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Myrdal Theory dals Myrdals Theory of Circular Causation Circular Causation
INTRODUCTION
Prof. Gunnar Myrdal maintains that economic development results in a circular causation process whereby the rich are awarded more favours and the efforts of those who lag behind are thwarted. The backwash effects predominate and the spread effects are dampened. This tends cumulatively to accentuate international inequalities and also leads to regional inequalities within the underdeveloped countries. In underdeveloped countries a circular and cumulative process, also known as the vicious circle of poverty, operates downwards and being unregulated causes increasing inequalities. Myrdal believes that our inherited theoretical approach is inadequate to solve the problem of economic inequalities. The theory of international trade and, indeed, economic theory generally were never worked out to serve the purpose of explaining the reality of economic underdevelopment and development.1 The reason is that the traditional economic theory is based on the unrealistic assumption of stable equilibrium. Prof. Myrdal believes that it is wrong to apply the notion of stable equilibrium for constructing a theory to explain the changes in a social system. If, however, we persist in applying the stable equilibrium analysis, then a change will regularly call forth a
1. G. Myrdal, Economic Theory and Underdeveloped Regions, 1957.

reaction in the system in the form of changes which on the whole go in the opposite direction to the first change.2 The idea I want to expound in this book, writes Myrdal, is that, on the contrary, in the normal case there is no such tendency towards automatic self-stabilisation in the social system. The system is not by itself moving towards any sort of balance between forces, but is constantly on the move away from such a situation. In the normal case a change does not call forth countervailing changes but, instead, supporting changes, which move the system in the same direction as the first change but much further. Because of such circular causation a social process tends to become cumulative and often to gather speed at an accelerating rate.3 Another unrealistic assumption which is closely related to the stable equilibrium approach is the economic factors. The classical economic theory had its principal shortcoming in disregarding the non-economic factors which are among the main vehicles for the circular causation in the cumulative processes of economic change. It was due to these two unrealistic assumptions that the traditional theory failed to state the dynamic problems of economic underdevelopment and development.

THE MYRDAL THESIS

Prof. Myrdal builds his theory of economic underdevelopment and development around the idea of regional inequalities on the national and international planes. To explain it, he uses the notions of backwash and spread effects. He defines backwash effects as all relevant adverse changes ... of economic expansion in a locality . . . caused outside that locality. I include under this label the effects via migration, capital movements and trade as well as the total cumulated effects resulting from the process of circular causation between all the factors, non-economic as well as economic. The spread effects refer to certain centrifugal spread effects of expansionary momentum from the centres of economic expansion to other regions. The main cause of regional inequalities, according to Myrdal, has been the strong backwash effects and the weak spread effects in underdeveloped countries. We first analyse below the principal forces responsible for this phenomenon at the national level and then at the international level. (A) REGIONAL INEQUALITIES The genesis of regional inequalities within a country has a non-economic basis. It is associated with the capitalist system which is guided by the profit motive. The profit motive results in the development of those regions where the expectations of profits are high while other regions remain underdeveloped. Prof. Myrdal attributes this phenomenon to the free play of market forces which tends to increase rather than decrease regional inequalities. He says, If things were left to market forces unhampered by any policy interferences, industrial production, commerce, banking, insurance, shipping, and indeed, almost all those economic activities which in a developing economy tend to, give a bigger than average returnand, in addition, science, art, literature, education and high culture generallywould cluster in certain localities and regions, leaving the rest of the country more or less in a backwater.4 In this way, regional inequalities are accentuated when some localities grow at the expense of other regions which stagnate.
2. Ibid., p. 13. 3. Ibid. 4. Ibid., p. 26.

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The Backwash Effects of Migration, Capital Movement and Trade. Next, Myrdal analyses the backwash effects of migration, capital movements and trade on the backward regions. . The localities and regions where economic activity is expanding will attract young and active people from other parts of the country. This will tend to favour the developing region and depress economic activity in the backward region, wherefrom such labour migrates. Capital movements also tend to increase regional inequalities. In regions which are developed, increased demand will stimulate investment which, in turn, will increase income and demand, and lead to a second round of investment, and so on. The scope for better investment in the centres of expansion may create capital shortage in the backward regions. Studies in many countries, writes Myrdal, have shown how the banking system, if not regulated to act differently, tends to become an instrument for siphoning off the savings from the poorer regions to the richer and more progressive ones where returns on capital are high and secure.5 Similarly, trade operates with a fundamental bias in favour of the developed regions and in disfavour of the less developed regions. The development of industries in former regions may ruin the existing industries of the backward regions and the poorer regions remain mainly agricultural. According to Myrdal, The freeing and widening of the markets will often confer such competitive advantages on the industries in established centres of expansion, which usually work under conditions of increasing returns, that even the handicrafts and industries existing earlier in the other regions are thwarted .... As industrialisation is the dynamic force in this development, it is almost tantological to state that the poorer regions remain mainly agricultural ... In these regions also, not only manufacturing industry and other non-agriculture pursuits but agricultural itself show a much lower level of productivity than, in the richer regions.6 The Spread Effects. About the spread effects, Myrdal writes, Against the backwash effects, there are, however, also certain centrifugal spread effects of expansionary momentum from the centres of economic expansion to other regions. It is natural that the whole region around a nodal centre of expansion should gain from the increasing outlets of agricultural products and be stimulated to technical advance all along the line. 7 There will also be spread effects to localities producing raw materials for the growing industries in the centres and those having consumer goods industries will be stimulated. These will overcome the backwash effects from the older centres and encourage self-expansion of new centres. Similarly, the spread effects flowing from a centre of industrial expansion to other localities and regions, operating through increased demands for their products and in many other ways, weave themselves into the cumulating social process by circular causation.8 Backwash vs. Spread Effects. It is, however, not possible that the backwash effects and spread effects should be in equilibrium. In support of this, Prof. Myrdal quotes two broad correlations from the studies of the United Nations Economic Commission for Europe: first, regional inequalities are much wider in the poorer than in the richer countries; and second, the regional inequalities are increasing in the poorer countries and diminishing in the richer countries. A large part of the explanation for these two broad correlations may be found in the important fact that the higher the level of economic development that a country has already attained, the stronger the spread effects will usually be. Because the development is
5. Ibid., p 28. 6. Ibid., pp. 28-29. 7. Ibid., p. 31. 8. Ibid.

