Relevance of Keynesian Theory to Underdeveloped Economies
Relevance of Keynesian Theory to underdeveloped Economies
We know that the basic cause of under-employment and unemployment in under-developed countries like India is to be found in the dearth of capital equipment which in turn is due to a low rate of investment and saving. As against this, unemployment due to a deficiency of effective demand is the main concern of Keynesian economics. The various policies like public works, deficit spending, etc., advocated by Keynes as a cure for unemployment have relevance only if unemployment is due to deficiency of demand. In such a situation, there is no dearth of capital equipment and of workers willing to work, so that an increase HI government expenditure financed by a budget deficit leads to an increase in output and employment via the multiplier effect.
But, in under-developed economies, though there is no shortage of manpower, capital equipment is scarce and an increase in government spending is more liable to create inflation rather than lead to an increase in output. This happens because for want of complementary resources in capital, the supply curve of output tends to be inelastic.
In backward countries, agriculture is a major sector and an increase in incomes caused by deficit financing is liable to lead to an increase in the demand for food, as at low income levels, income elasticity of demand for food tends to be high. But agricultural supply curve in backward countries is notoriously inelastic. There are great bottlenecks in increasing agricultural output which arise, because of extremely uneconomic size of the holding, lack of sufficient tools and implements with the farmer, etc. Thus, an increase in the demand for food is more likely to increase the prices of food grains rather than the supply of output. Similarly, in the industrial sector also, there is no idle capacity to be utilized and for these reasons reliance on Keynesian remedies to remove unemployment and under-employment in backward countries will plunge these countries into an inflationary spiral.
It does not mean, however, that Keynesian remedies have no place in under-developed countries. Deficit financing has a role to play in mobilizing resources for the public sector. But in resorting to Keynesian policies, we must bear in mind their inflationary effect and take necessary steps to curb them.
As we have said earlier, the basic solution for the problem of under¬developed countries is economic development. Economic development, however, is a long-run process. In a way, it depends on capital formation which in turn depends on the difference between income and consumption of the community. The wider this difference, the faster will be the rate of growth, if there are entrepreneurs who utilize resources for capital formation. To save more and consume less is, therefore, a good remedy for under-developed economies, while in a depression, for an advanced economy, the opposite is the case.
While Keynesian policies may not have much relevance to the problems of under-developed countries, the tools of analysis developed by Keynes are indispensable even in under-developed countries. The discussion of monetary flows, the concepts of national income accounting, the problem of inflationary gap are as useful to an economist in an under-developed country as to one in a developed country.