ECONOMIC THEORY AND UNDER-DEVELOPED REGIONS BY GUNNAR MYRDAL EMMANUEL NKANSAH Middle Tennessee State University, Murfreesboro, TN Paper submitted to complete course requirements in History of Economic Thought (ECON 7660) Spring 2020 Abstract How far is the economic theory of the industrially advanced countries applicable to the underdeveloped countries? Gunnar Myrdal explained the issue of inequality between countries and clarified the increasing accumulated cause of international inequality through cumulative causation. He agreed that there are so-called spreading effects from rich to poor countries due to economic expansion in the rich countries, which increases the demand for poor countries' goods. He also demonstrated, however, that backwash effects outweigh these spread effects because of increasing returns and emerging economies leading to a high level of productivity in rich countries and the siphoning of capital from the poor to the rich widening inequality in the poor countries. To reduce this inequality and achieve economic development, there is the need to have a state, national state policies, national economic planning and the need for research. Keywords: Inequality, developed and under-developed countries, cumulative causation, spread effects, backwash effect Emmanuel Nkansah, Ph.D. Student, Department of Economics and Finance, Middle Tennessee State University, Murfreesboro, TN 37132, phone: 330-780-4000; en2t@mtmail.mtsu.edu Page | 1 Introduction Gunnar Myrdal was a Swedish economist born on 6 December 1898 at Gustafs, Sweden. He was the son of Karl Adolf Pettersson, farmer and railroad employee, and of Anna Sofia Karlsson. Myrdal received his doctorate degree in economics in 1927 at the University of Stockholm and published his dissertation, setting out the starting points of his monetary theory. In 1938, he was commissioned by the Carnegie Corporation of New York to study the American Black Predicament. The material he collected and interpreted was published in 1944 as the landmark book "An American dilemma: The Black Problem and Modern Democracy"(Čaplánová, 2002). Professor Myrdal received more than thirty awards in his lifetime. In 1974, together with Friedrich von Hayek, they won the Nobel Prize for Economics for ‘pioneering work in the theory of money and economic fluctuations and penetrating analysis of the interdependence of economic, social and institutional phenomena (Čaplánová, 2002). He wrote books and published articles such as “A Problem for Democracy published in 1940, An American Dilemma, “The Negro Problem and Modern Democracy published in 1944”, “The Political Element in the Development of Economic Theory published 1953” during his lifetime and one of his book published in 1957 was “Economic theory and under-developed regions” addressed the inequality that exists between the rich and poor countries Myrdal married Alva Reimer, social reformer and politician on 8 October 1924. They had two daughters and one son. Myrdal was the First Executive Secretary of the United Nations Economic Commission for Europe (UNECE) 1947-1957, Sweden. He worked in Germany, Great Britain, the United States of America and many places. He died on 17 May 1987 at Danderyd near Stockholm (Čaplánová, 2002). The motivation behind writing Economic theory and under-developed regions1” stemmed out of the fact that there a lot of problems that under-developed countries face in relation to rapid growth. His 1 These lectures in Cairo formed the basis of his book, Economic Theory and Underdeveloped Regions (Myrdal 1957), which came out as he continued his leadership of the Asian Drama Team, a project financed by the Twentieth Century Fund. As a result, the underdeveloped regions were a major contributor to the Asian drama Page | 2 purpose is to inquire why and how these inequalities came about, why do they persist and why they tend to increase (Myrdal, 1958:vi). He talked about how these inequalities and trends can be reversed. Also, he detailed the treatment of problems of economic under-development and development. The Mechanism of National and International Economic Inequality Myrdal tried to identify factors that had led to an unexplained general trait of social reality that exists between the developed and under-developed countries2. Developed countries are characterized by upward indices in terms of low population growth, high capital formation and investment leading to higher income levels. On the other hand, under-developed countries are countries with high population growth, low capital formation and investment and income levels per head are generally low (Myrdal, 1957:16-16). The unexplained general trait that distinguishes the developed from the under-developed countries is the use of capital. He argued that industrialized (developed, rich countries) continue to grow. As the world’s total savings grow from these countries, new inventions constantly grow that lead to the demand for capital and investment. They control the areas by exploiting the poorer countries oil and natural resources worsening the development in the poor countries However, in the under-developed countries where incomes are low, capital formation and investment are generally low. Also, the faster growth in population as a result of high fertility and high mortality rates tends to make the age distribution of their populations disadvantageous. The consequence of this the stagnation of economic development leading to business slumps. These factors have widened the international inequality between the rich and very poor countries. He accepted the fact that, even within the developed countries, there exists an inequality that exists individually. But, within under- and were, in effect, an early indication of the development terrain as Myrdal saw it before starting work on his colossal project (Myrdal, 1957: v). 