CHAPTER

27
Theory The Big Push Theory
ROSENSTEIN-RODANS THESIS
The theory of the big push is associated with the name of Professor Paul N. RosensteinRodan.1 The thesis is that a big push or a large comprehensive programme is needed in the form of a high minimum amount of investment to overcome the obstacles to development in an underdeveloped economy and to launch it on the path to progress. To stress his argument, he quotes an analogy from an MIT Study : There is a minimum level of resources that must be devoted to... a development programme if it is to have any chance of success. Launching a country into self-sustaining growth is little like an airplane off the ground. There is a critical ground speed which must be passed before the craft can become airborne...2 The theory states that 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 the obtaining of external economies that arise from the simultaneous establishment of technically interdependent industries. Thus indivisibilities and external economies flowing from a minimum quantum 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 and W.W. Wallich, 1961. 2. The Objectives of US Economic Assistance Programmes, 1957.

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Rosenstein-Rodan distinguishes between three different kinds of indivisibilites and external economies. One, indivisibilities in the production function, especially the indivisibility of the supply of social overhead capital; two, indivisibility of demand; and three, indivisibility in the supply of savings. Let us analyse the role of these indivisibilities in bringing economic development. 1. INDIVISIBILITIES IN THE PRODUCTION FUNCTION According to Rosenstein-Rodan, indivisibilities of inputs, outputs or processes lead to increasing returns. He regards social overhead capital as the most important instance of indivisibility and hence of external economies on the supply side. The services of social overhead capital comprising basic industries like power, transport, and communications are indirectly productive and have a long gestation period. They cannot be imported. Their installations require a sizeable initial lump of investment. So excess capacity is likely to remain in them for some time. They also possess an irreducible minimum industry mix of different public utilities, so that an underdeveloped country have to invest between 30-40 per cent of its total investment in these channels. Thus, social overhead capital is characterised by four indivisibilities. First, it is irreversible in time and, therefore, must precede other directly productive investments. Second, it has a minimum durability, thus making it very lumpy. Third, it has a long gestation period. Last, it has an irreducible minimum industry mix of different kinds of public utilities. These indivisibilities of supply of social overhead capital are one of the principal obstacles to development in underdeveloped countries. Therefore, a high initial investment in social overhead 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 of interdependent industries in underdeveloped countries. This is because individual investment projects 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 workers are employed in a shoe factory whose wages constitute an additional income. If these workers spend all their income on shoes they manufacture, the shoe market will have a regular demand and thus succeed. But the fact is that they would not like to spend all their additional income on shoes, human wants being diverse. Nor will the people outside the factory buy additional shoes when 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 hundred factories (instead of hundred workers in one factory) who produce a variety of consumer goods and spend their wages on buying them. The new producers would be each others customers and thus create market for their goods. The complementarity of demand reduces the risk of finding a market and increases the incentive to invest. In other words, it is the indivisibility of demand which necessitates a high minimum quantum of investment in interdependent industries to enlarge the size of the market. Rosensteins example of the shoe factory is explained in Fig.1. The curves ATC and MC represent the costs of a plant which is a little smaller than the optimum-size plant. D1 and MR1 are the demand and marginal revenue curves of the shoe factory when investment is made only in it. It produces OQ1 (10,000) shoes and sells at OP1 price which does not cover the ATC. So the factory is incurring CABP1 losses. But when simultaneous investment is made in a number of different

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industries, the market for shoes expands. The demand for shoes rises to D4 (four times) so that the quantity of shoes becomes OQ4 (40,000). Now the shoe factory earns profits equal to P4 RST. Similarly, other industries earn profits. 3. INDIVISIBILITY IN THE SUPPLY OF SAVINGS

