developmentalist theories of economic development

Chapter 5Developmentalist Theories of

Economic Development

Authors: James M. Cypher and James L. Dietz

By Dhattaluck Boondhammadheerawoot

Presentation Paths

• Introduction of developmentalist theories of economic development

• Brief concept of 3 scholars in developmentalist theories of economic development

• Summary• Discussion

Introdution: Objectives of this chapter• Better understand– Theory of the big push by Paul Rosenstein-Rodan

(the Austrian economist)• The concept of hidden development potential in less-

developed nations

– Theory of balanced growth by Ragnar Nurkse (the Finnish economist)• Export pessimism and the need for domestic

industrialization

– Unbalanced growth by Albert O. Hirschman (the German-born economist)

Introduction• Developmentalist theories of economic development

has been occurred after the Second World War with “Marshall Plan”

• Marshall Plan (from its enactment, officially the European Recovery Program, ERP) – Marshall Plan was the primary program, 1948–51, of the

United States for rebuilding and creating a stronger economic foundation for the countries of Western Europe.

– Marshall Plan was the reconstruction plan, developed at a meeting of the participating European states and was established on June 5, 1947 as postwar economic reconstruction of Europe.

Introduction• Referral to 3 scholars, they formed a loose

school of thought on the issue of economic development– Emphasize a less theoretical and more historical

and practical approach to the question of – How to develop, particularly in relation to the

applicability of neoclassical models, such as the Solow model (in the last chapter)

– There were differences of emphasis and interpretation between these theorists.

Introduction• Concept behind of 3 theorists– They preferred for industrialization as the driving force of

economic growth.– Industrialization would release a tide of prosperity lifting all

other sectors of the economy.– Respect for market forces -> Not hesitate to advocate large-

scale, short-term governmental intervention into the economy.

– In the long term, an economy would achieve its best results with a competive market interacting with a responsive and efficient governmental apparatus.

– Role of government in development would be reduced to its stabilizing function, as in the already-developed nations.

(Markets are perceived as a means to realizing the end of economic development; they are not an end in themselves.)

Theory of the Big Push

The Theory of the Big Pushby Paul Rosenstein-Rodan

• Much of his work focused on the increasing returns from large-scale planned industrialization projects

• Rosenstein-Rodan formulated this theory on the basis of research he had conducted during the Second World War.

• Hi-light >> Call attention to the hidden potential for economic development in less-developed regions because they possessed the hidden potential for greater progress; the resources and talents of society simply needed to be coordinated and released.


• Large-scale investments (A “big push”) in several branches of industry would lead to a favorable synergistic interaction between these branches and across sectors.

• In less-developed nations, it would have to come from a concerted and substantial “push” from government to create, effectively, and entire industrial structure.

• More investment was needed and in many places at one time in order to shift the economy away from its low-level equilibrium trap and toward rapid and sustainable growth.


• Individual entrepreneurs would be not possible to invest enough to “push” the less-developed economy forward at its maximum potential rate << the profit-and-loss calculations of private entrepreneurs and resources are limited.

• Social overhead capital is important for the big push theory >> generate positive external benefits to society as a whole (public investment).


• Virtuous circle effect– An expanding manufacturing sector that raises

productivity then stimulates income growth. – In turn, it leads to increasing demand for the products

of the expanding manufacturing sector.– Increasing growth in this manufacturing sector could

lead to increasing demand for inputs (produce on a larger scale)

– Result: Lower the costs of production for the manufacturing sector which could lead to increasing demand for the product and growth.

Summary of The Theory of the Big Push

• Big push >> investment simultaneously in a number of branches of industry and emphasis on social overhead as fundamental to the success of the development project in less-developed nations.

• 4 innovations (Contribution in the area of development economics)– Disguised unemployment: Their labor could be tapped to

create the vast public works of social overhead capital without reducing output in the economy.

– Complementarity and the external economies of distinct investments >> Large-scale investments could have an impact on overall economic growth greater than calculations of individual entrepreneurs alone.

Summary of The Theory of the Big Push

– Social overhead capital >> Endogenous growth methods (Chapter 8)

– Big push results in “technological external economies” >> Large-scale industrialization could contribute to a socially beneficial level of labor training that would have spread effects to other sectors throughout the economy.

