VICIOUS CIRCLE OF POVERTY OR "A CUNTRY IS POOR BECAUSE IT IS POOR"NURKSE
More serious obstacles to the economic development of
under-developed countries lie in the operation of a vicious circle of poverty
which tends to keep the country in a state of perpetual poverty and economic
backwardness. It implies a circular flow 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,
There are two sides to the vicious circle of poverty.
(i) Demand Side.
(ii) Supply Side.
(1) DEMAND SIDE OF V.C.P.
In
a poor country, the level of income is very low which means a low purchasing
power Since the purchasing power of the people is low and the scope of
investment is practically limited. As a result, productivity is low and the
incomes are small. Underdeveloped countries face the vicious circle of
poverty on the demand side of capital formation because the level of real
income is low in these countries and the level of demand is low.
Therefore, there is not much inducement for business to make investments which further reflects on low capital formation. Hence, investment is discouraged and productivity per worker is low. The productivity per worker being low leads to low per capita income and thoro it; poverty, In this way the vicious circle of poverty is completed on the demand side.
(2) SUPPLY SIDE OF V.C.P.
Poverty in undeveloped countries means that the per capita income is low and the capacity to save is limited The rate of savings being low, the rato of investment, in turn, is bound to be, low and the rate of capital the formation is low. The level of productivity per worker is extremely low due to the great shortage of capital in underdeveloped countries, As a result of the above process, the real income per capita is low and there is poverty, Tho circular the flow of poverty diagrammatically is shown below.
The circle shows, low real income, the volume of savings is small and
this in turn leads to a low level of investment which further results in capital
deficiency, contributing ultimately to low economic productivity. Thus the low level of income is both a cause and consequence of the low level of savings.
Tho
vicious circles described above, keep a country in a tight corner. The various
components of the vicious circle constitute obstacles to economic development
in a poor country.
But
it is now the ambition of underdeveloped countries to break the vicious circle of poverty to accelerate tho process of
economic growth.
MEASURES TO BREAK THE V.C.P
The following measures can be adopted to break the vicious circle of poverty in
underdeveloped countries including Pakistan.
(i) Raising the
rate of savings
The rate of savings can bo raised in underdeveloped countries
by various action of tho government e.g. taxation, deficit financing, and by
public borrowing from banks and tho public etc, In this way, tho low level of
voluntary savings can be raised by forced savings. Thus, the increased savings
can be used for capital formation.
(ii) By Controlling Consumption
In
underdeveloped countries, tho rate of capital formation can be raised by
lowering the level of consumption, especially, the consumption of luxury or semi-luxury
goods. So, the saving margin can be increased by putting a curb on domestic
consumption by means of physical control and fiscal measures.
(iii) Business Savings
Business
enterprises save when they do not distribute the whole of their profits but retain
a part of them in the form of undistributed profits which aroused for
investment in real capital.
(iv) The Role of Wealthy Class
The wealthy class indulges in unproductive investments like Jewellery, house buildings, purchasing luxurious goods, etc. If this class is motivated to make their savings for investment in productive activities, the level of capital formation can be increased.
(v) Control
Population Growth Rate
Different steps should be taken to control the
population growth rate which should be lost than the growth rate of real per
capita income. It will lead to a decrease in the demand for consumer goods.
(vi) Employment
of Human Resources
There
is a serious problem of unemployment in under-developed countries.
The quality of manpower is poor. There is a lack of education training
facilities and facilities. Therefore, sufficient measures can improve tho
quality skill and efficiency of the labor force to increase tho productivity
and the vicious circle of poverty can be broken
(vii) Disguised Unemployment
The
surplus agricultural workers can bo transferred from the agricultural sector to
the nonagricultural sector without diminishing output. These urn-productive
workers can be employed in various capital creating projects such as roads,
buildings, canals, health centers, etc.
(viii) Efficient
Use of Natural Resources
Under-developed
countries are lack of exploiting their natural resources due to deficiency of
capital and technology. The Multi-National Companies (MNCs) of developed
countries are exploiting these natural resources.g. oil, gas, and other
minerals, etc. Some natural resources are not properly utilized. Therefore, the
optimum utilization Of resources can break the vicious circle of poverty.
(ix) Improved Technology
Modern technology is capital saving and helps in raising the level of output with a smaller use of real resources. Hence, the low 'level of production in underdeveloped countries can be increased by improving the techniques of production.
(x) Encouragement Of Investment
If
active steps are taken to encourage investment, the level of production and
income will rise. Thus the government can encourage investment by effective
monetary and fiscal measures.
(xi) Balanced Growth
According to Nurkse "if the investment is made in
several industries simultaneously, then the persons employed in different
industries become consumers of the goods produced by one another. Since they
have all acquired more purchasing power and poverty can be broken on demand as well as on the supply side.
(xii) Role of Financial Institutions
The
financial institutions should introduce and propagate various saving schemes to
the people, especially, in rural areas. This act of financial institutions will
raise the level of savings and capital formation.
(xiii) Foreign Sources
If the internal sources are insufficient for the economic development of an under development
country, then the capital formation can take place with the help of foreign the capital which has the following forms'
(a) Private Foreign Investment
Private foreign companies have an important role in capital formation by investing in the private sector directly.
(b) Foreign
Technical
For
effective human capital, foreign technical training is a necessary component of
modern technology.
(c) Foreign
Remittances
The surplus labor force gets employment in the developed
countrje% and the developing countries get rerruttancc% in the Shape of foreign
exchange. It also a source of capital formation (i,e $ 14970 Million July- April,
2014-15 in Pakistan).
(d) Foreign Aid
Developing countries are receiving a good amount of foreign
capital in the shape of loans or grant from other developed countries eg
(e) Loans
From International Agencies
Some international agencies or financial institutions provide
loans to developing countries which is also a source of capital formation e.g.
World Bank, Islamic Banks, I.M.F, etc.
(xiv) Political Stability
Most important to break the vicious circle of poverty is to make the system an instrument for the. realization of economic-cum-social goods of economic development of a country.
(xv) Control
Inflation
The purchasing power of consumers increases due to control
inflation in a developing country. It leads to an increase in consumption and
investment. Price stability can break the vicious circle of poverty.
(xvi) Privatization
The state
owned enterprises face the problem of loss in developing
(xvii) Increase
Literacy Rate
The literacy rate is low in developing countries. The
shortage of skilled and trained labor force can be removed by increasing the
literacy rate by taking drastic measures in the education sector of the economy.
(xviii) Decrease Unproductive Expenditure
The use of unproductive expenditure of the government
creates a situation of a deficit budget. On the other hand, people spend
their income in unproductive channels due to customs and traditions. By decreasing this unproductive expenditure, the saved amount can be utilized to increase production.
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