Big push model

The big push model is a concept in development economics or welfare economics that emphasizes that a firm's decision whether to industrialize or not depends on its expectation of what other firms will do. It assumes economies of scale and oligopolistic market structure and explains when industrialization would happen. The big push model is a concept in development economics or welfare economics that emphasizes that a firm's decision whether to industrialize or not depends on its expectation of what other firms will do. It assumes economies of scale and oligopolistic market structure and explains when industrialization would happen. The originator of this theory was Paul Rosenstein-Rodan in 1943. Further contributions were made later on by Murphy, Shleifer and Robert W. Vishny in 1989. Analysis of this economic model ordinarily involves using game theory. The theory of the model emphasizes that underdeveloped countries require large amounts of investments to embark 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 of growth as much as is required for developing countries. In fact, injections of small quantities of investments will merely lead to a wastage of resources.Paul Rosenstein-Rodan approvingly quotes a Massachusetts Institute of Technology study in this regard, '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 a little like getting an airplane off the ground. There is a critical ground speed which must be passed before the craft can become airborne....' Rosenstein-Rodan argued that the entire industry which is intended to be created should be treated and planned as a massive entity (a firm or trust). He supports this argument by stating 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. 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 indivisibilities are as follows- Indivisibilities in the production function may be with respect to any of the following: These lead to increasing returns (i.e., economies of scale), and may require a high optimum size of a firm. This can be achieved even in developing countries since at least one optimum scale firm can be established in many industries. But investment in social overhead capital comprises investment in all basic industries (like power, transport or communications) which must necessarily come before directly productive investment activities. Investment in social overhead capital is 'lumpy' in nature. Such capital requirements cannot be imported from other nations. Therefore, heavy initial investment necessarily needs to be made in social overhead capital (this is approximated to be about 30 to 40 percent of the total investment undertaken by underdeveloped countries).Social overhead capital is further characterized by four indivisibilities: 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 efficiency in a single industry has no impact on the economy as a whole since the output of that industry will fail to find 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 find 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 different industries.