Suitable Development Strategy for Developing Countries like Nepal

Posted by: Kiran

Very openly speaking, on one side you have people associated with Rosenstein-Rodan who argues that a successful development/industrialization strategy needs to “attack on all fronts”, that is aim for increasing in productivity and investment in all sectors of the economy at once. On the other there is Hirschman who argues that it is better to focus on a few key industries. These will create demand for inputs (backward linkages) and serve as inputs to other industries themselves (forward …

linkages) and will spur development economy wide. However, we have to look the situation of the particular country before choosing the development strategies so that the optimal level of economic growth can be achieved.

Much of the discussion in national economics is concerned with growth and the growth of a particular nation will be determined through the adopted policies and strategies of development by that particular country. As we all know that the strategies of development are of two types – Balanced and Unbalanced. So, let’s discuss separately about both strategies.

Balanced Growth Strategy:
Balanced growth strategy is the investment policy on which the investment should be made simultaneously in all the sectors of economics. According to P. A. Samuelson “Balanced growth implies growth in every kind of capital stock”. According to Benjamin Higgins “A wave of capital investment in number of industries is called balanced growth”. Similarly, according to UNO “Balanced growth refers to full employment, a high level of investment, overall growth in productive capacity equilibrium”. Thus, the balanced growth productivity is dynamic and elastic. Its secret is proper balance between different sectors like agriculture and industry; human capital and material output; domestic trade and foreign trade; demand and supply factors etc. As advocated by Ragnar, Nurkse, Arthur Lewis, A. Young, T. Sitovsky and Rosenstein-Rodan, the doctrine of balancd growth requires; balance in supply, balance in demand and sectoral balance on agricultural, economy, industry, transportation etc.
This theory sees the main obstacles to development in the narrow market and, thus, in the limited market opportunities. Under these circumstances, only a bundle of complementary investments realized at the same time has the chance of creating mutual demand. The theory refers to Say’s theorem and requests investments in such sectors which have a high relation between supply, purchasing power, and demand as in consumer goods industry, food production, etc.
The real bottleneck in breaking the narrow market is seen here in the shortage of capital, and, therefore, all potential sources have to be mobilized. If capital is available, investments will be made. However, in order to ensure the balanced growth, there is a need for investment planning by the governments.
Development is seen here as expansion of market and an increase of production including agriculture. The possibility of structural hindrances is not included in the line of thinking, as are market dependencies. The emphasis is on capital investment, not on the ways and means of achieving capital formation. It is assumed that, in a traditional society, there is ability and willingness for rational investment decisions along the requirements of the theory. As this will most likely be limited to small sectors of the society, it is not unlikely that this approach will lead to super-imposing a modern sector on the traditional economy, i.e., to economic dualism. As Prof. Nurske pointed out, balanced growth strategy talks about that more or less synchronized application of capital to a wide range of different industries.

Unbalanced Growth Strategy:
Hirschman, Singer, Fleming, Burger, Paul Streeten etc., have recommended the strategy of unbalanced growth as an alternative to the balanced growth. It is opposite of the doctrine of balanced growth on which the investment should be made in selected sectors rather than simultaneously in all sectors of the economy. The unbalanced growth theory emphasizes on few selected sectors’ or industries’ investment for the rapid development so that the acquiring economies from one sector can be utilized for the development of other sector and eventually the economy gradually moves a head from the path of unbalanced growth to that of balanced growth. The unbalanced growth strategy talks about the allotment of resources rationally in leading sectors.
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.

Suitability of strategies for developing countries like Nepal
After looking into both strategies, the unbalanced growth strategy is better for developing countries like Nepal. The prioritized and sectoral investment should be made first rather the overburden investment in all sectors. Development is a gradual process. If one country gets succeed in one sector then only it becomes capable enough to invest in other sectors and consequently the investment can be done one by one in all sectors in the long run.
Further, the developing countries’ main lacking is that they do not have sufficient capital to invest in all sectors at once. They are not capable of developing different sectors simultaneously due to shortage of resources and many factors. Therefore, investment should be made in leading sector of the economy deliberately. Besides, in developing countries, poverty is rampant and to cope with many problems, the countries have to rely on foreign aid. Under these circumstances, how can the developing countries like Nepal can assume to invest their tiny capital (mainly borrowed from foreign countries) in all sectors for the economic growth? So, balanced growth strategy’s investment in all sectors simultaneously is beyond the capabilities of developing countries like Nepal. Besides, the balanced growth strategy talks a lot about balanced regional development, division of labor, possibilities of innovative and researches, creation of social capital, wide extent of market, better use of resources, less dependence on foreigners and stability of prices but these things are only possible when the country is developed and there is no dearth of capital investment in all sectors. So, only a zero-aid-need and developed country can apply the principle of balanced growth strategy.
As suggested by Hirschman, unbalanced growth strategy is directed towards the skill formation opportunity via the investment in SOC and DPA sectors of UDCs. So the strategy is most appropriate for the developing country like Nepal. Besides, the strategy is practical in real sense as it talks primarily about the leading sectors investment and its motive is intended towards the development phenomena of UDCs. Furthermore, the unbalanced growth strategy is levelheaded towards developing countries’ developments rather creating overstrain tension of all sectors’ simultaneous investments. Because, it is based on the ground reality of UDCs on which the better utilization of available resources and advantages of specialization in the concept of competitive cost trend mechanism is possible. In nutshell, for each sector’s prosperous and competitive growth, unbalanced growth strategy of development is necessary for developing countries like Nepal. However, it is strictly connected with the particular empirical circumstances of the countries.

Suitable Development Strategy for Developing Countries like Nepal was last modified: September 11th, 2013 by Kiran

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