Banks as Catalysts for the Big Push

A literature has developed to substantiate Rosenstein-Rodan's intuition that coordination of a critical mass of investments may induce industrialization through a `big push.' This literature has essentially ignored the question of what economic institutions may overcome the coordination failures which give rise to an `underdevelopment trap.' In this paper we propose that banks may act as a `catalyst' for the `big push.' Our work is motivated by historic evidence that suggest an association between a `big push' and the emergence of large banks. We develop a model based on Murphy, Shleifer and Vishny (1989) and show that a `large' bank with su cient market power can induce the `big push' by coordinating the investments of a subset of rms in the economy. This creates a critical mass of demand that induces other rms to invest as well. A bank may coordinate rms directly, but more importantly indirectly, that is through the terms of its loans, o ering either a low interest rate or investment guarantees. We also show that a government might in principle improve on the private market outcome (by subsidizing a bank's coordination activities), but that problems of incentives, credibility and dynamic e ciency makes this di cult. Preliminary Version. Comments Welcome. JEL Classi cation numbers: G21 (Banks), N2 (History of nancial markets and institutions), O14 (Industrialization choice of technology), O16 (Economic development nancial markets)