2 At the time of this book, few countries such as Great Britain, United States, Canada, Australia, North-Western (France, Netherlands etc) and West-Central Europe (Germany, Switzerland etc). These countries are the upper class of nations in the world of society. Under-developed countries are very poor nations such Africa countries, Middle and East Asia and larger part of countries in the Latin America (Myrdal, 1957: 15-16). Page | 3 developed countries, inequalities exist between individuals, classes and regions and still growing low (Myrdal, 1957:18). Interestingly, he opined that under-developed countries are aware of this international inequality and the leaders in these countries are seeking equality in opportunity with other people as well as for liberty. They are also craving for economic development and national independence. But they fail to point their poverty and inequality to the rich countries but rather attribute it to the world economic system which keeps them so poor. Myrdal begins by stressing widening international economic inequality and then details the notion of circular and cumulative causation (pg.19). The Principle of Circular and Cumulative Causation Circular cumulative causation is a multi-cause approach in which the core variables and their linkages are clearly defined. The idea here seems to be that a change in one form of an institution will lead to successive changes in the other institutions. These changes are circular in that they keep in a cycle, many times in a negative manner, in which there is no end and cumulative in that they continue to exist in that round. Cumulative causation was at the forefront of his thinking; it was applied to regional development in economic theory and underdeveloped areas. His argument was the emergent spatial economic inequality between nations and regions. Myrdal began by stressing widening international economic inequality and then details the notion of circular and cumulative causation3. He argued that the circular pattern of forces tends to act and respond to one another, which keeps poorer countries in poverty. For example, a poor man may not have enough to eat; he may be malnourished, his health may be low; he may be physically weak, his working capacity may be bad, which means he is poor; which, in essence, means he would not have enough to eat, and this continues in a vicious cycle. The approach may be used to explain why poor countries are poor. 3 Winslow pointed out that the circular and cumulative process continuously suppress people. He stated that one negative factor can have both cause and effect on other negative factors that will even trigger more negative action leading to downward pressing of people (Winslow, 1951:9). Page | 4 In his book “An American Dilemma. The Negro Problem and Modern Democracy” published in 1944 talked about how discrimination exists between the Whites and the Blacks. He used this hypothesis to explain that White prejudice causing discrimination against the Negro Blacks because of their poor living conditions. Myrdal stated that these two factors are mutually interrelated. The vicious cycle continues because poverty among the Black Negros is kept down by discrimination from the Whites. Likewise, Negro's deprivation, slum housing, disorderly conduct, and crime exacerbate and fuel the White's antipathy to Negros. He concluded, therefore, that white prejudice and poor negro expectations are mutually affecting each other. (Myrdal, 1957:28). He pointed out that the low status of the Negroes is massively and self-perpetually unsustainable all round; their low educational level causes low productivity, loss of health and low earnings, which holds education standards down again. One solution to this problem is to apply the government needs a policy that can bring about new exogenous changes that have the direction and strength to bring the system to a rest (pg.25). Myrdal is of the view that the change can occur if the relevant factors are cumulatively magnified and applied wisely, it will bring great social gains for society. He said the changes in the relevant factors must be conceived in the dynamic terms of circular causation and not in static equilibrium. So the circular relationship between less poverty, more food, improved health, and higher working capacity would sustain a cumulative process upward instead of downwards4. The drift towards regional economic inequalities in a country Myrdal argued that, in fact, foreign and inter-regional economic relations entail unequal transactions in the sense that the weak are always manipulated by the strong. This explains the backwashing impact of migration, capital movements and trade in backward regions. The main cause of backwardness and ethnic inequalities has been the heavy backwashing effect and the low spread effect. 