P. T. Bauer

The Vicious Circle of Poverty: Reality or Myth?




A masterful essay on the misery of conventional economic thinking on development and why the economists kept offering farcical explanations for the lack of development as the “vicious circle of poverty” and the “international demonstration effect” (i.e. why international cultural contacts are, according to them, negative factors for development).

These nonsensical ideas cold emerge only because, being subservient to the interests of the state, most economists have completely silenced their rational faculties and, by doing so, they have brought the science of economics into disrepute. Professor Bauer is one of the few who kept his critical mental faculties functioning and this essay is a marvelous proof of it.



The Vicious Circle

The widely held notion that poor countries are caught in a vicious circle of poverty and stagnation, or, as the late Professor Nurske put it, that a country is poor because it is poor, is not true; this essay explains why.

The great upsurge of interest during the last twenty years in the economics of poor countries and in their development has not so far yielded many illuminating generalisations. The thesis usually known as the vicious circle of poverty claims to be a principal one. It is not quite so dominant now as it was a few years ago but it is still prominent in academic, official and popular literature. It also serves as the background or even as the basis for important policy proposals and measures, notably the suggestion that appreciable economic progress in poor countries requires drastic sacrifices at home, supplemented by large-scale aid from abroad.


1 The Thesis Outlined

The thesis states that it is poverty itself which sets up well-nigh insurmountable obstacles to its own conquest. The thesis is presented in several distinct and different formulations, which are not exclusive but cumulative. The most usual is that the low level of income makes saving impossible, thus preventing the capital accumulation necessary for an increase in income. Others include the suggestion that narrow markets in poor countries obstruct the emergence and extension of the specialisation necessary for higher incomes; that demand is too small to permit profitable and productive investment; that government revenues are insufficient for the establishment of effective public services; and that malnutrition and poor health keep productivity low, which prevents a rise in income. International private investment cannot, on this argument, alleviate the situation, since one aspect of the vicious circle is a lack of profitable opportunities for private investment.

I shall first quote at some length from influential sources to show the importance of the thesis in the literature, to illustrate the reasoning behind it and to forestall criticism that I am quoting out of context. A succinct formulation can be quoted from an early edition of Professor Samuelson's textbook:

They [the backward nations] cannot get their heads above water because their production is so low that they can spare nothing for capital formation by which their standard of living could be raised. [l]

The next example is from a study submitted to a United States Senate Committee by the Center for International Studies of the Massachusetts Institute of Technology, a well-known and influential organisation in this field:

. . . the general scarcity relative to population of nearly all resources creates a self-perpetuating vicious circle of poverty. Additional capital is necessary to increase output, but poverty itself makes it impossible to carry out the required saving and investment by a voluntary reduction in consumption. [2]

The emphasis on the impossibility of a voluntary reduction in consumption is notable. If it is the low level of incomes which prevents capital formation it is not clear how the exercise of compulsion would secure the required resources.

Yet another formulation, which has often been quoted, is by the late Professor Nurkse, whose book Problems of Capital Formation in Underdeveloped Countries is one of the best-known and most influential of the writings in this field. He writes under the heading 'The Vicious Circle of Poverty' :

In discussions of the problem of economic development, a phrase that crops up frequently is 'the vicious circle of poverty' . . . . A situation of this sort [of the vicious circle of poverty], relating to a country as a whole, can be summed up in the trite proposition: 'a country is poor because it is poor'. Perhaps the most important circular relationships of this kind are those that afflict the accumulation of capital in economically backward countries. The supply of capital is governed by the ability and willingness to save; the demand for capital is governed by the incentives to invest. A circular relationship exists on both sides of the problem of capital formation in the poverty-ridden areas of the world.
On the supply side, there is the small capacity to save, resulting from the low level of real income. The low real income is a reflection of low productivity, which in its turn is due largely to the lack of capital. The lack of capital is a result of the small capacity to save, and so the circle is complete.
On the demand side, the inducement to invest may be low because of the small buying power of the people, which is due to their small real income, which again is due to low productivity. The low level of productivity, however, is a result of the small amount of capital used in production, which in its turn may be caused, or at least partly caused, by the small inducement to invest!
The low level of real income, reflecting low productivity, is a point that is common to both circles. [3]

Parts of this formulation are vague and indeed slipshod in their shift between what will, may, or is likely to occur. But the general conclusion is clear. Such quotations could easily be multiplied from the writings of such well-known authors as Professor Gunnar Myrdal, Dr H. W. Singer, and others.

