3.1 Vicious Circle of Poverty
According to the principle of a vicious circle in UDCs’
level of income remains low which leads to low level of saving and investment.
Low investment leads to low productivity which again
leads to low income.
According to Prof. Nurkse. “It implies circular
constellation of forces tending to act and react to one another in such a way as
to keep a poor country in a state of poverty. He cited an example of a poor
man.
A poor man does not get enough food which makes him
weak. As a result of weakness, his efficiency reduces as a consequence he get
low income and thus becomes poor.”
The solution of Vicious Circle of Poverty:
Broadly, these two methods to solve the problem of
the vicious circle of poverty.
They are:
(I) Solution to the Supply-side
(II) Solution to the Demand side. Let us explain these
two aspects in detail.
A. Solution to Supply Side vicious circle:
1. Increase in Saving:
In order to get rid of supply-side vicious: circle, in
these countries; efforts should be made to increase savings so that investment
in productive channels may be encouraged. To increase saving, expenditure on
marriages, social ceremonies, etc. should be curtailed. In UDCs, the
possibilities of voluntary savings are very less.
Thus, in this regard, Govt. interference is
necessarily required. The Govt. can increase saving by altering its fiscal
policy. The Govt. can impose heavy taxes on luxurious goods. Moreover, it can
increase the role of direct taxes. Thus, the Govt. can curtail consumption by
doing alterations in tax system.
Increase in Investment:
To break the vicious circle of poverty apart from
increasing savings-investment of saving in productive channels is also of
immense use. The policies of short-run and long-run investment should be
co-ordinated. By short period investment, people can get the necessary goods at
fair rates, which will have a favourable impact on their skill.
Moreover, along with short period investment,
investment in the establishment of multipurpose projects, iron, chemical
fertilizers should be properly encouraged. In UDCs, proper monetary and banking
policies should be adopted which may provide facilities and encouragement to
small savings.
B. Solution to Demand Side Vicious Circle:
In UDCs to resolve the demand side vicious circle,
extent of the market should be widened so that people may get inducement to
invest. In this regard, Prof. Nurkse advocated the doctrine of balanced growth.
According to the principle of balanced growth, investment should be done in every
sphere of an economy so that the demand of one sector can be fulfilled by another
sector. Thus, an increase in demand will lead to a wider extent of the market and
so the inducement to invest.
On the other hand, economists like Hirschman, Singer,
Fleming does not consider the policy of balanced growth practically fair.
According to them, the policy of unbalanced growth would be more useful. In’
UDCs, there is every possibility of increase in demand and there is the need of
increase in monetary income. Majority of UDCs have adopted the policy of
planned development.
Accordingly, due to more investment in public sector,
supply of money increases. Due to the increase in monitory income, size of the
market get widen. These countries endeavour to widen the size of the foreign market
by increasing their exports.
C. Other Solution to vicious Circle of Poverty:
In underdeveloped countries, the main obstacle in
economic growth is the backwardness of human power. Many suggestion can be made
to increase the skill of human power. For instance, in these countries,
education, technical knowledge and administrative training should be enlarged.
In these countries, health facilities should be enhanced which may increase the
efficiency of the workers. Transportation and communication should be
developed.
Criticism:
Numerous economists do not consider the vicious circle of
poverty as an obstacle in the path of economic development. According to Prof.
Hirschaman, the basic problem of economic development in these countries is the
lack of decision-making ability. The real problem is a lack of capital.
According to Prof. Lewis, “If in these countries lack
of capital is not realized during the war period, then 10% of national
income can be easily saved for economic development.” Therefore, according to
these economists, the vicious circle of poverty has been over weighted in these
countries.
Moreover, Prof. Bailer, has also criticized the
the vicious circle of poverty on so many grounds.
3.2 Circular cumulative causation
Circular cumulative causation
is a theory developed by Swedish economist Gunnar Myrdal in
the year 1956. It is a multi-causal approach where the core variables and their linkages are delineated. The idea behind
it is that a change in one form of an institution will lead to successive
changes in other institutions. These changes are circular in that they continue
in a cycle, many times in a negative way, in which there is no end and
cumulative in that they persist in each round. The change does not occur all at
once as that would lead to chaos, rather the changes occur gradually.
