Theories of development of backward countries have this in common: backward countries are poor because productivity is low. Productivity is low because of the paucity of capital, skills, techniques etc. which, in turn, is because incomes are scarcely, if at all, above subsistence level for the majority of the population. Besides, even in those corners of the economy where the possibility for savings patently exists, there is no inducement for investing it productively – as distinct from such “malinvestments” as gold and foreign currency hoards, real estate purchases etc. [1] – as the universal poverty puts a low ceiling on market outlets. Again the nigger in the woodpile is low productivity. Both the supply of capital and the demand for capital are restricted in these capital-starved economies because of low productivity, which in its turn is a result of the paucity of capital.
Posing the problem thus presents the solution almost of itself. If capital is applied to a wide range of industries, thus synchronising increases in the level of productivity over the whole economy, a market can be generated spontaneously. Once the problem of the market is solved in this induced operation of Say’s Law (that the increase in output by each furnishes a market for the increased production of all), savings and investment will be generated spontaneously and cumulatively from within the system itself.
This theory of Balanced Growth [2] envisages a harmonious rise in productivity which, being diffuse, creates its own market. It assumes then that disposable incomes rise pari passu with investment and that the pattern of demand created by rising consumption levels sets the pattern for investment in the various sectors of the economy. If the investment pattern is not congruent with the consumption pattern, Say’s Law would not operate and the idea of balanced growth would fail, for “an increase in the production of shoes alone does not create its own demand. An increase in production over a wide range of consumables, so proportioned as to correspond with the pattern of consumers’ preferences, does create its own demand”. [3] Only strict observance of the dictates of consumer preferences can provide self-justifying investments to the prospective entrepreneur. In the last analysis, balanced growth through balanced investment in accordance with the pattern of consumers’ demand rests, as Nurkse puts it, “on the need for a ‘balanced diet’”.
It is to be expected that the normal course of investment envisaged by the theory of balanced growth would be a translation into time of the consumption stratification featured in Engel’s Law. Indeed, most practical proposals for investment priorities follow on these lines. A tentative list of priorities for Indonesia gives the following order: investment in agriculture; rural development and cottage industries; human investments (health, teaching, training); irrigation and power; transport and communications; and lastly, heavy industries............ (jump from page 231 to page 262).
In sum it might be said:
The doctrine, implicit in the generalised Balanced Growth Model, of SMP [Social Marginal Product], (or the diffuse growth in productivity over the whole economy) fails to take adequate account of the structural changes implied by development and necessary to it owing to its essentially static approach, its ambiguity regarding the time factor, and its ambiguous definition of the range of application. When brought down to the level of practical implementation it tends to ignore certain real pressures which might favour an opposite development. It might be thought that population pressure and political pressure would tend to make governments favour capital intensive investments as far as is feasible within the limitations of stringent capital supply; that within these limitations a tendency would be apparent to adopt such techniques in the export sector and the utilities substructure of industry, administration and security.
Given the unstable political situation in many backward countries – and specifically in the case of Indonesia – these tendencies might well result in a further deterioration of order. There is no easy criterion of choice: abrogation of Balanced Growth might result in as much instability as its adoption.
1. Following Joan Robinson, these might be called placements as distinct from investments (Accumulation, p. 8).
2. The “classic” presentation of the Balanced Growth doctrines are to be found in Rosenstein-Rodan’s Problems of Industrialisation of Eastern and South Eastern Europe, Economic Journal, June 1943; and in Nurkse, 1953. We shall adopt a generalised Balanced Growth model incorporating those elements of each presentation which are common to the others and not subject to dispute.
3. Nurkse, p. 12.
Nurkse, R. 1953. Problems of Capital Formation in Underdeveloped Countries, Oxford.
Robinson, J. 1956. The Accumulation of Capital, London.
In 1957 certain terms that we would now consider grossly racist and offensive were not recognised as such.
This text is extracted from Chapter VI Investment Patterns (pp. 229–231 and p. 262) of Mike Kidron’s unpublished thesis:
Kidron, Michael. 1957. Problems and patterns of development in overpopulated backward countries with special reference to Indonesia. M.Litt. University of Oxford, Faculty of Social Studies, Balliol College, 289pp.
Last updated on 10 April 2020