This thesis can also be expressed in the form of a model, that is an analytical device setting out the crucial variables in the explanation of particular phenomena. The crucial variables and relationships in most growth models are these: the growth of income is a function of the rate of capital accumulation, that is of investment; investment depends on saving; and saving is a function of income. Hence the growth of income depends on the growth of capital and the growth of capital depends on the growth of income. The model behind the thesis of the vicious circle of poverty pivots on the notion that the low level of income itself prevents the capital formation required to raise income. It is designed to explain the continuation through time of a zero or negligible rate of economic growth.


2 The Thesis Invalid

The thesis is demonstrably invalid in that it is conclusively refuted by obvious empirical evidence. The model behind it is defective in that the variables specified or implied in it are either relatively unimportant as determinant of development, or they do not interact in the fashion implied. If the thesis were valid, for instance, innumerable individuals, groups and communities could not have risen from poverty to riches as they have done throughout the world, in both rich and poor countries. This in itself should be sufficient to disprove the thesis as a general proposition. But the thesis is also refuted by the very existence of developed countries, all of which started poor, with low incomes per head and low levels of accumulated capital, that is with the economic features which now define underdeveloped countries.

Yet they have advanced, usually without appreciably outside capital and invariably without external grants, which would have been impossible according to the thesis of the vicious circle of poverty and stagnation. As the world is a closed system, the thesis is inconsistent with the phenomenon of development. The thesis of a general vicious circle of poverty thus conflicts with the most elementary empirical evidence.


3 Empirical Evidence

The thesis is also refuted by the rapid economic advance of many poor countries in recent decades, a phenomenon which is of obvious interest in this general context.

According to statistics of the Economic Commission for Latin America the gross national product in Latin American countries increased over the period 1935 through 1953 at an annual rate of 4.2 per cent, and output per head by 2 per cent [4]. Over the period 1945 through 1955 the rate of growth was even faster, as total output increased by about 4.9 per cent annually and output per head by 2.4 per cent, an appreciably higher rate than in the United States [5].

Latin America is largely pervaded by the money economy, so that statistics of the gross national product are more meaningful than for most underdeveloped countries. The record of the substantial growth rates in the publications of the Economic Commission for Latin America is of special interest, because economists connected with that organisation have been prominent exponents of the thesis of the vicious circle of poverty.

South-east Asia, particularly Malaya (broadly the present Malaysia), and West Africa are other underdeveloped regions which have achieved rapid and readily demonstrable progress since the latter part of the nineteenth century. However, there are no series of national income figures going back before the second world war in these areas and the present figures are unreliable. The national income per head in Malaya (gross domestic product per head per year) was about £100 in 1961 [6], the latest year for which official figures are available, and in Ghana about £75 in 1962, again the latest available figures. These are low figures by western standards, but they nevertheless represent substantial advances since the beginning of the century, when these countries were largely subsistence economies. The conventional statistics, moreover, much exaggerate income differences between the developed and underdeveloped countries.

Apart from national income statistics there is much information about the rapid progress of these economies in recent years. The rubber industry of south-east Asia began only around 1900. In 1963 it produced about two million tons of rubber annually (in spite of the disorganisation in Indonesia, the country with the largest area under rubber), worth about £400 million. More than two-thirds of the output is from Asian-owned properties. In 1900 there were no exports of plantation rubber from Malaya; in 1963 they exceeded 800,000 tons. In 1900 total domestic exports from Malaya were worth about £8 million annually; in 1963 they were about £300 million [7].

West Africa is another major region of the underdeveloped world where there has been large-scale material progress since the end of the nineteenth century. The progress of Gold Coast-Ghana [8] and Nigeria in particular has been rapid and is well documented; and in these areas, especially Gold Coast-Ghana, statistics are somewhat more reliable and meaningful than elsewhere in Africa. By the mid-1950s national income per head was about £70 to £75, approximately four times what it had been in 1890. The population also approximately quadrupled between 1890 and 1960 [9]. Material advance is reflected, too, in statistics of foreign trade, government revenues, literacy rates, school attendances, public health, infant mortality, and so on.

