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Subject ECONOMICS

Paper No and Title 12: Economic Growth and Development - I

Module No and Title 35: Big Push Theory and critical minimum effort

Module Tag ECO_P12_M35

ECONOMICS Paper12: Economic Growth and Development - I

Module 35: Big Push Theory and critical minimum effort
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TABLE OF CONTENTS

1. Learning Outcomes
2. Introduction
3. Big Push Theory
4. Critical Minimum theory
5. Summary

ECONOMICS Paper12: Economic Growth and Development - I

Module 35: Big Push Theory and critical minimum effort
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1. Learning Outcomes

 Understand the meaning of ‘Big Push’

 Know the working of the theory of big push
 Critical appraisal of the theory of big push
 Know the working of Critical minimum effort theory
 Criticism of the critical minimum effort theory

2. Introduction

The theory of Big Push is based on balanced growth strategy of development that
propagates that the need for simultaneous investment in a large number of industries to
cater to complimentary of demand as a solution to push the UDCs to higher trajectories of
income.

Critical minimum effort theory on the other hand emphasize on the two outcomes of any
developmental program- one that accelerates the process of expansion (stimulant) and the
one that decelerates the process (shocks). Hence the theory stresses on the importance of a
certain minimum level of investment for the UDCs to move to higher levels of growth
wherein the stimulants are more active than the shocks.

3. Big Push Theory

The theory of Big Push has been outlined by Paul Rosenstein-Rodan in 1943. The basic
preposition of the theory is that a certain minimum level of investment is required for the
developmental programs to be successful and sustained. This theory is of the view that
piece-meal efforts of resource allocation would be able to move a country on the path of
economic development rather a certain minimum amount of investment is required for
economic development. This idea was originally given by Allyn Young in his famous
example of the Shoe Factory which highlights that if a firm is only producing one product
i.e. shoes then it is bound to fail. This is because the workers (then consumers) engaged in
the factory will not spend their income entirely on the purchase of shoes. This is so
because human wants are diverse. So the demand for shoes will be less than the supply of

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shoes and hence a glut of shoes will be created which will result in the price to fall. Thus
the firm will suffer losses. Hence, it might be acceptable in the Short run but not in the
Long run.
So the way out is to set up a number of factories producing different goods that are
market-wise and technologically interdependent so that workers working in one firm
are the buyers of another firm and vice-versa i.e. there should be a synchronized
application of capital in a number of factories simultaneously so as to cater to the
complementarities of demand. If such kind of investment is made then the size of the
market will expand, there’ll be no deficiency of demand and all benefits will be realized in
terms of cheap goods both domestically and internationally. He said this will result in a
FRONTAL ATTACK on poverty. According to him a single factory fails and many
factories succeed to come out of the vicious circle of poverty through their forward and
backward linkages. Backward linkages can be defined as "the growth of an industry leads
to the growth of the industries that supply inputs to it". Forward linkages exist when the
growth of an industry leads to the growth of other industries that uses its output as input.
He argued that it is the role of the state to undertake measures that promote industrial
linkages, division of labour and hence expansion in the size of the markets (as the private
sector is driven by profit motives and thus is shy in commencing investment with long
gestation period and where the returns are uncertain and low).
Therefore, Rodan is of the view that specific investment must be made in a number of
industries which are technologically and market-wise interdependent to reap the economies
of scale so as to achieve economic development. He stressed on three kinds of
indivisibilities which are essential for generating Big Push in an economy:
1) Indivisibility of Production function
2) Indivisibility of Demand
3) Indivisibility of savings

Indivisibility of Production function: Production function explains a technological way

in which inputs can be transformed into output. This transformation leads to increase in
production, economies of scale and externalities. Rodan regards investment in social
overhead capital (SOC) rather than in Directly Productive Activities (DPA) vital for this
transformation which is lacking in the UDCs. Huge initial amount of investment is
necessary in SOC like irrigation system, power, transport, communication etc to pave the
way for quick yielding directly productive activities (DPA). Investment in SOC will bring
about increasing returns in the production process. However, SOC require a "sizeable
initial lump" of investment. So, excess capacity is likely to remain in them for some time.
There are other four indivisibilities that characterize SOC—SOC are irreversible in time
and, therefore, must precede other directly productive investments. Second, equipment of
SOC has high minimum durability. Lesser durability is not technically possible and is also
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less efficient. Hence it’s lumpy in nature. Third, development of SOC needs a long
gestation period. Last, it is an irreducible minimum industry mix of different kinds of
public utilities i.e. investment in one set of infrastructure is not adequate but investment in
multiple services or other complimentary inputs for SOC to work effectively. These
indivisibilities of supply of social overhead capital are all of the principal obstacles to
development in underdeveloped countries and due to these indivisibilities private players
are shy in investing in SOC. Hence the theory assigns a vital role on the State to play in
promoting economic development.

