Hirschman, A.O. 1958. Balanced growth: A critique. Chapter 3, pp.

50-61; Interregional and

international transmission of economic growth. Chapter 10 of The Strategy of Economic
Development, pp. 183-201. New Haven: Yale University Press.

Before setting out I think it only fair to warn the reader that I heartily disagree with the
''balanced growth" doctrine. The theory of balanced growth has several authors and aspects.
The principal authors are Rosenstein-Rodan, Nurkse, Lewis, and Scitovsky.

In one of its aspects, the theory stresses the need for the different parts of a developing
economy to remain in step to avoid supply difficulties. Industry must not, get too far ahead of
agriculture. Basic facilities in transportation, power, water supply, etc.-the so called
social overhead capital-must be supplied in adequate volume to support and stimulate the
growth of industry. We shall have to say something later on about these prescriptions of
balance between sectors in the course of growth.

In this version the requirement of balanced growth is derived from the demand side.
Therefore, it is argued, to make development possible it is necessary to start, at one and the
same time, a large number of new industries which will be each others clients through the
purchases of their workers, employees, and owners. For this reason, the theory has now also
been annexed to the theory of the big push." A big push could, of course, result from one or a
few big projects, or from a large number of projects of. varying size that dovetail with one
another. It is clearly the latter alternative of the big push" theory that is implied by the theory
of balanced growth.

My principal point is that the theory fails as a theory of development. Development

presumably means the process of change of one type of economy into some other more
advanced type.
Oblivious of this "difference," the balanced growth theory reaches the conclusion that an
entirely new, self-contained modern industrial economy must be superimposed on the
stagnant and equally self-contained traditional sector.
It combines a defeatist attitude toward the capabilities of underdeveloped economies with
completely unrealistic expectations about their creative abilities
People that is assumed to be unable to do any of these things and that is therefore entirely
uninterested in change and satisfied with its lot is then expected to marshal sufficient
entrepreneurial and managerial ability to set up at the same time a whole flock of industries
that are going to take in each others' output!
The initial resources for simultaneous developments on many fronts are generally lacking." In
other words, if a country were ready to apply the doctrine of balanced growth, then it would
not be underdeveloped in the first place.
The balanced growth doctrine is now seen to be essentially the application of
underdevelopment of a therapy originally devised for an underemployment situation.

The Paradox of the Internalization Doctrine

Production must be integrated and centrally planned as though it were taking place in a single
"trust," for only in that case are the external economies going to be "internalized" with a
consequent upward revision of profit estimates. This would be the case if all the
repercussions of a new venture were going to be favorable. However, if the repercussions
include losses (pecuniary external diseconomies), they will ordinarily be internalized along
with the gains and it is no longer certain where we will come out. But in general economic
development means transformation rather than creation ex novo: it brings disruption of
traditional ways of living, of producing, and of doing things, in the course of which there
have always been many losses; old skills become obsolete, old trades are ruined, city slums
mushroom, crime and suicide multiply, etc. And to these social costs many others must be
added. And, admittedly, a major difficulty for the speedy industrialization of today's
underdeveloped countries consists precisely in the fact that they are not prepared to incur
those social costs that were so spectacularly associated with the process during.
the early nineteenth century in Western Europe.

Different Types of Internalization and Their Effect on Growth

Under the guild system, for instance, an innovation in producing a given commodity could
only be introduced by someone who was already engaged in its production by the old
process. In this way, then, the external diseconomies of innovations were fully taken into
account by the guild system, and, to the extent that the regulations worked, technological
progress was seriously held back.
When anyone can enter a trade or industry, he can take advantage of the latest inventions and
innovations, and the damages suffered by traditional producers are no concern of his. So that
from the point of view of investment incentives, the capitalist system, especially as it existed
in the nineteenth century, is hard to beat: there was a minimum of internalization of external
diseconomies and there was no limitation on the internalization of pecuniary external
economies through acquisitions, combinations, or mergers with closely interdependent
economic activities. Finally, the state provided important external economies by supplying
law and order, basic education, and some public utilities. In other words, it was the peculiar
lack of internalization implicit in the private enterprise system-the way in which the
institutions of that system "hid" certain costs from the entrepreneurs -that was largely
responsible for the dynamic economic charges that took place.
In this respect, then, a planned economy is likely to behave much like the guild system; the
process of "creative destruction" is constitutionally alien to it because destruction here means
self-destruction rather than destruction of somebody else.
Society that centralizes investment decisions may therefore be expected to be biased against
innovations whose introduction might cause losses to existing operators. Thus, internalization
is likely to affect the pace of a country's development unfavourably in some areas and
favourably in other.