Statistics of foreign trade are of particular interest for West Africa because well over 99.5 per cent of the population is African: all agricultural exports (the bulk of exports) are produced by them and practically all imports are destined for their use. In 1890 there were no exports (or production) of Gold Coast cocoa; by the mid-1930s these were about 300,000 tons annually, and by the early 1960s they were over 400,000 tons, all from farms established, owned and operated by Africans; there are no foreign-owned cocoa farms. In 1890 combined imports and exports were less than £1 million annually; by the 1930s both imports and exports were in tens of millions; since the mid-1950s imports and exports have been about £100 million annually. Over this period there was a spectacular increase in imports of both consumer and capital goods. In 1890 there were no imports, or only negligible imports, of flour, sugar, cement, petroleum products, or iron and steel. In recent decades most of these have been on a massive scale. In the early 1890s there were about three thousand children at school; by the mid-1950s there were over half a million. In the 1890s there were neither railways nor roads, but only a few jungle paths, and transport of goods was entirely by human porterage or by canoe. By the 1930s there was a considerable railway mileage and a good road system; and journeys by road required fewer hours than they had required days in 1890.

Substantially the same applies to Nigeria between the end of the nineteenth century and 1960, when Nigeria became independent. Around 1900 exports and imports were each about £2 million annually; by the 1930s they were in tens of millions, and by the late 19508 they were about £150-200 million annually. Here again practically all exports are produced by Africans and practically all imports are destined for their use. In 1900 there were no exports (or production) of cocoa from Nigeria, and exports of oil palm products were one-tenth of their volume in the late 1950s. There was also a phenomenal increase in imports of mass consumer goods and capital goods over this period; in recent years there has also been a substantial increase in the local production of commodities previously imported.

To take one more example. In the first half of the nineteenth century Hong Kong was an empty, barren rock. By the end of the century it was a substantial port and a minor entrepôt centre. It has now become a major manufacturing centre, exporting manufactures on a massive scale. Throughout the western world  severe barriers have had to be erected to protect the domestic industries of the United States, Great Britain, Germany and France against imports from the unsubsidized competition of the industries of Hong Kong, an underdeveloped country, eight thousand or more miles away. This rapid progress has occurred in spite of the presence in Hong Kong of three features often said to reinforce the vicious circle of poverty, namely lack of natural resources, extremely severe population pressure, and a very restricted domestic market.

Statistical information of the kind presented in this section can be multiplied easily. But by itself it cannot convey the profound and pervasive changes which have taken place in many parts of the underdeveloped world in recent decades and which have changed the whole pattern of existence. In many areas this progress has meant the suppression of slavery and tribal warfare and the disappearance of famine and of the worst epidemic and endemic diseases. It has meant the development of communications, the replacement of local self-sufficiency by the possibilities of exchange, and the emergence and growth of cities. For instance, Malaya, which in the 1890s was a sparsely populated country of Malay hamlets and fishing villages, has been completely transformed by the rise of the rubber industry and has developed into a country with populous cities, thriving commerce and an excellent system of roads. In West Africa slave raiding and slavery were still widespread at the end of the nineteenth century; in 1900 the towns of northern Nigeria, which are now centres of the groundnut trade, were important slave markets.

The profound changes in the conditions of life which have occurred in many parts of the underdeveloped world over the last century also much affect the meaningfulness of discussions whether the differences in real income per head between rich and poor countries have widened or narrowed over this period. Indeed it is doubtful whether the concept of income conventionally measured is helpful in indicating or expressing profound changes.

The level of income in underdeveloped countries is by definition low, but this is still compatible with advance, indeed even rapid advance, if that advance has begun only comparatively recently and has started from a very low level. This is the position in many underdeveloped countries. The thesis of the vicious circle of poverty postulates either that low average levels entail zero rates of change, which is readily refuted by observation, or alternatively that a low level is the same as a zero rate of change, which is a simple error in logic. This confusion between a level and a rate of change is neatly reflected in references to the vicious circle of poverty in developing countries.


4 International Demonstration Effect

In recent years one variant of the general thesis of the vicious circle of poverty has gained particular influence. This is the suggestion that the presence of the developed countries sets up a so-called demonstration effect, which is regarded as a further obstacle to capital formation and to economic development, in effect substituting another vicious circle of poverty and underdevelopment should the first vicious circle be broken through in some way or other. The suggestion was first advanced by Professor Nurkse, who argued that contact with advanced economies is damaging to underdeveloped countries because it raises the propensity to consume, thus discouraging saving and preventing investment. To quote:

Knowledge of or contact with new consumption patterns opens one's eyes to previously unrecognised possibilities. . . . In the poorer countries such goods are often imported goods, not produced at home; but that is not the only trouble. The basic trouble is that the presence or the mere knowledge of new goods and new methods of consumption tends to raise the general propensity to consume. . . . The vicious circle that keeps down the domestic supply of capital in low-income areas is bad enough by itself. My point is that it tends to be made even worse by the stresses that arise from relative as distinct from absolute poverty [10]

The effects of contact with more advanced countries are, however, usually very different from those assumed in the international demonstration effect. International economic contacts, almost, invariably promote the development of less advanced communities by suggesting first of all that change is possible, and by undermining those attitudes and customs which most inhibits material advance. These contacts also promote new ideas, attitudes  and modes of conduct, as well as new crops, wants and improved methods generally, besides encouraging production for sale.

