Vicious circle of poverty implies a circular constellation of forces tending to act and react upon one another in such a way as to keep a poor country in a state of poverty. For example, a poor man may not have enough to eat; being underfed, his health may be weak; being physically weak, his working capacity is low, which means that he is poor, which in turn means that he will not have enough to eat; and so on. A situation of this sort relating to a country as a whole can be summed up in the trite proposition: “A country is poor because it is poor.”

The basic vicious circle stems from the fact that in LDCs total productivity is low due to deficiency of capital, market imperfections, economic backwardness and underdevelopment. However, the vicious circles operate both on the demand side and the supply side.

The demand side of the vicious circle is that the low level of real income leads to a low level of demand which, in turn, leads to a low rate of investment and hence back to deficiency of capital, low productivity and low income. Low productivity is reflected in low real income.

The low level of real income means low saving. The low level of saving leads to a low investment and to deficiency of capital. The deficiency of capital, in turn, leads to a low level of productivity and back to low income. Thus the vicious circle is complete from the supply side.

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The low level of real income, reflecting low investment and capital deficiency is a common feature of both the vicious circles.

A third vicious circle envelops underdeveloped human and natural resources. Development of natural resources is dependent upon the productivity capacity of the people in the country. If the people are backward and illiterate, lack in technical skill, knowledge and entrepreneurial activity, the natural resources will tend to remain unutilized, underutilized or even misutilized.

On the other hand, people are economically backward in a country due to underdeveloped natural resources. Underdeveloped natural resources are, therefore, both a consequence and cause of the backward people.