Hi friends, in today’s article we are going to know about the vicious circle of poverty theory and also know the causes of vicious circle. So let’s discuss in details.
What is Vicious Circle of Poverty?
Different economists have different opinions about the concept of vicious circle of poverty. According to Prof. Nurkse, “The main reason of vicious circle of poverty is the lack of capital formation.”
However, the reasons of vicious circle of poverty can be analyzed from three points view –
- Supply side of vicious circle.
- Demand side of vicious circle.
- Vicious circle of market imperfections
(i) Supply side of vicious Circle – Supply side of vicious circle indicates that in UDC’s, productivity is so low that its not enough for capital formation. In other words from supply point of view low level of income leads to low level of savings.
Low level to savings again reads to low level of investment. The low level of investment again leads to how level of productivity and ultimately the low level of productivity brings the low level of income in the society. In this way vicious circle of poverty generates in the economy.
In other words, the lack of supply of capital due to low income creates the income of poverty. The circle can be shown as follows –
(ii) Demand side of vicious Circle – On the demand side the vicious circle of poverty generates due to the low level of purchasing power. On the part of the people as a result of low level of income. Due to low level of income the aggregate demand is low.
The low aggregate demand leads to low level of investment the low level of investment leads to low level of productivity. Finally low level of productivity leads to low level of income. Thus, the poverty generates in the economy.
In the Nurkse words, “In under developed countries, on demand side, low purchasing power of the people results in low productivity.”
Low income → Low demand → Low investment → Low productivity → Low income.
It can be shown with the help of following diagram –
(iii) Vicious circle of market imperfections – Meier and Baldwin have described a third vicious circle based on capital deficiency due to market imperfections. In underdeveloped and people are economically backward.
Existence of market imperfections prevents optimum allocation and utilisationn of natural resources and the result, in turn, leads to economic backwardness. The development of natural resources depends upon the character of human resources.
But due to lack of skill and low level of knowledge, natural resources will remain unutilised, under utilised and misutilised. The vicious circle caused by Market imperfections is shown as under –
So friends, this was the concept of vicious circle of poverty. Hope you get the full details about it and hope you like this article.
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