Question

Elucidate major causes of a vicious circle of poverty with a diagram.

Answer 1

• There are circular relationships known as the ‘vicious circles of poverty that tend to perpetuate the low level of development in Less Developed Countries' (LDCs).

• Nurkse explains the idea in these words: “It implies a circular constellation of forces tending to act and react upon one another in such a way as to keep a poor country in a state of poverty.
• For example, a poor man may not have enough to eat; being underfed, his health may be weak; being physically weak, his working capacity is low, which means that he is poor, which in turn means that he will not have enough to eat and so on.
• A situation of this sort relating to a country as a whole can be summed up in the proposition: “A county is poor because the country is poor”.
• The vicious circle of poverty operates both on the demand side and the supply side.
• On the supply side, the low level of real income means low savings.
• The low level of saving leads to low investment and to deficiency of capital.
• The deficiency of capital, in turn, leads to low levels of productivity and back to low income. Thus the vicious circle is complete from the supply side.
• The demand-side of the vicious circle is that the low level of real income leads to a low level of demand which, in turn, leads to a low rate of investment and hence back to deficiency of capital, low productivity and low income.