Big push model

The big push model is a concept in development eco3. Indivisibility in the supply of savings
nomics or welfare economics that emphasizes that a rms
decision whether to industrialize or not depends on its
expectation of what other rms will do. It assumes 1.1 Indivisibility in production function
economies of scale and oligopolistic market structure and
explains when industrialization would happen.
Indivisibilities in the production function may be with reThe originator of this theory was Paul Rosenstein-Rodan spect to any of the following:
in 1943. Further contributions were made later on by
Murphy, Shleifer and Robert W. Vishny in 1989. Analy Inputs
sis of this economic model ordinarily involves using game
theory.
Processes
The theory of the model emphasizes that underdeveloped
countries require large amounts of investments to embark
Outputs
on the path of economic development from their present
state of backwardness. This theory proposes that a 'bit by
bit' investment programme will not impact the process
These lead to increasing returns (i.e., economies of scale),
of growth as much as is required for developing counand may require a high optimum size of a rm. This can
tries. In fact, injections of small quantities of investbe achieved even in developing countries since at least
ments will merely lead to a wastage of resources. Paul
one optimum scale rm can be established in many indusRosenstein-Rodan, approvingly quotes a Massachusetts
tries. But investment in social overhead capital comprises
Institute of Technology study in this regard, There is a
investment in all basic industries (like power, transport
minimum level of resources that must be devoted to... a
or communications) which must necessarily come before
development programme if it is to have any chance of
directly productive investment activities. Investment in
success. Launching a country into self-sustaining growth
social overhead capital is 'lumpy' in nature. Such capiis a little like getting an airplane o the ground. There is
tal requirements cannot be imported from other nations.
a critical ground speed which must be passed before the
Therefore, heavy initial investment necessarily needs to
craft can become airborne....[1]
be made in social overhead capital (this is approximated
Rosenstein-Rodan argued that the entire industry which to be about 30 to 40 percent of the total investment unis intended to be created should be treated and planned dertaken by underdeveloped countries). Social overhead
as a massive entity (a rm or trust). He supports this ar- capital is further characterized by four indivisibilities:
gument by stating that the social marginal product of an
investment is always dierent from its private marginal
1. Irreversibility in time: It must precede other directly
product, so when a group of industries are planned toproductive investments
gether according to their social marginal products, the
rate of growth of the economy is greater than it would
2. Minimum durability of equipment:. Any lesser level
have otherwise been.[2]
of durability is either impossible due to technical
reasons or much less ecient

The three indivisibilities

3. Long gestation periods: The investment in social

overhead capital takes time to generate returns and
its impact in the economy is not immediately or directly visible

According to Rosenstein-Rodan, there exist three indivisibilities in underdeveloped countries. These indivisibilities are responsible for external economies and thus
justify the need for a big push. The externalities are as
follows-

4. Irreducible minimum social overhead capital

industry mix: Investment needs to be of a certain
minimum magnitude and spread across a mix of
industries, without which it will not signicantly
impact the process of growth.

1. Indivisibility in production function

2. Indivisibility of demand
1

1.2

2 HOW THE BIG PUSH WORKS

Indivisibility (or complementarity) of

demand

Developing countries are characterized by low per-capita

income and purchasing power. Markets in these countries
are therefore small. In a closed economy, modernization
and increased eciency in a single industry has no impact on the economy as a whole since the output of that
industry will fail to nd a market. A large number of industries need to be set up simultaneously so that people
employed in one industry consume the output of other
industries and thus create complementary demand.
To illustrate this, Rosenstein Rodan gives the example of
a shoe industry. If a country makes large investments in
the shoe industry, all the disguisedly employed labor from
the other industries nd work and a source of income,
leading to a rise in production of shoes and their own
incomes. This increased income will not be expended
only on buying shoes. It is conceivable that the increased
incomes will lead to increased spending on other products too. However, there is no corresponding supply of
these products to satisfy this increased demand for the
other goods. Following the basic market forces of demand and supply, the prices of these commodities will
rise. To avoid such a situation, investment must be spread
out amongst dierent industries.
The situation may be dierent in an open economy as the
output of the new industry may replace former imports or
possibly nd its market by way of exports. But even if the
world market acts as a substitute for domestic demand, a
big push is still needed (though its required size may now
be reduced due to the presence of international trade).