The provision of a market for export has often provided an outlet for surplus labour and unused land, a vent for surplus in Adam Smith's terminology, a sequence which has helped material progress in many underdeveloped countries [11]. Such sequences are commonplaces of economic history. They still operate, as is shown by the fact that at present throughout the underdeveloped world the more advanced sectors and areas are those in contact with the more developed countries.

The usual formulation of the international demonstration effect fails to note that new types of consumer goods can be bought only if incomes are first earned to purchase them. Indeed, until quite recently it was the absence of new wants, and the inelasticity of consumption and of standards of living, which were regarded as major obstacles to economic development, so that the role of new categories of consumer goods, often termed incentive or inducement goods, used to be emphasised as an instrument of economic progress. External contacts do indeed often suggest new wants, but at the same time they usually acquaint the population with new methods which make possible the satisfaction of these new wants. There would be no advantage in introducing new commodities to the population unless the population could pay for them.

These external contacts make possible the transformation of effort into desired commodities on more attractive terms. This development usually elicits a higher economic performance: more effort (at the expense of leisure), more productive saving and investment, especially direct investment in agriculture for production for the market. Specially important instances of such improved performance are direct investment in agricultural production for the market in addition to production for the family or instead of it. Moreover, by generating cash incomes these processes also promote investment in other parts of the economy; public investment made possible by increased revenues is only one obvious example.

The usual expositions of the international demonstration effect assume tacitly that the level of economic performance, notably the supply of effort to the exchange sector, is unaffected by the prospects of a higher and more varied level of consumption. At times these discussions seem to assume that the whole economy is already in the exchange sector, so that the question of advance from subsistence production to production for sale does not arise. Such assumptions are inadmissible in the conditions of underdeveloped countries. This is apart from the fact that these expositions also ignore the effects of external contacts in undermining traditional attitudes adverse to material progress, and in transmitting new ideas, crops and methods of production. Further, the exponents do not usually ask why the international demonstration effect should operate only on the consumption habits of the population and not on the production, saving and investment habits, or why an international demonstration effect should be singled out for comment when there are also differing levels and patterns of consumption locally which could set up such effects.

In the public sector of underdeveloped countries, however, an adverse demonstration effect does indeed often operate. Politicians and public servants in underdeveloped countries seem to be susceptible to it by adopting or seeking to adopt technical, educational and social standards which are inappropriate and wasteful. Governments and public servants in these countries are being pressed to rival the standards of developed countries. Readiness to yield to these pressures may be a condition of political survival; and in yielding to these pressures the politicians and the administrators do not spend their own resources. But such a situation is very different from the international demonstration effect envisaged by Professor Nurkse and by those who follow him.

A qualification to the general argument of this section which is more formal and apparent than it is substantial, may be noted. It is possible to devise models under which the international demonstration effect could operate in the way envisaged by Professor Nurkse and other exponents. It could so operate if economic performance were unaffected by expectations of a higher and more varied level of consumption; if people's ideas and attitudes and the methods and types of production were not affected by external contacts, but only their consumption patterns were so influenced; and if economic progress depended solely or very largely on the level of saving. While such a situation is conceivable, it is unrelated to the real world, as is clear from present and past experience of the transmission of economic progress. And even if such a situation did exist, it would simply reveal the preference of the population for current consumption over speculative and uncertain future benefits. The suggestion that external contacts (which, as we have noted, very greatly promote material progress) should be restricted to deny consumption opportunities to the population implies that consumer choice is largely irrelevant when development policies are being framed. This suggestion raises wide issues about the very meaning and purpose of economic development which cannot be pursued here.


5 Some Objections Considered

I now turn to three points which may be of some interest in themselves and are also designed to forestall possible objections.

