ROSENSTEIN-RODAN’S THESIS

The theory of the “big push” is associated with the name of Professor Paul N. Rosenstein-Rodan.1 The thesis is that a “big push” or a large comprehensive programme is needed in theform of a high minimum amount of investment to overcome the obstacles to development in anunderdeveloped economy and to launch it on the path to progress. To stress his argument, hequotes an analogy from an MIT Study : “There is a minimum level of resources that must bedevoted to... a development programme if it is to have any chance of success. Launching acountry into self-sustaining growth is little like an airplane off the ground. There is a criticalground speed which must be passed before the craft can become airborne...”2 The theory statesthat proceeding “bit by bit” will not launch the economy successfully on the development path,rather a minimum amount of investment is a necessary condition for this. It necessitates theobtaining of external economies that arise from the simultaneous establishment of technicallyinterdependent industries. Thus indivisibilities and external economies flowing from a minimumquantum of investment are a prerequisite for launching economic development successfully.

1. Notes on the Theory of ‘Big Push’, in Economic Development of Latin America, Ch.III, (ed.) H.S. Ellis andW.W. Wallich, 1961.

2. The Objectives of US Economic Assistance Programmes, 1957.

C H A P T E RC H A P T E RC H A P T E RC H A P T E RC H A P T E R

TTTTThe “Big Push” The “Big Push” The “Big Push” The “Big Push” The “Big Push” Theoryheoryheoryheoryheory

27

196 The Economics of Development and Planning

Rosenstein-Rodan distinguishes between three different kinds of indivisibilites and externaleconomies. One, indivisibilities in the production function, especially the indivisibility of thesupply of social overhead capital; two, indivisibility of demand; and three, indivisibility in thesupply of savings. Let us analyse the role of these indivisibilities in bringing economicdevelopment.

1. INDIVISIBILITIES IN THE PRODUCTION FUNCTION

According to Rosenstein-Rodan, indivisibilities of inputs, outputs or processes lead to increasingreturns. He regards social overhead capital as the most important instance of indivisibility andhence of external economies on the supply side. The services of social overhead capitalcomprising basic industries like power, transport, and communications are indirectly productiveand have a long gestation period. They cannot be imported. Their installations require a “sizeableinitial lump” of investment. So excess capacity is likely to remain in them for some time. Theyalso possess “an irreducible minimum industry mix of different public utilities, so that anunderdeveloped country have to invest between 30-40 per cent of its total investment in thesechannels.”Thus, social overhead capital is characterised by four indivisibilities. First, it is irreversible intime and, therefore, must precede other directly productive investments. Second, it has aminimum durability, thus making it very lumpy. Third, it has a long gestation period. Last, ithas an irreducible minimum industry mix of different kinds of public utilities. Theseindivisibilities of supply of social overhead capital are one of the principal obstacles todevelopment in underdeveloped countries. Therefore, a high initial investment in socialoverhead capital is necessary to pave the way for quick-yielding directly productive investments.

2. INDIVISIBILITY OF DEMAND

The indivisibility or complementarity of demand requires simultaneous setting up ofinterdependent industries in underdeveloped countries. This is because individual investmentprojects have high risks because low incomes limit the demand for their products. To illustrate,Rosenstein-Rodan takes first a closed economy where a hundred disguised unemployed workersare employed in a shoe factory whose wages constitute an additional income. If these workersspend all their income on shoes they manufacture, the shoe market will have a regular demandand thus succeed. But the fact is that they would not like to spend all their additional income onshoes, human wants being diverse. Nor will the people outside the factory buy additional shoeswhen they are poor. Thus, the new factory will be abandoned for want of an adequate market.To vary the example, suppose ten thousand unemployed workers are engaged in one hundredfactories (instead of hundred workers in one factory) who produce a variety of consumer goodsand spend their wages on buying them. The new producers would be each others’ customersand thus create market for their goods. The complementarity of demand reduces the risk offinding a market and increases the incentive to invest. In other words, it is the indivisibility ofdemand which necessitates a high minimum quantum of investment in interdependentindustries to enlarge the size of the market.Rosenstein’s example of the shoe factory is explained in Fig.1. The curves ATC and MC representthe costs of a plant which is a little smaller than the optimum-size plant. D1 and MR1 are thedemand and marginal revenue curves of the shoe factory when investment is made only in it. Itproduces OQ1 (10,000) shoes and sells at OP1 price which does not cover the ATC. So the factoryis incurring CABP1 losses. But when simultaneous investment is made in a number of different

The “Big-Push”Theory 197

industries, the market for shoesexpands. The demand for shoes risesto D4 (four times) so that the quantityof shoes becomes OQ4 (40,000). Nowthe shoe factory earns profits equalto P4RST. Similarly, other industriesearn profits.