Gunnar Myrdal developed the concept from Knut Wicksell and
developed it with Nicholas Kaldor when they worked together
at the United Nations Economic Commission
for Europe. Myrdal concentrated on the social provisioning aspect of
development, while Kaldor concentrated on demand-supply relationships to the
manufacturing sector.
3.3 Lewis Model of Unlimited Supply of Labor:
The Nobel Laureate, W. Arthur Lewis
in the mid-1950s presented his model of an unlimited supply of labour or of surplus-labour economy. By surplus labour, it means that part of manpower
which even if is withdrawn from the process of production there will be no fall
in the amount of output.
Assumptions of the Lewis Model:
Lewis model makes the following
assumptions:
(i) There is a duel economy i.e., the
economy is characterized by a traditional, over-populated rural subsistence
sector furnished with zero MPL, and the high productivity modern urban
industrial sector.
(ii) The subsistence sector does not
make the use of 'Reproducible Capital', while the modern sector uses the
produced means of capital.
(iii) The production in the advanced
sector is higher than the production in the traditional and backward sector.
(iv) According to Lewis, the supply
of labour is perfectly elastic. In other words, the supply of labour is greater
than the demand for labour.
The followings are the sources
of an unlimited supply of labour in UDCs.
(i) Because of severe increase in
the population more, than the required number of labours are working with lands, the so
called disguised unemployed.
(ii) In UDCs so many people are
having temporary and part-time jobs, as the shoe-shines, loaders, porters and
waiters etc. There will be no fall in the production even their number are one
halved.
(iii) The landlords and feudals are
having an army of tenants for the sake of their influence, power and prestige.
They do not make any contribution towards production, and they are prepared to
work even at less than subsistence wages.
(iv) The women in UDCs do
not work, but they just perform house-hold duties. Thus they also represent
unemployment.
(v) The high birth rate in UDCs leads
to growing unemployment.
Basic Thesis of the Lewis Model:
Lewis model is a classical type model
which states that the unlimited supplies of labour can be had at the prevailing
subsistence wages. The industrial and advanced modern sector can be developed
on the basis of Agri. to the traditional sector. This can be done by transferring
the labour from the traditional sector and modern sector.
Lewis says that the wages in
the industrial sector remain constant. Consequently, the capitalists will earn
'surplus'. Such surplus will be re-invested in the modern sector leading to absorbing the labour which is migrated from the subsistence sector. In this way, the surplus-labour or the labour which were prey to disguised unemployment will get
employment. Thus both the labour transfer and modern sector employment
growth are brought about by output expansion in that sector. The speed with
which this expansion occurs is determined by the rate of industrial investment
and capital accumulation in the modern sector. Though the wages have been
assumed constant, yet Lewis says that the urban wages are at least 30% higher
than average rural income to induce the workers to migrate from their home
areas
3.4 Big Push Theory of Development
The theory of ‘big push’ first put forward by P.N.
Rosenstein-Rodan is actually a stringent variant of the theory of ‘balanced
growth’. The crux of this theory is that the obstacles of development are
formidable and pervasive. The development process by its very nature is not a
smooth and uninterrupted process. It involves a series of discontinuous
‘jumps’. The factors affecting economic growth, though functionally related to each other, are marked by a number of “discontinuities” and “hump.”
Therefore, any strategy of economic development that
relies basically upon the philosophy of economic “gradualism” is bound to be
frustrated. What is needed is a “big push” to undo the initial inertia of the
stagnant economy. It is only then that a smooth journey of the economy towards
higher levels of productivity and income can be ensured.
Unless big initial momentum is imparted to the
economy, it would fail to achieve a self- generating and cumulative growth. A
certain minimum of initial speed is essential if at all the race is to be run.
A big thrust of a certain minimum size is needed in order to overcome the
various discontinuities and indivisibilities in the economy and offset the
diseconomies of scale that may arise once development begins.
According to Rosenstein-Rodan, marginal increments in
investment in unrelated individual spots of the economy would be like
sprinkling here and there a few drops of water in a desert. Sizable lump of
investment injected all at once can alone make a difference.
