Capital Accumulation and Balanced Growth

One
of the earliest contributions to the theory of nature of backwardness and the
conditions for growth came from the Polish-born economist Paul Rosenstein Rodan
as early as 1943, in the form of an article on the problems of
industrialization in Eastern and Southern Europe. 

In
this article and through later works, Rosenstein-Radon became a prominent
spokesman for massive industrial development as the way to growth and progress
for the backward areas, both on the European fringe and in the rest of the
world. Rosenstein-Rodan expressly distanced himself from neo-classical
economics and its static equilibrium analyses, and proposed instead that the
growth process must be understood as a series of dissimilar disequilibria.

In
a paper from 1957, he expanded this argument further into a theory of the ‘big
push’ as a precondition for growth. The background areas were characterised by
low incomes and, therefore, little buying power. Furthermore, they were
characterised by high unemployment and underemployment in agriculture. To break
out of this mould, it was necessary to industrialise. 

<

p style=”line-height: 150%; text-align: justify;”>However, private
companies could not do this on their own, partly because they lacked incentives
to invest as long as the markets for their products remained small. The influence
of Adam smith’s reasoning was apparent here but Rosenstein Rodan went further
with an identification of other growth impeding conditions, including the
companies’ difficulties with internalising costs and consequently not being
paid for all the goods they produced, for example, the cost of training
workers who may then transfer their new skills to other companies.

Rosenstein-Roan
claimed that the barriers to growth could be overcome but this required active
state involvement in education of the workforce and in the planning and
organizing of large-scale investment programmes. And they had to be large scale
in order to set a self-perpetuating growth progress in motion, Rosenstein-Rodan
compared the ‘big push’ with an aeroplane’s take-off from the runway. There is
a critical ground speed which must be passed before a craft can become
airborne. A similar condition applied to the growth process: launching a
country into self-sustaining growth required a critical mass of simultaneous
investments and other initiatives (cf. also Rosenstein-Rodan, 1984).

Ragnar
Nurkse took over and further developed many of Rosensteain-Roadan’s major
points (Nurke, 1953). Nurke asserted that the economically backward countries
were caught in two interconnected vicious poverty circles, which can be
illustrated as in the figure.

The
reasoning behind the circles is that demand in backward countries is low as a
consequence of the very low incomes. When demand is low and the market limited,
there will not be much incentive to make private investments. Therefore,
capital formation and accumulation remain at a very low level. As fore, remain
low. On the supply side, the low incomes result in a small productivity. The
final outcome is reproduction of mass poverty. Nurkse added to this that the
whole problem with attaining the necessary savings and capital investments was
compounded by rich people’s tendency to copy, in their own consumption, the
consumption standards and patters of the industrially advanced countries. This
so-called Duisenberg effect implied an increase in the propensity to consume
and thus led to a reduction in the actual rate of saving.

The
preconditions for breaking out of these poverty circles were, according to
Nurkse, the creation of strong incentive to invest along with increased
mobilization of invertible funds. This required a significant expansion of the
market through simultaneous massive and balanced capital investments in a
number of industrial sectors. This is dependent further on an actively
intervening state, which could both plan investment programmes and ensure
internal mobilization of resources. The state was important also to bring about
optimal utilization of foreign aid, which Nurkse brought in as a critical
strategy for initiating accumulation of capital on a grand scale.

It is important to
note that behind both Rosenstein-Rodin’s and Nurkse’s modes of reasoning there
lay a fundamental assumption that an increased supply of goods — as a
consequence of capital accumulation — would create its own increased demand.
Both theorists imagined that the market would expand as a consequent of
increased capital investments which, in turn, would continue to grow in
response to market incentives.