ROSENSTEIN-RODAN

References
● Rosenstein-Rodan, Paul N. 1943. “Problems of Industrialization of Eastern and
South-Eastern Europe”, The Economic Journal
This was a chapter from the report of the Economic Group of the Committee on
Reconstruction, the Royal Institute of International Affairs.
● Rosenstein-Rodan, Paul N. 1984. “Natura Facit Saltum: Analysis of the Disequilibrium
Growth Process.” In Gerald M. Meier and Dudley Seers (eds). Pioneers in Development.
Oxford – New York: Oxford University Press, 207-221.

Development Plan for Eastern & South-Eastern Europe

● Internationally depressed areas: Albania, Bosnia, Bulgaria, Cyprus, Greece, Macedonia,
Montenegro, Romania, Serbia, Turkey, Kosovo and Northern Cyprus
● Motivation to choose this region : relatively underdeveloped countries compared other
Europe area, more similar than different so can analyze as a cluster

Two ways to utilize excess agrarian labour for eco development:

● Out-migration of labour (settlement of emigrated and immigrated regions is difficult)
● Industrialization of the same region (cost-effective)
Optimum size of industrialization = whole area between Germany, Russia & Italy

Finances for the industrialization process : in favor of foreign investment

Sr. Without international investment – With international investment
No. need to build all types heavy, basic,
light industries

1 Slow process Fast

To increase domestic saving, std. of No compromise on domestic std. of living
living will be compromised

2 Adding to excess capacity of the Utilization of existing heavy industries in

world’s industrial area different countries

3 Inefficient use of natural resource, Possibility of international division of

leading to overall low world outcome labour; with more labour-intensive
industries, more world output, efficiency

Framework Of The Paper

Industrialization for the development :
 ● Industrialization with & without international investment & advantages of each
● Supported large-scale international investment for the region
Why ‘Big-Push’ ?
Reasons for its success : Big-Push theory
Rodan’s calculation : approximate requirement of capital over a decade for the region during
1946-56, taking into consideration excess labour in agriculture, population growth,
capital/labour ratio, depreciation rate, output and saving rate in domestic economy

Differences in 19th Century and 20th Century industrialization

1) Self-liquidating based on exchange of agrarian and industrial products
2) higher risk of loss of capital due to increased overhead cost and fixed cost ; increased in firm
size due to less mobility of resources
3) Increased political risk, can be combated only by State
4) social consciousness would not tolerate misery & poverty as it was in 19th century
5) Present capital forms (like shares) too small and channelize to individual enterprise – fail to
enjoy external economies –fail to create simultaneous complementary industries
● In 20th Century: Industrialization of economically depressed areas by treating it as one
big firm/trust

Necessity to plan the industry as one huge firm

Industrialization demands skilled labours:
● Need to provide training to labours
● Private firms - no incentive – risk that trained labours can contract with other firms
● For Private firms – investment in training - not a profitable investment – but good
investment for State
● Similarly, good investment from the point of view of bulk of industries, though
irrevocable investment for small private units
● Divergence in private return and social return

Why Big-Push ?
Large investment bring sustainable development due to
● Complementarity or indivisibility of demand
● indivisibility in production functions
● Indivisibility in saving

Indivisibility Of Demands
● Most industries are inter-dependent
● Example of a shoe factory : increase employment in a shoe factory in urban area.
 ● Surplus agriculture Labours migrate to urban modern sector at relatively higher wage
● (Higher wages : to compensate for food cost inclusive of transport cost & housing rent)
● If labour spend all wages on shoes, a market for the products of their enterprise would
arise = expansion will not disturb previous market equilibrium

Complementarities between different industries

● But labours will not spent all wages on shoes
● Similarly lower income may limit the demand for newly produced shoes
● Expansion in demand for other necessary products – in the absence of production
capacity in other production – inflation – no rise in saving with rise in income - low per
capita income persist despite investment in an industry
● Alternatively, if investment in various industries considering the complementarity of the
demand
● Investment - employment – wages/rise in purchasing power – demand for each other’s
products - producers become consumers for each other – creation of own market – no
disturbances in world market
● Such investment reduces risk associated with uncertainty of finding market for the newly
produced goods
● Planned investment is necessary to capture such ‘external economies’ (type I – as it
reduces risk of not finding markets for products)

