Paul Narcyz Rosenstein-Rodan, Problems of Industrialisation of Eastern and South-Eastern Europe (1943)

Rosenstein-Rodan’s journal article presents a programme for post-war industrialisation grounded in the difference between the profitability of individual enterprises and that of a coordinated industrial system. Its thirteen numbered sections move from the problem of agrarian unemployment through an argument about complementary industries and external economies to proposals for international finance and estimates of capital requirements. Industrialisation should raise incomes in poorer regions while expanding world output; achieving this requires an investment institution capable of planning across firms and national boundaries.

The starting point is an estimated agrarian excess population of 20–25 million within a regional population of 100–110 million. Underemployment wastes labour on a scale greater than in rich industrial countries. Labour could move towards capital through emigration, or capital towards labour through industrialisation, but the practical obstacles to mass migration make the latter indispensable. Rosenstein-Rodan treats agricultural improvement and industrial development as interconnected tasks and proposes a regional economic unit large enough to support efficient enterprises and diversify investment risks.

He contrasts self-sufficient industrialisation on the “Russian model” with development integrated into the international division of labour. Autarky would require poor populations to finance heavy, machine and light industries through severe consumption sacrifices, while adding to existing world heavy-industrial capacity. International investment could instead accelerate employment in labour-intensive industries, drawing equipment from established industrial economies. Yet nineteenth-century investment practices cannot simply be reproduced: larger fixed costs, political risks and the social unacceptability of prolonged misery require new institutions.

An institutional framework different from the present one is clearly necessary for the successful carrying out of industrialisation in international depressed areas.

The proposed framework is an Eastern European Industrial Trust, encompassing the industries to be created. Labour training supplies the first justification. An employer cannot reliably recover training expenditure because workers may leave for another firm; what is unprofitable privately can nevertheless be highly productive socially. Training, housing and transport should therefore enter the investment programme of the industrial system as a whole.

The decisive argument concerns complementary demand. A factory employing 20,000 former agricultural workers cannot expect those workers to spend all their wages on its shoes. A coordinated group of industries producing their principal consumption goods faces a different prospect: employment generates purchasing power for the products of the system. The example establishes why simultaneous investment can succeed where an isolated project appears commercially doubtful.

The planned creation of such a complementary system reduces the risk of not being able to sell, and, since risk can be considered as cost, it reduces costs.

Rosenstein-Rodan extends this argument to economies generated within growing industries and between different industries. During structural transformation, benefits accruing outside an enterprise may be comparable in magnitude to its recorded profits. Private investors, relying on past experience and incomplete market information, can consequently overestimate risk and underinvest. The problem is not merely slower growth: decentralised investment can produce a different industrial structure and a lower eventual equilibrium.

If we create a sufficiently large investment unit by including all the new industries of the region, external economies will become internal profits out of which dividends may be paid easily.

The trust would capture returns dispersed among otherwise separate enterprises. Rosenstein-Rodan qualifies this reasoning through Allyn Young’s example of a railway financed by appreciation of adjacent property. Such gains need not represent a net social benefit if property elsewhere loses value. The regional case differs because removing surplus agricultural labour need not depreciate agricultural land. The relevant external gains therefore have a stronger claim to inclusion in the profitability calculation.

Nor does this justify an infrastructure-first programme that assumes other investments will follow automatically. Eastern and South-Eastern Europe does not face the same railway shortage as some other depressed regions; infrastructure requirements depend on the industrial structure being planned.

We have seen how complementarity makes to some extent all industries “basic.”

Complementarity replaces a rigid distinction between foundational utilities and subsequent industries. Private incentives may function successfully once development establishes a new equilibrium, but cannot be relied upon to create it amid post-war structural disequilibrium.

International coordination must also encompass repayment. Profitable domestic investment does not automatically generate foreign exchange: export industries must be planned, and creditor countries must accommodate their products. Processed foods and light manufactures would increasingly replace cereal exports. Rich countries might receive part of their benefit through shorter working hours rather than indefinitely increasing material consumption.

The institutional outline assigns equal shares to creditor and debtor countries, with government representation, guarantees and eventual redemption of foreign holdings. The final calculations temper the programme’s ambition. Industrial capital and maintenance require approximately £4,800 million over ten years, alongside £1,200 million for agriculture. Even optimistic saving and income-growth assumptions leave insufficient domestic resources to eliminate all surplus labour; at best, 70–80% of unemployed workers could obtain employment. Emigration and German reparations in equipment would remain supplementary measures. The article’s enduring conceptual contribution is thus a theory of coordinated development joined to a concrete, financially constrained reconstruction programme: collective profitability must become investible without abandoning international trade or overlooking domestic sacrifice.