Tejvan Pettinger

What do we mean by balanced economic growth? Also, is it important for an economy to promote a balanced approach to growth?

A balanced economy suggests that economic growth is sustainable in the long-term, and the economy is also growing across different sectors – and not focused on one particular industry or area.

A balanced economy has several key features.

Warning signs of an unbalanced economy

US house prices boomed in mid 2000s

In 2009-15, interest rates remained very low. Some economists argued the economy was in effect being ‘propped up’ by artificially low-interest rates – which in turn were distorting the economy by making borrowing very cheap and encouraging another asset bubble. A rise in interest rates is a sign the economy is healthier and less reliant on unorthodox monetary policy.

Is the UK a balanced economy?

There have often been fears expressed that UK economic growth in recent decades tends to be unbalanced. It is weighted towards services – consumer spending and financed by low saving and low investment rates. This has implications for the UK’s long-run trend rate of growth – without sufficient investment, UK productivity is more likely to fall behind our competitors.

Theory of unbalanced growth

We tend to think ‘unbalanced’ growth is harmful to the long-term prospects of the economy. However, one theory of unbalanced growth suggests – it is not harmful but actually a necessary part of economic development.

The theory of unbalanced growth is associated with Albert O. Hirschman. [Albert O. Hirschman. The Strategy of Economic DevelopmentYale University Press, 1958]

Hirschman notes it is not possible to always have broad growth across different sectors. He argues that as long as there is growth in some sector, it will create a dynamic pressure to grow other sectors at a later stage. Hirschman even argues that unbalanced growth and the dynamic tensions it creates helps to speed up economic development.

For example, if there is growth in primary product sector, this creates a complementary investment in transport to get the goods to the export market.

Secondly, if there is growth in one sector, there will be a multiplier effect, and this will cause induced investment in related industries. For example, if mining jobs are created, miners will demand more retail services.

Thirdly, if the mining industry develops and creates more infrastructure, this will later benefit different industries which can make use of the same infrastructure. For example, we built railways to transport coal, but now these railways are used by commuters to get into the city and work in the service sector.


Nevertheless, this theory of unbalanced growth is debated.

Dutch disease – the problem of being resource rich

Dutch Disease is a model goes to the other extreme and says that an economy which focuses on producing primary products will not get this induced investment, but can crowd out other sectors of the economy. An economy which becomes resource-rich creates problems, such as:

But, the price of raw materials can be volatile. Economies like Russia and Venezuela which become dependent on producing oil can have serious economic problems – when the price of oil falls. Arguably, it is desirable for oil rich countries to use proceeds to diversify and invest for the future. Norway is seen as one example.

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