Big Push Model or The theory of Big

Big Push Model or The theory of Big Push �The originator of this theory was Paul Rosenstein Rodan in 1943. � Further contributions were made later on by Murphy, Sheifer and Robert W. Vishny in 1989.

�The theory of the Big Push emphasizes that underdeveloped countries require large dose 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 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.

�Rosenstein Rodan emphasis on the external economies to be realized through industrialization and is advocacy of a ‘big push’ in the form of high minimum amount of industrial investment in order to jump over economic obstacles to development. � A ‘big push’ or ‘critical minimum effort’ is believed necessary to break out of a low level of equilibrium trap. Above 10% of national income is to be invested for take off as industry as the leading sector.

Role of the State for big push �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 investments 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 profit motives. �Many investments are profitable 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.

�Rosenstein Rodan has presented three types of indivisibilities and economies of scale. They are as: �(1) Indivisibilities in Production Function: When so many industries are established the economies regarding factors of production, goods, and techniques of production are accrued. Rosenstein Rodan gives more importance to economies which arise due to the establishment of social overhead capital. The infra structure consists of means of transportation, communication and energy resources. They all contribute to development indirectly.

�(2) Indivisibilities of Demand: The complementarily with respect to demand requires that UDCs should establish such industries which could support each other. To make investment in one project may be risky because in UDCs the demand for goods and services is limited due to lower incomes. In other words, the indivisibilities of demand require that at least a certain amount of investment be made in so many industries which could mutually support each other. As a result, the size of market will be extended in UDCs; or the problem of limited market will come to an end in UDCs. It is shown with Fig. �

Diagram/Figure:

�Here D 1 and MR 1 are the demand marginal revenue curves of a firm when investment is made in this single firm. This firm sells OQ 1 quantity and charges OP 1 price. Here it faces losses equal to P 1 cab. �But if investment is made in so many industries the market will be extended. In this way, the demand will increase as shown by D 4 and corresponding marginal revenue curve is MR 4. Now the equilibrium takes place at E where OQ 4 quantity is produced and OP 4 price is charged. As a result, the industries are having profits equal to P 4 RST. �It means that the greater investment in so many industries may convert the losses into profits.

�(3) Indivisibility in Supply of Savings: The supply of savings also serves as an indivisibility. A specific amount of investment can be made in the presence of specific savings But in case of UDCs because of lower incomes the savings remain low. �In the presence of these indivisibilities and non existence of external economies only a Big Push can take the economy out of dole drums of poverty. It means a specific amount of investment is necessary to remove the obstacles in the way of economic development.

Criticism/Demerits: �Rosenstein theory is better in the sense that it identified that market imperfections are the big obstacles in the way of economic development. Therefore, a big amount of investment will solve the problem of limited markets, rather depending upon market mechanism, and such heavy amounts of investment will become helpful for economic growth. Despite this merit, followings are the demerits of this theory.

�i) Negligible Economies in Export, and Import Substitute Sectors: The 'Big Push' infrastructure may be justified on the ground of external economies. But, according to Viner, the export sector and import substitute sectors are so backward in UDCs that they hardly give rise to economies. � �(ii) Negligible Economies from Cost Reducing Investment: The goods which are concerned with public welfare hardly yield external economies. Moreover, the investment which is aimed at reducing costs does not yield economies.

�(iii) Neglecting Investment in Agri. Sector: In this theory emphasis has been laid upon making investment in infrastructure and industries. While it neglects the investment to be made in agri. and its allied sectors. As the agri. sector is the largest sector in UDCs and it will be a mistake to ignore it. �(iv) Inflationary Pressure: From where the funds will come in UDCs to spend them on SOC(Standard Of Care). If the funds are raised through foreign loans and by printing new notes they will create inflation in the economy.

