IRSHAD CV has been a student in Economics. Now he is doing Masters in Economics. He completed B.A. Economics from the University of Calicut.
Vicious circle of poverty is an important theory in developmental economics introduced by Professor Ragnar Nurkse. The vicious circles of poverty tell us about the very pathetic conditions of under developed economies. It also explains why under developed countries suffer many problems and why such countries continue as under developed economies. In the theory, Professor Ragnar Nurkse mentioned some of the solutions to break the barriers of under developed economies to enter in to the path of development.
The Idea of Vicious Circles of Poverty
Vicious circle of poverty is one of the core features of under developed economies. Professor Ragnar Nurkse says that, the main reason for the under development of an economy is the economy itself. This is because such countries are filled with poor people. In under developed economies, the living standards of the people will be very low. Such countries lack better health care system, food supply etc. So people of under developed economies are challenging illness. Since the human capital is physically week, working capacity will be lower. Poor working capacity means lower productivity and lower income. Lower level of income will leads to deficiency in the aggregate demand. Low demand again leads to deficiency in production, more unemployment, and lower income and so on. Any way the idea of vicious circles of poverty can be explained under two heads as like follows.
- Demand side of capital formation
- Supply side of capital formation
I ) Demand Side of Capital Formation
Capital formation is one of the most significant factors of economic development. No economy can grow without adequate capital formation. More and reasonable economic activities will ensure the process of capital formation.
Here the demand side of capital formation vividly showing some of the reasons for vicious circles of poverty. For easiness, it is depicted in the following picture.
In underdeveloped countries, the productivity will be lower because of many reasons like traditional method of production, inefficiency etc. Low productivity earns lower level of income to the people. Lower income means lack of effective demand. So the size of the market and production will be smaller. Since the market size and its scope are constrained, the economy will suffer deficiency in investment. Once the investment is inadequate, there will no further capital formation. Lower level of capital formation will again lead to lower productivity. Since capital formation is very essential for the growth of any economy. this circle would prevail and continue in under developed economies.
II ) Supply Side of Capital Formation
The supply side of the capital formation in the vicious circles of poverty can be simply explained with the help of the following picture.
In the case of supply side also, low productivity is the fundamental problem. This will reduce the income of the people. Lower level of income may fully spend for consumption purposes, since they earn very lower income and may not eager to save money. So, lower income will reduce the amount of savings in the economy. Actually savings are converted in to investment. But here the investment will again lower. Therefore, low level of investment will reduce the amount of capital formation in the economy and again it will lead to low productivity. In fact the trap of circulation will continue in the underdeveloped economies.
According to the modern economists, the fundamental reason for the existence of vicious circle of poverty in underdeveloped economies is due to the use of poor technology, inefficient entrepreneurial skills, under utilization of resources etc.
How to Break Vicious Circles of Poverty
Vicious circle of poverty is a trap which creates barriers on the developmental path of an economy. No country can achieve development without breaking these barriers. Following are the some of the solutions to break this trap.
- Increase Employment, Savings and Production
The economy must generate more employment opportunities. Then only people can earn money. This income will automatically increase the consumption. So demand will increase. More demand lead to higher production. Higher production may again generate employment and income in the economy. This will gradually increase the rate of savings in the economy. Savings will convert in to investment. That means more capital formation.
2 .Attract Foreign Investment
The economy must open towards the rest of the world in trade and commerce. Foreign investments may be either in the form of Foreign Direct Investment (FDI) or Foreign Institutional Investment (FII) or both. Foreign investment encourages the domestic economy to enjoy more benefits through promoting competition, more capital formation, more utilization of resources etc.
Modernization of an economy includes many things like technological advancement, generation of skilled workers, training etc. It will ensure the efficiency and competitiveness of the economy. In short, introduction of new technologies and high level of production methods will boost the developmental progress of an economy.
4 . Efficient Utilization of Resources
Every economy must utilize its resources in an optimum way. Under utilization of resources is one of the crucial reasons of vicious circles of poverty. It can break only by the efficient utilization of the available resources of the economy.
Vicious circle of poverty is a model in the developmental economics, which was developed by Professor Ragnar Nurkse. He says about some of the reasons or barriers which may tend a country to continue in a state of poverty. He also suggests some of the solutions to break the trap as mentioned above.
icv (author) on March 06, 2016:
Thanks Besarien for your comments. This idea is is highly connected with the under developed economies and developing economies.
Besarien from South Florida on March 06, 2016:
A nice look at breaking the cycle of poverty with many possible applications, even in the life of one person. This is a well-written hub on an important topic. Kudos.
icv (author) on July 09, 2015:
Thanks jolly 1m for your comment
Laurel Johnson from Washington KS on July 06, 2015:
Very well done with good information.
icv (author) on January 25, 2015:
Thanks always exploring for your optimistic comments about the world
Ruby Jean Richert from Southern Illinois on January 25, 2015:
This was a well written hub explaining the vicious circles of poverty. My wish is for all cultures to grow and be productive. We are all humans living in different parts of the world..Peace..