According to Prof. Supply Side of Vicious Circle: Supply side of vicious circle indicates that in underdeveloped countries, productivity is so low that it is not enough for capital formation. Nurkse on the supply side there is small capacity to save resulting from low level of national income. The low real income is a reflection of low productivity, which in turn is due largely to the lack of capital.
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This vicious circle of poverty adversely affects the accumulation of capital in economically underdeveloped countries. If this vicious circle of poverty is broken then development will follow. On the supply side, there is small capacity to save due to low level of income, the low level of income result in low productivity which is again due to deficiency of capital which is the effect of low capacity to save. On the contrary, on the demand side, the inducement to invest is low due to low demand in the economy, which is because of low income.
This is how the vicious circle works on both supply and demand side. Operation of vicious circle of poverty limits the size of the market in underdevelopment countries. Nurkse believes that the vicious circle of poverty can be broken through balanced growth. He was of the view that vicious circle can be broken by enlarging the size of the market which cannot be done by individual investor.
It would be possible with the help of a group of investors in the market. Therefore, enlargement of market is possible with the help of development of complementary industries. This can break the vicious circle of poverty and release the forces of growth and expansion.
He also suggested that market size can be expanded by salesmanship and advertisement and infrastructure development.
Nurkse was of the view that the principle of balanced growth needs a balance between different sectors of the economy during the process of economic growth and development. These are: i balance between agriculture and industry; ii balance between domestic and foreign trade; and iii balanced between demand and supply factors. While talking of the balance between agriculture and industry, Lewis viewed that if agriculture stagnates, the capitalist sector cannot grow, capitalist profit remains a small part of the national income and saving and investments are correspondingly small.
Smooth economic development requires that industry and agriculture should grow together. Secondly, the balanced growth must promote trade within and across the countries. In other words, there should be rise in trade within the country and also enhancement of foreign trade. Nurkse suggested that balanced growth is a good foundation for international trade as well as a way of filling the vacuum at the periphery.
Thirdly, the balanced growth implies that different parts of the economy should grow in a smooth and harmonious manner so that no part is ahead of the other. It requires balance between the demand and the supply of factors of production.
Some of the benefits of balance growth are as follows: i balanced growth can better promote equitable and balanced regional development: ii balanced growth can pare the way for division of labour and thus can raise the specialization and productivity of labour force; iii when there is balanced growth of both agriculture and industrial sector, it will lead to creation of social over head capital for the effective growth of all these sectoral activities; iv it will boost foreign trade as expansion of both internal and external markets of the product of an economy will to a great extent promote foreign trade; v it will lead to better utilization of both natural and human resources of an economy.
Hirschman and Paul Streeten and others have argued that due to the lack of capital in developing countries, it is difficult to achieve balanced growth.
Ragnar Nurkse’s theory of balanced growth
3 Major Causes of Vicious Circle of Poverty (With Diagram)