Graveyard of old economic ideas - Balanced and Unbalanced Growth

I had a student from some other class come in asking me about "unbalanced growth". Apparantly he was referred to me by the professor running the other class (Econ History I believe). It actually took me a few minutes to connect two and two together and figure out what this was all about (the fact that he really mumbled the names Hirschman and Rosenstein-Rodan (saying something that sounded like "I read Ishmensteiennodan". Who?) didn't help much) but I'm a push over for this sort of thing so I ended up writing up a fairly lenghty response to him. I figure I might as well make it do double work as a blog post while I'm busy writing the final exam.

He basically had three questions:

1. What is “balanced” and “unbalanced growth”?
2. How is it perceived by economists today?
3. What was the role, if any, of unbalanced growth in the industrial revolution in England?

1. Here’s what I know about balanced and unbalanced growth theories.

Basically this was a big area of research in the 50’s so much that some people even talked of the “Balanced Growth Controversy”. Very roughly speaking, on one side you had people associated with Rosenstein-Rodan who argued that a successful development/industrialization strategy needed to “attack on all fronts”, that is aim for increases in productivity and investment in all sectors of the economy at once. On the other there was Hirschman who argued that it was better to focus on a few key industries. These would create demand for inputs (backward linkages) and serve as inputs to other industries themselves (forward linkages) and would spur development economy wide. However, this literature, along with a good chunk of development economics pretty much died in the 60’s. Paul Krugman has a good essay on this which you can find here (it’s a bit broader then just the story of development economics):

http://www.pkarchive.org/theory/dishpan1.html

To Krugman’s explanations for why this avenue of research was abandoned (i.e. it’s hard to formally model economies of scale and imperfect competition) I’d add two that I think are also relevant:

i) Solow’s publication of his model in 1956 which basically argued that differences in capital stocks could account for very little of the differences in standards of living, and correspondingly that it was technological progress not capital accumulation which was the engine of growth. As a result since the 1960’s many development/growth economists became less interested in capital and capital based models of development. The New Growth Theory of the 1980’s (Paul Romer and others) essentially tried to account for where technological progress comes from. Since both the Rodan-Rosenstein model and the Hirschman theory are essentially models of investment driven development, they were probably abandoned for this reason as well.

ii) The fact that the RR and Hirschman were not fully explicit formal models made them difficult to test empirically. Furthermore, even non-formally, some of the concepts employed were not easy to relate to real world experience. I know some folks tried to evaluate Hirschman’s ideas by identifying backward and forward linkages with the extent to which a particular industry was an input for other industries and how many different inputs itself it used but I don’t think any of these efforts were overtly successful.

The second point above I think explains why one has a hard time finding “real world examples” of balanced or unbalanced growth. One could argue that the import substitution/industrialization policies followed by many developing countries in the 60’s and 70’s were examples of Rosenstein-Rodan’s theory applied to practice. However many of these experiments ended in disappointment which may or may have not had anything to do with the validity of the RR story. More recently RR’s ideas were revived and formalized by Murphy, Schleifer and Vishny as the “Big Push” model. The paper is here

http://www.economics.harvard.edu/faculty/shleifer/papers.html

under “Industrialization and the Big Push”.

This paper here claims to have found evidence for the Big Push/RR model of industrialization in East Asia and Eastern Europe
http://economicsbulletin.vanderbilt.edu/2003/volume15/EB-03O40005A.pdf

I attach list some other relevant papers at the bottom. The 1973 Demery and Demery paper is probably closest to a thorough empirical investigation of the issues. Note they’re all pretty old.

2. Today “balanced growth” is pretty much associated with the “Big Push” model by contemporary economists. The Big Push model is itself in a class of models which rely on economies of scale and strategic complementarities to generate poverty traps and where a coordinated action by the government can push the economy out of the trap and into a better, higher growth equilibrium. Another important paper in this area is Kremer’s O-Ring model:

http://ideas.repec.org/a/tpr/qjecon/v108y1993i3p551-75.html

I’d say that while most contemporary development and growth economists are somewhat favorable to the Balanced Growth/RR/Big Push models many think that other factors (institutions, political systems, geography) are more important. This is a remnant of the Solow idea that it isn’t capital accumulation (which is what the Big Push entails) that drives growth.