First, the foregoing discussion is not intended to suggest that there has been material progress throughout the underdeveloped world. There are substantial groups and large areas in the underdeveloped world which have progressed little in recent times. They include the aborigines in many parts of the world, the desert people of the Sahara and elsewhere, and the tribal populations of central and east Africa. And over large areas of south and east Asia (including large parts of rural India, Pakistan and China), progress has been comparatively slow, and much of it has been absorbed in the form of increased populations. These are areas largely of subsistence agriculture. There is nothing abnormal or unexpected even in extreme material poverty in such materially backward societies. But the reasons for this backwardness have nothing to do with a generally operative vicious circle of poverty. There is no general rule to ensure that all countries or regions should reach the same level of economic attainment or the same rate of progress at any given time or over any given period.

Economic achievement and progress depend largely on human aptitudes and attitudes, on social and political institutions and arrangements which derive from these, on historical experience, and to a lesser extent on external contacts, market opportunities and on natural resources. And if these factors favourable to material progress are present, persons, groups and even societies will not stagnate, so that it is the absence of the favourable determinants, and not poverty, which is the causal factor in prolonged stagnation. 

The suggestion that it is poverty as such which acts as the principle obstacle to material progress has diverted attention from these underlying determinants of development.

Second, recognition of the material progress in so many parts of the underdeveloped world is not a plea for laissez-faire or for any other policy. The advance has often created formidable problems calling for government action. Progress has often been rapid and generally also uneven; it has affected certain areas and sectors earlier and more pervasively than others and its impact has been much greater on some activities, attitudes and institutions than on others. The differential incidence or impact of material advance in particular has often set up considerable strains. The resulting problems are often acute but they are totally different from those of stagnation. Problems of changes in land tenure arrangements and in property rights and inheritance; personal and social problems arising from the transformation of a subsistence economy into a money economy and from detribalisation; and congestion and delay in ports and on the railroads, are pressing issues in a number of underdeveloped countries. They would not arise in a stagnant economy caught in a vicious circle of poverty. Here again, insistence on the vicious circle of poverty has served to obscure these other problems and to divert attention and energy from attempts to deal with them.

The third point needs somewhat extended discussion. It is often said that the relatively advanced sectors in underdeveloped countries, particularly in Africa, are mere enclaves carved out of the local economies by the advanced countries, or outposts of the advanced economies which do not serve to improve the economic position or prospects of the local population.

It is not true that the local population does not participate in these relatively advanced sectors or does not derive material benefits from them. For instance, as already noted, all agricultural exports from West Africa and Uganda are produced entirely by the local populations on their own lands. Africans also have a large share in the transport, distribution and simple processing of these exports, as well as in the distribution of imports. In south-east Asia the bulk of the production of rubber is on Asian-owned properties. Even where enterprises in the advanced sectors are foreign, they normally still assist development by contributing to government revenues, by spreading skills, and by generally promoting the exchange economy.

These sectors are not, then, enclaves cut off from the rest of the economy, but the points where development makes its first impact. Economic advance always affects certain regions and activities first, from which it spreads outwards. The time required depends, among other factors, on the faculties of the population, on customs and attitudes, on institutional factors, and on physical communications.

The suggestion that the relatively advanced sectors of underdeveloped economies are enclaves which do not benefit the local population derives superficial but insubstantial plausibility from certain features of the economic and social landscape in the underdeveloped world which are especially pronounced in Africa.

All sub-Saharan Africa (outside South Africa) is poor; the incomes earned by Africans throughout Africa are low; apart from European-owned mines, estates and trading companies, small-scale agriculture is the main economic activity; in the advanced sectors, foreign personnel, enterprise and capital are prominent; and foreigners working in these sectors normally earn high incomes compared with the local population. The high incomes of expatriates reflect, of course, their command over skills and capital which could earn relatively high incomes in their own countries. But as is clear, both from general reasoning and from ample specific evidence, none of these features of the economies of underdeveloped countries warrants the suggestion that the material progress in the relatively advanced sectors in the economy has not benefited the living standards or the rates of material progress of the local populations.


6 Aspects and Implications of Change

The cultivation of cash crops by the local population both for export and for sale locally has been a major instrument of material advance in many parts of the underdeveloped world, notably in West Africa, south-east Asia, and parts of East Africa. The major products include cocoa, groundnuts, oil palm products and kola nuts in West Africa, and rubber in south-east Asia. And in East Africa there has occurred rapid, large-scale expansion in the production of coffee and cotton by the local population. The rapid and massive expansion of these products has a number of interesting implications [12].

First, the cultivation of these products was promoted by contacts established by the west with these areas. The activities of foreign merchants and an inflow of human and financial resources from abroad played a crucial role. But large sections of the local population responded readily to the opportunities presented. The phenomenal expansion of production of these crops from a zero or negligible amount to leading staples of world commerce within a few decades effectively disposes of the suggestion that Africans and Asians do not respond to economic incentives. It also suggests that they can produce competitively for world markets, though the external marketing may be carried out by expatriates.

