VICIOUS CIRCLES OF POVERTY

Vicious circles of poverty show the circuitous connections between the various economic
malaises that exist in weak economies and which act and react upon one another thereby keeping
a poor country in a constant state of a low level of development. It is the vicious circles of poverty
that are the fundamental cause of the entrapment of struggling economies in a state of poverty,
immiserization and low levels of productivity. Prof. Ragnar Nurkse concisely describes vicious
circles in the words : ‘A country is poor because it is poor’.
The basic vicious circle stems from the fact that in LDCs total productivity is low due to
deficiency of capital, market imperfections, economic backwardness and general
underdevelopment. The vicious circles operate on both the demand and supply sides of an
economy.

Fig. 1

Low Macro Low

Demand Investment

Demand side

Low Real Capital

Income Deficiency

Low
Productivity

Capital Low Real

Deficiency Income
Supply side

Low Low Aggregate

Investment Savings

On the demand side of vicious circle (shown in the upper half of Fig. 1) it is the low level
of productivity which is the root cause of the poverty entrapment. This low productivity causes
the real income to be low and this in turn triggers off the cascading effect of a low level of
demand, which consequently leads to a low rate of investment and hence a deficiency of capital,
low productivity and low income...
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 On the supply side of vicious circle (shown in the lower half of Fig. 1) it is again the low
level of productivity that cause the real income to remain low and this in turn leads to a low level
of savings which consequently leads to a low rate of investment and hence a deficiency of capital,
low productivity and low income…
Thus, it would be noticed that the low level of real income, reflecting low investment and
capital deficiency is a common feature of both the vicious circles.

It is possible to identify a third vicious circle that ensnares the weak economies. This
circle adversely impacts human and natural resources. The development of natural resources and
the development of the productive capacity of the people in the country are inter-dependent of
each other.
If the quality of the population is low, with respect to literacy, technical skills, knowledge
and entrepreneurial activity, the natural resources tend to remain unutilized, under-utilized or even
mis-utilized.
Again, if the natural resources are underdeveloped or beyond development (like the Sub-
Saharan topography), then the development of the people of such regions is hampered and so
stunted. This is explained in Fig 2.

Fig 2

The vicious circles of poverty thus reiterate that the inherent inter-connectivity that exists
Market Imperfections
between poverty and underdevelopment causes weak economies to get stuck in the rut of a low
level of development. Both poverty and underdevelopment, per se, are economic evils but their
viciousness is further aggravated by the fact thatNatural
Underdeveloped each ofResources
them can self-perpetuate.

Demographic Backwardness

The vicious circles of poverty can be broken through the adoption of one or a combination of the
following strategies:
a) An entrepreneurial surge in the Schumpeterian sense, i.e, though ‘the spontaneous and
discontinuous change in the channels of the circular flow, disturbance of equilibrium, which
forever alters and displaces the equilibrium state previously existing’. For such a strategy to
work it is imperative to have at least a basic infrastructure in place and / or an
entrepreneurial class with a sense of social commitment.
b) An appropriate policy-mix, wherein the government allocates public funds through
programmes that would directly attack poverty in the economy. It is essential that these
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 programmes empower the masses and not make them dependent on the state ad infinitum.
This would require human resource development and human capital formation along the
Schultzian orientation.
c) An external assistance programme, wherein the developed nations take it upon themselves to
contribute towards the well-being of the weaker nations. Such assistance could be in the
form of aid (especially for economies that are on the cusp of the Rostowian first and second
stages) and / or trade (especially for the economies that have moved deeper into the
Rostowian second stage). Global co-operation through UNCTAD and the recently
announced Millennium Development Goals can help the struggling economies come out of
the vicious circles of poverty.

Prof. Bauer, in his book ‘Dissent on Development’ regards the thesis of the vicious circles of
poverty as invalid. His objections are as under:
1) Empirical evidence indicates that the model behind the vicious circle thesis is defective in that
the variables specified or implied in it are either relatively unimportant as determinants of
development, or they do not interact in the fashion implied. If the thesis were valid,
innumerable individuals, groups and communities could not have risen from poverty to
betterment, in both rich and poor countries.
2) The current developed countries were at one time poor, with low levels of incomes per head
and low levels of capital accumulation. But they have advanced, usually without appreciable
outside capital and invariably without external grants. This would not have been possible
according to the vicious circles of poverty thesis.
3) The thesis fails to distinguish between level of savings and rates of savings. It is the latter
that affects the former and the thesis wrongly focuses on the former.