Model Answer
0 min readIntroduction
Economic underdevelopment is often characterized by persistent low income, limited productivity, and a lack of diversified economic activity. Traditional theories often attributed this to factors like limited capital or natural resources. However, Paul Rosenstein-Rodan, in his 1943 paper, proposed a different perspective: that underdevelopment isn’t simply a lack of something, but a result of a massive coordination failure. He argued that a simultaneous, large-scale investment program across multiple sectors is necessary to break the cycle of poverty and initiate sustained economic growth. This ‘big push’ is crucial because of the inherent externalities and indivisibilities present in developing economies.
Understanding the Coordination Failure
Rosenstein-Rodan’s central argument revolves around the idea that individual investment decisions, while rational for the investor, may not lead to optimal outcomes for the economy as a whole. This is due to two key characteristics of developing economies:
- Externalities: Investments in one sector often create positive spillover effects for other sectors. For example, building a railway line (infrastructure) benefits not only the transportation sector but also agriculture, manufacturing, and trade. However, individual investors may not fully account for these external benefits when making their decisions, leading to underinvestment.
- Indivisibilities: Certain investments require a minimum scale to be efficient. A small-scale steel plant, for instance, might be unprofitable due to high fixed costs. However, a large-scale plant can achieve economies of scale and become viable. These indivisibilities necessitate large, coordinated investments.
The ‘Big Push’ Strategy
To overcome these challenges, Rosenstein-Rodan advocated for a ‘big push’ – a comprehensive, coordinated investment program spanning multiple sectors. This involves:
- Simultaneous Investments: Investing in a range of complementary projects (e.g., infrastructure, manufacturing, agriculture) at the same time.
- Large Scale: Investments must be substantial enough to overcome indivisibilities and achieve economies of scale.
- Government Leadership: Given the coordination challenges and the need for long-term planning, the government plays a crucial role in initiating and managing the ‘big push’.
Illustrative Examples
The Tennessee Valley Authority (TVA) in the United States (1933) serves as a historical example, though not a perfect one, of the ‘big push’ concept. The TVA involved large-scale investments in dam construction, electricity generation, flood control, and agricultural development, aiming to transform a poverty-stricken region. Similarly, post-WWII Japan’s economic recovery involved coordinated investments in key industries like steel, shipbuilding, and automobiles, facilitated by the Ministry of International Trade and Industry (MITI).
Criticisms and Limitations
Rosenstein-Rodan’s theory has faced criticism. Some argue that:
- Implementation Challenges: Coordinating large-scale investments across multiple sectors is incredibly complex and prone to bureaucratic inefficiencies.
- Information Problems: Governments may lack the information necessary to accurately identify the most promising investment opportunities.
- Crowding Out: Public investment may crowd out private investment.
- Risk of Misallocation: Large-scale projects can be susceptible to errors in planning and execution, leading to misallocation of resources.
Despite these criticisms, the ‘big push’ theory remains influential in development economics, highlighting the importance of coordination and scale in overcoming the obstacles to economic growth.
Conclusion
Rosenstein-Rodan’s theory of economic underdevelopment as a coordination failure provides a valuable framework for understanding the challenges faced by developing economies. While the ‘big push’ strategy is not without its limitations, it underscores the necessity of overcoming externalities and indivisibilities through large-scale, coordinated investments. Modern development strategies often incorporate elements of this approach, emphasizing the role of infrastructure development, industrial policy, and regional integration in fostering sustainable economic growth.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.