1. Chapter 5
Developmentalist Theories of
Economic Development
Authors: James M. Cypher and James L. Dietz
By Dhattaluck Boondhammadheerawoot

2. Presentation Paths
• Introduction of developmentalist theories of
economic development
• Brief concept of 3 scholars in developmentalist
theories of economic development
• Summary
• Discussion

3. 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)

4. 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.

5. 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.

6. 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.)

7. Theory of the Big Push

8. The Theory of the Big Push
by 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.

9. The Theory of the Big Push
by Paul Rosenstein-Rodan
• 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.

10. The Theory of the Big Push
by Paul Rosenstein-Rodan
• 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).

11. The Theory of the Big Push
by Paul Rosenstein-Rodan
• 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.

12. 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.

13. 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.

14. The Theory of Balanced Growth
by Ragnar Nurkse

15. The Theory of Balanced Growth
by 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.

16. The Theory of Balanced Growth
by Ragnar Nurkse
• 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.

17. The Theory of Balanced Growth
by Ragnar Nurkse
– 2 reasons
1. 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.

18. Summary of The Theory of Balanced Growth
by 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.

19. Summary of The Theory of Balanced Growth
by 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 )

20. Unbalanced Growth
by Albert O. Hirschman

21. 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.

22. Unbalanced Growth
by Albert O. Hirschman
• 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.

23. Unbalanced Growth
by Albert O. Hirschman
• 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.

24. Unbalanced Growth
by Albert O. Hirschman
• 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 in
Mexico (Focus 5.2).