Economic Growth and Economic Development, Theory of Unbalanced Growth and Neo Classical Growth Theory

Economic development is the sustained, concerted actions of policy makers and communities that promote the standard of living and economic health of a specific area.

Economic development can also be referred to as the quantitative and qualitative changes in the economy. Such acts can involve multiple areas including development of human capital, critical infrastructure, regional competitiveness, social inclusion, health, safety, literacy, and other initiatives.

Economic development differs from economic growth. Whereas economic development is a policy intervention endeavor with aims of economic and social well-being of people, economic growth is a phenomenon of market productivity and rise in GDP. Consequently, as economist Sen (1983) points out, “economic growth is one aspect of the process of economic development.

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Economic development is a process whereby an economy’s real national income as well as per capita income increases over a long period of time. Here, the process implies the impact of certain forces which operate over a long period and embody changes in dynamic elements.

It contains changes in resource supplies, in the rate of capital formation, in demographic composition, in technology, skills and efficiency, in institutional and organisational set-up.

It also implies respective changes in the structure of demand for goods, in the level and pattern of income distribution, in size and composition of population, in consumption habits and living standards, and in the pattern of social relationships and religious dogmas, ideas and institutions.

Actually, economic development is a process consisting of a long chain of inter-related changes in fundamental factors of supply and in the structure of demand, leading to a rise in the net national product of a country in the long run.

The concept ‘economic growth’ has in some cases been used interchangeably with economic development. . Unarguably, however, economic growth has a narrower scope. Economic growth is a rise in the productive capacity of a country on a per capita basis. It involves the expansion of the economy through a simple widening process. It is the increase in the national output or GDP of the nation

Economic growth and development is a two-way relationship. According to experts, the first chain consists of economic growth benefiting human development, since economic growth is likely to lead families and individuals to use their heightened incomes to increase expenditures, which in turn furthers human development. At the same time, with the increased consumption and spending, health, education, and infrastructure systems grow and contribute to economic growth.

Economic development typically involves improvements in a variety of indicators such as literacy rates, life expectancy, and poverty rates. GDP does not take into account other aspects such as leisure time, environmental quality, freedom, or social justice; alternative f measures of economic well-being have been proposed. Essentially, a country’s economic development is related to its human development, which encompasses, among other things, health and education. These factors are, however, closely related to economic growth so that development and growth often go together.

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Theory of Unbalanced Growth

The theoretical foundation of this study anchored on theory of unbalanced growth. The theory of unbalance Growth postulated by Hirschman [1958] states that advanced and deliberately unbalancing the economy according to pre-designed strategy is the best way to achieve economic growth in an underdeveloped country.

According to this theory investment should be in selected sectors rather than simultaneously in all sectors of the economy.

Hirschman (1958, the leading exponent of the theory of unbalanced growth argues that a deliberate unbalancing of the economy in accordance with predesigned strategy is the best way to achieve economic growth. “An ideal situation obtains when one disequilibrium calls forth a development move which in turn leads to. a similar disequilibrium and soon ad-infinitum”.

Contrary to the theory of balanced growth, in Hirschman’s opinion, the real bottleneck is not the shortage of capital, but lack of entrepreneurial abilities. Potential entrepreneurs are hindered in their decision-making by institutional factors: either group considerations play a -great role and hinder the potential entrepreneur, or entrepreneurs aim at personal gains at the cost of others and are thus equally detrimental to development. In view of the lack of entrepreneurial abilities there is a need for a mechanism of incentive and pressure which will automatically result in the required decisions.

According to Hirschman, not a balanced growth should be aimed at, but rather existing imbalances— whose symptoms are profit and losses—must be maintained. Investments should not be spread evenly but concentrated in such projects in which they cause additional investments because of their backward and forward linkages without being too demanding on entrepreneurial abilities. Manufacturing industries and import substitutions are relevant examples.

These first investments initiate further investments which are made by less qualified entrepreneurs. Thus, the strategy overcomes the bottleneck of entrepreneurial ability. The theory gives no hints as to how the attitude of entrepreneurs and their institutional influence will be changed in time.

The theory noted that development has proceeded in this way with “growth being communicated from the leading sectors of the economy to the followers, from one industry to another, from one firm to another.” Development process is a chain of disequilibrium that must be kept alive and the task of development policy is to maintain tension, disproportions and disequilibria.

Hirschman’s theory of unbalanced growth is based on the following propositions: That technical complementarity is found among the various industries but in the case of some of them the degree of complementarity is more than the other. Therefore, the programme for economic development should aim at establishment of those industries where these complementarities happen to be the greatest.

Simultaneous investment in a number of complementary industries according to the programme of balanced growth may achieve a once for all increase in national income. But after this, the economy will become stabilized at a higher level without any movement forward.

The objective of development is not only to achieve a once for all increase in national income, rather this process of income propagation must continue year after year. In order to see that the development process moves on continuously, it is necessary to create and maintain deliberate imbalances in the economy.

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Every investment project has both forward linkages (it may encourage investment in subsequent stage of production) and backward linkages (it may encourage investment in earlier stages of production) and the task of development, policy is to find out projects with the maximum total linkage.

Hirschman has worked out the forward and the backward linkage in case of number of industries and on the basis of that, the maximum linkage exists in the case of intermediate manufacturing industries. Therefore, if investment is made in such industries, it is bound to affect the demand and supply positions in other sectors of the economy and thus leading to their expansion as well.

The significant of this theory to the study is that investment in strategically selected industries (small scale industries) of the economy will lead to new investment opportunity, employment generation so as to pave the way for further nation’s development.

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Neo Classical Growth Theory

This theory was propounded by Solow and Swan (1956). The neo-classicals stated that technology, labour and capital are the major determinants of growth in output, and they came up with a growth model, which states that technological change or scientific innovation replaces investment as the major factor thus explaining growth in the long-run.

The neo-classical stated that the level of technological change is determined exogenously, i.e. it is independent of all other factors including inflation. (Gokal V. & Hanif S, 2004) argued that the neoclassical economic theory of growth is built on the principle of diminishing returns of labour and diminishing returns of capital separately and constant returns to both factors jointly.

Therefore, the production function of neoclassical growth theory is used to measure the growth and equilibrium of an economy. That function is

Y = AF (K, L).

• Y denotes an economy’s gross domestic product (GDP)
• K represents its share of capital
• L describes the amount of unskilled labor in an economy
• A represents a determinant level of technology

However, because of the relationship between labor and technology, an economy’s production function is often re-written as Y = F (K, AL).

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