• Kattula

The vicious cycle of poverty and scarcity of capital.

Actualizado: 20 may 2021

Most economists tend to assume that the cause of the underdevelopment of a country is population explosion. However, this is not necessarily true for all countries, an example that illustrates this situation is China. This country has the world’s highest population and is also the second-largest economy on the globe. Among other things, one of the most important factors that contribute to the development of China is, in fact, its enormous population. Due to the enormous number of citizens, the government can benefit from taxes. And, as a consequence, that same government can invest in its economy and, therefore, contribute to the country’s development.

The vicious circle of poverty:

In economics, the cycle or circle of poverty is the “set of factors or events by which poverty once started, is likely to continue unless there is an outside Intervention”.

Every year 9 million children are dying before their 5th birthday. There are at least twenty-five countries where the average person is expected to live no more than 55 years. In India, more than 50 million children going to school cannot read and write a simple text. In my opinion, what is causing these countries to remain poor are the political and economical institutions, but most importantly, poverty. However, these problems can be solved by capital accumulation. Let’s try to understand this with an example:

Take a person that has fallen into poverty due to accidental causes or by birth and due to their poor financial situation, he cannot take a good diet which makes him remain weak, reduces his efficiency or capacity of work thus leads to a lower income. As a consequence of a low income, the poor man grows weaker and weaker, children won’t probably attend school and that will cause the kids to, most definitely, end up as poor as their parents.

This example proves Ragnar Nurkse’s statement that “a country is poor because it is poor”.

And you may be wondering… How can these poor people break their chains and avoid the vicious circle of poverty? The only way is receiving capital and investing it, being entrepreneurs. That capital could perfectly come from government incentives, NGOs, and microfinance providers. Nevertheless, if poor people don’t use the capital in a productive way, they will continue in the poverty circle.

If we take the same concept from the individual perspective to the national point of view, we can understand why poor nations are poor. The underdeveloped countries can’t climb high because their production is low, which creates low employment, and that leads to lower wages in the economy, thus resulting in lower supply. In terms of demand, the poor country with low wages and purchasing power will have low savings, which, again, leads to low investment, thus resulting in lower capital accumulation.

Hence, poor countries are held down to their low levels of per capita income by the “Inter Locking Vicious Circle”. Having capital, good political and economic institutions, plus natural resources are the keys to escape from these interlocking vicious circles.