Theory of Big Push

Rosenstein Rodan

“…..launching a country into self-sustaining growth is little like getting an airplane of the ground. There is a critical ground speed which muct be passed before the craft can become airborne….”

• Underdeveloped countries require a large amount of investment to break the shackles of backwardness and launch an era of economic development

• Proceeding bit-by-bit will fail to deliver the necessary impact and will merely lead to a dissipation of resources

The need for a big push in underdeveloped countries arises on account of at least three indivisibilities and external economies:

1.Indivisibility in the production function

2.Indivisibility of demand

3.Indivisibility in the supply of savings

1. Indivisibility in the production function• Indivisibilities of inputs, outputs or processes lead

to increasing returns• E.g. social overhead capital (SOC) – power,

transport, communications and other basic infrastructure – the most important instance of indivisibility

• These sectors are indirectly productive and have a long gestation periods

• They cannot be imported• Initial investment required is substantial and

‘lumpy’

• SOC characterised by four indivisibilities:-- indivisible in time and therefore must precede

other directly productive investments-- it has a minimum durability thus making it lumpy-- it has long gestation period-- it has an irreducible minimum industry mix of

different kinds of public utilities• These indivisibilities in the supply of SOC are the

principle obstacles to development• A high initial investment in SOC is necessary to

pave the way for quick yielding directly productive investments

• Indivisibility in infrastructure stems from the fact that in most LDCs infrastructural investment required a good number of large-scale projects, which were needed in their entirety.

• Take water , an obvious priority for many developing countries

• The building of a dam to control the flow of a major river promised improved conditions for domestic agriculture and hydroelectric power for industry

• But this makes the project huge • A project which has many and very diffused benefits almost always has to be

begun on the basis that no benefits will accrue until all the expenditure is undertaken

• You get very little flood control, irrigation and hydroelectric power from half a dam • Indivisibility in demand is a similar concept

2. Indivisibility of demand

-- citizens of underdeveloped countries have smaller purchasing power because of low per capita income

-- markets are therefore small in size

-- a particular industry/firm, even if technically efficient, may fail since low incomes limit the demand for the product produced by that firm/industry

-- what is required therefore is the simultaneous setting up of a large number of industries so that people people working in these industries become consumers of one anothers’ goods and the output of all of them may be sold

Example of a shoe factory• Assume a closed economyScenario 1• A shoe factory is set up that employs say 100 workers• They were disguised unemployed previously i.e., employed in low productivity jobs because of

lack of enough jobs• Their wages therefore constitute an additional income• If these workers spend all their income on the shoes they produce, the shoe market will have a

regular demand and will succeed• But, human wants are diverse and therefore it is unlikely that they would spend all their income

on shoes• If they spend a fraction of income on shoes, that too infrequently, shoes will remain unsold• The failure to find a market for the remaining output will reduce the incentive to invest and the

project would finally fail

Scenario 2• Ten thousand unemployed workers are engaged in 100 factories producing a variety of consumer

goods• Spend their wages on buying each others’ products• A market created for these goods• Complementarity of demand reduces the risk of finding a market and increases the incentive to

invest

Indivisibility of demand necessitates a high minimum quantum of investment in interdependent industries to enlarge the size of the market

3. Indivisibility in the supply of savings

-- high investment requires a high volume of savings

-- underdeveloped economy plagued with low levels of income

-- majority of it spent in consumption (basic commodities)

-- savings low

-- the marginal rate of savings (or the marginal propensity to save) increases only with a substantial increase in income

-- substantial increase in income will require a big push in terms of investment

• Given these three indivisibilities, a ‘big push’ or a minimum quantum of investment is required to overcome the obstacles to development in an underdeveloped economy

• Proceeding bit by bit in an isolated and small way does not lead to a sufficient impact on growth

• A climate for development is only created when investment of a minimum speed or size is made within an underdeveloped economy

• Therefore there is a need for centralised investment planning in these countries that would envisage simultaneous investment in a number of sectors/industries

• When the entire economic structure of a nation has to be changed, investment based on profit expectations of individual entrepreneurs may not be enough

• It is the State that must assume a crucial role

Critical Evaluation• Inadequacy of resources-- a ‘big push’ might require ample resources

• Difficulties in execution and implementation-- not enough capacity within Government officials of an underdeveloped nation to work according to time bound plans

• Neglect of agricultural sector-- ‘big push’ theory essentially a theory of large scale industrialisation-- no mention of agriculture, a sector that could generate demand for industrial goods-- food requirements

• Generation of inflationary pressures-- food shortages likely to raise food prices-- investments being lumpy would increase demand but SOC projects with their long gestation periods will not increase

supply in the short run-- deman supply mismatch, inflationary

• Difficulties in a mixed economy-- co-existence of public and private players likely to generate competition, mutual suspicion and distrust if their products

are substitutes

• Not supported by history-- historically, the presence or absence of a big push has not been a distinguishing feature of growth anywhere