4 Cumulative process upward is the improvement in the well-being of people when the factors cumulatively change in a dynamic and bring about more growth way while cumulative process downward is when the factors change and worsen the living conditions of people and bring about less growth Page | 5 Myrdal distinguished between what he called the spread and backwash effects connecting areas, the latter appearing to dominate the former. As a backwash, he underscored the implications of the selective essence of migration, the influx of finance capital, and the ways in which the profits of commodity exports return to more successful trading partners. In each case, he contradicts the statements of his contemporaries (Borts & Stein, 1964; Ohlin, 1933) that free trade and mobile development factors give rise to international and inter-regional economic convergence–claims, remobilized after the 1980s, to valid neoliberal globalization (pg.43). He also points out that economic processes run through many causal chains (p. 29) have not been accounted for in economic theory, rendering them closer to contemporary economic geographers than to geographical economists (Sheppard, 2017). Spread effects, on the other hand, may emerge from the way in which demand from the center of raw materials boosts jobs in the periphery, from agglomeration and economic growth (including wage increases) in the core, and from the Malthusian population constraints in fast-growing regions (pg.48). The advanced region is developing at a faster rate at the expense of the poor region. Income generated by the developed economy is not reinvested in poor regions but is repatriated to the developed sectors/regions contributing to further growth in these areas. Spread effects continued to increase in rich countries, while the Backwash effect continues to spread even more in backward countries. Again, he said the free play of market forces and the pursuit of profit motives in the capitalist system leads to increased inequality between poor regions instead of decreasing inequalities among poor regions (pg.38). The Role of the State He established why poor countries need a State and not the laissez-faire system. The laissez-faire system widened inequality between regions instead of decreasing inequalities among regions. When the spread effects are stronger than the backwash effect in the rich country and as some result inequalities would eventually diminish because of the interplay of market forces. In backward regions, the situation creates more problems, in developed regions, motor-solutions solve all problems. On the other hand, Myrdal then focused on policy implications for circumstances where backwashing is dominant, Page | 6 emphasizing that a European-style welfare state, establishing complex networks of state interference structures, preventing any country, industry or social group from being left behind in its growth (p. 47), is ideally equipped to tackle regional disparities through state spending. And that underdeveloped countries should replace ‘oppressor states’ with such welfare states5. The main function of the state is to provide a means of supporting the cumulative process. Economic growth and affluent regions and social classes were the most involved and successful in coordinating their activities, and they typically had the power to avoid the organizational activities of others. If the center and core are in semi-colonial relations with the fringes, then those development programs which provide for more power relations, inclusion and linkages are called for. All actions must be directed towards the end of socio-economic naturalism in the growth of less developed countries. Myrdal seeks much-reaching structural reforms that would bring the advantages of planning to the people. Therefore, what Myrdal said was that every national state must take some responsibility for common services and also build roads and raise the level of technology in the poorer regions (pg.56). However, government interference in a free-play market environment would result in inequality and differences and this will continue the vicious cycle (pg.66). Institution of National State Policies in Under-developed countries Economic nationalism does not need to be taught to newly liberated underdeveloped countries. Nationalism is an important function to serve in bringing the people together and motivating them to a common purpose and a single agenda, and this becomes even more important in the virtual absence of a functional world community (pg. 79). Myrdal stated that if the under-developed countries are able to manage, effectively and efficiently execute their state policies such as the raising of technology, etc, they can overcome the vicious cycle of 5 The oppressor state is the strong anti-state and anti-organization bias of the classical economists, thus, was more of a truly progressive position in their day. Their theory was mounted in protest against the pre-industrial state. Page | 7 poverty associated with the cumulative process. If the poorer countries become politically independent, they are at liberty to organize their own life base on their own interest (pg.78). Myrdal opined that underdeveloped countries trying to achieve economic development should have some nationalistic policies that are directed to improving their own economic standards and reaching equality of opportunity with the developed countries (pg.78). One feature of the nationalistic policy is to unify the masses and inspire them with a common purpose and vision. When applying the nationalistic policy, Myrdal advised the under-developed countries to take all measures that are welfare-enhancing and nationally beneficial to the masses (pg. 79). Myrdal argued that national state policies work best when there is a growth of solidarity between under-developed countries and this promotes the development of under-developed countries. Therefore, when they come together, they pool resources that propel their growth if doing it individually (pg.81). Through the internal policies that under-developed countries have, they are learning from each other’s experiences and are not taking all their patterns from the developed countries because of cultural differences. Ideas and social conscience come to play when people have a common purpose. Myrdal concluded that as international solidarity grows among great majority of people who are suffering in the under-developed countries, the rich or the minority of people in the