The principle of balanced growth needs a balance between different sectors of the economy during the process of the economic growth.
It requires a proper balanced investment in agriculture and industry. Therefore, it is imperative, that direct investment should be induced in the growing sector which may provide incentive to other economic activities to bring out ultimate transformation of the economy.
We analyze below some of the basic features for making the choice between different sectors of the economy.
1. Balance between Agriculture and Industry:
It implies that an increase-in industrial production will also require an expansion in agricultural production. These two sectors are not competitive but they are complementary to each other. The rate of growth of one sector is governed by the other. The growth of one sector creates external economies for other sectors. For instance, the expansion of the jute industry depends upon the availability of raw jute. Similar is the case of cotton and sugar industries which depends upon agriculture sector for the supply of raw material.
According to Prof. Nurkse, disguised unemployment is another important source of labour supply which is very vital for the expansion of manufacturing industries. Most of the people in underdeveloped countries live at the subsistence level. They are likely to spend a large part of their income on food. Hence, the expansion of non-agricultural sector will create a demand for the out of agricultural sector. Modern agriculture needs inputs like chemical fertilizers, pesticides, tractors etc. which are provided by manufacturing industries.
Thus, agricultural sector and industrial sector both are reciprocal to each other. Again industrialisation releases the new skills, dynamic entrepreneurs, new innovations, which transform the economic and social structure of agricultural sector. Besides simultaneous development between agriculture and industry is pre-requisite for balanced growth and they form an integrated part of the economy. It is rather very difficult to maintain balance between agriculture and industry for all underdeveloped countries.
Thus, following preventive measures can go a long way to ensure balance between the two sectors:
(a) The resources should be distributed among different sectors according to the principle of social marginal productivity to attain maximum social welfare.
(b) Local consideration should be taken into account for optimum combination of different factors.
(c) Efforts should be made to absorb surplus labour in different sector of the economy. For this purpose, the programme of agricultural improvement has to be carried out along with the development at manufacturing industries.
(d) Generally, there is disequilibrium between demand and supply due to some pulls and pressures. In order to bring harmony in both sectors efforts should be made to ensure that limited resources are put to best use.
2. Balance between Investment in Human Capital and Investment in Material Output:
In underdeveloped countries, balanced growth is not only required between agriculture and industry, but also a balance between investment in human capital and material capital. Abundant number of people in these countries are illiterate, ignorant and superstitious. Investment in human capital improves the quality of manpower. Investment in capital goods will raise the capacity to produce, capacity to work, capacity to save and investment capacity to export.
Therefore, investment on material and human capital will help to raise the capital formation. The other important aspect of human capital is quantitative growth of manpower. The limited growth of manpower is conducive for the economic development and after this limit, it is a threat to development. For this purpose, the policy of population control is must. Thus, stern efforts should be made to enlighten the general masses about the small size of the family.
3. Balance between Domestic and Foreign Trade:
There must be a balance between domestic trade and foreign trade. The expansion of domestic trade is essential for raising the flow of goods and services in a country, Domestic trade creates marketable surplus that leads to the expansion of foreign trade. Prof. Nurkse suggested that balanced growth is a good is a good foundation for international trade.
In order to bring the balance between domestic and foreign trade, following steps are advocated:
(a) The underdeveloped countries should re-shape the tariff policy in accordance with its requirements.
(b) Restrictions must be imposed on the import of luxury goods.
(c) Vigorous efforts should be made for removal of market imperfections, expansion of productive capacity and removal of monopoly practices, etc.
(d) The government should make consistent efforts to earn as much foreign exchange as possible for the promotion of exports and reducing imports.
(e) Improvement in transport facilities, abolition of tariff barriers and creation of custom duties can help to a great extent to enlarge the market.
4. Balance within Industrial Sector:
It implies that some internal consistency should be maintained even in the industrial sector itself. Interdependence of industries is needed for balanced growth. For example, a steel factory can be usefully built up only if the raw material is easily available. Similarly, a steel unit should not be operated to full capacity if it lacks demand for its products. In short, there should be a balance between consumer goods industries and capital goods industries. More output of consumer goods is needed to improve the standard of living of people and control inflationary tendencies.
5. Balance between Demand and Supply of Factors:
Another constraint in balanced growth is factor disproportion in underdeveloped countries. In some cases, abundant labour is pitched against too little capital and less resources while on the contrary, too little of labour is pitched against plenty of resources. This type of allocation upsets the entire system which greatly hampers the balanced development. Hence, it requires balance between demand for and supply of factors of production.