Big Push Theory

BITS Pilani, K K Birla Goa Campus

Big Push Theory of EconomicDevelopment


Paul Narcyz Rosenstein-Rodan (1902–1985)Austrian economist of Polish- Jewish origin. Wastrained in the Austrian Tradition under Hans Mayer inVienna.

Big Push Theory of Development

Paul Rosenstein– RodanPaul Rosenstein– Rodan

Rosenstein-Rodan emigrated to Britain in1930, and taught at University College ofLondon & at LSE until 1947. He then movedto the World Bank, before moving on toMIT, where he was a professor from 1953 -1968.

Rosenstein-Rodan emigrated to Britain in1930, and taught at University College ofLondon & at LSE until 1947. He then movedto the World Bank, before moving on toMIT, where he was a professor from 1953 -1968.


The Austrian School of Economics is a school of Economic Thoughtwhich advocates a methodological individualistic approach toEconomics called Praxeology.

The theory that Money is Non-neutral &

Interest rates and profits are determined by the interaction ofdiminishing Marginal Utility with diminishing Marginal Productivityof time and time preferences.

The capital structure of economies consists of heterogeneousgoods that have multi specific uses which must be aligned (seeAustrian Business Cycle Theory ABCT )and emphasizes theorganizing power of the price mechanism.

The Austrian School of Economics is a school of Economic Thoughtwhich advocates a methodological individualistic approach toEconomics called Praxeology.

The theory that Money is Non-neutral &

Interest rates and profits are determined by the interaction ofdiminishing Marginal Utility with diminishing Marginal Productivityof time and time preferences.

The capital structure of economies consists of heterogeneousgoods that have multi specific uses which must be aligned (seeAustrian Business Cycle Theory ABCT )and emphasizes theorganizing power of the price mechanism.


Author of "Problems of Industrialisation of Eastern andSouth-Eastern Europe“( article-1943) – This servers as theorigin of the “Big Push Model” theory

Source: The Economic Journal, Vol. 53, No. 210/211 (Jun. - Sep.,1943), pp. 202-211

Here he argued for planned large-scale investment programs inindustrialization in countries with a large surplus workforce inagriculture, in order to take advantage of network effects.

Back Ground


Proposes large Scale Industrialisation of E./ S Europewhich were depressed economies.

This shall drive more equal/higher distribution of income inthese economies than western Europe.(ComparativeGrowth)

Assumes that these economies (E/S Europe) have AgrarianExcess Population

Out of 100 – 110 Million of total population, about 25%(20 –25 million) are either partially or totally unemployed(disguised unemployment).

Though unemployment is very much there in rich westernEurope, in E./S Europe, it is considerably higher.



If international division of labour principle are to be applied, then,Labour must either be transported towards capital (emigration)

OR

Capital must be transported towards labour (Industrialisation)

Emigration involves transportation cost in capital movement oflabour.

Even if it is negligible, emigration has much larger social costslike resettlement etc. Hence, large scale emigration is notfeasible.

Alternative best option without incurring social cost is large scaleindustrialization.


In order to reach an optimum size of industrial enterprises,the area of industrialization must be sufficiently large.

Towards possibility of lowering the marginal risk ofinvestment, it is imperative to look at an economic unitcomprising the whole area between Germany, Russia andItaly.

Though the geographic area of this unit seems large, thetotal GNI is only f2000 million which is 40% of the GNI ofGreat Britain.

Two fundamentally different ways are available for this -


Eastern & S. Eastern Europe should industrialize on its own onthe Russian Model minus Communism i.e. self sufficiency withoutinternational investment.

That would imply construction of all stages of industry with thefinal result of a national economy built like a vertical industrialscale.

Disadvantages of Russian Model- In the absence international capital, It can only proceed

slowly.

Since, internal capital shall be employed/consumed for thismodel, it will eat up standard of living which is already atsubsistence level.


It will therefore involve unnecessary sacrifice which is notneeded.

Since the region has natural resources, it will initially showup in productivity.

However, since it will employ low level labour productivitydue to initial years of industrialisation, world out shall below.

World there fore shall be poorer in material goods.

Therefore, the alternative mode of industrialization would more fit E. SE.Europe into world economy which would preserve the advantages of an

international division of labour, and would therefore, in the end, producemore wealth for everybody.

Therefore, the alternative mode of industrialization would more fit E. SE.Europe into world economy which would preserve the advantages of an

international division of labour, and would therefore, in the end, producemore wealth for everybody.


Alternative Model Assumptions / Preconditions-

Large Scale Industrialization

Utilization of the advantages of International Division of Labour

Employment of agrarian surplus labour

Substantial International Investment or Capital lending i.e. CapitalMobility

Proposes State intervention to regulate/mitigate investment risks

Necessary institutional frame work needed.


Underdeveloped Economies require large amounts ofinvestments to embark on economic development

A piece meal approach shall not impact as much asneeded.

Rather, small investments shall cause wastage ofresources

Hence, a minimum level of resources must be devoted toachieve desired success.

Gives the example of air craft needing a critical minimumground speed to be airborne.

Big Push Model for Underdeveloped Countries

- Hence, to escape the low level equilibrium "trap“, economiesof scale and scope must have to be achieved.

- Hence, to escape the low level equilibrium "trap“, economiesof scale and scope must have to be achieved.


The entire industrialization which is intended to be createdshould be treated and planned as a massive entity.

Argues that the social marginal product of an investment isalways different from its private marginal product.

So, when a group of industries are planned togetheraccording to their social marginal products, the rate ofgrowth of the economy is greater than it would haveotherwise been


According to Rosenstein - Rodan, there exist threeindivisibilities in underdeveloped countries.

These indivisibilities justify the need for a big push. Theexternalities are as follows-

Indivisibility in Production FunctionIndivisibility of Demand

Indivisibility in the supply of Savings

The three Indivisibilities


Indivisibility in Production Function-

Inputs/Processes/Outputs

Indivisibility in Production Function involves preceding investments inmany infrastructure area to host /sustain large scale industrialization .

Example - investments in road / electricity etc. which is nearly 30 – 40%of lumpy investment which has to be invested in advance of large scaleindustrialisation.


Indivisibility of Demand

Underdeveloped countries are characterized with lowper capita income and the corresponding lack ofsurplus for expenditure.

Market creation Needed. Shoe Industry Example. Industrialization can not

happen in isolation. Has to happen in all sectors in abig way


Indivisibility in the supply of Savings-

High level investment needed for large scaleindustrialization

International investments(Aid) may not necessarily flowall the time.

Hence domestic saving mechanism / instrument /framework needed i.e. State intervention.


Single Sector Industrialization Model


Real Big Push in Work


Difficulties in Execution & Implementation Problems in Mixed Economies Ignores Agriculture Sector Shortage of Resources in underdeveloped countries Dependence on Indivisibilities Historical inaccuracy Long gestation Period Neglect of Method of Production

Criticism


Documents

Big Push Theory