Notes on Big-Push Theory

1. Notes on Big-Push Theory • Also called balanced-growth theory • What is the question? Virtually every country that experienced rapid growth of productivity and living standards over the last 200 years has done so by industrializing. Yet despite the evident gains from industrialization and the success of many countries in achieving it, numerous other countries remains unindustrialized and poor. What is it that allows some but not other countries to industrialize? And can government intervention accelerate the process? A particularly important and frequently discussed constraint on industrialization is the small size of the domestic market. When domestic markets are small and world trade is not free and costless, firms may not be able to generate enough sales to make adoption of increasing returns technologies profitable. So how do we get a country out of the no-industrialization trap? Or as some economists phrased, a switch from the cottage production equilibrium to industrial equilibrium.

2. Notes on Big-Push Theory • The core idea of big-push is simultaneous/coordinated investments, with the focus on the contribution of industrialization of one sector to enlarging the size of the markets in other sectors. Such demand spillover gives rise to the possibility that coordination of investments across sectors---which the government can promote---is essential for industrialization. • This simultaneous industrialization of many sectors can be self-sustaining even if no sector could break even (or be profitable) industrializing alone.

3. Notes on Big-Push Theory • Why profitability is not the sufficient condition for big-push? • If profitability is the only condition to push an economy up to the higher equilibrium, then during bad times, unprofitable investments may again push the economy back into low equilibrium. Thus, industrialization or high equilibrium is unstable. • So, when distribution of profits to other firms are the only channel to raise aggregate demand, there is no guarantee that the size of the market will increase as well.

4. Notes on Big-Push Theory • A stable multiple equilibria (with low and high equilibrium existing at the same time, i.e., the agricultural and the industrial) is possible when the size of other firms’ markets is being raised. This can happen regardless whether firm itself makes money. • One way to achieve this is to pay workers higher wages to entice them to work in industrial plants. Hence, even a firm losing money can still benefit firms in other sectors because it raises labor income and hence demand for their products. • Obviously another way to achieve this is to build infrastructure such as railroads or public training facilities. The infrastructure helps to defray the fixed cost of building industrial plants, thus making all firms closer to profitability. As a result, more firms are likely to invest in the industrial sector.

5. Notes on Big-Push Theory • Remember, our discussion is limited to closed economy without technology. Obviously, if trade is relatively free, the limit of small domestic market can also be overcome by the enlarged demand of the world market. • More importantly, compared to free trade policy, big-push theory implies a policy of central-planning penchant, which makes the theory less effective in practice.