Rationale for the Big Push:
The basic rationale of the ‘Big Push’ like the
‘Balanced Growth’ theory is based upon the idea of ‘external economies’. In the
theory of welfare economics, external economies are defined as those unpaid
benefits which go to third parties. The private costs and prices of products
fail to reflect these. And the market prices have to be corrected if an account
of these external economies is to be taken. However, the concept of external
economies has a different connotation in growth theory. Here, they are
pecuniary in nature and get transmitted through the price system.
To explain the emergence of such external economies
and their transmission, let us consider two industries A and B. If the industry
A expands in order to overcome the technical indivisibilities, it shall derive
certain internal economies. This may result in the lowering of the price for
the product of the industry A. Now if the industry B uses A’s output as an
input, the benefits of A’s internal economies shall then be passed on to the
industry B in the form of pecuniary external economies. Thus, “the profits of
industry B created by the lower prices of product. A call for investment and
expansion in industry B, one result of which will be an increase in industry
B’s demand for industry A’s product. This in turn will give rise to profits and
call for further investment and expansion of industry A.”
Following such a line of argument, Prof.
Rosenstein-Rodan contends that the importance of external economies is one of
the chief points of difference between the static theory and a theory of
growth. “In the static allocative theory there is no such importance of the
external economies. In the theory of growth however,” remarks Prof. Rodan,
“external economies abound because given the inherent imperfection of the
investment market, imperfect knowledge and risks, pecuniary and technological
external economies have a similarly disturbing effect on the path towards
equilibrium.”
Now, the basic contention of the “big push” theory is
that such a mutually beneficial way of output expansions is not likely to occur
unless the initial obstacles are overcome. There are “non- appropriabilities”
or “indivisibilities” of different kinds which if not removed through a “big
push” will not permit the emergence and transmission of ‘external economies’ –
which lie at the back of a self-generating development process.
Associated with the removal of each set of
indivisibilities is a stream of external economies. A ‘bit by bit’ approach to
development would not enable the economy to cross over certain indivisible
economic obstacles to development. What is required is a vigorous effort to
jump over these obstacles. As such, for the economy to be successfully launched
on the path of self-generating growth a “big push” in the form of a minimum
size of investment programme is necessary. In essence, therefore, an
all-or-nothing approach to development is stressed in big-push approach to
development.
Requirements for Big Push:
The hallmark of the ‘big-push’ approach lies in the
reaping of external economies through the simultaneous installation of a host
of technically interdependent industries. But before that could become
possible, we have to overcome the economic indivisibilities by moving forward
by a certain “minimum indivisible step”. This can be realised through the
injection of an initial big dose of a certain size of investment.
Prof. Rodan distinguishes three kinds of
indivisibilities and externalities with a view to specify the areas where big
push needs to be applied.
They are:
(i) Indivisibilities in the production function, i.e.,
lumpiness of capital, especially in the creation of social overhead capital.
(ii) Indivisibility of demand, i.e., the complementarity
of demand.
(iii) Indivisibility of savings, i.e., a kink in the
supply of savings.
Let us study each of these individually so as to bring
out their importance in providing a self- generating stimulus to the
development process.
(i) Indivisibilities in the Production
Function:
Prof. Rodan argues that it is possible to generate
enormous pecuniary external economies by overcoming the ‘indivisibilities of
inputs, processes and outputs.’ The emergence of such externalities would bring
about a wide range of increasing returns. To corroborate his contention he
cites the case of the United States. He feels that the fall in the capital-output
the ratio in the U.S.A. from 4:1 to 3:1 over the last eighty years was chiefly due to
the increasing returns made possible by the levelling down of production
indivisibilities.
The most important case of indivisibilities and
external economies on the supply side resides in the social overhead capital
which is now called infrastructure. The most important effect of jumping over this
indivisibility is the “investment opportunities created in other industries”.
Social overhead capital consists of all the basic industries such as transport,
power, communications, and such other public utilities.
The construction of these infrastructures involves
‘lumpy’ capital investments. And the capital- output ratio in the social
overheads is considerably higher than in other industries. Moreover, these
services are only indirectly productive and involve long gestation periods.
Besides, their “minimum feasible size” is large enough. As such it is well-nigh
difficult to avoid excess capacity in these, at least in the initial periods.