Second, the establishment of agricultural properties by Asians and Africans represents massive direct investment in agriculture. This type of capital formation is both quantitatively and qualitatively significant in many poor countries. It is important quantitatively because of the comparative importance of agriculture and its ancillary activities in these economies; and it is qualitatively important because it is generally necessary for the transition from subsistence production to production for wider exchange. This form of investment is important in many poor countries but is often ignored in estimates of capital formation. It is also yet another refutation of the argument that poverty precludes economic advance.

Third, the successful establishment and expansion of these crops shows that rapid and comparatively smooth progress is possible in poor countries. The comparative smoothness of this advance by way of the production of cash crops is not surprising since it involves less of a break with traditional pursuits and ways of living than do large-scale manufacturing or mining. From time immemorial the local population has engaged in various forms of subsistence production; the difficulties of adjustment involved in progress from subsistence production to production for wider exchange and sale are not exacerbated by violent changes in the pattern of life or by the additional need rapidly to acquire knowledge of unfamiliar techniques. The comparative smoothness of the advance is also demonstrated by the establishment of the kola nut industry, now a large-scale activity in western Nigeria, which passed unnoticed in official statistics until years after it had become quantitatively important (though it was reflected in railway returns, amongst other pieces of evidence). Similarly, in Sumatra and Borneo the rapid expansion of the acreage under smallholders' rubber also passed unnoticed for many years in the 1920s and 1930s.

Fourth, the substantial direct investment in agricultural properties , producing cash crops also refutes the notion that individual Africans and Asians are invariably unenterprising. But the form of their enterprises, notably the establishment and production of cash crops, or transport and trading activity, differs substantially from that found in more advanced economies.

Fifth, the development of some of these cash crops conclusively refutes the suggestion that individual Africans and Asians cannot or do not take a long-term view, an opinion well known by anthropologists to be erroneous. Many of these crops, especially rubber, cocoa, kola nuts and coffee, are the products of trees or bushes which mature only four to six years after planting. Thus anyone planting these crops looks forward for a long period.


7 Impact of Change

The standard current ideology or orthodoxy about underdeveloped countries, of which the thesis of the vicious circle is an integral and indeed principal part, refers to the underdeveloped world almost wholly in terms of stagnation, starvation and retrogression. However, there also exists a substantial and authoritative body of writings, chiefly by anthropologists, historians, administrators and even a few economists, which is preoccupied with the rapid changes in these countries since the end of the nineteenth century, and the problems caused by them. This literature emphasises the difficulties of adapting institutions and attitudes to fast-changing conditions; the transition from communal to individual tenure of land; the results of detribalisation and disintegration of communal life and values; and the difficulties of rapid urbanisation. Here are a few examples.

In 1926, well before African development became a major international issue, Dr A. McPhee published a book with the revealing tide The Economic Revolution in British West Africa. The following passages epitomise his conclusions:

In fact, the process since the 'nineties of the last century has been the superimposition of the twentieth century after Christ on the twentieth century before Christ, and a large part of the problem of native policy is concerned with the clash of such widely different cultures and with the protection of the natives during the difficulties of transition. . . . The transition has been from the growth of subsistence crops and the collection of sylvan produce to the cultivation of exchange crops, with the necessary implication of a transition from a 'Natural' economy to a 'Monetary' economy, and the innumerable important reactions from the latter phase [13].

Much the same conclusions were reached by Sir Keith Hancock, judicious and critical historian of African development. This is what he says:

In some periods of European history - in our own day, for example, or in the day of the first steam engines and power mills - the European world has seemed to be transformed; Europe nevertheless has remained the same world, spinning very much faster. But in Africa change means more than acceleration. Europe's commerce and its money-measurements really have brought the African into a new world. . . . He retains something of his old social and religious and mental life and habit - these things are very slow in dying - but they are distinct from his new economic life and habit [14]

Nor is this literature confined to Africa. The problems and strains of rapid advance are a major theme of J. S. Furnivall's Colonial Policy and Practice, which deals extensively with experience of Burma:

The dissolution of the political structure is only the first stage in social dissolution, and it is completed by the second, or economic stage, breaking up the village into individuals. In this process two factors are operative: economic forces are released; and the checks controlling their action are relaxed. . . . In such circumstances there remains no embodiment of social will or representative of public welfare to control the economic forces which the impact of the west releases [15].

