Big Push Theory of Economic

Development

R P Pradhan
BITS Pilani KK Birla Goa Campus

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Big Push Theory of Development

Background
Paul Narcyz Rosenstein-Rodan (19021985)
Austrian economist of Polish- Jewish origin. Was
trained in the Austrian Tradition under Hans Mayer in
Vienna.

Rosenstein-Rodan emigrated to Britain in

1930, and taught at University College of
London & at LSE until 1947. He then moved
to the World Bank, before moving on to MIT,
where he was a professor from 1953 - 1968.
Paul Rosenstein Rodan
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The Austrian School of Economics is a school of Economic Thought which
advocates a methodological individualistic approach to Economics called
Praxeology(Deductive / Opposite of reflexive)

The theory that Money is Non-neutral &

Interest rates and profits are determined by the interaction of diminishing

Marginal Utility with diminishing Marginal Productivity of time and time
preferences.

The capital structure of economies consists of heterogeneous goods that have

multi specific uses which must be aligned (see Austrian Business Cycle Theory
ABCT )and emphasizes the organizing power of the price mechanism.

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Back Ground

Author of "Problems of Industrialisation of Eastern and

South-Eastern Europe( article-1943) This servers as the
origin 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 in

industrialization in countries with a large surplus workforce in
agriculture, in order to take advantage of network effects.

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Idea!

Proposes large Scale Industrialization of E./ S Europe which were depressed

economies.

This shall drive more equal/higher distribution of income in these

economies than western Europe.(Comparative Growth)

Assumes that these economies (E/S Europe) have Agrarian Excess

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 western Europe, in E./S

Europe, it is considerably higher.
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Area under Study

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 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 of labour.

Even if it is negligible, emigration has much larger social costs like

resettlement etc. Hence, large scale emigration is not feasible.

Alternative best option without incurring social cost is large scale

industrialization.

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 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 of investment,

it is imperative to look at an economic unit comprising the
whole area between Germany, Russia and Italy.

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

Two fundamentally different ways are available for this -

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 Eastern & S. Eastern Europe should industrialize on its own on the
Russian Model minus Communism i.e. self sufficiency without
international investment.

That would imply construction of all stages of industry with the final
result of a national economy built like a vertical industrial scale.

Disadvantages of Russian Model-

In the absence international capital, It can only proceed slowly.

Since, internal capital shall be employed/consumed for this model, it

will eat up standard of living which is already at subsistence level.
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 It will therefore involve unnecessary sacrifice which is not
needed.
Since the region has natural resources, it will initially show up
in productivity.
However, since it will employ low level labour productivity due
to initial years of industrialization, world output shall be low.
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, produce
more wealth for everybody.

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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. Capital

Mobility

Proposes State intervention to regulate/mitigate investment risks

Necessary institutional frame work needed.

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Big Push Model for Underdeveloped Countries

Underdeveloped Economies require large amounts of

investments to embark on economic development.

A piece meal approach shall not impact as much as

needed.

Rather, small investments shall cause wastage of resources.

Hence, a minimum level of resources must be devoted to

achieve desired success.

Gives the example of air craft needing a critical minimum

ground speed to be airborne.

- Hence, to escape the low level equilibrium "trap, economies of

scale and scope must have to be achieved.
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 The entire industrialization which is intended to be created
should be treated and planned as a massive entity.

Argues that the social marginal product of an investment is

always different from its private marginal product.

So, when a group of industries are planned together according

to their social marginal products, the rate of growth of the
economy is greater than it would have otherwise been

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The three Indivisibilities (Limitations)

According to Rosenstein - Rodan, there exist three

indivisibilities in underdeveloped countries.

These indivisibilities justify the need for a big push. The

externalities are as follows-

Indivisibility in Production Function

Indivisibility of Demand
Indivisibility in the supply of Savings

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Indivisibility in Production Function-

Inputs/Processes/Outputs(Initial Investment Capital)

Indivisibility in Production Function involves preceding

investments in many 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 scale industrialization.
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Indivisibility of Demand-

Underdeveloped countries are characterized with low per

capita income and the corresponding lack of surplus for
expenditure.

Market creation Needed.

Shoe Industry Example. Industrialization can not happen in

isolation. Has to happen in all sectors in a big way

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Indivisibility in the supply of Savings-

High level investment needed for large scale industrialization

International investments(Aid) may not necessarily flow all the

time.

Hence domestic saving mechanism / instrument / framework

needed i.e. State intervention.

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Single Sector Industrialization Model

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Real Big Push in Work

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Criticism

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

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