Above all, there is a “minimum industry mix of public utilities” that must be
required to divert at least 30 to 40 per cent of their total investment in the
creation of social overhead capital.
In this view, therefore, it is possible to distinguish
four types of indivisibilities of creating social overhead capital.
They are:
(a) Indivisibility of Time:
The creation of social overhead capital must precede
other directly productive industries so that it is irreversible or indivisible
in time.
(b) Indivisibility of Durability:
The infrastructures generally last long. The overhead
capital with lesser durability is either technically not feasible or is very
poor in efficiency.
(c) Indivisibility of Long Gestation
Periods:
The investments in social overhead capital, by all
counts involve a highly protracted period of time for their fruition as
compared with investments in other directly productive channels.
(d) Indivisibility of an Irreducible
Industry Mix of Public Utilities:
Social overhead capital must grow collectively. There
is an irreducibly minimum industry mix of different public utilities that have
to be created all at one stroke.
As it is impossible to import the infrastructures,
they have got to be produced domestically. And because of the existence of above-explained indivisibilities, it is necessary to make ‘lumpy’ investments
in them. And their creation is a precondition to the investments in directly
productive and other quick-yielding productive activities. Only then the way
for a self-generating economy can be paved. Thus the absence of adequate social
overhead capital constitutes the most important bottleneck in the development
of developing countries.
(ii) Indivisibility of Demand:
This refers to the complementarity of demand arising
from the diversity of human wants. The very fact that there is an
indivisibility of complementarity of demand requires simultaneous setting up of
interrelated industries in countries to initiate and accelerate the process of
development.
Indivisibility of demand generates interdependencies
in investment decisions. As such, if each investment project was undertaken
independently, it is in most cases likely to flop down. This is because
individual investment projects generally have “high risks because of
uncertainty as to whether their products will find a market,” This point can be
clarified with the help of the following well-known example given by
Rosenstein-Rodan for a closed economy.
To start with, let us suppose that 100 disguisedly
unemployed workers in an underdeveloped country were withdrawn and employed in
a shoe factory. The wages of the newly employed workers would provide
additional income to them. Now, if they spend all their newly received
purchasing power on the shoes, an adequate market for the shoe industry would
be ensured. As a result, the industry would succeed and survive.
But the fact is that human beings having a diversity of
wants cannot simply afford to survive simply by the consumption of shoes and
nothing else. As such, they will not spend all their earnings on the purchase
of shoes. The market for the shoe industry will, therefore, remain limited as
before. Therefore, incentives to invest will be adversely affected. As a
result, the shoe factory investment project might end in a fiasco.
Now let us make a somewhat different assumption to see
how an atmosphere congenial to the undertaking of investments can occur.
Suppose that instead of only 100 workers being engaged in the shoe factory,
10,000 workers are put to work in 100 different factories producing a variety
of consumer goods. These new factories provide larger employment and thus
purchasing power to their workers. There is an increase in the total volume of
purchasing power and the total size of the market. This is because the “new
producers would be each other’s customers”.
In a way, what has happened is that due to the
complementarity of demand, the risk of the limitedness of the market is greatly
reduced. The result is that the incentives to invest are increased. “Thus
provided that the total volume of employment and purchasing power is increased
by a minimum indivisible step, each factory Will have enough market to reach
full capacity production and the point of minimum cost per unit.”
We, therefore, find that the indivisibility of demand
requires the simultaneous production of a “bundle” of a large number of wage
goods on which the newly employed workers could spend their income. That alone
would ensure an adequate market for the product of each producer. In terms of
investment the implication is that “unless there is an assurance that the
necessary complementary investments will occur, any single investment project may
be considered too risky to be undertaken at all.”
This, as Prof. Higgins remarks, results in
indivisibility in the decision-making process. A large-scale investment
programme based on the complementarity of demand undertaken as a unit may bring
forth large increases in national income. But each of the individual investment
projects undertaken singly may not fructify at all.
The essence of the whole analysis is that a high
minimum quantum of investment in interdependent industries is needed to
overcome the indivisibility of demand and hence that of decision-making. That,
according to the big push theory, is the only reliable way of overcoming the
smallness of the market size and low inducement to invest in the developing
economies.
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