Low Rate of Saving and investment
Another main reason of the poverty and underdevelopment of the under-developed countries is that the rate of saving and investment in these countries is very low. In these countries. only 5-8 per cent of the national income goes into savings. whereas the rate is 15-20 per cent and even more in the developed countries. When the rate of saving in a country is low. the rate of investment is bound to be low and the rate of capital formation is low too. Since capital per man is low. the productivity is also low. Productivity being low, the per capital income and the national income too arc low. It is truly said that the under-developed countries are caught up in a vicious circle of poverty which we shall discuss presently. This vicious circle of poverty is the greatest obstacle in the way of their economic development.
The vicious circle of poverty affects both demand side and supply side of capital formation. On the supply side. the saving capacity is low on account of poverty and low per capital income. Since the rate of saving is low. investment is low and the rate investment being low. capital formation is low which results in capital deficiency in the country and small capital per worker on account of which productivity is low which ends in low per ca pita income or poverty. On the demand side. since people are poor. demand for goods or the size of the market is small and since the size of the market is small. inducement to invest is low. Since investment is small. national output is small which means low national income and per ca pita income. ending in poverty.