These writers were not simple sentimentalists deploring the passing of the good old days; they recognised the very rapid changes taking place and noted the problems which were thus created.


8 Appeal of the Vicious Circle

Our discussion of the thesis of the vicious circle of poverty has progressed from a description of the thesis, to examination and refutation based on empirical evidence and analytical reasoning; in technical language the discussion has been positive. I would now like to turn to more speculative issues and consider how a notion so crude as that of the vicious circle of poverty and stagnation have come to be widely accepted. The explanation seems to lie, in its congruity with certain intellectual fashions and method of approach, and also in its effectiveness in forwarding certain political aims, especially the promotion of intergovernmental foreign aid and of the establishment in underdeveloped countries of economies closely controlled by the state.

The thesis has been a major factor in building up a picture of the underdeveloped world as a substantially homogeneous and stagnant mass, sharply distinct from the developed world. However, the underdeveloped world is a vast aggregate of different peoples, societies and countries, with widely different faculties, attitudes, modes and conditions of living, as well as widely different densities of population, levels of income and rates of growth of population and income. It includes areas in which progress has been relatively slow, such as parts of Central America, Africa, India and Pakistan; and countries which have advanced very rapidly, such as Colombia, Venezuela, Malaya and Hong Kong; very densely populated regions such as Java and much of India and Pakistan; and the sparsely populated areas of Sumatra, Borneo, and most of Africa and Latin America. It includes traditional and highly stratified societies such as those of India and Pakistan and the Moslem middle east, and the much more fluid societies of south-east Asia and Latin America. It includes the semi-deserts of the middle east and the tropical jungles of Africa, Asia and Latin America; the thriving modem cities of south-east Asia, the tribal communities of Africa, and the millions of aborigines in Asia, Africa and Latin America [16].

Many participants in discussions on economic development find it uncongenial to recognise this diversity, to note that the situation is complex, and that certain lines of distinction, especially that between developed and underdeveloped countries, are arbitrary and indeed impermanent. These participants have a predilection for the clear distinctions and high degree of simplification which rightly characterise the methods of natural sciences and which are at times also useful in certain branches of social study. Even severe abstraction is a valuable or even indispensable scientific device when it isolates principal variables or aspects of the phenomena or processes under review. However, in the economics of poor countries this procedure has often obscured rather than clarified major issues.

In economic discussion on underdeveloped countries, the predilection for sharp distinctions and for a high degree of abstraction has been further encouraged by the practice of negative definition, of treating the underdeveloped world as a residual, that is as the whole world outside North America, western Europe, Australasia and Japan. Special care and discrimination need to be exercised in discussions of residual concepts and categories derived from negative definition, especially in view of the political potentialities often set up by arbitrary and shifting classification [17].
But the practice of negative definition itself has an appeal, since it conduces to a neglect of close examination of situations. It also makes more plausible the view of the underdeveloped world as a uniform and stagnant mass, which in turn promotes the acceptance of the vicious circle.

The intellectual attraction of the vicious circle is reinforced by certain political attractions; and the two sets of influences mutually reinforce each other. Insistence on the vicious circle of poverty and on the stagnation of the underdeveloped world has promoted the flow of foreign aid, which is a major object of policy for many people, both for its own sake as a supposed instrument for promoting the development of poor countries, and also as an instrument for the extension of progressive taxation from the national to the international level. The suggestion noted previously, that the operation of the vicious circle of poverty prevents a voluntary reduction in consumption and thus supposedly justifies compulsion, is a specific instance of the political basis of the thesis of the vicious circle.

Conscious or subconscious political motivations may also have played a part in the emergence and acceptance of the idea of the adverse international demonstration effect (a subspecies of the vicious circle of poverty). The notion is paradoxical that contacts which widen the consumption and production opportunities of people should damage their material position and prospects. It is a notion which conflicts with simple observation and elementary economic analysis. On the other hand, suggestions of western and especially American responsibility for the poverty of underdeveloped countries often serve to promote or reinforce feelings of guilt in the west, which in turn serves to further various political objectives, especially the flow of foreign aid.

Again, the notion that the advanced sectors in underdeveloped economies are foreign enclaves has proved acceptable because it appears to rescue the untenable thesis of the vicious circle of poverty and also because it vaguely confirms the unfounded but politically effective idea of external responsibility for the poverty of the underdeveloped world.

It seems especially paradoxical that the notion of the vicious circle should have been championed most widely and uncritically in countries with a Protestant culture, that is a culture which values self-achievement and is generally opposed to charity in the form of giving something for nothing. On the other hand, the Protestant culture seems more vulnerable to feeling of guilt, and this as we have seen has played its part in the arguments in favour of foreign aid.

