Understanding Economy










LDCs are trapped in set of inter-related problems or a set of such circles perpetuating themselves by what Nurkse would call “constellation of forces. The circles are usually known as V.CP. According to Ragnar Nurkse “A country is poor because it is poor”.

“It implies a circular constellation of forces tending to act and react upon one another in such a way as to keep a poor country in state of poverty”.


LDCs have little ability to save due to low level of income. Low saving leads to low investments and low productivity, which adversely affect the per capita income in the country. Low per capita income and high consumption again create the problem of low saving capacity and keep them in a circle which is called vicious circle of poverty.


On the other hand, a low level of real income reflecting to a low level of demand, which shows less incentive for investors and negatively affects the rate of investment in the country. Due to the low rate of investment, the productivity of factors of the product also remains low.

All these forces keep the per capita income at a low level and economy again reaches the stage were due to low per capita income demand for goods is to be small. In this way, inter-related forces creates a circle of problems know as V.C.P.


As it is stated that a country is poor due to its poor policies”, to break these circles of poverty and don’t let them severe, LDCs can adopt the following measures:

1. Savings:

The root cause of the vicious circle of poverty is low saving level in LDCs. Vicious circles can be broken by making efforts to increase the volume of saving both at individual and government levels. The strong monetary and fiscal measures can be helpful to raise the level of domestic and foreign savings to meet the capital requirements for investment. The saving rate as a percentage of GDP was 14.4 during 2007809 which was 13.9% during (2007-08).

2. Role of State:

It is also the responsibility of Govt. to break these circles. The government should make serious effort to break these circles by providing employment opportunities to their citizens. In Pakistan, the unemployment rate remains the same as 5.2% during (2008-09), which is very high as compared to other advanced nations. The government should plan and takes certain steps to uplift the employment level to enhance the income level.

3. Utilization of Natural Resources:

LDCs are not getting the full benefit from their available natural resources. These resources either are not being fully utilized or misused in LDCs due to a number of obstacles. To prevent the economy from the problems of V.C.P, optimum utilization of label natural resources should be ensured.

4. Human Resources:

In LDCs like Pakistan shortage of human resources such as; doctors, engineers teaches, artisans, etc., is one of the primary causes of poverty. Due to the poor education system, absence of health facilities and shortage of training institutions, LDCs are facing the problems of human capital shortage. Effective measures are required to bridge up the deficiency of human capital to raise their income and living standards. Raising the income levels will increase the per capita income and saving level in the country that will be helpful in breaking circles of poverty.

5. Role of Technology:

Technology plays a vital role in the way of economic progress of a country The government should make effective arrangements to provide facilities of modern technology for mass production to break these circles of poverty.

6. Role of Advanced Nations:

Advanced nations can help the LDCs to break these circles by providing them economic assistance in the form of soft loans, and aid for the social sector. Foreign aid should be used very carefully to create employment for the nationals to raise their income, spending and saving levels. This process will provide greater help to break these circles
in LDCs.

7. Reducing Population Growth Rate:

The high population growth rate is also one of the main features of developing countries like Pakistan. A high population growth rate reduces the per-capita income and creates many economic and non-economic problems in the society. According to the economic survey of Pakistan (2008-09), the population growth rate was 1.7%. Government should take appropriate measures to retard the rapid growth rate in population to rise per capita income and to prevent society from many other non-economic problems that are necessary to break these circles.

8. Awareness:

Financial institutions should properly propagate their schemes to develop awareness among people. The majority of our population lives in rural areas. People in rural areas hoard money and make it stagnant, saving schemes should be started in these areas to mobilize these resources for investment.

9. Political and Social Contribution:

Most important to break the vicious circle of poverty is political stability, constant policies, honest and efficient administration, etc. Planners should make effective economic plans. The government should perform its duties purely for the best of a nation to achieve the targets of growth and development.

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