Wednesday, August 17, 2011
Vicious Circle of Poverty
Wednesday, August 17, 2011 by Faizan Bhatti
Tags: Development Economics
Question: What is vicious circle of poverty? How can it be tackled?
Question: Explain the vicious circle of poverty. How does it check the growth of capital in a poor country?
Question: “A country is poor because a country is poor” (Nurkse). Discuss.
The poverty in this world of ours is a great curse is admitted on all hands. Poverty is not only distressing but it is also demoralising. A poor man is disgrace to society, but a cause of humiliation to the person himself. But the worst thing about poverty is that a poor man is ought in vicious circle. Being poor, he lacks the means to prosper and since he lacks means to prosper, he must remain poor. The vicious circle is complete. Poverty leads to inefficiency and incapacity to do well, and efficiency and incapacity must end in poverty. That is why we generally find that poverty is perpetuated from generation to generation. It is cumulative that is the curse of poverty and vicious circle.
What is true of the individual is true of community as a whole for an under developed economy to develop economically is needed an uphill task. The rate of savings and investment in an under developed economy is too low to make for rapid development and since the rate of savings and development is too small, it must remain under developed. Here is the vicious circle of poverty embracing the entire economy. As Nurkse says “It implies a circular constellation of forces tending to act and react upon one another in such a way as keep a poor country in a state of poverty. A country is poor because a country is poor”.
The crux of the problem is capital formation. The rate of capital formation is affected by both demand for and supply of capital. Let us take the demand side first. In a poor country, the level of productivity and so of incomes is very low which means a low purchasing power. Since the purchasing power of the people is low, the scope for business and industry is correspondingly limited. The inducement to invest is practically absent. The rate of investment being low productivity is low and the incomes are small, completing the vicious circle. On the side of supply, in a poor country having a low level of income, the rate of savings must be small. The resulting lack of capital leads to low productivity and low incomes, thus completing the vicious circle.
The two vicious circles relating to the demand side and supply side can be represented diagrammatically as under
The vicious circle must be broken at both ends. The supply of savings both from domestic and foreign sources must be increased and the state must provide incentives for investment by means of a suitable monetary and fiscal policy. The low level of real income reflecting low productivity is the crucial point both in the demand circle and the supply circle.
On these two the supply end is more difficult to break, than the demand end. It is obviously easy to create or increase demand for capital but it is not so easy to make up the deficiency of capital. The country may also suffer from lack of natural resources like water and mineral resources or the poverty of the soil. But in the matter of economic development the things of vital importance are the small capacity to save and small inducement invest. Other deficiencies can be made up and the handicap of the natural factor removed of the problem of capital formation is successfully tackled.
However one should not make too much of this concept of vicious circle. Indeed as Gunar Myrdd has pointed out, it is also possible to conceive of a vicious circle being created in the same context.
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