September 1988 | Kevin M. Murphy, Andrei Shleifer, Robert Vishny
This paper explores the idea that simultaneous industrialization of multiple sectors can be mutually beneficial, even if no single sector can break even on its own. The authors analyze this concept in an imperfectly competitive economy with aggregate demand spillovers, interpreting the "big push" into industrialization as a transition from a bad to a good equilibrium. They show that for two equilibria to exist, an industrializing firm must raise the demand for products in other sectors through channels other than its own profits contributing to demand. For example, a firm paying high factory wages can raise demand in other manufacturing sectors even if it loses money. Similarly, a firm investing today to produce at a lower cost tomorrow shifts income and demand for other goods into the future, making it more attractive for other firms to invest today. Additionally, an investing firm can benefit other sectors if it uses shared infrastructure, such as railroads, which helps defray the fixed cost of building the infrastructure. These mechanisms are relevant for less developed countries, where the big push can be facilitated by government intervention. The paper also discusses the importance of domestic markets for industrialization and presents models to illustrate how coordinated investment across sectors can lead to the expansion of markets for all industrial goods, making industrialization self-sustaining.This paper explores the idea that simultaneous industrialization of multiple sectors can be mutually beneficial, even if no single sector can break even on its own. The authors analyze this concept in an imperfectly competitive economy with aggregate demand spillovers, interpreting the "big push" into industrialization as a transition from a bad to a good equilibrium. They show that for two equilibria to exist, an industrializing firm must raise the demand for products in other sectors through channels other than its own profits contributing to demand. For example, a firm paying high factory wages can raise demand in other manufacturing sectors even if it loses money. Similarly, a firm investing today to produce at a lower cost tomorrow shifts income and demand for other goods into the future, making it more attractive for other firms to invest today. Additionally, an investing firm can benefit other sectors if it uses shared infrastructure, such as railroads, which helps defray the fixed cost of building the infrastructure. These mechanisms are relevant for less developed countries, where the big push can be facilitated by government intervention. The paper also discusses the importance of domestic markets for industrialization and presents models to illustrate how coordinated investment across sectors can lead to the expansion of markets for all industrial goods, making industrialization self-sustaining.