According to Prof. Nurkse:
"It is the vicious circle of poverty
(VCP) which is
responsible for backwardness of UDCs".
Vicious circle of poverty:
circular constellation of forces tending to act and react in such a way as to
keep a country in the state of poverty".
In such state of affairs the process of
capital formation remains obstructed and restricted. This VCP is presented as:
We start with low real income which results in a
meager savings which in turn
will check investment. Low level of investment would create deficiency of
capital which in second round leads to low productivity. This again results in
low income. Here, the circle perpetuates the low level of development.
From the supply side, there is low income, low savings,
low investment, capital deficiency and low productivity.
On the demand side, low income, low demand for goods, limited home
market and low investment.
According to Nurkse, a break through on demand side can be brought about by
dashing initiatives on the part of entrepreneurs. On the supply side the
disguised unemployment ranging between 20% to 30% of total agri. labor force can
be mobilized for financing capital formation. And the parents of such disguised
unemployed will go on feeding them. It means that in Nurkse's model the hidden
food surplus will finance the process of economic growth.
Responsible For Breakthrough: According to Nurkse to break the VCP
entrepreneurs will play an important role. But he does not suggest the means for
such funds. As in poor countries the savings are low, hence for the supply of
funds the credit creation will have to be restored. But Nurkse rejects it.
(ii) Disguised Unemployment: According to Nurkse, the disguised
unemployment will finance for growth. But the domestic resources are not
sufficient, they can partially meet the requirements of growth.
(iii) Raw Material And Machines: Nurkse's theory fails to answer the
question from where the machines and raw material will be provided to the labor
which will be utilized for capital formation. Moreover, why the parents will
continue providing food to their disguised unemployed offspring's once they get
(iv) Utilization Of Disguised is Not
a New Idea: Nurkse says that the labor of Indo-Pak have much more leisure.
But it is not true. The labor perform so many works like repair of houses,
digging of canals, construction of small roads and cutting of forests etc.
Therefore, it is not possible to withdraw these people from lands.
(v) Misleading and Over Simplified: According to Bauer the idea of
VCP is misleading and over-simplified because the developed countries never
passed through such situation when they where UDCs.