�(v) Administrative and Institutional Difficulties: This theory stresses upon state investment to remove deficiency of capital. But in case of UDCs the machinery is corrupt. There exist a lot of problems in state machinery. The private and public sectors compete with each other, rather supporting each other. Consequently, there will not be the balanced growth in the economy. �(vi) It is Not a Historical Fact: The Big Push theory is a recipe for the UDCs, but it has not been derived on the basis of historical experience. As Prof. Hagen says, "the Big Push theory lacks the historical evidences and facts".

Harrod-Domar model �The Harrod Domar Model delineates a functional economic relationship in which the growth rate of gross domestic product (g) depends positively on the national saving ratio (s) and inversely on the national capital/output ratio (k) so that it is written as g = s / k. The Harrod Domarmodel in the early postwar times was commonly used by developing countries in economic planning.

�This model, developed independently by the British economist Sir Roy F. Harrod and the American economist Evsey Domar in the 1930 s, �Suggests savings provide the funds which are borrowed for investment purposes. The model suggests that the economy's rate of growth depends on: �the level of saving �the productivity of investment i. e. the capital output ratio

�For example, if $10 worth of capital equipment produces each $1 of annual output, a capital output ratio of 10 to 1 exists. 3 to 1 capital output ratio indicates that only $3 of capital is required to produce each $1 of output annually.

�The Harrod Domar model was developed to help analyse the business cycle. However, it was later adapted to 'explain' economic growth. It concluded that: 1. Economic growth depends on the amount of labour and capital. 2. As LDCs often have an abundant supply of labour it is a lack of physical capital that holds back economic growth and development.

� 3. More physical capital generates economic growth. � 4. Net investment leads to more capital accumulation, which generates higher output and income. � 5. Higher income allows higher levels of saving

Implications of the model �The key to economic growth is to expand the level of investment both in terms of fixed capital and human capital. � To do this policies are needed that encourage saving and/or generate technological advances which enable firms to produce more output with less capital i. e. lower their capital output ratio.

Problems of the model �Economic growth and economic development are not the same. Economic growth is a necessary but not sufficient condition for development �Practically it is difficult to stimulate the level of domestic savings particularly in the case of LDCs where incomes are low. �Borrowing from overseas to fill the gap caused by insufficient savings causes debt repayment problems later. �The law of diminishing returns would suggest that as investment increases the productivity of the capital will diminish and the capital to output ratio rise.

Example: �If you have capital output ratio (K) is 3, and the saving ratio is 18%, what will be the growth of GNP? Make necessary comments. We know, �ΔY/Y = S/K �Here, �Capital output ratio =K �Saving ratio =S �Growth of GNP = ΔY/Y= ? �ΔY/Y = 18%/3= 6% =3 =18%

�This 6% GNP growth implies that the country is staying in underdeveloped category. � If the countries want to go to develop stage, its GNP growth has to be 7%. For achieving this, 21% saving ratio is needed. So, here the saving gap is 3% which can be meet up by either through foreign aid or private foreign investment.

Nurkse's Model of Vicious Circle of Poverty (VCP) and Economic Development: �Definition and Explanation: �According to Prof. Nurkse: �"It is the vicious circle of poverty (VCP) which is responsible for backwardness of UDCs". �Vicious circle of poverty: �"Implies a circular constellation of forces tending to act and react in such a way as to keep a country in the state of poverty".

�In such state of affairs the process of capital formation remains obstructed and restricted. This VCP is presented as: �We start with low real income which results in a meager savings which in turn will check investment. � Low level of investment would create deficiency of capital which in second round leads to low productivity. This again results in low income. Here, the circle perpetuates the low level of development.

�From the supply side, there is low income, low savings, low investment, capital deficiency and low productivity. �On the demand side, low income, low demand for goods, limited home market and low investment.

Diagram/Figure:

�According to Nurkse, a break through on demand side can be brought about by dashing initiatives on the part of entrepreneurs. �On the supply side the disguised unemployment ranging between 20% to 30% of total agri. labor force can be mobilized for financing capital formation. And the parents of such disguised unemployed will go on feeding them. It means that in Nurkse's model the hidden food surplus will finance the process of economic growth.

