Vicious Circles and Virtuous Circles (Part 3)
Most of the vicious circles occur in reality because of the fact that the assumptions on which they are based are truly real. But when we talk of the virtuous circle, their assumptions are never true in the sense that they do not occur in real life.
• Vicious Circle of Hyperinflation
Hyperinflation is a spiral of inflation which causes even higher inflation. The initial exogenous event might be a sudden large increase in international interest rates or a massive increase in government debt due to excessive spending. Whatever the cause, the government could pay down some of its debt by printing more money (called monetizing the debt). This increase in the money supply could increase the level of inflation. In an inflationary environment, people tend to spend their money quickly because they expect its value to decrease further in the future. They convert their financial assets into physical assets while their money still has some purchasing power. Often they will purchase on credit. Because of this, the level of savings in the country is very low and the government could have problems refinancing its debt. Its solution could be to print still more money starting another iteration of the vicious cycle.
There is no dearth of such examples. We must also remember that most of the vicious circles occur in reality because of the fact that the assumptions on which they are based are truly real. But when we talk of the virtuous circle, their assumptions are never true in the sense that they do not occur in real life.
There is no dearth of such examples. We must also remember that most of the vicious circles occur in reality because of the fact that the assumptions on which they are based are truly real. But when we talk of the virtuous circle, their assumptions are never true in the sense that they do not occur in real life.
Let us now look at some of the examples of virtuous circles:
• Virtuous Circle of Fiscal Deficit
If fiscal deficit is controlled in a way that it does not cross the borderline, the rate of economic growth gets accelerated; and once the rate of growth becomes more, fiscal deficit becomes less. But, this is not a reality, because, fiscal deficit is always more than what it should be. Hence this virtuous circle seldom occurs.
If fiscal deficit is controlled in a way that it does not cross the borderline, the rate of economic growth gets accelerated; and once the rate of growth becomes more, fiscal deficit becomes less. But, this is not a reality, because, fiscal deficit is always more than what it should be. Hence this virtuous circle seldom occurs.
• Virtuous Circle of “Macro-to-Micro Strategy”
If the rate of economic growth is high, it would a) lead to high employment, b) reduce the level of Gini’s coefficient and thus reduce inequalities of income, and c) reduce the number of people below the poverty line. This is called the “macro-to-micro” strategy. In other words, higher is the rate of economic growth, better will be its distribution, and better is the distribution scenario, higher will be the rate of economic growth. But this is not a reality because of a number of non-friendly barriers that obstruct the trickle-down or percolation effect of economic growth. This is also called the virtuous circle of economic growth, where economic growth might start with an exogenous factor like technological innovation.
If the rate of economic growth is high, it would a) lead to high employment, b) reduce the level of Gini’s coefficient and thus reduce inequalities of income, and c) reduce the number of people below the poverty line. This is called the “macro-to-micro” strategy. In other words, higher is the rate of economic growth, better will be its distribution, and better is the distribution scenario, higher will be the rate of economic growth. But this is not a reality because of a number of non-friendly barriers that obstruct the trickle-down or percolation effect of economic growth. This is also called the virtuous circle of economic growth, where economic growth might start with an exogenous factor like technological innovation.
As people get familiar with the new technology, there could be learning curve effects and economies of scale. This could lead to reduced costs and improved production efficiencies. In a competitive market structure, this will probably result in lower average prices. As prices decrease, consumption could increase and aggregate output also. Increased levels of output lead to more learning and scale effects and a new cycle starts. However, pollution, natural resource depletion and other externalities associated with uncontrolled economic growth can turn the virtuous cycle into a vicious cycle.
Virtuous Circle of “Micro-to-Macro Strategy”
The initial impulse for this kind of virtuous circle come from micro-scale development through area-specific or people-specific schemes in order to improve the employment level, income disparities, and poverty levels. Once all this is done effectively, it pushes economic growth which, in turn, further improves the equity indices.
The initial impulse for this kind of virtuous circle come from micro-scale development through area-specific or people-specific schemes in order to improve the employment level, income disparities, and poverty levels. Once all this is done effectively, it pushes economic growth which, in turn, further improves the equity indices.
• Virtuous Circle of Management
An investment in the employees’ ability to provide superior service to customers can lead to a virtuous circle through effort spent in selecting and training employees and creating a corporate culture in which they are empowered can lead to increased employee satisfaction and employee competence. This will probably result in superior service delivery and customer satisfaction. This in turn will create customer loyalty, improved sales levels, and higher profit margins. Some of these profits can be reinvested in employee development thereby initiating another iteration of a virtuous cycle. This circle is shown below:
An investment in the employees’ ability to provide superior service to customers can lead to a virtuous circle through effort spent in selecting and training employees and creating a corporate culture in which they are empowered can lead to increased employee satisfaction and employee competence. This will probably result in superior service delivery and customer satisfaction. This in turn will create customer loyalty, improved sales levels, and higher profit margins. Some of these profits can be reinvested in employee development thereby initiating another iteration of a virtuous cycle. This circle is shown below:
Concluding this paper, I would like to say that it is enormously difficult to eliminate the vicious circles and it is also difficult to make virtuous circles functional. Hence, there is always a dilemma faced by the developing countries in respect of these circles.
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