Nurkse's Model of Vicious Circle of Poverty (VCP) and Economic Development:

According to Prof. Nurkse:

"It is the vicious circle of poverty (VCP) which is responsible for backwardness of UDCs".

Vicious circle of poverty:

"Implies a 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.

Diagram/Figure:

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.

Shortcomings/Flaws of the Model:

(i) Entrepreneurs 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 employment.

(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.

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