3. As for the role of unbalance in England’s industrialization. Well, basically theories of the industrial revolution are a dime a dozen. Some of these implicitly incorporate some of the ‘unbalanced growth’ ideas others do not. But these are sort of two different questions. Rosenstein-Rodan and Hirschman were trying to figure out what the proper government policy should be to make a poor country industrialize in the heyday of state sponsored planning and development programs (most of which failed). 19^th century England, as well as most presently-rich countries, seems to have industrialized/developed without any concerned coordinated government intervention at all, aside from the establishment of property rights and rule of law. The exceptions here might be 19^th century Prussia and Meji Japan so they’re probably better candidates to look at in terms of balanced and unbalance growth theories.

To the extent that ‘unbalances’ played a role though, different authors have stressed different industries as being “key” to England’s industrialization. David Landes (Wealth and Poverty of Nations) for example argues that it was the innovation in the textiles industry which raised incomes, which in turn raised demand and which then allowed other sectors of the British economy to develop – which depending on how you read it sounds either like a Big Push story (without government intervention), or a backwards and forwards linkages Hirschman story. Other authors have stressed the labor saving productivity advances in agriculture which released rural labor to be employed in factories and textile mills, which also has aspects of “unbalanced growth”. However, Greg Clark in his forthcoming book “Farewell to Alms” and previous papers has argued that the productivity growth during the industrial revolution was occurring in many sectors at once; textiles, manufactures, agriculture, transportation – i.e. balanced growth. Other authors have argued that balanced growth and unbalanced growth are essentially empirically indistinguishable. Under Balanced growth you have spontaneously occurring productivity growth and industrialization across many sectors. Under Unbalanced growth you have a few key industries grow but this quickly translates into overall economic growth as the backward and forward linkages establish themselves. Either way a detached observer/researcher would see essentially the same thing happen. I think one of the papers below makes this point in the context of England.

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More speculatively, 40 years from now, what are going to be the forgotten, abandoned, orphaned research areas in economics? Will RBC be just a footnote in a book no one reads? (yeah, I'm trying to rile Gabriel up a bit)? Behavioral economics (I'm sure at least of its aspects will be)?

And if you go strictly by the title of this post, does it mean that the "Big Push" model is just a Balanced-Growth-Zombie?

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Some refs (no particular order)

V. V. Bhatt, 1965, "Some Notes on Balanced and Unbalanced Growth", The Economic Journal, Vol. 75

David Demery and Lionel Demery, 1973, "Cross-Section Evidence for Balanced and Unbalanced Growth", The Review of Economics and Statistics, Vol. 55.

Gawande, Li and Sauer, (2003), "Big push industrialization: some empirical evidence for East
Asia and Eastern Europe", Economics Bulletin, Vol 15.

J. R. T. Hughes, 1959, "Foreign Trade and Balanced Growth: The Historical Framework", The American Economic Review, Vol. 49, No. 2, Papers and Proceedings of the Seventy-first
Annual Meeting of the American Economic Association.

P. N. Rosenstein-Rodan, "Problems of Industrialisation of Eastern and South-Eastern Europe"
The Economic Journal, Vol. 53, No. 210/211.

Paul Streeten, 1959, "Unbalanced Growth", Oxford Economic Papers, New Series, Vol. 11, No. 2.

Robert B. Sutcliffe, 1964, "Balanced and Unbalanced Growth", The Quarterly Journal of Economics, Vol. 78, No. 4.

Pan A. Yotopoulos and Jeffrey B. Nugent, "A Balanced-Growth Version of the Linkage Hypothesis: A Test" The Quarterly Journal of Economics, Vol. 87, No. 2.
(note the different citation style - as in original)