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Big Push Theory of Economic Development | Balanced Growth Theory | Ecoholics
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Overview
This video explains Paul Rosenstein-Rodan's "Big Push Theory" of economic development. The theory argues that underdeveloped economies require a large, synchronized investment across multiple sectors to overcome market failures and achieve self-sustaining growth. This "big push" is necessary to exploit economies of scale and scope (network effects) and to address three key indivisibilities: in the production function (inputs, processes, output quality), in demand (complementarity of goods), and in savings (low savings hindering investment). Without this concentrated effort, smaller, isolated investments are unlikely to generate the momentum needed to escape poverty and underdevelopment.
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Chapters
- The Big Push Theory, proposed by Paul Rosenstein-Rodan, suggests that significant, coordinated investment is crucial for economic development.
- It counters the idea that small, incremental investments in isolated sectors can lead to substantial growth in underdeveloped economies.
- Rosenstein-Rodan's initial ideas were influenced by economist Ragnar Nurkse and published in his 1943 work on industrialization in Eastern and Southern Europe.
Understanding this theory helps explain why targeted, large-scale interventions are often proposed for developing economies, rather than gradual, sector-specific aid.
Rosenstein-Rodan's 1943 publication focused on planning large-scale industrialization in underdeveloped, labor-abundant economies.
- The theory emphasizes leveraging "network effects," which include economies of scale (cost reduction through increased production) and economies of scope (cost reduction through producing a variety of goods).
- A "big push" is needed to achieve a "critical minimum level of resources" or "critical minimum effort" for development programs to succeed.
- This substantial investment creates momentum, akin to an airplane needing sufficient speed and fuel to take off, enabling a country to reach a self-sustaining growth path.
This highlights that development isn't just about having resources, but about deploying them in a coordinated, sufficiently large manner to overcome initial inertia.
The analogy of an airplane needing minimum fuel and engine speed to lift off is used to illustrate the concept of critical minimum effort for self-sustaining growth.
- Underdeveloped economies face "indivisibilities" in their production functions, meaning certain inputs, processes, or outputs cannot be easily scaled down or substituted.
- Problems can arise from inaccessible or low-quality inputs, outdated or inefficient production techniques and technologies, and the inability to produce high-quality, export-friendly outputs.
- These production-related issues hinder the efficient transformation of resources into valuable goods and services.
Addressing these production bottlenecks is essential because even with demand and savings, the inability to produce effectively will stall development.
Issues like not having access to specific raw materials, using old machinery, or lacking the technology to process inputs into quality outputs are examples of production function indivisibilities.
- Demand is also indivisible, meaning that increased production of one good requires a corresponding increase in demand for other goods (complementarity of demand).
- Investing heavily in one industry, like shoe manufacturing, can lead to increased employment and income for workers.
- This rise in income boosts demand not only for shoes but also for a wide range of other products from different industries, stimulating overall market activity.
This explains how a large investment can create a virtuous cycle by simultaneously boosting production and demand across multiple sectors.
A shoe factory expanding, employing more people whose increased wages then drive demand for food, clothing, and other goods, illustrating demand complementarity.
- Underdeveloped economies suffer from low incomes, which naturally lead to low savings rates.
- Low savings, in turn, limit the potential for investment, creating a cycle of underdevelopment.
- The Big Push Theory implicitly addresses this by aiming to increase overall economic activity and incomes, which should eventually lead to higher savings and investment capacity.
Recognizing the savings-demand-investment link is crucial, as development requires not just production but also the financial capacity to fund future growth.
Low incomes in underdeveloped countries mean people can only save a small portion of their earnings, which then limits the amount of capital available for new investments.
Key takeaways
- Development requires a large, synchronized investment ('Big Push') rather than small, isolated efforts.
- The Big Push aims to overcome market failures and "indivisibilities" inherent in underdeveloped economies.
- Network effects, like economies of scale and scope, are crucial benefits that a Big Push can unlock.
- Indivisibilities exist in production (inputs, processes, output), demand (complementarity), and savings, all of which must be addressed.
- A successful Big Push can create a virtuous cycle of increased production, employment, income, and demand, leading to self-sustaining growth.
- The concept is analogous to needing a critical minimum effort or resource level to initiate significant change, like launching an airplane.
Key terms
Big Push TheoryPaul Rosenstein-RodanEconomic DevelopmentUnderdeveloped EconomiesIndustrializationNetwork EffectsEconomies of ScaleEconomies of ScopeCritical Minimum EffortSelf-Sustaining GrowthIndivisibilitiesProduction FunctionDemand ComplementaritySavings Rate
Test your understanding
- What is the core argument of the Big Push Theory regarding investment levels in developing economies?
- How do "network effects" like economies of scale and scope justify the need for a Big Push?
- What are the three main types of "indivisibilities" that the Big Push Theory seeks to address?
- Why is "demand complementarity" a challenge for underdeveloped economies, and how does a Big Push help overcome it?
- Explain the relationship between low savings, low investment, and the need for a Big Push in the context of economic development.