Shortcomings/Flaws of the Model: �(i) Entrepreneurs Responsible For Breakthrough: According to Nurkse to break the VCP entrepreneurs will play an important role. But he does not suggest the means for such funds. As in poor countries the savings are low, hence for the supply of funds the credit creation will have to be restored. But Nurkse rejects it. �(ii) Disguised Unemployment: According to Nurkse, the disguised unemployment will finance for growth. But the domestic resources are not sufficient, they can partially meet the requirements of growth.

�(iii) Raw Material And Machines: Nurkse's theory fails to answer the question from where the machines and raw material will be provided to the labor which will be utilized for capital formation. Moreover, why the parents will continue providing food to their disguised unemployed offspring's once they get employment.

�(iv) Utilization Of Disguised is Not a New Idea: Nurkse says that the labor have much more leisure. But it is not true. The labor perform so many works like repair of houses, digging of canals, construction of small roads and cutting of forests etc. Therefore, it is not possible to withdraw these people from lands. �(v) Misleading and Over Simplified: According to Bauer the idea of VCP is misleading and over simplified because the developed countries never passed through such situation when they where UDCs.

Mahalanobis Growth Model �At the time of the formulation of the Second Five Year Plan, Prof. P. C. Mahalanobis who was friend adviser to Late Prime Minister Jawaharlal Nehru and who was one time member of Planning Commission, prepared a growth model with which he showed that to achieve a rapid long term rate of growth it would be essential to devote a major part of the investment outlay to building of basic heavy industries.

�Mahalanobis strategy of development emphasizing basic heavy industries which was adopted first of all in the Second Plan also continued to hold the stage in Indian planning right up to the Fifth Plan which was terminated by the Janata Government in March 1978, a year before its full term of five years.

�It will be useful to explain first Mahalanobis model of growth which provided a rationale for the heavy industry biased development strategy. �An important point to note is that Mahalanobis identifies the rate of growth of investment in the economy not with rate of growth of savings as is usually considered by the economists but with rate of growth of output in the capital goods sector within the economy.

�The growth of capital goods sector in turn depends upon the proportions of total investment allocated to the capital goods sector and output capital ratio in the capital goods sector. � Given the output capital ratio in capital goods sector (i. e. heavy industries), he proves that if the proportion of total investment allocated to the capital goods is relatively greater, the rate of growth of output of capital goods will be greater and hence, given the Mahalanobis assumption, the future rate of growth of investment in the economy will be greater.

�Now, the greater the rate of investment, the greater will be the long term rate of growth. �We thus see that with the rate of growth of output of capital goods industries. � Mahalanobis shows that the proportion of total investment resources allocated to the capital goods industries for each year is the most important factor determining the long term rate of growth of national income.

�The Mahalanobis model has been constructed in terms of Keynesian aggregates; national income, investment, savings, and consumption, � Two sectors are considered in the model; production goods producing sector (K sector) and consumption goods producing sector (C sector). �This sectoral classification is not for an inter sectoral analysis of economy but for analyzing an allocation of investment to respective sectors.

�Price situation is kept constant in his argument. And foreign trade is not considered in his model. � The fundamental assumptions in the Mahalanobis model are as follows: � (a) the saving investment `equilibrium is maintained, and � (b) the production processes respective sectors are always operated under full capacity situation.

Criticism �In critique of the Mahalanobis heavy industry development strategy, Professors Vakil and Brahmanand of Bombay University put forward a wage goods model of development and suggested a development strategy which accorded a top priority to agriculture and other wage goods industries in sharp contrast to the Mahalanobis heavy industry biased strategy of development. �The most important criticism was concerned with an absence of the demand side consideration of products in his theory.