1.3

Indivisibility in the supply of savings

High levels of investment require a corresponding high

level of savings. We cannot always rely on foreign aid
as the huge levels of investments in the dierent sectors
need to be made not only once, but multiple number of
times. Hence domestic savings are a must. But in an
underdeveloped economy,this is a challenge due to the
low income levels.Marginal rate of savings needs to be
increased following the rise in incomes due to higher investment.

Fig.1

Using traditional technology, a sector would produce l/n

amount of output, with each worker producing one unit
of the commodity.
Using modern technology a sector would produce more
as the productivity would be greater than one unit per
worker. However, a modern sector would require some
of the workers (say h ) to perform administrative tasks.
In gure 1, the x-axis represents the labor employed and
the y-axis represents the level of production. The production in the traditional sector is given by the curve T
and the production in the modern sector is given by M.
The curve M has a positive intercept on the x-axis, implying that even with zero production, there is a minimum
level of h workers who still remain employed for carrying out administrative activities. With our assumption of
l/n workers in the economy, the modern sector will have
a higher level of productivity than the traditional sector.
The production function of the modern sector is steeper
than that of the traditional sector because of the higher
productivity of workers in the former. The slope of both
production functions is 1/m , where m is the marginal labor required to produce an additional unit of output. This
level of m is lower for the modern sector than it is for the
traditional sector.

How the big push works

Consider a country whose economy is characterized by a

large number of sectors which are so small that any increase in the productivity of one sector has no impact on
the economy as a whole. Each sector can either rely on
traditional methods or switch to modern methods of pro- Fig.1
duction which would increase its eciency. Let us assume that there are l workers in the economy and n sec- Assume that the traditional sector pays workers one unit
of output which is subsequently spent equally by them
tors. Each sector therefore has l/n workers.

3
in all sectors. The modern sector pays higher wages to
workers. If all the workers are employed by the traditional sector, then the demand generated for the output
of each sector is D1 = 1/n . Government intervention
in a manner that investment is carried out on those industries that have higher forward and backward linkages. We
have two possible cases:

due to internal economies of overcoming technical indivisibilities. This reduces the price of its product, which
will benet another industry (say industry Y) which use
this output as an input or a factor of production.[4] Subsequently, the prots of industry Y will rise, leading to
its expansion and generating demand for the output of industry X. As a result, industry Xs production and prots
also expand.[5]

Wages are low When low wages are prevalent in

the economy, say w1 , a rm which faces demand
D1 will need to employ l workers if it wants to
modernize. This will cost the rm w1 l .

However in underdeveloped countries, conditions

of perfect competition are not present due to the
decentralized and dierentiated nature of the market.
Prices fail to act as a signalling system in the following
ways:[3]

Now, wages are low. Therefore

w1 l < D1

Prices express the situation as it is and do not predict

future economic situations

This implies that costs (given by w1 l ) are

lower than the earnings (given by D1 ). So the
rm makes a prot and will choose to modernize (even if other rms do not).

Prices can decide present productive activities but

cannot determine investments which would be appropriate for developing countries

Wages are high When high wages are prevalent in

the economy, say w2 , a rm which faces demand
D1 will make losses if no other rms choose to modernize.

This justies the need for centralized pan-industry planning of investment in Developing countries, as the private
sector cannot undertake such planning.