developed countries will feel compelled to join by careful steps the majority, which is becoming powerful and they will end up arriving at one common policy for common goals (pg.82). He said the national state policies should have a moral element that will shape the attitudes of the people. For example, for many reasons, anti-colonialism and sympathy for the poorer nations are much greater in the United States of America than anywhere else in the richer countries, either in Western Europe or in the "white" British dominions. In Europe, and even more so in the underdeveloped parts of the world, he noted that ordinary people, as well as leaders, have no real appreciation of how important this characteristic is to American culture and, more importantly, how seriously limited in practice is the capacity of the US government to support the old colonial forces in Western Europe who are its political allies (pg. 89). Page | 8 Although under-developed countries are formulating national state policies, there is a disparity between the rich and poor countries. The political tension between the rich and poor continue to grow indefinitely, as the lower class nations become more consolidated and at the same time more conscious of their grievances. This might result in a swell defensive attitude of the nations in the upper class (pg.83) National economic planning in under-developed countries There is the need to have some state policies in the form of a national plan that will guard and govern the activities of the under-developed countries in achieving economic development. Myrdal argued that under-developed countries should have an integrated national plan that will shape and effectively help carry out the national policies. Therefore, it is assumed that the state should be responsible for initiating the general plan and see to it that it is implemented (pg.91). Myrdal defined national plan as a program for the strategy of a national government applying a system of state interferences with the play of market forces, thus conditioning them in such a way as to give an upward push to the social process6. It is the responsibility of the government in the under-developed countries to implement most of the functions in the national plan because of the various deficiencies and setbacks. Unlike the developed countries where private businesses implement most of the functions with the government implementing needful ones. If the government in under-developed countries wants to succeed, the central planning should constantly target breaking the rigidities associated with under-development and rather establish greater flexibility in the entire economic and social process in a cumulative process (United Nations, Economic Commission for Latin America, 1955). For instance, the plan must determine the overall amount and must determine the proportions of the capital to be allocated in different directions, this will increase the overall facilities in transport and power production. Construction of new plants and acquiring machinery for heavy industries will increase. As these increases, it will lead to an increase in productivity 6 The national plan is to make a decision to increase the overall amount of expenditure to increase the productive forces of the country and to establish the means by which this can be achieved. It should also include population policy aimed at controlling fertility. A vigorous and successful birth control campaign will be needed to prevent the rate of natural population rise (pg. 97). Page | 9 and both short and long-investment. Education, health, and training of the working people will also increase. Also, the national government is expected to seek the implementation of the plan through a coordinated system and also ensure directing the entire economic development of the country. Therefore, economic development is defined as a rise in the well-being of the people. Generally, in under-developed countries, it is the responsibility of the government to enforce a general economic plan having a network of deliberately implemented controls and impulses to get the production underway and keep it moving. Myrdal stated that there are some flaws in state planning but it can be improved. First, the plan in underdeveloped countries is generally design which does not address each sector well. Therefore, to practically and effectively implement the plan, it must be adequately worked out in detailed directives by carefully planning of the different sectors. Also, the plan must give instructions for the specific inducements and controls by which the realization of those directives become effected (pg.93). Furthermore, the plan should learn from rich countries that national integration towards greater social mobility and regional economic equality is conducive to rapid and sustained economic growth in the country. The national plan must enhance the spread effects of the development between regions and between occupations. This will ensure that the under-developed countries get rid of outworn institutions of social and economic inequality which usually cannot be broken. When those traditional social chasms are broken, ideas, social and political situations help increase economic development. Myrdal cited an example that in Sweden, land reforms are included in the national plan to break the foundations of the old class structure of a stagnated society (pg.94). So, Myrdal argued that the price system does not give a rational criterion for Economic planning. The elements of the price system (prices, money costs, profits) are, of course, the terms to which a large part of the national plan has to be defined. It offers the main means for quantitative comparisons within the program, and