Big-Push theory of economic development
The theory of “bigh push’ is associated with the name of Professor Paul N. Rosenstein-Rodan. This theory is needed in the form of a high minimum amount of investment to overcome to obstacles to development in an underdeveloped economy and to launch it in the path of progress.
Rosenstein-Rodan distinguishes between three different kinds of indivisibilities 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.
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 installations require a “sizeable initial lump” of investment. So excess capacity is likely to remain in them for some time.
They also excess “an irreducible minimum industry mix of different public ties, so that an underdeveloped country will have to invest between K per cent of its total investment in these channels.
“Thus, social overhead capital is characterised by four indivisibilities, of, it is irreversible in time and, therefore, must precede other directly productive investments. Second, it has a minimum durability, is making it very lumpy.
Third, it has a long gestation period. Last, it is an irreducible minimum industry mix of different kinds of public utilities. These indivisibilities of supply of social overhead capital are all of the principal obstacles to development in underdeveloped countries.
Therefore, a high initial investment in social overhead capital necessary in order to pave the way for quick-yielding directly productive investments.
Indivisibility of Demand:
The indivisibility or complementarily of demand requires simultaneous setting up of interdependent industries in interdependent countries.
This is because individual investment projects have high risks as 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 that ten thousand unemployed workers are engaged in one hundred factories (instead of hundred workers in one factory) that 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 complementarily 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.
Indivisibility in the Supply of Savings:
A high income elasticity of saving is the third indivisibility in Rosenstein’s theory. A high minimum size of investment requires a high volume of savings.
This is not easy to achieve in underdeveloped countries because of low incomes. To overcome this, it is 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.