This is because
w2 l > D1
This implies that costs (given by w2 l ) are
higher than the earnings (given by D1 ).
However, if all the other rms have modernized, the rm faces a higher demand D2 , arising out of higher income levels of workers of
these modernized rms. The rm will hence
choose to modernize as well so that it makes
prots:
w2 l < D2

Indivisibilities
economies

The response of the private sector to price signals is

inadequate and imperfect due to the dierentiation
and decentralisation in developing countries

and

external

Enlargement of the market size is another important

externality which arises from the complementarity of industries. There exists an incentive to expand the scale
of operations because the employees of one industry become the customers of another industry. In terms of
products too (as in the above example of industries X and
Y), one industry generates demand for the output of the
other when the scale of operations increase.[6]
Marshallian economies also accrue to a rm within a
growing industry, resulting from agglomeration of industrial districts or clusters in a particular area. These occur
due to the following advantages of agglomeration identied by Alfred Marshall:
1. Spillover of information
2. Specialization and division of labor

3. Development of a market for skilled labor.[5]

The concept of externalities is relevant for the Industrialization of underdeveloped countries, where decisions are
to be made regarding distribution of savings among al- Availability of skilled labour is an externality which
ternative investment opportunities. These arise from the arises when industrialization occurs, as workers acquire
interdependence in market economies.[3]
better training and skills. This is not achievable by mere
Pecuniary economies are external economies transmit- establishment of a few industries, but requires a large proted through the price system, as prices are the signalling gram of industrial growth. It is one of the most important
device (under conditions of perfect competition in a mar- external economies because absence of skilled labor is a
ket economy). They arise in an industry (say industry X) strong impediment to industrialization.[7]

Role of the State

The large-scale programme of industrialization advocated by this model requires huge investments which are
beyond the means of the private sector. The investment in
infrastructure and basic industries (like power, transport
and communications) is 'lumpy' and has long gestation
periods. The role of the state in this theory is therefore
critical for investment in social overhead capital. Even if
the private sector had the requisite resources to invest in
such a programme, it would not do so since it is driven
by prot motives.[7] Many investments are protable in
terms of social marginal net product but not in terms of
private marginal net product. Due to this there is no incentive for individual entrepreneurs to invest and take advantage of external economies.[1]

Criticisms

The theory has been criticized by Hla Myint and Celso

Furtado, among others, primarily on the grounds of the
massive eort required to be taken by underdeveloped
countries to move along the path of industrialization.
Some of the major criticisms are as follows.
Diculties in execution and implementation: The execution of related projects during the course of industrialization may involve unexpected or unavoidable changes due to revisions of plans, delays and deviations from the planned process. Hla Myint notes
that the various departments and agencies involved
in the process of development need to coordinate
closely and evaluate and revise plans continuously.
This is a challenging task for the governments of developing countries.[4]
Lack of absorptive capacity: The implementation of industrialization programmes may be constrained by ineective disbursement,short-term bottlenecks, macroeconomic problems and volatility,
loss of competitiveness and weakening of institutions. Credit is often utilized at low rates or after
long time lags. There is often a loss of competitiveness due to the Dutch disease eect.[8]
Historical inaccuracy: When viewed in light of historical experience of countries over the last two
centuries, no country displayed any evidence of
development due to massive industrialization programmes. Stationary economies do not develop simply by making large-scale investment in social overhead capital.[9]
Problems in mixed economies: In a mixed economy,
where the private and public sectors co-exist, the
environment for growth may not be a conducive

