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Wednesday, August 17, 2011

Vicious Circle of Poverty

Wednesday, August 17, 2011 - 0 Comments

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.

Basic Characteristics of Under Developed Countries

Question: What are the basic characteristics of under developed economies?
Question: What are the main characteristics of less developed countries?
Question: What are the main characteristics of under-developed countries?

The general nature of an under-developed economy may be gathered from common economic characteristics of such an economy. It may be too much to talk of the common economic characteristics of under-developed countries in view of the wide diversity of among under-developed countries as revealed by numerous case studies that have been made. While it would be very difficult to locate a representative under-developed country, it is much easier to bring out some fundamental characteristics common to under-developed countries. These main characteristics of under-developed countries are given below.

1. Low per Capita Income:
The per capita income in under-developed countries is extremely low. The average annual income in under-developed countries like India Pakistan and Srilanka is nearly $130 per head as compared with $6640 in the USA. Low per capita income is an out standing feature of an under developed economy and is a significant measure of a country’s development.

2. Deficiency of Capital Equipment:
The insufficient amount of physical capital in existence is also a characteristic feature of all under-developed economies. Hence they are often called simply “capital poor” economies. One indication of the capital deficiency is the low amount of capital per head of population. Not only is the capital stock extremely small but the current of capital formation is also very low. In most under-developed countries investment is only 5 percent to 8 percent of the national income, where as in the USA, Canada and Western Europe it is generally from 15 percent to 18 percent.
The low level of capital formation in the under-developed country is due both to the weakness of ducement to invest and to the low propensity and capacity to save. In under developed economy at the root of capital deficiency is the shortage of savings. The per capita income being quite low most of it is spent in satisfying the bare necessaries of life, leaving a very low margin of income for capital accumulation. Even with an increase in the level of individual incomes, there does not usually follow a higher rate of saving because of the tendency to emulate the higher levels of consumption prevailing in the advanced countries.

3. Excessive Dependence on Agriculture:
Most under developed countries are predominantly agricultural. A great majority of their population are engaged in agriculture and allied occupations. This excessive dependence on agriculture is due to the fact that non-agricultural occupation have not grown at a rate of commensurate with the increase in population for lack of sufficient investment outside agriculture. The labour-land ratio being high agricultural holidays have become sub-divided into small plots, which do not permit the use of modern mechanical methods of production.

4. Rapid Rate of Population Growth:
Although there is diversity among under-developed economies in respect of their population, there appears to be a common feature namely a rapid rate of population increase. This rate has been rising still more in recent years. Thanks to the advances in medical science which have greatly reduced the mortality due to epidemics and diseases. While the death rate has thus fallen phenomenally, birth rate does not yet show any significant decline so that the natural survival rate has become much larger. IN countries like India, Pakistan, Burma a veritable population explosion is faced.

5. Unemployment and Under-employment:
An important consequence of rapid rate of population growth without a corresponding increase in the level of economic development is that there is large scale unemployment in urban areas and disguised unemployment in rural areas. More and more people are thrown on land, since alternative occupations do not develop simultaneously to absorb surplus population. It means that there are more persons engaged in agriculture than are actually needed, so that the addition of such persons does not add to land’s productivity. Even if some of the persons are withdrawn from land no fall in production will follow from such withdrawal.

6. Under-utilization of Natural Resources:
The natural resources are an under-developed economy is either unutilized or under-utilized. Generally speaking under-developed countries are not deficient in land, water, mineral, forest or power resources, though they may be untapped. In other words they constitute only potential resources. The main problem in their case is that such resources have not been fully and properly utilized due to various difficulties such as the deficiency of capital equipment, the inaccessibility of natural resources, primitive techniques and the small extent of the market.

7. Foreign Trade-Orientation:
An under-developed economy is generally foreign trade-oriented. They export raw materials instead of utilising them at home and import manufactures instead of making them at home. Since in some cases like Srilanka Burma and Thailand, they export a significant proportion of their national output, they may be termed “export economies”. Excessive dependence on export makes these economies precarious and unstable and affects adversely their terms of trade. The marginal propensity to impart too is high in such countries.

8. Low Levels of Technology and Skills:
The under-developed countries employ primitive methods of production and inferior and less productive techniques. There is also a terrible death of skilled personnel. Poor techniques and lower skills result in inefficient and insufficient production, which cause general poverty.

9. Economic Backwardness:
The people of under-developed countries are economically backward. The economic backwardness manifests itself in lower efficiency, illiteracy, poverty, factor-immobility, lack of enter preneurship and ignorance in economic matters. Their value structure and social structure reduces incentives for economic change.

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