Resuscitating the "big push" theory, with a twist

Randall Morck and Masao Nakamura present a new interpretation of Japanese economic take-off following the Meiji Restoration of 1868, building on the old idea of a "big push" originally developed by Paul Rosenstein-Rodan.  The big-push notion is usually taken to justify large-scale and coordinated investments by the public sector to overcome complementarities and scale problems in development. The twist is that Morck and Nakamura argue the big push was engineered by the private sector--namely, by the Zaibatsu. In so doing, they also provide a new justification for the prevalence of business "groups" in developing countries:

Our big push theory of pyramidal business groups differs from other explanations of pyramidal business groups. Business group firms may well let firms coinsure each other to spread risk.Group firms may well trust each other to do business in economies where corruption stymies arm’s length dealing. Without denying such possibilities, we suggest a broader argument that subsumes them. The highly industrially diversified pyramidal structure common to business groups throughout the world permits a controlling shareholder to stem hold-up problems and coordinate growth across diverse complementary industries, permitting very rapid growth financed by public equity -- a big push.

Morck and Nakamura emphasize the special circumstances in Japan that may have made this private-sector led big push particularly potent:

Japan’s economic history suggests a big push can succeed under certain circumstances despite gloomy evidence to the contrary. Specifically,

1. The state gives an initial shove, marginalizing traditional elites, reforming basic institutions, perhaps even subsidizing technology imports, and then withdraws its hand. This withdrawal checks government failure problems.
2. Pyramidal business groups emerge to propel the big push. An undisputed controlling shareholder focusing on the apex firm’s value, prevents hold up problems and coordinates cross-industry subsidies, as group member firms tap public equity markets to capitalize cascades of subsidiaries spanning all relevant industries. At least to some extent, this echoes what a selfless central planner coordinating a big push would do
3. The controlling shareholders are marginalized as the big push nears completion. This prevents entrenched oligarchy problems from reversing the big push.
4. All this is done with limited trade barriers and no barriers against foreign investment.

In other words, not your grandfather's big push.

Comments

[Ktwdawg]

If only we could get the government to give one of these new-fangled pushes to our telecom/cable sector. I am so sick of the service monopolies in this country that I could scream. I'm so glad to be paying cable premiums and 'infrastructure invesment charges' so that the wealthy suburbs can have Fiber Optic service installed, while my center-city apartment building has cable wires sprouting from every crevice like wild hairs. Grumble Grumble Grumble.

[Jeff H]

I was surprised Morck and Nakamura wrote this paper, given their previous collaboration was a pretty wide-ranging attack on the role of business groups in Japan's economic development. Basically, they tried to pull the lid off the argument that the keiretsu form of industrial organization was key to Japan's economic development. Also, Morck collaborated on a number of papers with Yeung and others which detail the ills of concentrated corporate control (you may note during the paper that they carefully do not challenge this agency perspective of business groups).

Other authors have argued this point for years, as Amsden has suggested that Korea's business groups, the chaebol, were key to the country's economic development since such groups allow for learning project execution skills and moving up the value chain, a la Hausmann's work on the product space (he specifically looks at Malaysia, another country chock full of business groups).

I believe the ubiquity of business groups in developing countries is causing a sea-change in the orthodox perception of these entities (see Khanna's 2007 JEL article on business groups as an example of this growing interest). I think increasingly the agency theorists are going to revisit their view of business groups as universally-bad and move towards a more nuanced position where we can see which groups are good or bad for development, and why and why not.

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This sounds related to Bernanke's discourse on GSEs last Friday (among the other topics he elucidated).

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Our big push theory of pyramidal business groups differs from other explanations of pyramidal business groups.

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