LEAKAGES OF MULTIPLIER IN DEVELOPING COUNTRIES

According to the Keynesian multiplier, an initial increase in investment leads to an increase in

income as well as employment. Also, multiplier theory states that higher the marginal propensity
to consume (MPC), the higher is the rate of the multiplier. However, there is evident data that
suggests that many developing countries like India, despite of having low marginal propensity to
save, have a lower multiplier. Therefore, it is generally agreed that the logic of Keynesian
multiplier cannot be applied to developing countries.
The Great Depression affected mainly the developed countries and it was this time when Keynes
had formulated his theories, this might be reason for such paradox, as stated in an article written
by Dr. V.K.R.V. Rao. In the article it is stated that, an underdeveloped country is characterized
by, a principal agricultural sector, a vast concealed unemployment, low capital equipment, lower
level of technology as well as technical knowhow, a large non-monetized sector, and a large
sector being produced for self-consumption. In developing nations there was minimal
accumulation limit in the customer merchandise business. In this way, the supply of yield was
inelastic. Thus, there is an infusion of investment which results principally in increase in cash
wage and not expansion of genuine national wage. In developing countries, there is an immature
economy which leads to intense shortage of crude based materials and other products putting
extraordinary weaknesses for the working of the multiplier in genuine terms. It was also
contended that in a developing country, disguised unemployment hides the state of
unemployment.
The shifting of these workers to industries from the agricultural sector is not easy for achieving
the multiplier effect. In the end, it is also pointed out that any developing country has a
predominant agricultural economy and the income elasticity of demand for food grains is very
high in these economies. Considering this, rise in investment results in the rise in money incomes
of the people that they mostly used to spend on the food grains.
The supply of agricultural item is inelastic and thus, it is hard to increase the agricultural
production due to the expansion which is sought after through the multiplier impact of increment
in investment. For the above stated reasons, the multiplier theory cannot be applied to developing
countries in the real terms although it works in monetary terms.