Finally, the notion of the vicious circle is attractive and useful to those numerically small but effective groups and persons, whose influence we noted in the introduction, who are opposed to major institutions of western society and who envisage the underdeveloped countries as instruments in the promotion of their beliefs and policies. The usefulness of the underdeveloped countries for these purposes depends largely on their assumed homogeneity and on the assumed uniformity of their interests in opposition to the west. Their usefulness would be greatly reduced, and might disappear altogether, if the wide differences in conditions, conduct, mores and abilities, and the bitter conflicts within the underdeveloped world, were recognised or admitted. Hence the suggestion of the basic uniformity of the underdeveloped world. It is a suggestion which is so widely at variance with the truth that it could not possibly have gained any credence if it were not for a widespread predisposition among both the promoters of this suggestion and the population at large to believe that the people of the world outside the highly industrialised nations are all much of a muchness.




[1] Paul A. Samuelson, Economics: An Introductory Analysis (2nd edition), New York, 1951, p. 49.

[2] Study submitted by the Center for International Studies of the Massachusetts Institute of Technology to the State Committee investigating the operation of Foreign Aid, Washington, 1957, p. 37.

[3] Ragnar Nurkse, Problems of Capital Formation in Underdeveloped Countries, Oxford, 1953, p. 4 et seq.

[4] United Nations, Department of Economic and Social Affairs, Analyses and Projections of Economic Development. I: An Introduction to the Technique of Programming, New York, 1955, p. 10.

[5] United Nations, Department of Economic and Social Affairs, Economic Survey of Latin America 1955, New York, 1956, p. 3.

[6] The statistics of national income per head in this paragraph are calculated from the figures of the gross domestic product presented in the United Nations' Year Book of National Accounts Statistics 1963, New York, 1964, pp. 85 and 107; and from the population figures in the United Nations' Monthly Bulletin of Statistics, vol. XVIII, New York, December 1964. More up-to-date figures are, of course, available since this essay was written, but they do not affect the argument.

[7] The external trade of Malaya and Singapore in 1963 is derived from data in the official Monthly Statistical Bulletin of the States of Malaya, Kuala Lumpur, October 1964, and from the Singapore Monthly Digest of Statistics, vol. III, October 1964.

[8] In this book we refer to this territory as Gold Coast, Ghana, or Gold Coast-Ghana, according to the period covered by the context.

[9] Details will be found in R. B. Szereszewski, Structural Changes in the Economy of Ghana 1891-1911, London, 1966; and in P. T. Bauer, West African Trade, Cambridge, 1954.

[10] Nurkse, Problems of Capital Formation in Underdeveloped Countries, Oxford, 1953, pp. 61-2, 70.

[11] The applicability of Adam Smith's concept of the vent for surplus to the expansion of export crops in underdeveloped countries is noted in H. Myint, ‘The "Classical Theory" of International Trade and the Underdeveloped Countries', Economic Journal, June 1958.

[12] Some of the factors behind the expansion of the production of cash crops in under-developed countries are examined in H. Myint, The Economics of the Developing Countries, London, 1964, and in ‘The "Classical Theory" of International Trade and the Underdeveloped Countries', Economic Journal, June 1958.

[13] A.McPhee, The Economic Revolution in British West Africa, London, 1926, p. 8.

[14] W.K.Hancock, Survey of British Commonwealth Affairs, vol. II: Problems of Economic Policy 1918-1939, part 2, London, 1942, p. 283.

[15] J. S. Furnivall, Colonial Policy and Practice, A Comparative Study of Burma and Netherlands India, Cambridge, 1948, pp. 297 and 298.

[16] Of course diversity in itself does not preclude the establishment of valid generalisations; indeed the recognition of uniformities underlying surface diversities is a principal task of scientific activity. Underdeveloped economies do indeed exhibit certain common features which justify limited generalisations for certain purposes, such as the comparative importance of subsistence production, or wide inter- and intra-seasonal price fluctuations in local markets, or a large proportion of children in the population. However, for many other purposes, including discussions on the background of policy and the framing of policy, it is essential to remember their deep-seated heterogeneity.

[17] A penetrating discussion of some of the motives and implications of negative definition will be found in Kenneth Minogue, The Liberal Mind, London, 1963, chapter 4. We shall note in several places the significance, potentialities and dangers of classification, and of distinctions which are apparently clear but are in fact arbitrary.


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