According to the principle of vicious circle in UDCs’ level of income remains low which leads to low level of saving and investment.
Low investment leads to low productivity which again leads to low income.
According to Prof. Nurkse. “It implies circular constellation of forces tending to act and react one another in such a way as to keep a poor country in a state of poverty. He cited an example of a poor man.
A poor man do not get enough food which makes him weak. As a result of weakness his efficiency reduces as a consequence he get low income and thus becomes poor.”
Solution of Vicious Circle of Poverty:
Broadly, these two methods to solve the problem of vicious circle of poverty.
(I) Solution to the Supply side
(II) Solution to the Demand side. Let us explain these two aspects in detail.
A. Solution to Supply Side vicious circle:
1. Increase in Saving:
In order to get rid of supply side vicious: circle, in these countries; efforts should be made to increase savings so that investment in productive channels may be encouraged. To increase saving, expenditure on marriages, social ceremonies, etc. should be curtailed. In UDCs, the possibilities of voluntary savings are very less.
Thus, in this regard, Govt. interference is necessarily required. The Govt. can increase saving by altering its fiscal policy. The Govt. can impose heavy taxes on luxurious goods. Moreover, it can increase the role of direct taxes. Thus, the Govt. can curtail consumption by doing alterations in tax system.
Increase in Investment:
To break the vicious circle of poverty apart from increasing savings investment of saving in productive channels is also of immense use. The policies of short run and long run investment should be co-ordinated. By short period investment, people can get the necessary goods at fair rates, which will have favourable impact on their skill.
Moreover, along with short period investment, investment in the establishment of multipurpose projects, iron, chemical fertilizers should be properly encouraged. In UDCs, proper monetary and banking policies should be adopted which may provide facilities and encouragement to small savings.
B. Solution to Demand Side Vicious Circle:
In UDCs to resolve the demand side vicious circle, extent of the market should be widened so that people may get inducement to invest. In this regard, Prof. Nurkse advocated the doctrine of balanced growth. According to the principle of balanced growth, investment should be done in every sphere of an economy so that demand of one sector can be fulfilled by another sector. Thus, an increase in demand will lead to wider extent of the market and so the inducement to invest.
On the other hand, economists like Hirschman, Singer, Fleming do not consider the policy of balanced growth practically fair. According to them, the policy of unbalanced growth would be more useful. In’ UDCs, there is every possibility of increase in demand and there is the need of increase in monetary income. Majority of UDCs have adopted the policy of planned development.
Accordingly, due to more investment in public sector, supply of money increases. Due to increase in monitory income, size of the market get widen. These countries endeavor to widen the size of foreign market by increasing their exports.
C. Other Solution to vicious Circle of Poverty:
In underdeveloped countries, the main obstacle in economic growth is the backwardness of human power. Many suggestion can be made to increase the skill of human power. For instance, in these countries, education, technical knowledge and administrative training should be enlarged. In these countries health facilities should be enhanced which may increase the efficiency of the workers. Transportation and communication should be developed.
Numerous economists do not consider vicious circle of poverty as an obstacle in the path of economic development. According to Prof. Hirschaman, the basic problem of economic development in these countries is the lack of decision making ability. The real problem is the lack of capital.
According to Prof. Lewis, “If in these countries lack of capital is not realized during the war period, then ten percent of national income can be easily saved for economic development.” Therefore, according to these economists, vicious circle of poverty has been over weighted in these countries.
Moreover, Prof. Bailer, has also criticized the vicious circle of poverty on so many grounds.
Circle of poverty in UDCs is an easy explanation of nature. However, its main drawbacks has been summarized below:
1. The doctrine of vicious circle of poverty in UDCs is an easy explanation of nature. There are so many other reasons of vicious circle in these countries.
2. The experience of Latin American countries have proved that underdeveloped countries can also develop.
3. The doctrine of vicious circle neglects the so many important reasons like lack of entrepreneurs, political, social and religious atmosphere.
4. The principle of vicious circle do not explain important determinants of economic development.