According to the concept of Vicious circle of poverty, income level in less developed countries remain low and this further causes low level of investment and saving. This low investment in turn leads the country to experience low productivity along and low income (Pullen 2017). Based on the statement of Prof. Nurkse, this vicious circle represents constellation of forces, which further force a developing country to experience poverty. This essay intends to analyze and understand that whether low level of standard of living can generate a vicious cycle in developing countries. In this context, this essay intends to describe about three chief causes for which this cycle generates within a developing country (Pillay-van Wyk and Bradshaw 2017). These causes are classified into supply side and demand side vicious cycles along with market imperfection. This essay intends to discuss that whether low population growth can act as an important factor to develop such poverty cycle.
How low levels of living can turn into a vicious cycle in developing countries:
In vicious circle, supply side indicates that the level of production in developing countries is low, which further cannot generate enough capital formation. In this context, Prof, Nurkse has explained that due to small productivity, the saving capacity becomes low and this further tends to low national income (Li and Ma 2015). Therefore, the level of real income implies low productivity and causes lack of capital. This lack of capital comes due to small capacity of savings and this in turn completes the circle. The following figure describes this vicious circle of poverty where the circle starts and finishes at the point low income.
In developing countries, poverty indicates low real income that occurs due to low capital formation. This low capital formation comes due to low level of saving, which further generates due to low income level. Therefore, the above analysis says precisely that chief reason of low poverty level as well as income comes from the saving level (Sodhi 2016). This implies that production channels do not receive sufficient amount of investment. Therefore, in developing countries, the entire society is segmented into two parts, which are rich and poor.
The above analysis describes precisely that low level of living successfully tends a society to experience vicious circle of poverty. In these countries, the chief earning-source of most of the people is agricultural sector. Moreover, most of the farmers belong from poor income-groups due to subsistence farming. Farmers in these countries use traditional method of cultivation through applying old and unskilled techniques (Omotayo, Ogunniyi, Tchereni and Nkonki-Mandleni 2018). Due to unskilled labor along with immobility of labor and disguised unemployment, the productivity of farmers remains low. As a result, a major portion of national income is consumed and this further reduces the possibility of savings as well as investment by sufficient amount. Therefore, the entire process of capital formation in these countries becomes low. In this context, the rich group of people may save sufficient amount. However, most of them spend their money purchasing luxurious products. As a result, saving limit of those persons reduces and this cannot fulfill the required amount of investment.
This poverty cycle can be generated from demand side. In this context, Prof. Nurkse has stated that due to low purchasing power of people, the amount of induced investment becomes low. This low income among people can be observed due to low productivity, which further occurs due to small amount of capital formation within the production process. Moreover, this low level of investment further generates low capital formation (Mahembe and Odhiambo 2017). The following figure represents this demand side of vicious circle, where low income generates low demand and this further leads to low investment. This in turn generates low productivity and again the society experiences low income.
In figure 2, the diagram represents all causes and their respective outcomes precisely. The chief reason of this type of poverty is low demand which further keeps the market low. For investors, this small size of market several problems to invest further. As a result, investors cannot establish large scale industries and consequently productivity as well as income remains low. Based on the example provided by Nurkse, a company may to intend to establish a shoe factory in a developing country through charging higher prices. Therefore, in developing countries low income or low purchasing power of people tend to low productivity.
Some economists have discussed and formed other form of vicious circle related to capital deficiency. This deficiency occurs due to market imperfections. In developing countries, the amounts of resources are insufficient and economic background of people is backward. Due to imperfect market, the economy experiences various restrictions to utilize natural resources at an optimum level. This consequence further leads the economy towards backward (Goodin and Le Grand 2018). Thus, human resources can help a developing country to develop its natural resources. However, unskilled knowledge leads the society to utilize natural resources inefficiently. Therefore, according to the argument of Stiglitz (2015), backward people and their insufficient knowledge can be taken as both cause and effect for underdeveloped resources. This backwardness arises due to low income. The following diagram represents this type of vicious circle based on market imperfections.
The above figure represents the vicious cycle where market imperfection plays a significant role. Due to this imperfection, the entire society can experience low productivity, low real income along with low demand and low saving. This further causes low investment and low capital formation that further causes imperfect market formation.
Therefore, it can be said from the above discussion that vicious cycle of poverty can occur from supply side or demand side of capital. Due to this low level of capital formation, the level of productivity as well as real income becomes low. Thus, it becomes difficult for a developing country to break such cycle without any jerk. Moreover, technological gaps can be observed in poor developing countries that can be identified as the chief factor of underdevelopment. In addition to this, barriers in the context of socio-culture can also be observed in developing countries (Goodin and Le Grand 2018). Therefore, economists cannot point out any particular factor for which a country does not attain economic growth and remains underdeveloped. Many socio-economic as well as political factors work as catalyst and keep these countries in the state of underdevelopment. To reduce this bottle lock, many economists suggest that improvement in capital accumulation is necessary though it is not a sufficient condition for development.
