The theory of Balanced Growth treats the economy of the developing country as one unit. In this it is an advance on the macro-economic analysis of the recent past. However, it tends to exaggerate the independence of this unit, to deal with the interrelationships of the national economy and the world market as limiting factors of no particular significance to the nature of development, but merely as the regulator of its speed via the balance of payments.
It is difficult to accept such an approach as realistic. We have seen reason to question the assumption of the theory on the grounds of its ignoring the real problems of Western-inspired (through public health measures) population growth, of the increasingly potent demonstration effect of Western living standards and forms of organising social protest, of the need to meet Western competition, to adopt Western-type administrative, security and public utility installations etc. It has been shown that backward countries are not backward in themselves but relatively to the problems facing them, and that these derive precisely from the impact of the developed world upon them. Indeed the nub of development might be stated thus: the tasks facing the backward countries are those normal to the developed world; the resources at their disposal are those of the under-developed world. The investment pattern derives from the industrial communities; the savings pattern from peasant villages.
This paradox, more than anything else, would tend to rule out as the paradigm for the backward world the historic pattern of development epitomised in the industrial evolution of the West or envisaged in the generalised Balanced Growth model. The juxtaposition of the “haves” and the “have-nots” in the world raises its own problems and debars a purely national analysis or solution. [1]
The requirements of an even, cumulative development would point to a diffuse increase in productivity throughout the entire economy. The exigencies of competition, the need to satisfy – if only in part – the increasing demands of increasing populations, etc. point to the adoption of the most productive techniques available. (The latter requirements implies greater enhanced outlays on imports of skills and capital goods than is usual for non-developing backward countries).
Given the resources available to Indonesia (both in general and in foreign currency), given the difficulties in increasing savings either voluntarily or through taxation, these two requirements seem mutually inconsistent. The country seemingly cannot command the resources to satisfy both conditions. Unless she can augment her own resources substantially with income transfers from the developing countries, one or other of these conditions might have to be jettisoned. [2]
The choice between balanced growth and unbalanced, forced development is not easy and there is no simple formula for making it. The fragile social and political equilibrium might well be shattered by forced, unbalanced, development; on the other hand it might be necessary to stave off social disruption. In either case, equilibrium might be ruined anyway.
An absence of foreign aid or private capital flow does not imply an absence of the foreign impact which make such aid necessary. Population growth has been firmly incorporated into the dynamics of the area as have income comparisons and the organisation of social pressure. The level of Western technique would still set the pace in world competition and, by derivation, in the export sector and its utilities substructure. With or without foreign aid, developing economies might be forced to choose capital intensive production functions, and a “co-efficient of development” [3] heavily biased in the direction of investments in low-return utilities and heavy industry. For in the long run, an over-expansion of utilities and heavy industry in terms of current production might be justified in those of foreseeable future output.
With adequate foreign aid such a choice need not bear unduly on the consumption levels of the population, even if the returns on such investments through time are the smallest per unit of capital. Without it the postponement of consumption implied by such an investment pattern might be disastrous.
The first difficulty in the latter eventuality would be raised by inflation. Without increases in taxed agricultural output (the difficulties of which we have discussed [4]), the purchasing power generated by new employment would both push up prices and tend to divert resources from long-term development to investment of a short-term or even speculative nature. The former might well result in enhanced social unrest; the latter might put the development priorities decided upon in jeopardy.
If these priorities are to be defended in the face of consumer demand, the State might have to intervene and resort to direct controls – rationing and resource allocation – might have to abrogate consumer sovereignty completely. If the resultant social unrest is to be controlled, the State might have to adopt undemocratic, indeed totalitarian methods to impose its will. This implies both enhanced security expenditure and isolation from the currents of freedom abroad. What this implies in terms of international relations – economic autarky, militarism, etc., – is beyond our scope.
Suffice it to say in conclusion that for Indonesia the choice between this crudely sketched Russian-type development and that of the more harmonious Balanced Growth model turns on the degree of assistance which she – like many of her neighbours – receives from the developed countries of the West. Foreign aid can mean that the assumption of an SMP-rule defined in the long term can be satisfied with the need for capital intensive production functions; that accumulation can go on concurrently with rising income levels and unabrogated consumer sovereignty. Foreign aid can mean, finally, the difference between economic growth under conditions of democracy and forced development under totalitarian rule. It can influence the critical choice that is Indonesia’s at this moment of writing (February, 1957).
1. This point has been admirably developed by Myiat in An Interpretation of Economic Backwardness, OEP, Vol. VI No. 2 (June 1954) where he writes, inter alia, “when we adopt the approach in terms of ‘backward people’ we are by definition making their failure in the economic struggle the centre of the problem and….this involves: a) a fundamental contrast between them (the ‘backward people’), and the natural resources and the economic environment of their country, and (b) a deliberate concentration of attention on their share of incomes or economic activity either within their own country or in relation to the world at large as distinct from the total volume of output or economic activity”.
2. Whether the additional resources are supplied via private investment channels or through intergovernmental grants is immaterial to the analysis at this point. The current state of international investment (private) and of international grants in aid as well as a discussion of their relative merits will be found above, pp. 44ff.
3. Denoting the proportions existing between investing in the various sectors of the economy.
4. See above, pp. 157ff.
This text forms Chapter VII Conclusion: The Need for International Income Transfers (pp. 263–266) of Mike Kidron’s unpublished thesis:
Kidron, Michael. 1957. Problems and patterns of development in overpopulated backward countries with special reference to Indonesia. M.Litt. University of Oxford, Faculty of Social Studies, Balliol College, 289pp.
Last updated on 10 April 2020