Ragner Nurkse explains the problem of capital formation in underdeveloped countries through the vicious circle of poverty. To quote Nurkse : “Vicious circle of poverty implies a circular constellation of forces tending to act and react upon each other in such a way as to keep a poor country in a state of poverty.” To clarify this Nurkse takes a poor man as his example.
Owing to inadequate diet, a poor man remains weak which reduces his efficiency or capacity to work and thus lowers his earnings. As a consequence of lower income, the poor man continues to grow weaker and inefficient thereby perpetuating his poverty.
This example of a poor individual can be generalised to enfold a country as a whole because a country’s income depends on the efficiency of the individuals in the country. Therefore, Nurkse concludes that “a country is poor because it is poor.”1
The vicious circle of poverty operates both on the supply as well as demand side of capital formation in the underdeveloped countries.