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Appropriate Technology by prolit-maximizing firms of appropriate technology would be automatic.

But the conflict between output growth and employment inherent in this reading of appropriate technology was never well understood. Governments in middle income countries with a long-term perspective, appreciative of the high risks of a trade-reliant development strategy amidst rising wages, borrowed heavily abroad. Funds were used to establish new industries with long lead times and high capital requirements in order to stay ahead of competition from even lower wage countries in labour-intensive goods. Debt servicing required access to the markets of advanced countries. Yet as advanced countries climbed up the ladder of comparative advantage, they became less capable of achieving full employment and less willing to relinquish their labour-using industries to imports. Neither the theoretical solution, lower wages, nor the politically popular one, protection, promised relief for indebted nations. Thus, the technologies that seemed appropriate to different groups of countries were out of synchronization. The fast growing, newly industrializing countries and the slower growing advanced economies collided in a widening range of markets for industrial products.
)4IHLIOGRtiIHY

Balanced Growth
T. SCITOVSKY

Dobh, M. 1963. Economic Growth and UnthrdevLloped Countries. London: Lawrence & Wishart; New York: International Publishers. Jequier, N. 1976.Appropriate Technology. Paris: Development Centre of the Organization for Economic Cooperation and Development. Schumacher, E.F. 1973. Small is Beautfiii. London: Blond & Briggs. Stewart, F. 1972. Choice of technique in developing countries. Journal of Development Studies 9(1), October, 99121. Stewart, F. 1985. Macro policies for appropriate technology: an introductory classification, In Technology, Institutions and Government Policies, ed. J. James and S. Watanabe, London: Macmillan. Stohaugh, R. and Wells, L.T., Jr. (eds) 1984. Technology Crossing Borders. Boston: Harvard Business School Press. Sutcliffe, R.B. 1971. Industry and Underdevelopment. London: Addison-Wesley.

The idea of balanced growth can be traced back to John Stuart Mills qualified restatement of Says Law: Every increase in production, if distributed without miscalculation among all kinds of produce in the proportions which private interest would dictate, creates.., its own demand (Mill, 1844). Say had the insight that all productive activity creates demand along with supply, and Mill added his no less important caveat that while production creates specific supplies, and investment creates specific productive capacities, the income they generate creates general demand, which then is distributed over many goods. Accordingly, for the structure of additional productive capacities to match the structure of additional demand, investment would have to proceed simultaneously in the economys various sectors and industries in the same proportions in which the buying public apportions the expenditure of its additional income among the outputs of those sectors and industries. That implies a faster growth of sectors and industries for whose output the income elasticities of demand are high and a simultaneous but slower growth of those for whose products income elasticities of demand are low. Such is the meaning of balanced growth. A simplified version of balanced growth, proportional growth of all outputs, recurs in John von Neumanns celebrated growth model (Von Neumann, 1945). On its customary nationalistic interpretation, the argument for balanced growth calls for inward-looking development policies: investment in productive capacities to match the expansion of domestic demand. It then conflicts with Ricardos doctrine of comparative advantage, which says that rather than produce everything at home, each country does better if it specializes in the goods it is best at producing and trades its excess output of them for imports of those commodities in whose production it would have a comparative disadvantage. Moreover, the argument for nationally balanced growth also conflicts with the argument for exploiting economies of scale, whenever a countrys domestic market for a particular good is too small to absorb the minimum output that is economical to produce. For in such cases, it is cheaper either to import that good from high-volume low-cost producers abroad, or to produce it at home on 55

