Myrdal's backwash and spread effects in classical economics: implications for multilateral trade negotiations.

Author:Ho, P. Sai-wing
Position:Gunnar Myrdal

Within the economics profession it is well understood that what informs the "trade" part of multilateral trade negotiations (MTNs) is deeply, though by no means solely, rooted in the orthodox version of classical trade theory. What has largely been left out of that version, however, are the dynamic elements in classical trade analyses. These dynamic forces, acting through trade and other international economic activities, trigger what Gunnar Myrdal labeled as "backwash" and "spread" effects and thus possibly engender a process of uneven development. This consideration serves as an illuminating contrast with the orthodox theory as far as support of MTNs is concerned.

It is the purpose of this paper to juxtapose the backwash and spread effects in classical trade analyses, (1) with the hope that the discussion can shed some light on the North-South divide in MTNs. The discussion begins with Myrdal, an institutionalist who devoted himself during the postwar decades to studying uneven development and who characterized it as a result of the interplay between backwash and spread effects in circular and cumulative processes. Both effects are then identified and illustrated in classical trade analyses, which then sets the stage for comprehending the North-South divide on major issues in the recent rounds of MTN. (2)

Myrdal on Backwash and Spread Effects

To Myrdal, orthodox trade theories, or for that matter orthodox economic theories, were "never developed to comprehend the reality of great and growing economic inequalities and of the dynamic processes of under-development and development" (1963, 151). The major reason for this blind spot, he argued, is that those theories have all been dominated by the "assumption of stable equilibrium," which entails the belief that any change will normally call forth as reaction secondary changes with an opposite direction. That assumption and others (e.g., that development analysis can be restricted to interactions of "economic," while ignoring "non-economic," factors) enables trade to bring about greater economic equality between regions and countries (10, 144, 151-2).

Under an alternative and what Myrdal regarded to be "more realistic" assumption, economic processes can be viewed as "cumulative because of circular causation" and will unfold as some combination of backwash effects and spread effects (1963, 152). He referred all relevant adverse changes, caused outside a locality (nation), (3) as the "backwash effects" of economic expansion in that locality (nation). These could comprise brain drain and capital flight from, and deindustrialization in, localities (nations) outside of the center of expansion (27-30, 51-3, 58). They are engendered "via migration, capital movements and trade as well as all the effects via the whole gamut of other social relations ... and the term refers to the total cumulated effects resulting from the process of circular causation between all the factors, 'non-economic' as well as 'economic'" (30-1). By implication, the spread effects of momentum from a center of economic expansion--again operating through the media of trade, capital movement, migration, and so on--refer to all favorable changes experienced outside that center, and these could likewise "weave themselves into the cumulating social process by circular causation" (31). They could arise from increased demand by the center for agricultural products and raw materials; something akin to Albert Hirschman's various linkage effects (1977); the emergence of new secondary centers of expansion; or how industrialization may inculcate "a new spirit of rationalism, enterprise, discipline, punctuality, mobility, and efficiency" (Myrdal 1963, 31; 1968, 1186-7, 1196). Depending on which set of effects predominate in a setting, the cumulative process could evolve upward, as in the "lucky" regions, or downward, as in the "unlucky" ones (1963, 27). It is thus in a situation where the spread effects are weak relative to the backwash effects, which Myrdal regarded to be very often the case among the underdeveloped countries that he studied, that international trade becomes the medium through which market forces tend to result in increased inequalities (152).

Stable Equilibrium versus Backward and Spread Effects in Classical Economics

The one component of classical trade theory that has most captivated the attention of orthodox economists is, of course, the principle of comparative advantage. (4) The reason is that the model that embodies it, viz. David Ricardo's England-Portugal trade example (1951, chap. 7), anticipates the two-agent exchange and stable-equilibrium model that serves as a crucial building block of orthodox economics. Having thus located an ancestral-anchor, orthodox economists then proceed to piece together a story of the evolution of their theory during the classical period. Specifically, in motivating an advantage of international trade by drawing an analogy with the division of labor between a tailor and a shoemaker, Adam Smith (1979, 456-7) is regarded as seeing only absolute, but not comparative, advantage as a basis of trade. Ricardo thus advanced beyond Smith, but only to be improved upon by John Stuart Mill (1974, Essay 1; 1987, Bk. 3, chap. 18). According to Paul Samuelson, in grappling with the determination of international values, Mill "provide[d] the first complete model of general equilibrium--one essentially isomorphic with Jevons' chapters a generation later on competitive exchange and with...

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