VICIOUS CIRCLE OF POVERTY

CONCEPT OF POVERTY

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VICIOUS CIRCLE OF POVERTY

Meaning of poverty:-

In simple terms, poverty is not having enough money or access to resources to enjoy a decent standard of living; be that the lack of access to healthcare, education or sanitation facilities, etc.

The simplest definition of being poor is ‘being unable to subsistence’ that is, being unable to eat, drink, have shelter and clothing.

Types of poverty:-

Primary poverty means not having enough money to meet basic needs, it can also be considered as ‘living below the poverty line.’

Secondary poverty is when people earn just enough money to afford the necessities but spend part of it on “coping mechanisms” to deal with financial and work-related stress (high risk and/or difficult working conditions due to abuse and long hours) and therefore end up struggling to make ends meet.

Absolute poverty is when we consider every poor person as equal. The general definition of poverty which is valid at all times and for all economies is called absolute poverty.

Relative poverty is the condition in which people lack the minimum amount of income needed in order to maintain the average standard of living in the society in which they live. Relative poverty is considered the easiest way to measure the level of poverty in an individual country. Relative poverty is sometimes described as “relative deprivation” because the people falling under this category are not living in total poverty, but they are not enjoying the same standard of life as everyone else in the country. It can be TV, internet, clean clothes, a safe home (a healthy environment, free from abuse or neglect), or even education. Relative poverty can also be permanent, meaning that certain families have absolutely no chance of enjoying the same standards of living as other people in the same society currently have access to. They are basically “trapped” in a low relative income box.

Under the relative concept of poverty, a family (or an individual) is deemed to be poor if its level of income or consumption expenditure falls below a predetermined level. Then the income distribution of the population in different fractile groups is estimated and a comparison is made between the level of living of people in the bottom layer and the top layers of the population to assess the relative standard of poverty. The concept of relative poverty has received little attention. The concept of relative poverty is more suitable for developed countries while the absolute concept is relevant for the developing countries

In addition, the concept of poverty has two connotations, namely,

INDIVIDUALIZED POVERTY.-

The concept of individualized poverty is concerned with those poor individuals who are not able to incur even the minimum expenditure on most essential items viz., food, clothing and housing and

COLLECTIVE POVERTY.- Collective poverty referees to social systems.

The term virtuous circle and vicious circle refers to a complex chain of events that reinforce themselves through a feedback loop.

Virtuous circle refers to favourable result and vicious refers to detrimental result.

In other words:-

“A situation in which action and reaction intensify on other”

Different Economists gave different definitions of the vicious circle of poverty.

“The main reason of vicious circle of poverty is the lack of capital formation.” 

                                                                                     -According to Nurkse

“Vicious circle of poverty takes place due to the small size of the market.”

                                                                            -According to Kindleberger

“A nation is poor because it is poor”

Reason of poverty:-

1.First, poverty is due to the differences in the pattern of resource ownership leading to unequal distribution of income. The poor only have very limited resources with low quality.

2. Secondly, poverty emerged as a result of differences in the quality of human resources. Low quality of human resources that will lead to low productivity that would result in low levels of wages. The low quality of human resources caused partly by a lack of education, the fate of the less fortunate, the existence of discrimination and heredity.

3.Third, poverty appears as a result of differences in access to capital. This can be explained by figure-1 which is given below.

The theory that further clarifies the phenomena of poverty and contributing factors is the theory of “cycle of poverty” (vicious circle of poverty) is expressed by Nurkse. Which has significance, in theory, is the "State is poor because he is poor" (poor in a poor country is poor because it is poor).

1. At the macro level, poverty arises because of the inequality of resource ownership patterns that cause unequal income distribution, poor people only have the resources in a limited number and low quality;

2. Poverty arising from differences in the quality of human resources due to the quality of human resources means low productivity is also low, wages were low;

3. Poverty exists due to differences in access and equity. The three causes of poverty that leads to a vicious cycle of poverty.

The process begins with the poverty of the retardation/underdevelopment, and lack of capital market imperfections. These factors affected the low productivity of the total population. Low productivity results in lower incomes of the poor receive. The low income will have implications for the low savings and investment trend lower. Subsequent impact, low investment will further aggravate the economy and result in socioeconomic underdevelopment and backwardness of the community. Therefore, every effort should be concentrated on the fight against poverty "cut" the circle of poverty traps.