Indivisibility of demand: It refers to small size of the markets in the UDCs that limit scale
of production and hence under-exploits the capacity of firms. The theory suggests that
investment in a large number of industries that cater to complementary demands will help
increase the size of the markets and thus, the industry will be able to reap the advantage of
large amount of production at lower levels of cost. It will also ensure adoption of practices
like division of labour that save time, tools and promote new inventions. This will make
the domestic industries more competitive as compared to their foreign rivals. However,
increasing the production capacity of small and cottage scale industries will be a challenge
and to make the benefits inclusive to all, the growth of small and cottage industries is also
called for. Hence the kind of policy framework adopted by the state to incentivize and
encourage these industries becomes important for overall growth of markets.

Indivisibility of Savings: The central problem of the third world country in the process of
economic growth is that there is dearth of capital in the form of plant, machinery,
equipment etc due to the low levels of savings in these economies. Rodan argued that if
these countries are able to accelerate their incremental savings ratio, then it could be
translated into expansion of large stock of capital. However capital is seen as only a
necessary but not a sufficient condition to move to higher trajectory of income. The focal
point is how gainfully this stock of capital is employed in productive projects which
require exchange of ideas. Therefore exchange of ideas is even more important than
provision of capital. Hence, they play an excessive role in the process of economic
development.

Critical appraisal of the theory of Big Push:

 Theory examines the path to equilibrium and not merely the point of equilibrium.
 The theory is based on realistic assumptions of indivisibilities faced by the under-
developed countries.
 This theory overlooks the role of agriculture sector in the process of growth. Economist
H.W. Singer argued that if underdeveloped countries are to launch a large investment

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package in industries without paying much attention to agriculture, they are bound to run
into difficulties like shortage of food and raw-material shortages. Hence, development of
industries requires development of agriculture sector as well. But whether it is in the
capacity of UDCs to carry out investment in both the sectors or not is debatable.
 Low levels of capital formation are the central problem faced by the UDCs due to which
investment in a large number of industries simultaneously, as suggested by the theory,
seems impractical.
 The theory is silent on the role of trade to ensure additional capital required for
initiating higher economic activity.
 In the context of UDCs, since the provision of SOC is expensive, the state has to
channelize resources from other developmental projects to SOC. This might create
imbalances in terms of shortage of certain goods and services. In addition, there could be
inflationary pressures in the economy.

4. Critical Minimum Effort theory

This model was outlined by Harvey Leibenstein in his book ‘Economic Backwardness
and Economic Growth’. This theory stresses on the fact that underdeveloped countries are
in the firm grip of poverty due to which they are trapped in the equilibrium at subsistence
levels. Any small change to move the economy to higher levels of growth are counter
acted by certain forces that are pertinent to developing economies only, despite increased
capital accumulation and rising manpower. So there is a sort of self-defeating mechanism
that prevails in the underdeveloped countries which seem to limit its growth at the
subsistence level of output. Professor Leibenstein suggested that “if sustained development
is to be generated it is necessary that the initial effort or initial series of efforts must be
above a certain magnitude. That is to say not all efforts to raise per capita income lead to
economic development. There are some that are too small to do so.” In the underdeveloped
countries, the equilibrium levels are Quasi-stable with respect to per capita income. It is a
condition under which, after any disturbance (in every economy there are two types of
disturbances that are operative-stimulants that impart dynamism to the system and shocks
that act as bottlenecks), some variables come back to their previous values and others are
settled down at new values. Within the third world countries, there are little forces that
could lead to a change in the magnitude of its variables, given the structural inefficiencies
in these countries. These inefficiencies could be increase in population along with the
small increase in income, rigidities in behaviour, attitudes, practices incentives, risk-averse
entrepreneurial class and other institutions, demonstration effect etc. Hence, if a specific
minimum expenditure is not incurred the new investment towards developmental efforts is
bound to fail.
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In other words if the per capita income is not raised to a certain level, then ‘income-
depressing forces’ will over power the ‘income-raising forces’ and per capita income will
come back to the previous level. The additional income would be eaten up by the additions
to the population which may come in the wake of the additional income, and hence the
effort may fail to generals a cumulative process of growth. Hence he emphasized the fact
that in the developmental process it is crucial to expand the income-raising forces at a
higher pace than the growth of the income-depressing forces. The income-raising activities
result in rise in savings and corresponding investment, higher levels of income, creation of
entrepreneurship and increase in the skills of the people.
Prof. Leibenstein classified two types of incentives influencing the growth- expanding
factors. They are- (i) Zero-sum incentives which do not have any effect on national
income. They include trading risk, non-trading or speculative activities and transfer of
income from one section of people to another. They have only a distributive effect. They
are carried on in order to secure greater monopolistic position, political power and local
prestige. They do not add to aggregate resources of the economy. We can thus say that
they are wastage of scarce economic resources of a country. (ii) Positive-sum incentives
that lead to an expansion of national income and hence economic growth. These activities
consists of the increases in productive investment, application of technical knowledge,
exploration of new sources of raw-materials, exploration and use of new markets and use
of scientific discoveries and innovations to stimulate the process of economic growth and
development. Leibenstein is of the opinion that minimum effort should be made to create
such a favorable environment congenial for the expansion of these positive sum incentives,
counteracting the zero-sum activities, so that they could be directed towards raising the
level of income, output, savings, investment and employment in an economy.

