down Effect refers to the transmission of goods and services from the core towards the periphery/ hinterland.
      • The goods and services may include new technology, high end wage labor, modern inputs for agricultural, small factories, health services, educational services etc.
      • The Trickle Down Effect induces growth and development in the periphery.

    • Polarization Effect

      • The Polarization Effect refers to the transmission of goods and services from the periphery/ hinterland towards the core.
      • These goods and services may include, agricultural products, mineral resources, labor force etc.
      • The Polarization Effect may be positive or negative for the growth of hinterland.

Unbalanced Growth

Despite the large similarities with Myrdal’s Theory regarding process of economic growth, Hirschman’s theory differed in essence. Hirschman believed that the growth is intrinsically unbalanced.

  • He argued that natural resources are unevenly distributed. Some places are resource rich and some are resource scarce.
  • Growth starts taking place only at certain resource rich regions having good location. He considers this disequilibrium as the natural part of growth process.
  • Since, good location and abundance of resources provide higher profit, most of the industry accumulate at the one location i.e. core. The polarization effect causes the economy to grow very fast in the core.
  • He argued that once the process of growth starts at the core, its benefits trickle down to the periphery regions. The trickle down leads to growth and development of the periphery, too.
  • Here, Hirschman argues against Myrdal that trickle down is automatic and government should not interfere in the growth process.
  • Ultimately, the income trajectories of developed and underdeveloped regions converge. This leads to restoration of regional equilibrium

Balanced Vs Unbalanced Growth

The primary question facing a student or planner is, “should I choose balanced or unbalanced growth for development of a region?” The answer to this question is complex.

  • Both Myrdal and Hirschman agree that the economic growth takes place unevenly over space or region.
  • However, they differed in their views regarding restoring regional equity.
  • On the one hand, Hirschman is right to argue that growth is uneven. Spreading large investment into small portions over large area do not yield economic growth. Hence, large investments made at one location yields growth.
  • On the other hand, Myrdal argues that the growth does not spread automatically to underdeveloped regions or countries.
  • For instance, the economic experience of the countries such as India shows that nation as a whole may grow very fast but many of its parts remain underdeveloped. We see stark disparity in conditions of rich and poor within cities. A porsch residential area is usually in proximity of a slum which provides services to the rich.
  • It has also been observed that resource rich regions, too, do not grow due to adverse public policy e.g. Orissa, Chhattisgarh etc.
  • This means that markets’ main objective is profit not social or regional equity.

Therefore, the policy interventions by the government are necessary to enable the equitable economic growth. The policy should aim that all potential regions get the opportunity for economic growth e.g. tax rebate for setting industry in backward regions. Additionally, the policy should not be so overarching that it impedes the economic growth itself e.g. License Raj. The policy should ensure minimum living standards for all the population of a country if not perfect equality. Hence, unbalanced growth should precede the balanced growth.