To what extent is lower population growth the key to development in such cases:
In this context, the researcher intends to analyze that whether lower level of population growth can overcome this situation through the process of development. According to many orthodox economists, population explosion is one of the chief causes that keep a country in the state of underdevelopment. However, the relationship between economic growth and population growth is complex one. Lower growth of population advances development but at the same time this economic phenomenon retards this process. In this context, many economists have argued that developing countries generally suffer from the insufficient amount of saving and investment along with shortage of human capital (Tomé and Goyal 2015). Therefore, economists argue that poverty acts as the chief factor of underdevelopment. A large population can achieve economic development potentially. This is because the society can produce more output with the help of this large scale of population. From this aspect, population growth at a faster rate cannot be considered as negative. However, in most of the developing countries, the opportunity of getting job is limited. This in turn causes unemployment and poverty in the society. Poverty acts as an obstacle through adversely affecting capital formation of a country. In this situation, slow growth of population can help a developing country to generate employment opportunity gradually over the time. Instead of massive population explosion, this slow growth can help the society to improve national income, per capita income as well as capital formation efficiently.
Therefore, the impact of population growth to develop economic condition of a country can be discussed further from the economists’ point of view. According to Maganga and Omwenga (2018), the relationship between economic development and population growth is controversial as well as complex. Some economists have considered people as the greatest wealth of a nation. However, economist Malthus has considered population growth as the barrier of economic development (Kumarasinghe and Wickramasinghe 2018). Following this statement, neo-Malthusians argue that the common problem of each underdevelopment countries across the world is rapid growth of population. Therefore, the entire consequences can be analyzed based on the concept of costs and benefits.
Costs of the population growth in a society can be discussed with the help of Malthusian concepts. Firstly, this theory considers that population growth has a negative impact on economic development. This can be described with the help of diminishing returns in agriculture. Increasing growth of population generates disguised unemployment, which further affects national income of a country. Moreover, shortage in food supply can be observed that influences the food prices to increase. Therefore, standard of living influence negatively. In addition to this, developing countries cannot export agricultural foods by large extend due to shortage of supply. Therefore, net exports cannot influence national income of these countries significantly. Secondly, increasing population has negative impact on a developing country’s savings and investments, which further hampers capital formation. This occurs due to age-dependency effect Mirjalili, Cheraghlou and Sa’adat (2018), investment diversion effect and capital-swallowing effect. According to economists, dependency ratio increases when the number of non-working population to total working wage population increases. The capital-shallowing indicates a state where a rapid growth of population decreases the capital-labor ratio. This in turn uses lower capital in workforce for which savings effects adversely. Therefore, total productivity reduces. On the other side, the effect of investment-diversion states that due to rapid growth of population, scarce resources are distributed unequally (DeAngelis 2018). Moreover, the government spends huge amount of capital in unproductive sectors like education and health to provide basic needs to each people. As a result, productive sectors do not receive enough capital for further investment.
Fourthly, economists assume rapid population growth as a major problem. However, the actual relationship cannot be measured accurately due to weak correlation between these two factors. Lastly, neo-Malthusian economists argue that excessive growth of population as well as massive poverty in less developed countries have destroyed the ecological balance due to land degradation and deforestation (Clemens and McKenzie 2018). As a result, those developing countries experience various environmental hazards. Therefore, the government spends huge amount of money to recover the condition after the disaster and this restricts the process of development in these countries.
On the contrary, the process of population growth can develop the economy in various ways. Firstly, increasing population implies increasing number of work force, which can participate in the production process actively. Therefore, increasing population tends total output of a country to increase further which in turn brings development in the country (Coale and Hoover 2015). Secondly, an increasing population indicates increasing market for goods and services. An expanding market further stimulates entrepreneurs and investors to invest more money to produce more output. In addition to this, expanding market further attracts foreign investors to invest significant amount. This stimulates national income in these developing countries (Ostry, Berg and Tsangarides 2014). Most of the Asian countries are expanding their markets rapidly, which further help foreign investors to invest sufficient amount of money. Large amount of capital formation further generates employment opportunities and increases per capita income.
Conclusion:
Therefore, the entire discussion can be concluded in this section. The essay has observed that low levels of livings generate a vicious cycle with the help of low capital accumulation. In this context, it is observed that this vicious cycle can be generated through influencing total demand or supply of a country. In addition to this, market imperfection also plays vital role to generate vicious cycle. Moreover, the paper has intended to analyze that whether lower population growth plays any vital role to develop economic condition. However, the study has analyzed that population has both positive and negative impacts on economic development.
References:
Clemens, M.A. and McKenzie, D., 2018. Why don’t remittances appear to affect growth?. The Economic Journal, 128(612), pp.F179-F209.
Coale, A.J. and Hoover, E.M., 2015. Population growth and economic development. Princeton University Press.
DeAngelis, D.L., 2018. Individual-based models and approaches in ecology: populations, communities and ecosystems. CRC Press.
Goodin, R.E. and Le Grand, J., 2018. Not only the poor: The middle classes and the welfare state. Routledge.
Kumarasinghe, P.J. and Wickramasinghe, A., 2018. Population Pyramid And Economic Growth: An Econometric analysis of Sri Lanka. International Journal of Management Excellence, 10(3), pp.1348-1354.
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Mahembe, E. and Odhiambo, N.M., 2017. On the link between foreign aid and poverty reduction in developing countries. Revista Galega de Economia, 26(2), pp.113-128.
Mirjalili, S.H., Cheraghlou, A.M. and Sa’adat, H., 2018. Avoiding Middle-income Trap in Muslim Majority Countries: The Effect of Total Factor Productivity, Human Capital, and Age Dependency Ratio. International Journal of Business and Development Studies, 10(1), pp.5-21.
Omotayo, A.O., Ogunniyi, A.I., Tchereni, B.H. and Nkonki-Mandleni, B., 2018. Understanding the Link Between Households’ Poverty and Food Security in South West Nigeria. The Journal of Developing Areas, 52(3), pp.27-38.
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