7. Paul Rosenstein-Rodan and the Post-war Development Model

For dependency theories, which talk about the development of the centre at the cost of the periphery, see Raul Prebisch (1950), Paul Baran (1957), and A.G. Frank (1967).

The mainstream model of growth based on the ideas of big push (or balanced growth) evoked dissent from economists like Albert Hirschman (1958, 1984) and Peter Bauer (1966, 1971). Hirschman (1958) criticized the balanced growth strategy and put forward in its stead the unbalanced growth strategy where “the task of development policy is to maintain tensions, disproportions and disequilibria” (ibid., p. 66). Bauer argued that while foreign aid is neither a necessary nor a sufficient condition of development because it increases the dependency syndrome of the poor countries and strengthens the government’s grip on the economy. The major determinants of development are human qualities, attitudes, social and political institutions and market opportunities.

Rosenstein-Rodan (1943, pp. 206–7) stated that when the whole industrial structure has to be created, individual investment decisions in the market framework become distorted. “The main driving force of investment is the profit expectation of an individual entrepreneur which is based on experience of the past. Experience of the past is partly irrelevant, however, where the whole economic structure of a region is to be changed. An individual entrepreneur’s knowledge of the market is bound to be insufficient in this case because he cannot have all the data that would be available to the planning board of an East European Investment Trust [E.E.I.T.]. His subjective risk estimate is bound to be higher than the objective risk. If industrialization of the internationally depressed areas were to rely entirely on the normal incentive of private entrepreneurs, the process would not only be very much slower, the rate of investment smaller and (consequently) national income lower, but the whole economic structure of the region would be different. Investment would be distributed in different proportions between different industries, the final equilibrium would be below the optimum which a large E.E.I.T. could achieve”.

Rosenstein-Rodan (1957, p. 9), invoking Say’s Law, stated: “The new producers would be each other’s customers and would verify Say’s Law by creating an additional market. The complementarity of demand would reduce the risk of not finding a market. Reducing such interdependent risks increases naturally the incentive to invest”.

A word about the political context of Rosenstein-Rodan’s 1943 paper is also in order. Born in Poland, Rosenstein-Rodan became a British citizen in 1930, and taught at the University College, London. He was appointed as secretary of the Economic Group of the Royal Institute of International Affairs (also known as Chatham House) in 1941 which evolved into a prominent think-tank in international relations (see Alacevich 2020, p. 7). East Europe was considered to be crucial to the balance of power not only in Europe but also at the global level. There was a widely held opinion that whoever controlled Eastern Europe would eventually control Europe and the world. Thus the British government considered the development of Eastern Europe as “a necessary bulwark against German expansionism, and fundamental to a pacified, non-totalitarian Europe” (ibid., p. 9). The economic backwardness of the region had caught the attention of scholars in the face of Nazi aggression, but after World War II, cold war politics implied that the region was “no longer the target of UK development plans” (ibid., p. 12).

“Technological external economies are rare in a static competitive economy with one important exception: training of labor and education. In the theory of growth, however, external economies abound because given the inherent imperfection of the investment market, imperfect knowledge of risks, pecuniary and technological external economies have a similarly disturbing effect on the path towards equilibrium” (Rosenstein-Rodan 1957, p. 4). Further, the distinction between technological and pecuniary external economies become practically irrelevant in the theory of growth (ibid., p. 4).

Rosenstein-Rodan (1957, p. 7) stated that social overhead capital is characterized by four indivisibilities: First, it is indivisible (irreversible) in time. It must precede other “directly productive” investments. Second, its equipment has high minimum durability. Lesser durability is either technically impossible or much less efficient. For this and other reasons it is very lumpy. Third, it has long gestation periods. Fourth, an irreducible minimum social overhead capital industry mix is a condition (consisting of at least 30–40% of total investment) for getting off the dead-end.

According to Rosenstein-Rodan (1957, p. 14), the economic factors constitute the necessary condition for the big push, to jump over the obstacles to development. Psychological factors remain important even though our knowledge regarding them may be deficient. “[Psychology] may well constitute the difference between the necessary and sufficient condition of success” (ibid., p. 14).

The role of human capital or R&D in growth during the 1950s and 1960s was emphasized by scholars such as Griliches (1957), Schultz (1961), and Denison (1967). See Chapter 9.

Meier (2005, pp. 55–56) summarizes the early development thought thus: “In approaching development problems, the early development economists first thought of what ‘obstacles’ to development had to be overcome, and what ‘missing components’ of the development process had to be supplied… The emphasis was on planned investment in physical capital, utilizing reserves of surplus labor, adopting import-substitution industrialization policies, practicing centralized planning, and relying on foreign aid”.

At the very outset, Lewis (1954) posed the problem of growth in terms of capital formation thus: “This essay is written in a classical tradition, making the classical assumption, and asking the classical question. The classics, from Smith to Marx, all assumed, or argued, that an unlimited supply of labour was available at subsistent wages. They then enquired how production grows through time. They found the answer in capital accumulation, which they explained in terms of their analysis of the distribution of income” (p. 139, emphasis added).

Indian five-year plans started from 1951. So the first three decades of planning would correspond to the period 1951–1981.

Bardhan (1984) describes the “all pervasive” nature of the Indian state well where it even occupied low-priority areas such as hotels, tourism, scooters, bicycles, cars and bread.

Murphy et al. (1989b, p. 1004) point out that “the source of multiplicity of equilibria is pecuniary externalities generated by imperfect competition with large fixed costs”.

Several development theorists made this assumption—Lewis (1954) talked of “unlimited supplies of labour” at subsistence wages, Rosenstein-Rodan (1943) of “agrarian excess population” and Nurkse (1953, 1957) of “surplus labour” and “disguided unemployment” in agriculture.

Hirschman (1984, p. 92), however, warned: “There is no doubt that the unbalanced growth strategy can be overdone, with dire consequences”.

Hirschman tried to look for hidden rationalities in the Colombian reality of shortages and bottlenecks, capital intensive production processes, inflation and balance of payments pressures on the decision makers. He stated that his approval of hidden rationalities was not an exercise in apology for the existing order as these were principally those changes which were already under way so that progressive economic and political forces that deserved recognition and help could be identified (ibid., 93–94).

Broadly two types of trade strategies were distinguished—inward orientation and outward orientation. An inward-oriented strategy is one where the system of incentives is biassed in favour of home production and discriminates against exports. An outward-oriented strategy, on the other hand, provides a neutral incentive structure between exports and import substitution.