CRITICISMS

one. Unless there is a complementarity between

the sectors, there is bound to arise competition between them, with the government departments keeping their plans condential out of fear of speculative
activities by the private sector. The private sectors
activities are simultaneously inhibited due to lack of
information of government policies and the general
economic situation[4]
Neglect of methods of production: Rather than
capital formation, it is productive techniques which
determine the success of a country in economic development. The big push model ignores productive
techniques in its support for capital formation and
industrialisation.[9]
Shortage of resources in underdeveloped countries:
Eugenio Gudin criticizes the theory of the big push
on the grounds that underdeveloped countries lack
the capital required to provide the big push required
for rapid development. If an underdeveloped nation
had ample capital supply and scarce factors, it would
not be classied as underdeveloped at all. Limited
resource availability is the rst impediment to such
countries. Though this problem may be overcome
by foreign aids, industrialization may not take o as
expected if the aid ows are volatile.[8]
Ignores the agricultural sector: With its heavy emphasis on industry, the model nds no place for agriculture. This is a gaping aw in the theory, as in
most underdeveloped countries it is this sector which
is large and has labor surplus. Investments in agriculture need to go hand-in-hand with those in industry so as to stimulate the industrial sector by providing a market for industrial goods. If neglected, it
would be dicult to meet the food requirements of
the nation in the short run and to signicantly expand the size of the market in the long run.
Inationary pressures: It follows from the neglect of
the agricultural sector that food shortages are likely
to occur with industrialization. Though it would
take time for investments in social overhead capital
to yield returns, the demand would increase immediately, thus imposing inationary pressures on the
economy. Cost escalations may even cause projects
to be postponed and the development process in general to slow down.[1]
Dependence on indivisibilities: The emphasis of this
theory on indivisibility of processes is too much, as
investments need not necessarily be on such a large
scale to be economic. Social reforms are ignored,
which are vital if a country is to grow on the basis
of its own resources and initiatives. Development is
bound to intensify if social reform is a part of the
industrialization process.[9]

See also

8 Further reading

Ragnar Nurkse

1. http://m.domaindlx.com/cihanyuksel2/Two%
20Concepts%20of%20External%20Economies.
pdf

Ragnar Nurkses Balanced Growth Theory

2. http://www.colorado.edu/Economics/morey/
externalitylit/meade-ej1952.pdf

Virtuous circle and vicious circle

3. http://www.wider.unu.edu/publications/
working-papers/discussion-papers/2007/en_
GB/dp2007-#

Rostows stages of growth

Critical minimum eort theory

Strategy of unbalanced growth
Low level equilibrium trap
Dual economy

4. 05/_les/78515953270128788/default/dp200705.pdf
5. http://www.econometricsociety.org/meetings/
wc00/pdf/1269.pdf
6. http://www.centrocelsofurtado.org.br/adm/
enviadas/doc/25_20060719190655.pdf

References

[1] Notes on the theory of the Big Push, in Howard S. Ellis

(ed.) for Latin America, Macmillan & Co., 1961
[2] Nath, S.K. (June 1962), The Theory of Balanced
Growth,Oxford Economic Papers, Vol. 14, No. 2, Oxford
University Press, pp. 138153
[3] Scitovsky, Tibor (April 1954), Two Concepts of External Economies in The Journal of Political Economy,Vol.62,no.2, Chicago University Press, pp. 143151
[4] Myint, Hla (1969), The Economics of the Developing
Countries, Hutchinson University Library, p. 119
[5] A.N. Agarwala, S.P. Singh (1969), The Economics of
Underdevelopment, Oxford University Press India, pp.
3034, ISBN 978-0-19-560674-4
[6] Meade, James (March 1952), External Economies and
Diseconomies in a Competitive Situation in The Economic Journal,Vol.62,no.245, Royal Economic Society,
pp. 5467
[7] S. K. Misra; V. K. Puri (2010). Economics Of Development And Planning Theory And Practice (12th ed.). Himalaya Publishing House. pp. 217222. ISBN 81-8488829-5.
[8] Patrick Guillaumont, Sylviane Guillaumont Jeanneney
(October 2007), Big Push versus Absorptive Capacity:
How to Reconcile the Two Approaches, United Nations
University World Institute for Development Economics
Research Discussion Paper No. 2007/05
[9] Furtado, Celso (1964), Development and Underdevelopment: A Structural View of the Problems of Developed and
Underdeveloped Countries (translated by Ricardo de Augiar and Eric Charles Drysdale), University of California
Press

9 External links
1. http://monthlyreview.org/2006/05/01/
the-neoliberal-rebirth-of-development-economics
2. http://are.berkeley.edu/~{}adelman/WORLDEV.
html

10

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