Myrdal’s Theory of Circular Causation Introduction 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 backwash and spread effect 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. In underdeveloped countries a circular and cumulative process, also known as the “vicious circle of poverty”,. main cause of the economic inequalities has been the strong backwash effect and the weak spread effects in underdeveloped countries

Regional Inequalities Introduction The basic sources of regional inequalities with in a country have a non economic basis Associated with the capitalist system which is guided by the profit. The profit motive results in the development of those regions where the expectations of profit are high while other regions remain underdeveloped. free play of market forces which tends to increase rather than decrease regional inequalities. Market forces unhampered by any policy interferences, industrial production, commerce, banking, insurance, shipping, and indeed almost all those economic activities. Science, art, literature, education and high culture generally would cluster in certain localities In this manner regional inequalities are created when some localities grow at the expense of other regions which stagnate.

Regional Inequalities Introduction The basic sources of regional inequalities with in a country have a non economic basis Associated with the capitalist system which is guided by the profit. The profit motive results in the development of those regions where the expectations of profit are high while other regions remain underdeveloped. free play of market forces which tends to increase rather than decrease regional inequalities. Market forces unhampered by any policy interferences, industrial production, commerce, banking, insurance, shipping, and indeed almost all those economic activities. Science art, literature, education and high culture generally would cluster in certain localities In this manner regional inequalities are created when some localities grow at the expense of other regions which stagnate.

Backwash effects of migration, capital movement and trade Attract young and active people from the other parts of the country. This will tend to favour the developing regions and depress economic activities in the backward region. Labours migrate towards the developed regions. Capital movement In Developed regions, increased demand will stimulate investments. Increase incomes and demands and lead to a second round investment The scope for better investment in the centers of expansion may create capital shortage in the backward regions. Non Acting and regulated Banking system . Banks become an instrument for siphoning off savings from the poor regions to the richer.

Backwash effects of migration, capital movement and trade 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 developed regions may ruin the existing industries of the backward regions. Poor regions opt to remain mainly agriculture. The freeing and widening of the markets will often confer such competitive advantages on the industries in developed region. The handicrafts and industries existing earlier in under-developed regions are thwarted. Industrialization is dynamic force in this development it is almost tautological to state that the poorer regions remains mainly agricultural and it is characterized by low productivity.

The Spread Effects Against the backwash effects, there are however also certain centrifugal spread effects of expansionary momentum from the centers of economic expansion to other regions. It is natural that the whole region around a nodal center of expansion should gain from the increasing outlets of agricultural products and be stimulated to technical advance all along the line. Localities producing raw material for the growing industries in the centers and those having consumer goods industries will be stimulated. Encourage self expansion of new centers. Spread effects flowing from a center of industrial expansion to other localities. Regions operating through increased demands for their products and in many other ways weave themselves into the cumulating social process by circular causation.

Backwash effects v/s spread effects It is however not possible that the backwash effects and spread effects should be equilibrium. United Nations Economic Commissions for Europe, according to this commission regional inequalities are much wider in the poorer countries than in the richer countries. The higher the level of economic development that a country has already development is accompanied by improved transportation and communication day attained the stronger the spread effects will usually because. higher levels of education and a more dynamic communions of ideas and values. Economic development becomes an automatic process once a country has reached a high level of development. The major cause of the backwardness of 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 give more importance to regional inequalities in poorer countries. The free play of market forces and the fair policies have been the two potent forces in creating regional inequalities in the presence of weaker spread effects. Other factors- feudal and in egalitarian institutions and power structures which aid the rich in exploiting the poor. The governments of the underdeveloped countries - adopt egalitarian policies to weaken the backwash effects and strengthen the spread effects to bridge inequalities and to strengthen the continuous economic progress. Higher is the level of development will strengthen the spread effects and tends to hamper the drift towards regional inequalities. Sustain economic development and creates more favourable conditions for policies for decreasing regional inequalities.

International Inequalities International trade may have backwash effects on the underdeveloped countries. Trade operates with a fundamental bias in favour of the richer and progressive regions and in disfavour of the less developed countries.’ Unhampered trade between two countries one is industrial and other is underdeveloped, strengthens the former and impoverishes the latter. By exporting their industrial goods 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. colonials system- Involved in primary production for exports. 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 governments.

International Inequalities The demand for primary products being inelastic in the export market, they suffer from excessive price fluctuations. when there is any technological improvement in their export production. Increased export earnings lead to inflationary pressures, misallocations of investment expenditure and balance of payments difficulties when they are wasted in speculation, conspicuous consumption, real estates, 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 underdeveloped countries. 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 governments.

International Inequalities Difference 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.

Criticism The Myrdal thesis marks an important departure from the other theories of underdevelopment. He beautifully combines national and internationals 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 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 plays of market forces and unhampered trade have tended to cramp the export potential of such countries. As result, a Great Gap has developed between imports and exports of underdeveloped countries which have made their economic development a costly and lengthy affair. Even empirical evidence indicates that the Myrdal thesis has been vindicated (Justify).