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Balanced Growth a large enough scale to render its cost competitive in world markets and export the surplus. To resolve those conflicts, growth would have to be balanced, not on a national but on a world scale. Each country would then specialize in areas where its comparative advantage and economies of scale are the greatest, but they would have to keep their borders open to trade and let market forces assure the balanced growth of the world economy as a whole, in the sense of balancing each countrys lopsided growth against the complementary lack of balance in the rest of the worlds growth. For example, the fast expansion of Great Britains economy during her industrial revolution consisted in unbalanced growth in the direction of her comparative advantage to a degree that greatly increased her dependence on imports of food and primary products and her need of foreign markets for her exports with which to pay for those imports. To make that work, however, the developing world (which then was much larger) had to grow in an offsettingly unbalanced fashion by specializing on its comparative advantages in agricultural production, and also by growing at a much slower rate, given the much lower income elasticity of demand for food than for industrial products. All this has long been known and more or less taken for granted by most economists; but the new problems and new thinking of the mid-2Oth century gave new prominence to the argument for nationally balanced growth. To begin with, the break-up of the colonial empires after World War II created many new, independent countries, all of them poor, undeveloped and anxious not only to grow but to catch up with the advanced industrial countries if possible. That brought the problem of accelerating economic development to centre stage and made the developing countries reluctant to acquiesce in their traditional role of primary producers, which, in a system of universal growth balanced on a worldwide scale, would have kept their growth rates well below those of the advanced countries (owing to the much lower demand elasticities for their exports), thereby further widening the gap between rich and poor countries. Secondly, the Keynesian revolution stressed the importance of effective demand, and that, in the development context, was translated into a new emphasis on matching the structure of supply to the structure of demand. Thirdly, the successful industrialization of Germany and the United States behind the shelter of protective tariffs led to the realization that a countrys comparative disadvantage in some sectors is seldom unalterable but usually something that can be remedied through learning by doing; and that realization in turn greatly diminished the importance attached to the conflict between the doctrines of comparative advantage and nationally balanced growth. Finally, the dismal economic performance and protectionist stance of the industrial countries during the great depression of the 1930s led many economists, including some of the most distinguished and influential among them, to believe that, even apart from the argument of the previous paragraph, the developing countries would be well advised to limit their dependence on trade with the advanced countries and not make their own development contingent on the latters parallel development. All the above considerations contributed to making many, perhaps most, development economists advocate that the developing countries go their own 56

Balanced Growth separate ways, taking the route either of nationally balanced growth or of growth balanced for the developing world as a group, specializing among themselves in the framework of customs unions. Paul Rosenstein-Rodan was the first to advocate such a course in a celebrated article proposing a Danubian federation (Rosenstein-Rodan, 1943); but the foremost and most influential advocate of balanced growth was Ragnar Nurkse, who put the argument in the following way: The case for international specialization.., is as strong as ever,.., but if development through increased exports to the advanced industrial centers is retarded or blocked, there arises a possible need for promoting increases in output that are diversified in accordance with domestic income elasticities of demand so as to provide markets for each other locally (Nurkse, 1953). Widespread agreement on the desirability of matching the structure of output to the structure of domestic demand contrasted with widespread disagreement as to the best way to achieve that goal. Nurkse and some others believed that, in poor countries, the market left to itself perpetuates poverty, because to emerge from it would require investment in increasing productivity, which is impeded not only by the low saving of the poor but even more by the lack of profit incentive to build high-productivity plants when the already existing local market for their output is too small. As a means of escaping that vicious circle of poverty, some favoured the central planning of investment to overcome the lack of private incentive; others (including Nurkse) believed that even indicative planning would provide enough additional incentive, especially when aided by tariff protection, tax concessions or cheap credit. Albert Hirschman and his followers showed more faith in market forces but stressed the virtual impossibility of balanced growth in the narrow literal sense of the simultaneous establishment of many industries all at the same time. He pointed out (Hirschman, 1958) that most poor countries lack the resources for investing in more than one or very few modem projects at any given time, and therefore can aim at balanced growth only in the long run, through a sequential process of building first one then another plant, with each step correcting the worst imbalance in order to approach a more balanced structure gradually. He called that process unbalanced growth and argued that market forces are likely to aid it, because imbalances create shortages, whose impact on prices render their relief or elimination more profitable. Note that Hirschmans unbalanced growth is the distribution over time of individual investment projects whose cumulative long-run aim and effect is still to balance and keep in balance the structure of domestic productive capacities and outputs. Although the shortcomings of balanced growth were not forgotten (Scitovsky, 1959), it had become the fashionable doctrine of development economists in the period following World War II. The policy-makers of developing countries were influenced by it to the extent of drawing up Three-, Four- or Five-Year Plans to coordinate investment; but they paid more lip service than serious attention to the doctrine of balanced growth. The fashionable policy was importsubstituting industrialization, all too often centred on the most highly automated and therefore most prestigious industries. In consequence, the growth of many 57

