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Nurkse’s Theory of Vicious Circle of Poverty
Ragnar Nurkse, an Estonian economist, is known for his “Vicious Circle of Poverty” theory, which explains why underdeveloped economies remain trapped in low growth and low investment cycles. He argued that poverty itself is a major obstacle to economic development and that breaking out of this cycle requires a coordinated effort to increase savings, investment, and productivity.
1️⃣ The Vicious Circle of Poverty: Why Poor Nations Stay Poor
Nurkse believed that both demand-side and supply-side factors reinforce poverty in underdeveloped economies.
📌 A. The Supply-Side Vicious Circle
👉 Low income → Low savings → Low investment → Low productivity → Low income again!
🔍 Explanation:
- Poor people lack the ability to save, which means less investment in capital goods.
- Without investment in industries or agriculture, productivity remains low.
- Low productivity leads to low wages and incomes, continuing the cycle.
📌 B. The Demand-Side Vicious Circle
👉 Low income → Low demand for goods → Low investment in industries → Low employment & low income again!
🔍 Explanation:
- In poor countries, people spend most of their income on basic necessities like food.
- This means less demand for manufactured goods, leading to low industrial development.
- With fewer factories and businesses growing, job opportunities remain scarce, keeping wages and income low.
💡 Key Insight: Poor countries cannot break free from this cycle unless external forces (like government policies or foreign investment) intervene to stimulate savings and investment.
2️⃣ How to Break the Vicious Circle? Nurkse’s Solutions
📌 1. Increase Savings and Investment
- The government should encourage savings through banking reforms and incentives.
- Foreign aid and investment can help fund capital projects.
📌 2. Balanced Growth Strategy
- Investment should be spread across multiple industries at once (like Rosenstein-Rodan’s Big Push).
- Infrastructure, education, and health sectors should develop alongside industry.
📌 3. Improve Agricultural Productivity
- Since most people in poor countries work in agriculture, improving farming techniques can increase income and savings.
- Investments in irrigation, fertilizers, and machinery can boost food production.
📌 4. Encourage Entrepreneurship and Industrialization
- Governments should support small and medium enterprises (SMEs) with credit and training.
- Import substitution industrialization (ISI) can help reduce dependency on foreign goods.
📌 5. Promote International Trade
- Developing countries should increase exports to earn foreign exchange and attract investment.
- Diversification of exports (not relying on just one commodity like oil or coffee) is crucial.
3️⃣ Strengths of Nurkse’s Theory
✔ Explains the root cause of underdevelopment → Poverty itself is a self-reinforcing problem.
✔ Stresses the role of investment in breaking the cycle.
✔ Provides policy guidance → Governments must intervene to promote savings and industrialization.
4️⃣ Criticisms of Nurkse’s Theory
❌ Overemphasizes capital accumulation → Human capital (education, skills) is just as important.
❌ Ignores entrepreneurship → Simply increasing investment won’t work without innovation.
❌ Doesn’t consider external shocks → Wars, political instability, and global markets affect development.
❌ Too much reliance on government intervention → Some argue that market-driven growth is more effective.
5️⃣ Conclusion: Is Nurkse’s Theory Still Relevant?
📌 Yes, but with modifications!
- Microfinance and digital banking now help poor people save and invest.
- Technology and globalization allow even small economies to grow without waiting for capital accumulation.
- Sustainable development and green growth are now key factors in breaking poverty cycles.
🚀 Final Thought: While Nurkse’s Vicious Circle of Poverty is still relevant in many developing countries, modern solutions like technology-driven entrepreneurship, global trade, and education reform are helping to break the cycle in new ways.