a. Vicious circles of poverty:
There are circular relationships known as the vicious circles of poverty that tend to perpetuate the low level of development in LDCS. Professor Nuakse explains the idea in these words: 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 a state of poverty. For example, a poor man may not have enough to eat, being underfed, his health may be weak, being physically weak, his working capacity is low, which means that he is poor, which in turn, means that he will not have enough to eat and so on. A situation of this sort relating to a country as a whole can be summed up in the trite proposition: “A country is poor because it is poor.”
b. Low Rate of Capital Formation:
The most pertinent obstacle to economic development is the shortage of capital. This stems from the vicious circle of poverty analysed above. In an underdeveloped country, the masses are poverty-ridden. They are mostly illiterate and unskilled, use outmoded capital equipment and methods of production. They practice subsistence farming, lack mobility and have little connection with the market sector of the economy. Their marginal productivity is extremely low. Low productivity leads to low real income, low savings, low investment and to low rate of capital formation. The consumption level is already so low that it is difficult to restrict it further to increase the capital stock.
That is why millions of farmers in LDCS use outmoded and obsolete capital equipment. Such small sums as they may be able to save are often hoarded in the form of currency or used in purchasing gold and jewellery, etc. The inclination to hoard money is due to the absence of banking facilities in rural areas. This explains the reason why there is little capital formation in LDCS.
It is the high income group that does most of the savings in LDCS. But these savings do not flow into productive channels. On the other hand, they are dissipated into real estate, gold, jewellery, commodity hoards and hoards of foreign or domestic currency, money lending and speculation.
Thus value – retaining objects and durable goods, dominate their expenditure patterns.
In addition, conspicuous consumption plays an important part in their consumption patterns. Consequently, they prefer an imported article for its prestige value to an equally good domestic article.