CHAPTER 10
Interregional and International Transmission of Economic Growth

In this inquiry we may take it for granted that economic progress does not appear everywhere
at the same time and that once it has appeared powerful forces make for a spatial
concentration of economic growth around the initial starting points. Why substantial gains
may be reaped from overcoming the "friction of space" 1 through agglomeration has been
analysed in detail by the economic theory of location. During the development process,
international and interregional inequality of growth is an inevitable concomitant of growth
itself.
What appears to happen is that the external economies due to the poles, though real, are
consistently overestimated by the economic operators.
Even though the initial success of these groups may often be due to sheer luck or to
environmental factors such as resource endowment, matters will not be left there. Those who
have been caught by progress will always maintain that they were the ones who did the
catching; they will easily convince themselves, and attempt to convince others, that their
accomplishments are primarily owed to their superior moral qualities and conduct.
In other words, there is reason to think that the "protestant ethic," instead of being the prime
mover, is often implanted ex post as though to sanctify and consolidate whatever
accumulation of economic power and wealth has been achieved.

Trickling-Down and Polarization Effects

The growth of the North will have a number of direct economic repercussions on the South,
some favourable, others adverse.
Trickling down of Northern progress:
Increase of Northern purchases and investments in the South, an increase that is sure to take
place if the economies of the two regions are at all complementary.
In addition, the North may absorb some of the disguised unemployed of the South and
thereby raise the marginal productivity of labour and per capita consumption levels in the
South.
Several unfavourable or polarization effects are also likely to be at work:
Comparatively inefficient, yet income-creating, Southern activities in manufacturing and
exports may become depressed because of Northern competition.
Instead of absorbing the disguised unemployed, Northern progress may denude the South of
its key technicians and managers as well as of the more enterprising young men. This type of
migration may be undesirable not only from the point of view of the South but also from that
of the country, for the loss to the South due to the departure of these men may be higher than
the gain to the North.
In spite of this bleak picture, we would still feel confident that in the end the trickling-down
effects would gain the upper hand over the polarization effects if the North had to rely to an
important degree on Southern products for its own expansion.(how not valid in Indian
context)

In other words, if the market forces that express themselves through the trickling-down and
polarization effects result in a temporary victory of the latter, deliberate economic policy will
come into play to correct the situation.

The Regional Distribution of Public Investment

Three principal patterns of allocation can be distinguished: dispersal, concentration on
growing areas, and attempt to promote the development of backward areas.

Due to political reasons, the temptation to scatter the investment is strong. Disconnected
roads are built at many points; small Diesel power plants and aqueducts are installed in many
towns. Wherever this idea prevails, governments are unprepared and unwilling to make the
choices about priorities and sequences that are the essence of development programs.
Dispersal requires little skill and planning which is not there in underdeveloped countries.

Interregional and International Transmission Compared

Polarisation effects will be less strong in country than in a region.

If the South were an independent country, mobility would certainly be far lower and the
Southern development potential would be less impaired.

Suppose that North and South, considered independently, both have a

comparative advantage in cane sugar, but that production is more
efficient in the North. Then, if each were an independent country,
they would both specialize in sugar, with real factor returns being
lower in the South. But if North and South are united in one country,
sugar production would be expanded in the North and may be
abandoned in the South even though the maintenance and expansion
of sugar exports could represent the valuable beginning of a "growth
pole" for the South.
The region cannot ordinarily protect its industries except through exemption from minor local
taxes.
Finally-and related to the previous points-the absence of economic sovereignty with respect
to such matters as currency issue and exchange rate determination may be a considerable
handicap for the development of a region.