Myrdal’s Theory

Karl Gunnar Myrdal, a Swedish economist and sociologist gave the Circular and Cumulative
Causation theory in 1957 in his work ‘Rich Lands and Poor Lands’. In this theory he highlighted the
‘spatial inequalities’ which were inherent in the free market economic development using the
concept of cumulative causation. According to Myrdal, ‘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 return and, in addition, science, art, literature, education and higher culture
generally would cluster in certain localities and regions, leaving the rest of the country more or less
in a backwater.’
Determinants of regional growth

Endogenous forces Exogenous forces

operate from within the region- operate from outside the region-
distribution of factors of production level of demand for a region's
such as land, labour and capital commodities from other areas

It rejects the assumption of automatic tendency of socio-economic system towards stabilization and
holds that a change does not create opposite reaction but other changes which emphasize it. Prof.
Gunnar Myrdal maintains that development results in a circular causation process leading to rapid
development of developed countries while the weaker countries tend to remain behind the poor.

Myrdal was convinced that market forces lead to deepening of interregional differences - i.e., the
rich regions are getting richer and the poor are getting poorer. The impulses which may cause
negative cumulative process include a sudden bankruptcy of a production plant or local increase of
taxes. In this context, Myrdal points out that the rich regions may utilize external and internal
economies of scale. Myrdal considers traditional mechanisms such as mobility of capital, regional
drainage (outflow of financial resources from the periphery to the centre via bank system) and
selective migration a means by which cumulative mechanisms manifest themselves. Myrdal held
that the effects of individual cumulative mechanisms are related and lead to a growth spiral - i.e., to
the outflow of growth sources (capital and labour) from the underdeveloped to more developed
regions. He defined cc as a spiral of advantage that occur in a specific geographic location which he
termed as the core or the focal point.

CORE – core is the focal point that has all the comparative advantages due to its possession or
availability in the region of resource development. This becomes the basis for continued growth and
it achieves acquired advantages such as multiplier effect, agglomeration impacts, increased tax
revenue, enhanced public spending, good basic amenities etc.

PERIPHERY – Periphery is different from core and it is the depressed regions with little and
insufficient investment, devoid of resources, depopulated spaces near or surrounding the core.

THE SPREAD EFFECT: Refers to the expansionary momentum emanating from the centres of
economic expansion to other regions. They have a positive impact on the dev of other regions and
operate
 a. Increased demand for agricultural products and raw materials in progressive regions
b. Extension of advanced technology to the lagging regions from advanced regions
c. Diseconomies of scale in the prosperous regions, resulting in the dispersal of activities to the
lagging regions where such activities are likely to become more profitable with access to
cheaper amenities in peripheral regions.

Hence spread effects lead to convergence i.e., reduction in inequality between regions by

a. As rich region grows it demands more products from poorer regions, thus stimulating
growth in latter
b. Out migration of factors from poor regions may induce a more efficient use of resources
with an internal re- allocation from low wage to high wage and high productivity sectors,
thus generating growth.

Ex- case study of Thailand’s Automobile industry: illustrating spread effects (centrifugal force)
✓ In 1990s- car manufacturing rose in Japan- relocated factories to Thailand- job creation for
Thailand locals- transfer of skills from Japan counterparts

THE BACKWASH EFFECT: The term refers to the forces emanating from the prosperous regions
which discourage growth in the lagging areas. Myrdal believed that spread effects are offset by
backwash effect.

1. Increased demand for peripheral goods resulting from an increase in propensity of a centre
or region may not materialise if peripheral goods are primarily agricultural commodities with
low-income elasticity of demand. Thus, an increase in income in richer areas will not trigger
off increased demand for agricultural commodities because the population was already
above the subsistence level and likely to increase demand for other industrial goods and
luxury items
2. Progressive regions tend to attract migrants from other parts of the country; the resultant
selective outmigration of capital and skilled labour from the poor region to the rich may
reduce the ability of the poor region to compete
3. Diseconomies of the rich regions tend to be offset by other economic and sociopsychological
benefits

Therefore, backwash effect leads to a divergence i.e., an increase in economic inequality between
regions.

Cumulative Causation
Cumulative Causation in core

Cumulative causation in periphery

MYRDAL ADVOCACY FOR ECONOMIC DEVELOPMENT:

Myrdal identifies international trade as the main mechanism which causes market forces to increase
inequalities between developed and underdeveloped countries. The development of interregional
problems happens in three stages:

1. selection – subjects achieve different levels of success,

2. expansion of the successful - the difference is at their peaks as successful subjects utilize their
dominance to the maximum,
3. diffusion/integration - differences are decreasing due to mutual relationship or the organicity of
the whole system.

In developed countries the positive effects on less developed regions are more significant than in
developing countries due to the system of parliamentary democracy, stable and integrating
institutional framework and a conscious effort of the state to decrease the differences between the
rich and the poor in accordance to the concept of welfare state.

The main tool to improve underdeveloped region is, according to Myrdal, an integrated
development plan which allows the implementation of investments which are beneficial for the
whole society, they are non-profit, but they allow the achieve external economies of scale to other
subjects and thus initialize growth in regions.

ASSUMPTIONS:

1. Unemployment depends on a lack of aggregate demand, which, in turn, depends on low

consumption and low investments. As Myrdal points out: “decreased demand will lower
incomes and cause unemployment” (Myrdal, 1957, 23), and “the explanation why there are
unemployed and underemployed workers…is that the market provides no effective demand”
(Myrdal, 1957, 89).
2. Low investments are caused by low profits and/or by a low motive for accumulation. This
occurs, as a norm, in peripheral economies—populated by small firms—and also in cases
where “a rich country which, thanks to an early start, has for some time enjoyed a quasi-
monopolistic position may find that the spirit of enterprise and risk-taking has been
damaged” (Myrdal, 1967, 36).
3. Wages rise as employment increases: “a rise in employment will almost immediately raise
some levels of living” (Myrdal, 1957, 20). 
4. As far as labour productivity is concerned, it must be taken into account that low wages
and high job insecurity are associated with low worker ‘morale’ and the consequent low
work intensity.

APPLICATIONS and RELEVANCE:

Myrdal´s theory received different evaluations - application of some of the components of this
theory aided in some countries to a significant improvement in lifestyle (e.g., Sweden after WWII)
but, on the other hand, this theory also led to the expansion of public sector, increased taxation, and
the loss of competitiveness. His theory allows the possibility and necessity of the social reform by
introducing policies. Myrdal’s cc theory has a special methodology of explicit value premises and
admits various value judgements or various optimal policies.

CRITICAL EVALUATION:

1. this model combines national and international forces which tend to keep backward
countries in cumulative process where poverty becomes its own cause.
2. Made important contributions to the theories of convergence and divergence,
agglomerations and locational economies and the theory of vicious circle
3. He was in support of balanced growth and wanted it to be initiated, directed, and sustained
by government and supported the theory of SPONSORED GROWTH
4. Criticized regarding the “accidental factors” as the only factors which start the growth
process.
5. There are setbacks in developing regions and there can be development in vicious circle
region.
6. The agglomerating factors can also bring decreasing returns when diseconomies overcome
the economies.
7. Free play of market forces and unhampered trade have tended cramp the export potential
of such countries creating a GREAT GAP bet imports and exports of underdeveloped
countries which makes economic development a costly and lengthy affair