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Backwash and Spread Effect

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What are the causes and consequences of ‘backwash’ and ‘spread’ effects? What type of public policies can correct any imbalances between the two effects, inter-regionally within a country

Once economic and social forces occur in favored region, development produce tendencies toward disequilibrium, the differences in living standards may persist and even widen over time. Myrdal propose hypothesis of circular and cumulative causation, means once an economy obtains a growth advantage it will tend to keep it. Development proceeding more rapidly in certain region than other. The cumulative movements which tend to economically weaken region were termed backwash effects. Those caused by labor migration, capital movements, and trade. In free market, capital will tend to move to the site where prospective returns are highest.  Thus capital, labor, technology, and entrepreneurship will migrate together. The benefit of trade will accrue to the host region. As the results, the region experiencing the rapid growth will be able to increase its competitive advantage over the relatively lagging regions, the improvement in transportation, communication, education, healthcare facilities.

Myrdal also argues the spread effect or positive externalities, that such a new growth stimulus might induce other region, such as increased demand for backward areas product, diffusion of technology and knowledge. However, the spread effects are weaker than backwash effect, and interregional differences remain widen.

Hirchman argues that policies must be designed to reduce polarization and to strengthen spread effect. Type of public policies to imbalance between those two effect inter regionally within the country are: (i) fiscal policy, wealth taxes for redistribution of wealth and income; (ii) institutional reform against corruption, corruption is critical issue in development country. The World Bank defines corruption as the abuse of public office for private gain, including bribery, threats, and kickbacks. The existence of licenses, permits, regulations, subsidies, and taxes in the hand of politician or government officials, are open opportunity for corruption. The state has an obligation to reduce bureaucracy and regulation to allow markets to flourish. Corruption creates high cost economy because the cost in time, effort, and money in setting up business in developing countries are high with delay and inefficiency in bureaucracy.  Corruption discourages business, higher proportion of business operates outside the law, so the tax also lower, and corruption become acute. In the context of backwash effect, corruption affect distribution of allocation resource, when industry can get privileges to choose any place they want to operate their business, regardless the development planning for allocation of resources; (iv) balance between agriculture and industry, placing labor-intensive industry in rural area to attract circular cumulative causation in rural area, reduce rural-urban migration, and eradicate poverty both in rural and urban.