Balanced Growth developing countries not only remained unbalanced but became unbalanced in the wrong direction, in favour of sectors with the countrys greatest comparative disadvantage. Industry was favoured to the neglect of agriculture; automobiles, large kitchen appliances and petrochemicals were favoured to the neglect of the simpler manufactures and processed foods on which most of the newly generated income of the emerging urban working classes was spent. The unbalanced nature of such development manifested itself in the chronic underutilization of the new modern plants side by side with excess demand for food and its consequences, increasing imports and inflationary pressures. The disappointing record of import-substituting development in many countries led to a gradual shift towards export-led growth, which was equally unbalanced but in favour of industries with a comparative advantage. Export-led growth therefore was much more successful, especially as long as it was favoured by expanding world trade. Nationally balanced growth continues to remain a theoretical doctrine more than a tried practical policy. Mention should also be made in this connection ofharmonic growth, a related but different concept, introduced by Janos Kornai and mainly applied, together with its opposite, rushed growth, to the growth policies of socialist countries (Kornai, 1972). Harmonic growth is a planners value judgement of what list of things and in what proportions a countrys growth policy ought to encompass. One of its elements, the balanced satisfaction of all the needs of the consuming public, corresponds to balanced growth; but most of its other elements go beyond a concern with market goods alone and call for such things as a parallel growth of public and private goods, an increase in leisure along with the increased availability of goods, an equitable distribution of income, a steady rate of growth over time, and the free unfolding of talents, which implies adequate and equal access to education, full employment, and matching the training of specialists to the economys demand for them. The opposite of harmonic growth, rushed growth, is the neglect or sacrifice of some of those or similar elements for the sake of the faster growth of the remainder. An obvious example is the policy of many socialist countries to ignore the housing shortage, neglect residential construction and use the resources so saved for a faster expansion of manufacturing capacity. l-Iirschman, A. 1958. The Strategy of Economic Development. New Haven: Yale University Press. Kornai, J. 1972. Rush versus Harmonic Growth. Amsterdam: North-Holland. Mill, J.S. 1844. Essays on Some Unsettled Questions of Political Economy. London: London School of Economics, 1948; New York: A.M. Kelley, 1968. Neumann, J. von. 19456. A model of general equilibrium. Trans. 0. Morgenstern, Review of Economic Studies 13, 19. Nurkse, R. 1953. Problems of Capital Formation in Underdeveloped Countries. Oxford: Basil Blackwell; New York: Oxford University Press. Rosenstein-Rodan, P.N. 1943. Problems of industrialization of Eastern and South-Eastern Europe. Economic Journal 53, June-September, 20211. Scitovsky, T. 1959. Growth balanced or unbalanced? In The Allocation of Economic Resources, ed. M. Abramovitz et al., Stanford: Stanford University Press.

Bauer, Peter Tamas


A.A. WALTERS

BUILIOGRAP) IY

Born in Hungary in 1915, Bauer became a fellow of Gonville and Caius College, Cambridge, from 1946 and Professor of Economics in the University of London at the London School of Economics from 1960 until he retired as Professor Emeritus in 1983. The earliest and most distinguished critic of development economics, he launched is research with a classic study of the rubber industry (1948), where he showed that the very rapid growth was a consequence of voluntary responses, usually of illiterate peasants, to expanded opportunities due largely to contacts with the West. In West African Trade, he showed that, contrary to the views of development economists and the evidence of official statistics, the extensive system of traders was efficient in providing production for the market and for expanding material welfare. State intervention in the form of marketing boards was shown to be a mechanism for exploiting monopsony power to the detriment of producers, particularly the small farmers, and to the benefit of the rulers. Stabilization of farm incomes did not require state marketing; it could be achieved by the farmers themselves. Bauers empirical studies and further reflection on the role of the state in development led him to challenge the widespread belief, urged most eloquently by Myrdal, that comprehensive central planning, together with substantial aid from the governments of industrialized countries, was needed to overcome the vicious circle of poverty, low savings and low investment. Bauer pointed out that virtually all the rich countries had emerged from poverty without the supposed benefits of central planning or aid, and that even in very poor countries, provided there was security and suitable motivations, people saved and invested considerable sums efficiently. With central planning, on the other hand, investment was undertaken primarily for political motives and was much more likely to result in economic waste, such as premature industrialization behind high trade barriers. Bauer showed that aid was not a necessary condition of development and, since it reinforced governments grip on the economy, aid frequently inhibited material progress. He stressed the corrosive and corrupting politicization of economic life with its stultifying effects on development. 59

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