most decisions on how to incorporate output factors from day to day will have to be based on ‘opportunity costs ' estimates. He said measuring national plan based on the elements of the price system is irrational because these elements of price system do not give true criteria for the Page | 10 measurement due to individual profits embedded in it7. He is of the view that the national plan rather should be determined based on the decisions which represent choices made between different, alternatively possible, set of goals and means. These choices are policy decisions and policy-oriented which is achievable in terms of national development. Myrdal talked about how international trade can be carried out under the national plan. The positive effect of international trade on under-developed is to promote the production of primary products and such production, employing mostly unskilled labor has come to constitute a large part of exports. There is no scarcity of unskilled labor, so any technological improvement in their export production tends to transfer the advantages from the cheapening of production to the importing countries. Since demand is inelastic for the under-developed countries, the market will not be greatly enlarged due to excessive price fluctuations (Myrdal, 1957:64). His advice was that the under-developed countries should know how to carry their trade and payments regulations as well as how to retain the necessary minimum control of internal inflationary pressure. This is important to effectively manage the monetary, trade and payment policies which sometimes mess the national planning for economic development. If the backwash countries are able to efficiently manage this, it will serve as a precondition for rational and efficient management of trade and payment regulations (pg. 106). Also, the under-developed countries need special protection for their industry opposing the capitalist approach of open trade. Due to the small size of the domestic market, many manufacturing industries have been hampered in their growth ever to come into existence. This market is often dominated by foreign imports from markets to which demand is often negligible. Local industries can, therefore, be given a chance to grow and prosper by providing protection from the competition (pg. 107). 7 “The price system as a part of national plan is very irrational as whole, namely the economy of a backward and stagnating country, can hardly have any great claim on rationality to begin. It could even less form the rational basis for those “economic and “objective” criteria as, furthermore, its continuous modification is a necessary part of the state interferences which form the operative part of the national plan (Myrdal, 1957:102) Page | 11 The need for Research in under-developed countries The under-developed countries started very slow in achieving economic development because of excessive wars and political instability. Their economic level is low because of the unfavorable relationship between population and resources available. Also, under-developed countries do not have the international capital market like the developed countries had and the poorer countries have no opportunity to even exploit and grow their manufactured goods. Myrdal said under-developed countries can achieve economic development if there are accumulated scientific and technical knowledge in the form of human capital. If they want to utilize this knowledge, then they need fresh research in all fields. Under-developed countries should utilize all available knowledge, but work out their own specific techniques to fit their own values and conditions because techniques from the developed countries are designed to fit their economy and are not appropriate for the implementation in under-developed countries. Myrdal advises that under-developed countries need to carry out research on all values including fundamental research. To achieve economic development, the provision of schools and universities for the training of scientists and the conduct of scientific research in all fields must be given the highest priority to the underdeveloped countries. He suggested that the financial aid from developed countries should be given to the under-developed for the sustainment of the research centers so that under-developed countries can have the momentum in the cumulative process of development (pg.111). He concluded that as underdeveloped nations become aware of their desires and worries, we should expect a change of direction in their research. He admonished the young economist in the under-developed countries to rise up since they have responsibilities in ensuring economic development in their countries. Myrdal said the young economists should have the courage to throw away large structures of meaningless, irrelevant and sometimes blatantly inadequate doctrines and theoretical approaches and start thinking afresh from a study of their own needs and problems. This would take them far beyond the realm of both outmoded Western liberal Page | 12 economics and Marxism8. These policies are old doctrines and that they should pick what is practical and useful in their tradition and proceed to make theoretical constructions to suit their problems. When they do that, they will realize some old and common premises and theorems will be useful when modified to fit into a new frame. Furthermore, students from under-developed countries should an initial special advantage. They should detach from particular needs for rationalization that have dominated the development of economic theory in the rich countries. They must liberate themselves from doctrinal predilections and consciously start the intention of constructing social