To what extent is the Keynesian theory of unemployment applicable to the economies of the developing countries? 

1. Keynes argued that inadequate overall demand could lead to prolonged periods of high unemployment.

To a greater extent, this theory is irrelevant to developing countries because

• It is one sided. it is mainly concerned with demand deficiency yet unemployment in LDCs is basically from supply side hence inapplicable.
• It assumes full employment. The theory is only applicable under conditions of full employment of resources, which condition do not exist in LDCs since there is excess capacity.
• It considers industrialized economies. The theory is mainly concerned with industrialized economies like Britain and yet LDCs are agrarian economies.
• It can be inflationary. As a solution to unemployment, Keynes prescribes policies, which raise the levels of aggregate demand such as increase in money supply which is always inflationary.
• The theory is based on a highly monetized industrial economy. LDCs are basically subsistence where production is intended for producer’s own consumption.
• The theory is drawn basing on the existence of a strong private sector in LDCs is weak.
• The theory is based on a well-functioning product, money and factor markets which is not the case in LDCs.
• The theory is based on assumption that firms respond quickly and effectively to change in demand. Firms in LDCs due to structural difficulties tend not to respond quickly and effectively to demand.
• Keynes based his theory on investment multiplier as a major contributor to employment. In LDCs, it is export multiplier that contributes more employment than investment multiplier.
• The theory of unemployment was based on a closed economy. LDCs economies are open in that they have trade interactions with others.

However to small extent the Keynesian theory is relevant in LDCs because

• In LDCs, the element of industrialization exist, hence the theory applies.
• Use of expansionary monetary policies increase purchasing power has tended to increase employment level in LDCs.
• Measures to stabilize export earnings through IMF compensatory arrangements to ensure stable export market reduces the rate of unemployment.
• Since investment climate affects employment, then it is true that improved investment in LDCs will expand employment hence relevancy of the theory.
• The supply of co-operant factors e.g. labour can increase in the long run.
• A fall in demand can lead to unemployment hence the applicability of the theory.