Previous Year Question

The concept of the Vicious Circle of Poverty is associated with economist Ragnar Nurkse. He systematically analysed this concept in his book Problems of Capital Formation in Underdeveloped Countries (1953). According to this concept, different economic causes of poverty in underdeveloped economies reinforce one another, allowing poverty to persist continuously.

The Vicious Circle of Poverty operates mainly through two sides:

1. Supply Side: Low income reduces the capacity to save. Low savings limit investment and Capital Formation. A shortage of capital keeps labour productivity low, causing income to remain at a low level.

Low Income → Low Savings → Low Investment → Low Capital Formation → Low Productivity → Low Income

2. Demand Side: Low income limits people's Purchasing Power, resulting in low market demand for goods and services. The small size of the market provides insufficient incentives for entrepreneurs to make new investments. Limited investment restricts the expansion of production capacity and productivity, keeping income at a low level.

Low Income → Limited Purchasing Power → Low Market Demand → Reduced Investment Incentives → Limited Production and Productivity → Low Income

Nurkse emphasised the Balanced Growth Theory as a means of breaking the Vicious Circle of Poverty. This theory proposed coordinated investment across different industries and economic sectors to increase production capacity, employment, income, and market demand simultaneously.

This concept belongs to Development Economics. In this framework, a shortage of capital is not merely a consequence of poverty but also a factor that perpetuates poverty.