In the UDCs certain influences which work against the positive change are as follow:
 The zero-sum entrepreneurial activities directed towards the maintenance of present
economic privileges
 Large size of the unorganized sector. The conservative attitude of both organized and
unorganized workers.
 The prevalence of traditional ideas, social taboos, dogmatic views and resistance to the
new ideas and knowledge.
 Increase in the non-productive consumption expenditures that could otherwise be used
for capital accumulation or other developmental activities.
 High capital-output ratio used in the production processes

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 High rate of growth of population that puts pressures on the food security and existing
resources.

Leibenstein stresses that these influences can be overcome by a sufficiently large critical
minimum investment which would restore a rapid rate of economic growth in the
underdeveloped economies. The critical minimum investment would lead to expansion of
growth agents; an increase in the productivity of factors of production (with decline in
capital-output ratio and rise in human capital); creation of an environment that stimulates
socio-economic mobility and expansion of secondary and tertiary sectors by the working
of linkages and an ideological change that eventually leads to decline in fertility rate and
hence rate of growth of population.

Moreover, the theory stresses that there is a sort of mutuality and interdependence between
a number of firms and industries. As these develop, there emerge external economies.
Apparently, their economies can be reaped only when there are at least those minimum
numbers of industries operating which make these economies possible. In their absence,
these economies may not arise at all absence; these economies may not arise at all. The
minimum investment that the theory stresses on is in terms of introduction of mechanized
capital intensive techniques of production, changes in the ideology of institutions,
innovation etc.

Population Growth and Per Capita Income

Leibenstein theory recognizes population growth as initially increasing, then remaining

constant and further declining with the stages of a country’s economic development.
Initially at the subsistence level equilibrium, both Birth Rate (B/R) and Death Rate (D/R)
are constant at low levels and so the rate of growth of population is also low. The same is
the case with rate of growth of output.
Now with increases in per capita income above the subsistence level, D/R falls without a
decline in B/R with advances in medical science, improved public health measures and
decreased incidents of drought, famine and epidemic. As a result of which the rate of
growth of population rises. In fact the theory explains that in this stage of economic
development the rate of growth of population is higher than the rate of growth of output.
So, according to him, it is in this stage that any development effort undertaken by the
country is bound to flop as the counter-acting factor which is the population growth
overpowers the income-raising factor which is the output growth. However the rise in per
capita income raises the rate of growth of population up to a certain level only. Beyond

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which, with the rise in per capita income any further, it would lead to a fall in the B/R also.
This is so as a result of adoption of family planning measures, greater availability of
contraceptives and change in the mindset of the individuals leading to a fall in the desire to
have more children. It is in this stage that the rate of growth of population becomes
constant and then starts declining gradually as the economy advances towards the path of
sustained development. Moreover in the later stages the rate of growth of population will
be even lower than rate of growth of output. Hence, Leibenstein argued that a certain
minimum level of investment is required so that the increase in the per capita income can
bring out a decline in the rate of growth of population. It is only with this level of
investment that the development path can be sustained. Otherwise the structural rigidities
present in the UDCs will bring back the economy to the earlier level at which high growth
rates cannot be sustained.

Criticisms:
 Oshima argued that on applying this theory in practice there is a possibility of the
problem of inflation in the case of excessive investment as suggested by Leibenstein.
 Oshima claims that Leibenstein variables are crucial for a developed society like US but
their relevance for underdeveloped societies in questionable. He also claims that
Leibenstein’s model is indeterminate. To be determinate he must stipulate that product
prices remain unchanged.
 Leibenstein’s hypothesis concentrates on a closed economy. It does not account for the
impact of external trade, foreign capital and international forces upon the level of income
in an economy.
 The theory did not give any precise relationship between the rate of growth of
population and per capita income of an economy.

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5. Summary

Both the theories highlight the central problem of under-developed countries is the low
levels of savings and hence low levels of investment in these economies. They further
emphasize on not only increasing the existing rate if savings but also how to get the
savings translated into productive investment and hence enhancing the growth prospects of
these countries. So, the two theories suggested the need for a certain minimum amount of
investment in market-wise and technologically related industries so as to cater to
complementarities of demand. Doing so it will accelerate these economies to higher levels
of economic prosperity. However if a certain minimum investment is not made that all
developmental efforts will fail due to the bottlenecks that exist in the UDCs.

ECONOMICS Paper12: Economic Growth and Development - I

Module 35: Big Push Theory and critical minimum effort