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Wrong! Look on the cover of the Art Of Oddworld Inhabitants book. You can clearly see a little penis peeking out from between the front of the Mudokon fetus's legs.
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Are you sure you're not looking at the umbillical cord?
Looking closely, there is a little nubbin that you might also be referring to, but it's coming out of the fetus' arse, below the tail. That would be one strange wang.
In any case, it's unlikely that those fetuses are actually meant to be Mudokon babies. Apart from anything... Muds hatch from eggs.