Policy Center for the New South

This paper revisits Big Push industrialization theory in the context of open economies deeply integrated into global value chains (GVCs). While classical Big Push models emphasize demand complementarities and coordination failures in largely closed economies, many middle-income countries now industrialize through foreign-owned, import-intensive production networks. We develop an extended Big Push framework that incorporates GVC integration and import leakage, and show how these features can prolong the middle-income trap, despite rapid manufacturing expansion. Importantly, the analysis shows that without careful and well-designed industrial policy, large-scale investment programs inspired by Big Push logic may unintentionally reinforce import leakage, rather than generate self-reinforcing domestic demand spillovers. In this case, a Big Push can prolong the middle-income trap and lead to adverse outcomes. We characterize the conditions under which the domestic modern industry is left unviable, derive the critical industrial-policy threshold required to redirect domestic demand toward local production, and establish welfare rankings across alternative development strategies.

Using a panel of ten middle-income economies from 1989 to 2024, we provide empirical evidence consistent with the model’s predictions: greater trade openness and higher investment-income payments are associated with systematically larger GDP-GNI wedges, reflecting structural income leakage rather than transitory price effects. Distributed-lag estimates show that investment-income outflows affect the wedge immediately, while trade integration operates with longer lags. The results imply that GVC participation alone does not guarantee national income convergence, and that successful late industrialization requires deliberate policy sequencing to convert export-led growth into domestic value capture.