Large scale private investment is necessary

● So to reach a threshold (so that complementarity will be effective) and take advantage of
complementarity in demand, a minimum quantum of investment is required to produce
the bulk of additional goods on which newly-employed people can spend their additional
income.
● Similarly, underdeveloped countries have low level of per capita income
● So demand for others products may not rise substantially, similarly, with lingering
uncertainty about persistent demand may not induce private firms to invest on their own

Planned Industrialization & External Economies

● External Economies (Type II) : economies external to one industry due to growth of other
industries (which may not always occur in strictly competitive market & definitely not in
depressed areas)
● External Economies (Type III): national and international sponsors fund individual
enterprises for dividends; planned investment will allow external economies being part
of profits & dividends (Council of State Industrial Development and Investment
corporation in India, MIDC)
● External Economies (Type III): Prof. Young’s Tube Line example. Construction of Tube
Line as a stand-alone project – not profitable
● Construction of Tube Line with housing project (revenue in terms of passenger traffic)
 ● Net capital gains due to appreciated housing & land prices in emigrated areas and lack
of considerable depreciation of housing & land prices in immigrated areas.
● Role of Trust (an agency/organization)
● External economies as a part of internal profit

Indivisibilities in Production Function

● When various industries are established, the economies regarding factors of production,
goods, and techniques of production can be obtained.
● The establishment of Social Overhead Capital (SOC)
● SOC consists of powers, means of transportation, communication and energy resources.
● They all contribute to development indirectly for comparatively longer duration
● Large amount of capital is required to construct it
● Long gestation period
● Private producers are least interested
● The SOC (such as road, dam etc.) can not be imported.
● Supply of SOC create new investment opportunities & speed up industrialization process
● Accordingly, UDCs will have to spend 30% to 40% of investment on SOC.
● These indivisibilities serve as big obstacle in the way of economic development of a
UDC, thus required large planned investment

Rationale for huge investment & a Trust

● SOC or ‘basic’ industries need to be created
● Some ‘basic’ industries may exist already while others need to be created. – require
assessment by a Trust
● As complementarity makes all industries ‘basic’ to some extent.
● Huge investment
● Huge (domestic / foreign) investment for ‘Basic’ industries to obtain natural ‘multiplier’
effect
● Possible disturbances due to reliance on foreign capital (in the absence of domestic
capital) such as reduction in import of consumer goods, pushing exports, borrowing
causing disequilibrium).
● Govt. in creditor’s country can initiate to lend funds/provide technical assistance through
a channel of Trust (with some controlling power)
● Liquidation as another source to payoff debts
● Self-liquidation (through market forces) may not be possible so needs to be planned
● Some exports industries to sell to creditors
● Planning required to foresee the demand* by creditors etc. and to avoid disturbances in
rest of the economy
* with cross-nations income disparities, rich countries show high-income elasticity of import to
only leisure. So working hours in rich countries get reduced (35-hrs a week vs. 48 hrs in
depressed areas)
Indivisibility in Supply of Savings*:
● 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.

Summary
● Indivisibilities on the demand side refer to limitations imposed by the size of market on
profitability
● Indivisibilities on supply-side refer to lumpiness of capital and necessity of the
investment in large number of activities simultaneously can take advantage of various
external economies of scale
● Divergence between Private Marginal product and Social Marginal Product
● Small investments may not be useful to reap the external economies
● Large-scale expansion of activities for obtain external economies
● So ‘Big-Push’ is required as Natura Facit Saltum (Nature does not make a jump)
● To establish equilibrium in the world economy

Merits
● Recognition that automated Laissez Faire may not solve market imperfections
● The market imperfection are the big obstacles in the way of economic development.
● Therefore, deliberate action of planned & huge investment, rather than dependency on
market mechanism for sustained development

Demerits
● Neglecting Investment in Agri. Sector: Agriculture is the largest sector in UDCs, which
has been largely ignored by the theory. The emphasis has been laid upon making
investment in infrastructure and industries.
● Inflationary Pressure: If funds are raised through foreign loans or by printing new notes,
may create inflationary pressure in the economy.
● Administrative and Institutional Difficulties: Decision-making mechanism in the State
for the investment may take longer time
● No empirical evidence for the theory: it’s a prescription for launching underdeveloped
economies on the path of progress rapidly. The Big Push theory lacks the historical
evidences and facts. It is not an historical expansion of how development takes place