The Vicious Cycle of Poverty

1.0 Introduction
A vicious cycle is where one problem begets another problem which causes the first problem
again and the process is repeated over and over again. The vicious cycle of poverty is a
phenomenon used by economists to simply mean poverty brings about poverty. It illustrates
how poverty begets poverty and enchains populations in poverty unless there is an external
intervention to break the cycle. This is a common phenomenon in underdeveloped countries.
In this countries, the per capita income of populations is low which leads to low savings. Low
savings will lead to low investment. Low investment brings about low productivity. Low
production leads to low income and hence the cycle repeats itself. Underdeveloped countries
are poor because they lack enough capital for investment. Capital is a key recipe for
economic development. A country that is financial starved is trapped in its own poverty hence
the saying a country is poor because it is poor. An economy can come out of poverty if capital
formation rate increases more than the population growth. Therefore, capital formation spurs
economic development by demand and supply of capital (Pragyandeepa 2015).
The vicious cycle can be explained from the demand side, supply side and market
imperfections. In this paper I will only discuss the demand and supply side of the vicious
cycle.
1.1 Supply Side of Vicious Circle
From the supply perspective; productivity is low leading to low capital formation. The
underdeveloped countries cannot develop because their rate of production is low hence they
have nothing to spare for capital formation which is necessary in raising their living
standards. In simple terms, from the supply side the capacity to save is low leading to low
level of national income. The low real income is a reflection of low productivity which is

mainly caused by insufficient capital. Low income results from low saving capacity and
hence the circle completes.
The supply side of the vicious cycle is illustrated in figure 1.1

Poverty

Low
Supply

Low
Income

Low
Investme
nt

Low
Saving
Lack of
Capital

Underdeveloped countries are poor because of low real income. This is because low capital
level which is brought about by low savings. Low saving is brought about by low income.
From the above analysis poverty and low level of income are brought about by low saving
level. A person can only save when his real income is above his consumption.
In underdeveloped countries, majority of the population are small scale farmers. Income from
farming is low because they engage in subsistence farming. They use manual methods of
cultivation and they are unskilled. Production level is low because of lack of skills, disguised

unemployment and immobile labour. Under such circumstances most of the national
production is consumed in that saving is low, capital is low and investment is also low.
Although there are the rich in underdeveloped countries who are in a position to save; they
are few and spend their income on luxurious products instead of saving. They mostly prefer
foreign products. In the economy, investment is not only determined by saving but also on the
ability and willingness to invest. The attitude of the rich class in underdeveloped economies
is not to dare take risks. The medium income group prefer to work in trades, services etc.
instead of capital creation. This is due to lack of investment capital, limited industrial finance,
insufficient skilled labour, social overhead etc (Rohima et al. 2013).
1.2 Demand Side of the Vicious Cycle
On the demand side, the inducement to invest in an ecomomy may be low because of low
purchasing power of the people. In underdeveloped countries production is normally low.
This leads to low per capita income and low purchasing power. The low purchasing power
limits the demand for goods and services. Low demand limits the market. The limited market
leads to low inducement to invest which leads to low production. The low production results
to low production per capita. This in turn leads to low per capita income. Therefore, the
vicious circle of poverty closes on the demand side.
The investors in such economies do not establish large industries due to low demand hence
production and income remains low. The rich who have enough income prefer foreign
products and thus the demand still remains low.
Figure 1.2 illustrates the demand side of the vicious cycle of poverty

Conclusion
The vicious cycle of poverty which simple means poverty begets poverty is a major
hindrance to economic development. The supply of capital and demand for products in
underdeveloped countries is normally low and brings about the vicious cycle of poverty.
Poverty can only be reduced in an economy with the intervention from the government.

Reference List
Pragyandeepa. (2015). 3 Major Causes of Vicious Circle of Poverty (With Diagram).
Retrieved February 03, 2016, from http://www.economicsdiscussion.net/poverty/3major-causes-of-vicious-circle-of-poverty-with-diagram/4592
Rohima S. et al. (2013). Vicious Circle Analysis of Poverty and Entrepreneurship. IOSR
Journal of Business and Management, Vol. 7, Issue 1, PP 33-46.