In the Big Push model, a foreign investor opens a shoe factory in a low-income country, hiring workers at wages above subsistence. The factory eventually fails. According to the model, what is the most accurate explanation?
AThe factory lacks sufficient capital to achieve the minimum efficient scale of production
BWorkers at the factory earn above-subsistence wages but there are still no customers — the rest of the economy earns subsistence wages and cannot afford shoes
CThe government failed to provide adequate infrastructure, raising transport costs above sustainable levels
DShoe-making technology is too advanced for local workers, leading to low productivity and high defect rates
This is the core Big Push insight: the shoe factory's profitability depends not on its own technology or capital, but on the purchasing power of the broader economy. Workers at the factory earn above-subsistence wages and want to buy goods — but there are no modern firms producing goods for them to buy. Meanwhile, the rest of the population still earns subsistence wages and cannot afford shoes. The factory fails not because of supply-side problems but because the demand side doesn't exist yet. No single firm can create its own market.
Question 2 Multiple Choice
The Big Push model predicts that coordinated simultaneous investment across many sectors can succeed where individual investment fails. The core mechanism is:
ASimultaneous investment reduces the cost of capital by pooling risk across sectors
BGovernment coordination eliminates information asymmetries that block private investment decisions
CEach sector's workers become customers for the other sectors, creating reciprocal demand that makes all investments profitable
DSimultaneous investment spreads political and regulatory risk, reducing the probability of policy reversal
The Big Push is fundamentally about demand complementarities, not capital cost or information. When a shoe factory, textile mill, food processor, and bicycle manufacturer all open simultaneously, each factory's workers earn wages and spend them at the other factories. Each investment creates the market that makes the other investments viable. The key word is 'reciprocal': the demand flows in both directions, creating a self-reinforcing cycle. No coordination mechanism (options A, B, D) would generate this without the actual concurrent demand expansion.
Question 3 True / False
In the Big Push model, individual investments may each be unprofitable even though the same investments made simultaneously would all be profitable, because profitability depends on the market that other investments create.
TTrue
FFalse
Answer: True
This is precisely the coordination failure at the heart of the Big Push. Profitability in any one sector depends on whether wages are being paid across the whole economy — which only happens if many sectors industrialize at once. Each investor, acting individually, sees no profitable opportunity. Each investor, acting as part of a coordinated push, sees a profitable opportunity. The gains are real but non-appropriable by any single party, which is why the market cannot solve the problem unilaterally.
Question 4 True / False
The Big Push model identifies lack of physical capital as the primary obstacle to industrialization in developing countries, implying that external loans or aid can trigger development by funding the needed investment.
TTrue
FFalse
Answer: False
The model's diagnosis is coordination failure, not capital scarcity. Even if capital is freely available, no rational private investor will build a shoe factory if the market for shoes doesn't yet exist — and the market won't exist until workers across many sectors are earning wages. Capital alone cannot solve a coordination problem. The policy prescription of the Big Push is therefore not simply 'provide funds' but 'coordinate simultaneous investment across many sectors so that the economy jumps to the high-level equilibrium at once.' Funding without coordination does not resolve the underlying trap.
Question 5 Short Answer
Why can't the free market solve the coordination failure at the center of the Big Push model, even when the necessary technology, labor, and capital are all available?
Think about your answer, then reveal below.
Model answer: Each firm's profitability depends on income and purchasing power generated by other firms investing simultaneously — a positive externality that no single investor can capture as private profit. Because each investor waits for others to move first, and no one can credibly commit to invest without assurance that others will too, all investors rationally hold back and the economy stays in the low-level equilibrium. The gain from coordination is real, but it accrues to the economy as a whole rather than to the investor who moves first. Markets cannot internalize this spillover without an external coordinating mechanism.
This is the general structure of a coordination failure with strategic complementarities. Each investment is a complement to the others — your return rises when others invest — but no investor can make the complementary investments happen. The free market equilibrium is a Nash equilibrium where no one invests, even though a Pareto-superior equilibrium (everyone invests) exists. Breaking out requires either credible commitment among firms, a large enough player (like a government) to internalize the spillovers, or an external financier willing to condition funding on coordinated action.