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accompanied by improved transportation and communications, higher levels of education and a more dynamic communion of ideas and valuesall of which tend to strengthen the forces for the centrifugal spread of economic expansion or to remove the obstacles for its operation. As such economic development becomes an automatic process once a country has reached a high level of development. In contrast, the major cause of the backwardness of underdeveloped countries has been the weaker spread effects and stronger backwash effects whereby in the cumulative process poverty becomes its own cause. The Role of the State. National policies have tended to accentuate regional inequalities in poorer countries. The free play of market forces and the laissez-faire policy have been the two potent forces in creating regional inequalities in the presence of weaker spread effects. Other factors responsible for regional disparities in the poorer countries have been built-in feudal and other inegalitarian institutions and power structures which aid the rich in exploiting the poor. The governments of underdeveloped countries should therefore, adopt egalitarian policies to weaken the backwash effects and strengthen the spread effects in order to bridge regional inequalities and to strengthen the foundations for continuous economic progress. In the words of Myrdal, A higher level of development will strengthen the spread effects and tend to hamper the drift towards regional, inequalities; this will sustain , economic development, and at the same time, create more favourable conditions for policies directed at decreasing regional inequalities still further. The more effectively a national state becomes a welfare state, the stronger will be both the urge and the capacity to counteract the blind market forces which tend to result in regional inequalities; and this, again will spur economic development in the country, and so on, in circular causation. (B) INTERNATIONAL INEQUALITIES International trade may have strong backwash effects on the underdeveloped countries, according to Myrdal. At another place he writes, Trade operates (as a rule) with a fundamental bias in favour of the richer and progressive regions (and continues) and in disfavour of the less developed countries.9 Unhampered trade between two countries of which one is industrial and the other underdeveloped, strengthens the former and impoverishes the latter. The rich countries have a large base of manufacturing industries with strong spread effects. By exporting their industrial products at cheap rates to underdeveloped countries, they have priced out the small-scale industry and handicrafts of the latter. This has tended to convert the backward countries into the producers of primary products for exports. The demand for primary products being inelastic in the export market, they suffer from excessive price fluctuations. As a result, they are unable to take advantage of either a fall or a rise in the world prices of their exports. The importing countries take advantage of the cheapening of their products because of the inelastic market for their exports. Similar advantages follow when there is any technological improvement in their export production. When the world prices of their products rise, they are again unable to benefit from it. Increased export earnings lead to inflationary pressures, malallocation of investment expenditure and balance of payments difficulties when they are wasted in speculation, conspicuous consumption, real estate, foreign exchange holdings, etc. Capital movements have also failed to counteract international inequalities. Since advanced countries themselves offer to investors both goods, profits and security, capital will shun
9. G. Myrdal, Challenge to Affluence, 1963.

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underdeveloped countries. Capital which flowed to underdeveloped countries under the colonial system was mainly directed towards primary production for exports. But it tended to affect their economies adversely through strong backwash effects. Whatever little was invested by the foreigners in the form of roads, ports, railways, etc. was for political stability and economic profitability of the colonial government. International migration between underdeveloped and developed countries is no longer possible as a solution to the problem of international inequalities. Thus unhampered trade and capital movement which have led to economic progress in advanced countries have produced strong back wash effects in the underdeveloped countries of the world. Differences in legislation, administration and more generally, in language, in basic values and beliefs, in levels of living, production capacities, and facilities, make national boundaries much more effective barriers to the spread of expansionary momentum than any demarcation lines within one country can be . ... Even more important as impediments to the spread effects of expansionary momentum from abroad than the boundaries and everything they stand for are the very facts of great poverty and weak spread effects within the underdeveloped countries themselves .... Basically, the weak spread effects as between countries are thus for the larger part only a reflection of the weak spread effects within the underdeveloped countries themselves caused by the low level of their development attained. In these circumstances market forces will tend cumulatively to accentuate international inequalities. A CRITICAL APPRAISAL The Myrdal thesis marks an important departure from other theories of underdevelopment. He beautifully combines national and international forces which have tended, to keep the underdeveloped countries of the world in the cumulative process where poverty becomes its own cause. There is no denying the fact that in underdeveloped countries the spread effects are dampened by the strong backwash effects. National and international forces tend to perpetuate them and thus accentuate regional and world inequalities. Moreover, the free play of market forces and unhampered trade have tended to cramp the export potential of such countries. As a result, a Great Gap has developed between imports and exports of underdeveloped countries which has made their economic development a costly and lengthy affair. Even empirical evidence indicates that the Myrdal thesis has been vindicated.