COMMON CITED CAUSES OF POVERTY IN INDIA

The vicious circle is classified in the three groups:-

1. Supply side of vicious circle
2. Demand side of the vicious circle
3. Vicious circle of market imperfection

SUPPLY SIDE:-

Supply-side of vicious circle indicates that in underdeveloped countries, productivity is so low that it is not enough for capital formation. According to Samuelson, “The backward nations cannot get their heads above water because their production is so low that they can spare nothing for capital formation by which their standard of living could be raised.”

In the words of Prof. Nurkse on the supply side there is a small capacity to save resulting from the low level of national income. The low real income is a reflection of low productivity, which in turn is due largely to the lack of capital. The lack of capital is a result of the small capacity to save and so the circle is complete.

LOW-INCOME → LOW SAVING → LOW INVESTMENT → LOW PRODUCTION → LOW INCOME

The supply side of the vicious circle can be illustrated with the help of a fig .1

It Reflects the UDCs are poor. In these countries, poverty refers to low real income. Real income remains low due to the low level of capital and capital is low because of low level of saving. The reason for low saving is a low level of income. Those, it becomes clear from the above analysis, that the main reason for the low level of poverty and income is the low level of saving. Consequently, investment is not possible in production channels. A man can save only when his real income exceeds consumption. Generally, in UDC, society is divided into two groups’ viz.; rich and poor.

In such countries, the majority of farmers are from poor groups. Their income is very low because they are engaged in subsistence farming. The methods of cultivation are old and unskilled. The productivity of labor is low due to unskilled labor, disguised unemployment, and immobility of labor. Under such a situation, a huge chunk of national product is consumed on consumption purposes. In this way, they lack saving, investment and so the capital formation.

Although, the rich group of the society is in a position to save. But, they spend their savings on luxurious goods instead of saving. They gave preference to foreign products. Thus, their demand does not enlarge the size of the market. Basically, in an economy, investment does not depend only on saving, but also on the ability to invest and willingness to invest. These countries lack in investment facilities due to the low level of demand.

The quantity of investment depends on able entrepreneurs. Able entrepreneurs have to take risks and put hard work to set up a new industry. The social atmosphere of the rich class is such that they do not dare to take risks. They prefer to put some laborers on work. Moreover, in UDCs, there exist a medium-income group that prefer to work in trade, services, etc. instead of capital formation. The main reasons responsible for this are lack of capital for investment in industries, lack of industrial finance, lack of skilled labor, lack of transportation and social overhead, etc.

Demand Side of Vicious Circle:-According to Prof. Nurkse, “On the demand side, the inducement of invest may he low because of the small purchasing power of the people, which is due to the small real income, which is again due to loco productivity. The level of productivity, however, is the result of the small amount of capital used in production which in turn may be caused or at least partly caused by small inducement to invest.

LOW INCOME → LOW DEMAND LOW INVESTMENT → LOW PRODUCTIVITY → LOW INCOME

Fig. 2 shows that low income leads to low demand which in turn results in low investment and so the low level of capital which again leads to low productivity and low income. The main reason for the poverty in these countries is the low level of demand. Consequently, the size of the market remains low. The small size of the market becomes a hurdle in the path of inducement to invest.

Thus, the investors do not establish industries on large scale and productivity remains low and so the income. In order to prove this, Prof. Nurkse has cited many examples. For instance, an entrepreneur will not establish a modern shoe factory in a country where the people are poverty-ridden and unable to purchase shoes. Similarly, the iron and steel industry in Chile will produce so much iron and steel in three hours that the entire demand of the country can be fulfilled. Thus, according to Nurkse, “In underdeveloped countries, on-demand side, low purchasing power of the people results in low productivity.”

VICIOUS CIRCLE OF MARKET IMPERFECTIONS:-Meier and Baldwin have described a third vicious circle based on capital deficiency due to market imperfections. In underdeveloped countries, resources are underdeveloped and people are economically backward. Existence of market imperfections prevent optimum allocation and utilization of natural resources and the result is under development and this, in turn, leads to economic backwardness.

The development of natural resources depends upon the character of human resources. But due to lack of skill and low level of knowledge, natural resources will remain unutilized, under-utilized and miss-utilized. In the words of Meier and Baldwin, “Underdeveloped resources are, therefore, both a consequence and cause of the backward people… The more economically backward are the people, the less developed will be natural resources, lesser the development of natural resources more the people are economically backward.” The vicious circle caused by Market Imperfections is shown as under.

The vicious circle of poverty is a result of the various vicious circles which were on the sides of the supply of and demand for capital. As a result capital formation remains low productivity and low real incomes. Thus, the country is caught in vicious circles of poverty which are mutually aggravating and it is very difficult to break them.

*The source of the information is books and the internet.

*image source-India tv