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no power station and no factory,
developing economies suddenly need
to have both. Starting from a position
where they have no industrial sectors,
they must establish all of them at
once. But because each investment
requires others, it is difficult for
individual entrepreneurs to lead the
push. For this reason Rosenstein-
Rodan and others like him argued
that the big push has to come from
the state, not from private markets.
In line with this thinking
post-war governments across the
developing world became involved
in large investment programs,
undertaking industrial and
infrastructure projects as part of
national development plans. Less-
developed nations were viewed as
having dual economies, consisting
of traditional agricultural sectors
(containing a lot of unproductive
labor) alongside modern sectors
made up of new industries. The idea
was that the big push would siphon
off excess labor from the rural areas
and deposit it in the new industrial
enterprises. This way of thinking
provided the rationale for large
infusions of foreign aid, intended
as the fuel for the investment drive.
State-directed investment has led
to beneficial industrialization in
some places. Some Southeast
Asian countries saw industrial
expansion and fast income growth;
their successful tying together of
an activist state and big business
became known as the Developmental
State model. However, the conditions
in which the Marshall Plan was
enacted in 1948 were different from
those in the newly independent
nations of the 1950s; many attempts
at a big push ran into trouble.Inefficient investment
At early stages the investments
needed for economic development
may seem obvious. Even so,
coordinating an investment drive
across many industries is a huge
task. Governments can only create
viable industries if they know the
correct balance of production—the
right share of shoes, clothes, and
bread—which is implied by the
composition of consumer demand.
It is only possible to exploit the
interactions between different
kinds of production when there is
detailed knowledge of the forward
and backward linkages between
industries. Not all governments
have the expertise, information, or
political clout to do this successfully.
What many countries ended up
with was bloated, inefficient, state-
owned industries that failed to
trigger take-off into sustained
growth. Industrialization was
frequently attempted behind trade
tariffs—foreign goods were shut out
of the domestic market in the hope
that this would give fledgling
industries a chance to develop.
The state’s protection of firms from
foreign competition generated “rent-
seeking”—wasteful lobbying of the
government by commercial interest
groups seeking to preserve their
privileges. Often this led to cozyDEVELOPMENT ECONOMICS
relationships between governments
and politically connected
industrialists, which hampered
competition and innovation.
During the 1970s the big push
came under intellectual attack by
new classical economists (p.247)
such as the American Paul Krugman,
who believed that developing
economies were not fundamentally
different from developed ones. They
said economically rational behavior
and the power of price signals were
as valid in poor as in rich countries.
Investment was important, but it
needed to be correctly distributed
around the economy. Markets, not
governments, were the best arbiter
of where to invest.
This new wave of thinking held
that developing economies were
hampered not by the inherent
inefficiency of their markets, but by
the wrong policies. Too much state
involvement had undermined the
price mechanism (where prices are
set by supply and demand), and
had disrupted its ability to allocate
resources efficiently. Good policy
involved “getting prices right” and
allowing the market mechanism
to operate freely so that resources
would be put to the best use.A large nut-shelling factory built
with Indian investment employs workers
to shell nuts in Tanzania. Other industries
sprang up to service the factory, aiding
the country’s general development.
Complementarity of
different industries provides
the most important set of
arguments in favor of a
large-scale planned
industrialization.
Paul Rosenstein-Rodan