Industrialization Policy and the ‘Big Push’

Abstract

The recent theoretical literature on industrialization has formalized the long-standing idea that development traps are the result of a failure of economic organization rather than a lack of resources or other technological constraints. The so-called ‘big push’ models of industrialization have shown how, in the presence of increasing Retums, many equilibria are possible with some Pareto dominating others. Such a view not only provides an explanation for the coexistence of industrialized and non-industrialized economies, but also a rationale for government intervention to coordinate investment in a ‘big push’ towards industrialization (Murphy et al., 1989, p. 1024). Moreover, unlike competing theories, these models emphasize the temporary nature of any policy.¹ Thus, industrialization policy involves facilitating an adjustment from one equilibrium to another rather than any change in the nature of the set of equilibria per se.

This chapter is an amended version of Chapter 4 of my PhD dissertation from Stanford University (see Gans, 1994a). I wish to thank Susan Athey, Antonio Ciccone, Avner Greif, Yingyi Qian, Philip Trostel, Graham Voss, seminar participants at Stanford University, Monash University and the World Congress of the Econometric Society (Tokyo, 1995), and especially, Kenneth Arrow, Paul Milgrom and Scott Stern for helpful discussions and comments. I also thank the Fulbright Commission for financial support. All errors are my own responsibility.