The Theory of Balanced Growthby Ragnar Nurkse


• Hi-light– Increase in the amount of capital utilized in a wide

range of industries if industrialization has a chance of being achieved (like Rossenstein-Rodan emphasized).

– Key for development process in less-developed nations• Massive injection of new technology, new machines,

and new production processes spread across a broad range of industrial sectors.


• Nurkse was branded an “export pessimist”– He worked on assumption based upon the weak

pattern of prices for traditional primary exports from the less-developed nations in twentieth century.

• Export pessimism and the need of domestic industrialization– Contrast with doctrine in trade theory >> less-

developed nations should foster economic progress by increasing their exports of tropical products and raw material products.


– 2 reasons1. In future, those demands would be relatively limited

and slow to expand.• An increase in supply under such conditions would result in a decrease in

the market price. – The reduction in price could be a magnitude that the total revenue

received (= unit price X quantity of the product sold on the world market).

– After an increase in supply could be less than the export income.

2. In orthodox trade theory, it was assumed that– A less-developed nation with the ability to export either tropical

products and/ or raw materials would use the income earned to import machinery, equipment, and manufactured consumer goods for domestic consumption.

– High income consumers would spend inordinately on imported luxury products to “keep up with the Joneses” of the richer nations.

Summary of The Theory of Balanced Growthby Ragnar Nurkse

• In less-developed nations, small incremental increases in capital formation would not solve the problem because an individual business or a single industry alone attempted to raise its output and risk of not finding a market for its product because of the low level of overall average income (similar to Rosenstein-Rodan).

• Solution: Balance investment program >> Large-scale increases in supply across a large number of industrial sectors would at the same time, be met by a large-scale increase in demand created by the same expansion.– This income would be transposed into a further expansion of demand by other firms

and by workers in those firms buying the increased array of domestic goods available.

“If supply increases were coordinated with simultaneous demand increases across the economy.”

– Fiscal policies could have a very positive effect on the prospects for development without large –scale government involvement in production decisions or large-scale planning projects.

Summary of The Theory of Balanced Growthby Ragnar Nurkse

– Nurkse advocated forced savings through an increase in taxes on upper-income recipients.

– The increased investment funds generated could be allocated to the most promising industrial sectors via government-operated development banks designed to identify and promote industrialization in the private sector or via private sector banks.• This leads to an increase in the supply of available domestic output

via enhanced capital formation.• A market for domestically produced goods would be created

because potentially competing imports would be deflected via tariffs to the purchase of lower-priced domestically produced goods known as “Import substitution industrialization” (Chapters 9 and 1 0 )

Unbalanced Growth by Albert O. Hirschman


• Hirschman’s work was to be interpreted as an attack on the theory of big-push or balanced growth.

• He supported an “industrialization” and believed that the key to rapid industrialization was to be found in large-scale capital formation in several industries and sectors.


• Hirschman advocated the unbalancing of the economy, creating disequilibrium situations, for 2 reasons.– There were resource limits in the less-developed regions and

that this would necessitate prioritizing some areas of industry over others for the use of limited investment funds.• It’s impossible to move invest in all industries at the same

time as was envisioned in the big-push and balanced growth theories.

– The pressure from unbalancing the economy and in creating excess capacity in some areas and intensifying shortages in other areas results in subsequent reactions >> speed the development process by opening up opportunities for profit for new entrepreneurs.


• Backward and forward linkages– They were important in evaluating where to locate the initial

investment.• Development strategies could be built around the

maximization of the estimated stimulus of promoted industries in generating domestic backward and forward linkages.

– Backward linkages: When one industry expands, it requires inputs from other industries to be able to produce.

– Forward linkages: When an industry sells and transports its production to other firms and sectors in the economy.

>> The production of one firm in one industry has a multiplicity of backward and forward linkages with firms in other industries.


• Changing the social organization of the labor process– This is to advance for promoting a capital-intensive,

unbalanced industrialization program in less-developed nations, according to exceedingly lax standards in the workplace.

– He suggested that introduction of more advanced machine-paced techniques, it would become easier both to calculate reasonable work-norms and to evaluate both success and failure in completing tasks.• Workers and managers would be created as a complementary effect

of industrialization, with positive and cumulative spin-off effects for other industries.

• Attitudes toward efficiency and responsibility on the job would also be transmitted to society at large.

Note: There’s study of the significance of achievement attitudes to deliver output per worker inMexico (Focus 5.2).

developmentalist theories of economic development

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