3. INDIVISIBILITY IN THE SUPPLYOF SAVINGS

A high income elasticity of saving isthe third indivisibility in Rosenstein’stheory. A high minimum size ofinvestment requires a high volume ofsavings. This is not easy to achieve inunderdeveloped countries because oflow incomes. To overcome this, it isessential that when incomes increasedue to an increase in investment, themarginal rate of saving should be very much higher than the average rate of saving. Given these three indivisibilities and the external economies to which they give rise, a “bigpush” or a minimum quantum of investment is required to overcome the obstacles todevelopment in underdeveloped countries. “There may be finally a phenomenon of indivisibilityin the vigour and drive required for a successful development policy,” writes Rodan. Butproceeding 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 ismade within an underdeveloped economy.

A CRITICAL APPRAISAL

Rosenstein Rodan regards his theory of development superior to the traditional static equilibriumtheory because it appears to contradict the latter’s motto that nature does make jumps. Histheory is based on more realistic assumptions of indivisibilities and nonappropriabilities in theproduction functions. It examines the path towards equilibrium and not merely the conditionsat a point of equilibrium. It is thus primarily a theory of investment concerned with imperfectmarkets in underdeveloped countries. It is a high minimum quantum of investment rather thanprice mechanism in such imperfect markets that takes an underdeveloped economy towardsan optimum position.The big push theory is, however, not free from certain defects.1. Negligible Economies from Investment in Export and Import Substitutes. The mainjustification for a big push in investment on social overhead capital is the realization of extensiveexternal economies. But as pointed out by Viner,3 underdeveloped economies realize greatereconomies from world trade independently of home investment. Rodan has recognised thisfact, but keeps silent over another reality that in the newly developing countries investment forexport and for marginal import substitutes occupies a large chunk of total investment. The

O

MC

S

E

R

B

C A

ATC

Q1Q4

T

P1

D1

P4

D4

E1

MR1

MR4

Quantity

Pri

ce

Fig. 1

3. “Stability and Progress: The Poorer Countries Problem,” in Stability and Progress in the World Economy,(ed.) D. Hague. 1958.

198 The Economics of Development and Planning

external economies argument for a big push does not hold because external economies arenegligible in the above types of investments.2. Negligible Economies even from Cost-Reducing Investments. Even in the production oflocal consumer goods and most public utilities, potential external economies can be realized ina limited way. Investments in the case of fairly inelastic demand are cost-reducing rather thanoutput-expanding. Since external economies accrue from the output-expansion in the initialindustry, they are negligible in the case of cost-reducing investment.3. Neglects Investment in the Agricultural Sector. One of the principal defects of the big pushtheory is that it emphasizes the importance of a high level of investment in capital goods andconsumer goods industries and social overhead capital, except agricultural and other primaryindustries. In agriculture-oriented underdeveloped countries a big push of large investmentsin irrigation, transportation facilities, land reforms, and in improving agricultural practicesthrough better tools, implements, fertilisers etc. are as important as investment in other industries.The neglect of the agricultural sector in such economies will retard rather than accelerate theirdevelopment.4. Generates Inflationary Pressures. Even the launching of a high minimum amount ofinvestment on social overheads is highly expensive. Moreover, overhead capital has a highcapital-output ratio and a very long gestation period. This makes the task of developing UDCsmore difficult and longer. This is because such countries do not possess enough financialresources to provide social overhead capital required for the big push. The period during whichsocial overhead capital is being formed will also be one of inflationary pressures because of theshortage of consumer goods. These inflationary pressures, in turn, would prolong the processof building social overhead capital, thus making it highly difficult for an UDC to achieve rapideconomic development.5. Low Investment Leads to Large Increase in Output. John Adler’s statistical analysis of theeconomic development of the world reveals that “a relatively low level of investment pays offwell in the form of additional output.”4 This conclusion is based on his study of low capital-output ratios in India, Pakistan and in many other Asian and Latin American countries. Thus,there appears to be little conclusive proof that a big push of investment is a prerequisite for theeconomic development of underdeveloped countries6. Administrative and Institutional Difficulties. Further, the big push theory is based upon aburst of state-engineered investment. Rosenstein himself points out that in the presence ofimperfectly developed markets in underdeveloped countries, the price mechanism is a verypoor signalling system. But the dependence on state investment itself poses a number ofproblems. The administrative and institutional machinery in such economies is weak andinefficient. Difficulties are bound to arise not only in drawing up the plans for various projectsbut also in their execution. Lack of statistical information, technical know-how, trained personneland coordination between the various departments are some of the complex problems whichare not easy of solution. Moreover, the majority of underdeveloped countries have a mixedeconomy, where the private and public sectors are mostly competitive rather thancomplementary. This leads to mutual rivalry and suspicion which are inimical to a balancedgrowth of the economy. 7. Not an Historical Fact. Last but not the least, Rodan’s thesis is a sort of prescription forlaunching underdeveloped countries on the path to progress rapidly in the present. It is not anhistorical explanation of how development takes place. Historically, the presence or absence ofa big push has not been a distinguishing feature of growth anywhere, according to ProfessorHagen.5

4. “World Economic Growth—Retrospect and Prospect,” RES, August 1956.5. E.E. Hagen, On the Theory of Social Change, 1962.