Price

C
P4 P1

A
R

B
S

MC ATC

D4

A high income elasticity of saving is E1 E the third indivisibility in Rosensteins theory. A high minimum size of MR4 investment requires a high volume of MR1 D1 savings. This is not easy to achieve in underdeveloped countries because of O Q4 Q1 Quantity low incomes. To overcome this, it is Fig. 1 essential that when incomes increase due to an increase in investment, the marginal 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 big push or a minimum quantum of investment is required to overcome the obstacles to development in underdeveloped countries. There may be finally a phenomenon of indivisibility in the vigour and drive required for a successful development policy, writes Rodan. But 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. A CRITICAL APPRAISAL Rosenstein Rodan regards his theory of development superior to the traditional static equilibrium theory because it appears to contradict the latters motto that nature does make jumps. His theory is based on more realistic assumptions of indivisibilities and nonappropriabilities in the production functions. It examines the path towards equilibrium and not merely the conditions at a point of equilibrium. It is thus primarily a theory of investment concerned with imperfect markets in underdeveloped countries. It is a high minimum quantum of investment rather than price mechanism in such imperfect markets that takes an underdeveloped economy towards an optimum position. The big push theory is, however, not free from certain defects. 1. Negligible Economies from Investment in Export and Import Substitutes. The main justification for a big push in investment on social overhead capital is the realization of extensive external economies. But as pointed out by Viner,3 underdeveloped economies realize greater economies from world trade independently of home investment. Rodan has recognised this fact, but keeps silent over another reality that in the newly developing countries investment for export and for marginal import substitutes occupies a large chunk of total investment. The
3. Stability and Progress: The Poorer Countries Problem, in Stability and Progress in the World Economy, (ed.) D. Hague. 1958.

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external economies argument for a big push does not hold because external economies are negligible in the above types of investments. 2. Negligible Economies even from Cost-Reducing Investments. Even in the production of local consumer goods and most public utilities, potential external economies can be realized in a limited way. Investments in the case of fairly inelastic demand are cost-reducing rather than output-expanding. Since external economies accrue from the output-expansion in the initial industry, 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 push theory is that it emphasizes the importance of a high level of investment in capital goods and consumer goods industries and social overhead capital, except agricultural and other primary industries. In agriculture-oriented underdeveloped countries a big push of large investments in irrigation, transportation facilities, land reforms, and in improving agricultural practices through 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 their development. 4. Generates Inflationary Pressures. Even the launching of a high minimum amount of investment on social overheads is highly expensive. Moreover, overhead capital has a high capital-output ratio and a very long gestation period. This makes the task of developing UDCs more difficult and longer. This is because such countries do not possess enough financial resources to provide social overhead capital required for the big push. The period during which social overhead capital is being formed will also be one of inflationary pressures because of the shortage of consumer goods. These inflationary pressures, in turn, would prolong the process of building social overhead capital, thus making it highly difficult for an UDC to achieve rapid economic development. 5. Low Investment Leads to Large Increase in Output. John Adlers statistical analysis of the economic development of the world reveals that a relatively low level of investment pays off well in the form of additional output.4 This conclusion is based on his study of low capitaloutput 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 the economic development of underdeveloped countries 6. Administrative and Institutional Difficulties. Further, the big push theory is based upon a burst of state-engineered investment. Rosenstein himself points out that in the presence of imperfectly developed markets in underdeveloped countries, the price mechanism is a very poor signalling system. But the dependence on state investment itself poses a number of problems. The administrative and institutional machinery in such economies is weak and inefficient. Difficulties are bound to arise not only in drawing up the plans for various projects but also in their execution. Lack of statistical information, technical know-how, trained personnel and coordination between the various departments are some of the complex problems which are not easy of solution. Moreover, the majority of underdeveloped countries have a mixed economy, where the private and public sectors are mostly competitive rather than complementary. This leads to mutual rivalry and suspicion which are inimical to a balanced growth of the economy. 7. Not an Historical Fact. Last but not the least, Rodans thesis is a sort of prescription for launching underdeveloped countries on the path to progress rapidly in the present. It is not an historical explanation of how development takes place. Historically, the presence or absence of a big push has not been a distinguishing feature of growth anywhere, according to Professor Hagen.5
4. World Economic GrowthRetrospect and Prospect, RES, August 1956. 5. E.E. Hagen, On the Theory of Social Change, 1962.