| has given a proper explanation of the theory of balanced
growth. | Prof. Nurkse |
| the major obstacle to the development of the
underdeveloped countries | vicious circle of poverty |
| This vicious circle
of poverty shows | that income in underdeveloped countries is low. Low
income leads to low savings. Low savings will naturally result in low investment, which will result in less production. Low production will generate low income. Low income will create low demand for goods. In other words, it will result in smaller markets (limited extent of markets). Thus, there will be no inducement to invest. |
| According to Nurkse | “The inducement to invest may be low because of the small buying power of the people, which is due to their small real income,
which again is due to low productivity. The low level of productivity however is a result of the small amount of capital used in production which in turn may be caused, at last partly, by inducement to invest.” |
| in order to break the vicious circle of poverty in under-developed countries, it is essential to have | balance between demand and supply |
| The vicious circle of poverty operates both on | demand and supply side |
| (a) Demand Side: | Low Income → Low Size of Market → Low Investment → Low Productivity → Low Income. |
| (b) Supply Side: | Low-Income → Low Savings → Low Investment → Low Capital → Formation → Low Productivity → Low Income |
| Vicious circle of poverty: On Demand Side: | In UDCs the size of the market is limited. As a result, private investors do not get opportunities for more investment. This reduces investment and capita. Hence productivity of capital would fall |
| Vicious Circle of Poverty: Supply Side: | The underdeveloped countries, can resort to capital formation and accelerate the pace of economic development only by breaking the vicious circle of poverty. Once the vicious circle of poverty is broken, the economy would be on the rails to development. Now the question is how to break the vicious circle of poverty |
| How to Break Vicious Circle of Poverty? | (i) Complementary Demand:
(ii) Government Intervention:
(iii) External Economies:
(iv) Economic Growth: |
| (i) Complementary Demand: | means the vicious circle of poverty cannot be broken only by making investments in one industry or one sector. Rather, there should be an overall investment in all the sectors. This is the only way to enlarge the size of the market. |
| The complementarity of industries is in reality, the crux of the concept of
balanced growth. | This is termed as complementarities of demand. |
| (ii) Government Intervention: | the government must intervene in productive activities through economic planning. when government participates in productive activities, it will help in breaking the vicious circle of poverty. Nurkse opines that if entrepreneurs are available in underdeveloped countries, then they can be induced to make investment. |
| (iii) External Economies: | External economies are those which accrue because of the setting up of new industries and expansion of the existing industries. The accruing of external economies lead to the law of increasing returns to scale. It leads to a fall in the cost of production and hence the price level. A fall in the price leads to an increase in demand which is useful for economic development. |
| (iv) Economic Growth: | Balanced growth helps in accelerating the pace of economic growth, G.M.Meier is of the view that “Balanced Growth is a means of getting out of a rut”. |
| How the Market can be enlarged: | by monetary expansion, salesmanship, and advertisement, removing trade restrictions, and expanding social other heads i.e., infrastructures. It can be widened either by a reduction in prices or by an increase in money while keeping constant prices |
| Nurkse further submits his notion of balanced growth from Say’s law | which states that “Supply creates its own Demand” |
| Mill cites | “Every increase of production, if distributed without miscalculation among all kinds of produce in the proportion which private interest would dictate, creates or rather constitutes its own demand.” |
| Nurkse’s, balanced growth | a sort of frontal attack—” a wave of capital investment in a number of different industries.” |
