Vicious Circle of Poverty
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.
The vicious circle of poverty is associated with low rate of saving and investment on the supply side. In UDCs the rate of investment and capital formation can be stepped up without reduction in consumption. For this, the marginal rate of savings is to be greater than average rate of savings.
To break the vicious circle on the demand side, Nurkse suggested the strategy of balanced growth. If investment is made in several industries simultaneously the workers employed in various industries will become consumers of each other’s products and will create demand for one another. The balanced growth i.e. simultaneous investment in large number of industries creates mutual demand. Thus, through the strategy of balanced growth, vicious circle of poverty operating on the demand side of capital formation can be broken.