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 andhence back to deficiency of capital, low productivity and low income.
Breaking the Vicious Circle of Poverty:
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 suggestedthe 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.