Explain the vicious circle of poverty and how does it check the growth of capital formation in the country? or A country is poor because it is poor
Vicious Circle of Poverty :-
The people in the less developed countries have low per capita income. Having low income their rate of savings is low. When savings are small in a country, investment will also be low. Low investment leads to low productivity. With low productivity level, the income is bound to be low. People as such remain poor. In the way vicious circle of poverty completes.Summing up, we can say that less developed countries are poor because they do not have sufficient capital resources for investment. Capital has a central position for economic development. A financially poor country is trapped in its own poverty. A country can get rid off from poverty if its rate of capital formation increases than the rate of population growth. So capital formation is the key to economic development by demand and supply of capital.
Demand Side of Capital :-
The production of the poor country is low. The low production causes low per capita income and low purchasing power. The low purchasing power reduces the demand for products. Due to low demand, market will be limited. The small size of market discourages the investment. The low production reduces the productivity per worker. When the out put per worker is low, the per capita income is bound to be low. So vicious circle of poverty is complete on the demand side of capital formation.
On the demand side vicious circle of poverty operates in the following manner :
Supply Side of Capital :-
In the developed countries due to low production, per capita income is low. The low level of income means the capacity to save is low. The low level of savings leads to low investment. The low rate of investment reduces the productivity per worker. It leads to low per capita income. The vicious circle is thus complete on the supply side of capital formation.
The vicious circle of supply can shown by the following diagram :
Main Points of Vicious Circle of Poverty :-
2. Low production
3. Rapid population growth
4. Low per capita income
5. Low consumption
6. Limited market
7. Low savings
8. Lack of capital
9. Low investment
10. Low production
If any country per capita income is high, then the rate of capital formation will be high as the factors affecting the demand for and supply of capital formation are favorable to economic growth.
A country is poor and remains poor because its human and natural resources remain not utilized. In the less developed countries people are mostly unskilled and technologically backward. They are illiterate and lack the entrepreneurial ability. So the natural resources are not used properly, out put remains low and poor country remains poor because it is poor.