Myrdal’s CC (Cumulative Causation) theory �Cumulative causation is a theory developed by Swedish economist Gunnar Myrdal in the year 1956. It is a multi causal approach where the core variables and their linkages are delineated. � The idea behind it is that a change in one form of an institution will lead to successive changes in other institutions. �These changes are circular in that they continue in a cycle, many times in a negative way, in which there is no end, and cumulative in that they persist in each round. The change does not occur all at once as that would lead to chaos, rather the changes occur gradually.

�Gunnar Myrdal developed the concept from Knut Wicksell and developed it with Nicholas Kaldor when they worked together at the United Nations Economic Commission for Europe. � Myrdal concentrated on the social provisioning aspect of development, while Kaldor concentrated on demand supply relationships to the manufacturing sector

�Myrdal’s CC theory has been adopted for explaining various theoretical or practical problems. � It has been typically examined by dividing into its three different aspects. � The first way recognizes it as CC theory simply positioning between Young and Kaldor. � The second recognizes it as a theory by a member of the institutional school and considers its institutional aspect in main.

�The third recognizes it as a theory by a member of the Stockholm school, focusing on the monetary theory in his early days

�They have seldom discussed how Myrdal’s CC theory (theories), which have various theoretical contents, should be integrated or interpreted as a whole. � Although Myrdal has been often introduced in the context of the history of CC theory and evaluated as a key person in its theoretical development, his position there has left quite ambiguous.

�Myrdal experienced three academic stages in his life: a theoretical economist or a member of Stockholm school, a politician, and an “institutional economist” as he called himself.

�Though he said he had been affected by Wicksellian monetary theory and got the first idea of his CC theory, it was the last stage that he utilized and emphasized CC theory as his main theoretical tool in analyzing practical socio economic problems.

�Myrdal’s CC theory in its final phase consists of four theses as follows. � 1. The basic thesis: �The thesis of “backwash effects” Myrdal’s CC theory has emphasized a divergent process. �Such a process is well known as a typical logic of CC theory in general. Myrdal(1957) proposed a concept of “backwash effects” in order to explain the increasing economic inequality between developed countries and underdeveloped countries.

� 2. The opposite or exceptional thesis: � The thesis of “spread effects” contrary to the first thesis, the second one is the logic of convergence. � Although CC theory has its importance in emphasizing a divergent process and it is admitted that Myrdal didn’t emphasized this thesis as much as the first one, this thesis should be a crucial thought because this characterizes his CC theory. Myrdal’s CC theory doesn’t deny the potential possibility of a convergent process.

� 3. The thesis relating to the scope of the analysis: �The thesis of the importance of institutional factors Myrdal insists that if so called “non economic” factors are excluded from the analysis, it will result in distorting the recognition of the facts. � According to him, it is whether it is related to the problem, not whether it is an “economic factor”, that decides whether the factor should be included in the analysis.

� 4. The thesis of political implications : �Although Myrdal’s CC theory admitted the potential possibility of convergence in the second thesis, he was too pessimistic to think such possibility would come true naturally. � He rather believed in policies to turn over the economic forces composing the “vicious” circle. He showed the “equality” as his most important value premise and insisted the policies based on the “equality” will induce higher economic growth.

�Myrdal’s CC theory can be characterized in three points. � The first is that his CC theory is not a simple logic of polarization process, because it includes not only “backwash effects” but also “spread effects”. � The second is that his CC theory is supposed to consist of both “economic” and “non economic” factors. � The third is that his CC theory exists as theoretical foundation of egalitarian policies.

�So Myrdal’s CC theory is theory for “development”. By the word of “development”, Myrdal means more than mere increasing production. � His CC theory includes institutional and political factors besides the demand supply. � Myrdal’s CC theory should be positioned between Young Kaldor type CC theory and Institutional School type CC theory. Myrdal’s CC theory might be able to integrate those two currents with its unique theoretical character.

�Myrdal’s CC theory allows the possibility and necessity of the social reform by introducing policies. �Myrdal’s CC theory can be a kind of indicator of the direction for the further development of CC theory.