theory free from objectified valuations (pg.115). His conclusion was that the rational way that the young economists can do this is to work with explicit value premises, ascertain and analyze facts and causal relations. This methodological clarification and its application in their scientific work would sharpen their analytical tools and make these tools much more powerful also when used for practical and political purposes. Economic inequalities, the public conscience, and economic theory Myrdal devotes the second part of the book to questioning conventional economics ' wider ignorance of economic inequality, albeit with little regard to regional issues. He defines and criticizes the principle of natural law, which he dubs the doctrine of equality that, in general–and with a range of exceptions –everything will come to everyone's satisfaction if the natural forces of the economy are left to their own free play (p. 137), but also the doctrine of free trade. More generally, it addresses with taste the idea that capitalist economies tie together desires among the actors, that laissez-faire is attractive, and that balance is disappearing. Acknowledging that data are always theory-laden and stressing that science must engage with moral questions, he concludes as follows: “This is the logical crux of all science: it assumes in all its endeavors an a priori but its ambitions must constantly be to find an empirical basis for this a priori. A worth-while theory of underdevelopment and 8 Myrdal, although showing no interest in Marx, walked a thin line between social democracy and democratic socialism that sometimes got him in trouble in Sweden. (He had to resign his position as Swedish Trade Minister in 1947, after proposing a trade pact with the Soviet Union (Barber, 2008) Page | 13 development, if it ever could be formulated, would have to be based on ideas distilled from the broadest empirical knowledge of social change in all its manifold aspects, acquired only under the greatest freedom from tradition-bound predilections” (pg. 176). Myrdal obviously has in mind, here, the neoclassical predilections that still form the basis of much of the regional economy. Geographical economists are also theorizing the development of spatial inequality or morphogenesis (Krugman, 1996), but in a very different way. Geographical economics explores spatially polarized equilibrium governed by certain parameters; Myrdal focuses on imbalanced dynamics. In geographical economics, spatial disparity refers to local disparities (e.g. industrial versus agricultural regions); for Myrdal, it represents unequal, asymmetric inter-regional connectivity. For Myrdal readers, Economic Theory and Underdeveloped Regions is one of his lesser works. It remains a rare-read classic for area scientists. “For myself, reading it again after all these years, I see remarkable resonances of how geographers, writing from the political economy tradition that underlies critical economic geography, approach the issue of unequal geographical growth” (Sheppard, 2017). Myrdal failed to develop a coherent alternative theory of regional development, preferring to function by traditional criticism, left behind by eye-catching metaphors (circular and collective causation, spread and backwashing remain very useful pedagogical devices) (Sheppard, 2017). How Myrdal writing benefited people in that time The book was writing based on the lecture that Gunnar Myrdal had in Egypt, Cairo. This book especially benefited African countries because they were now developing. “David Wightman, who analyzed the work of the Economic Commission for Europe, wrote about Myrdal that it was impossible to be indifferent to his complex personality as he evoked strong antipathies and affections: ‘Self-centered and temperamental, a voluble talker …, he is a man of ideas and intensity, has great intellectual integrity and preserves a highly objective atmosphere within the organization’. Wightman calls him politically courageous and apparently a good judge of a long-run political situation. He mentions Myrdal’s belief that facts are the greatest persuaders and that Myrdal repeatedly confronted governments with facts, no matter how unpleasant these might be. Myrdal was unwilling to remain silent Page | 14 when he believed that wrong decisions were being made. This policy of toughness and independence won Myrdal the respect of most member governments of the Economic Commission for Europe” (Wightman, 1956: 256-257). Conclusion Myrdal analyzed the problem of inequality between countries and explained the increasing international inequality in terms of cumulative causation. He acknowledged that there are so-called spread effects from rich to poor countries due, for example, to economic expansion in rich countries, which raises the demand for products from poor countries. However, it has also shown that the backwashing effects outweigh these spread effects, owing to increasing returns and emerging economies leading to a high level of productivity in the rich countries and the siphoning of resources from the poor to the rich. Page | 15 Bibliographies Barber, W. J. (2008). Gunnar Myrdal: An intellectual biography. New York: Palgrave Macmillan. Borts, G. H., & Stein, J. L. (1964). Economic growth in a free market. New York: Columbia University Press. Čaplánová, A. (2002). Gunnar Myrdal. BIATEC, 10, 6. Ohlin, B. (1933). Interregional and international trade. Cambridge, MA: Harvard University Press. Myrdal, G. (1957). Economic theory and under-developed regions. Vora & Co. Publishers private Ltd. Wightman, D. (1956). Economic co-operation in Europe. Sheppard, E. (2017). Economic theory and underdeveloped regions, Regional Studies, 51:6, 972-973 Page | 16