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LOW LEVEL
EQUILIBRIUM
TRAP & CRITICAL
MINIMUM
EFFORT THEORY
ESKEVI
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LOW LEVEL
EQUILIBRIUM
TRAP
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Introduction
The theory of Low Level Equilibrium Trap has
been developed by R.R. Nelson for
underdeveloped countries.
In his 1956 article “ A Theory of the Low Level
Equilibrium Trap “
.
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● Richard R. Nelson (May 4, 1930 –
January 28, 2025) was an
American professor of economics
at Columbia University.
● Evolutionary economist.
● He was also known for his work on
industry, economic growth, the
theory of the firm, and technical
change.
RICHARD R NELSON
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Theory
This theory is based upon 'Malthus' view that
when per capita income of a country rises above
the ‘Minimum Subsistence Wage', the population
will tend to increase.
Initially population grows rapidly with increase in
per capita. But when the growth rate of
population reaches an upper physical level, it
starts declining with further increase in per
capita.
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Theory
“The malady of underdeveloped
economies can be diagnosed as a stable
equilibrium level of per capita income at
or close to subsistence requirements.”
- Richard
Nelson
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increase in
savings &
investment
Population Growth
Per Capita Per Capita
Income Income
To come from this trap, the rate of increase of growth of income must be
higher than the rate of increase in population .
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Graph &
Equation
Nelson uses a model with
following three equations:
net capital formation
population growth
income growth.
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01 Capital Formation
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01 Capital Formation
Capital
formation
takes place
through saving
and new land
brought into
cultivation, i.e.
dk = dk' + dR,
where k is
capital, k' is
savings
created capital
and R is land.
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02 Population Growth
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02 Population Growth
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03 Income Growth
0 = Tf(K, L)
where
K is capital
L is labour (as a constant proportion of the
population)
T is an index of 'total' productivity.
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03 Income Growth
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Low Level
Equilibrium Trap
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How to avoid Trap ?
(i) There should be a favorable socio-economic political environment
in the country.
(ii) Social structure be changed by greater emphasis on theft and
entrepreneurship.
(iii) The size of the family by reduced.
(iv) Measures be taken to change the distribution of income.
(v) The proportion of public investment be increased.
(vi) In order to enhance capital and investment the loans be obtained
from foreign countries.
(vii) Improved techniques of production be used to utilize the existing
resources.
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Criticism
1. not easily possible as it is not possible to
establish a function between rate of
growth of per capita income and rate of
growth of population.
2. Illustrates a set of timeless functional
relationship rather than time series of
growth in income and population.
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This critical minimum effort or big push
theory provided us a clear idea of the
vicious circle of low per capita income.
The origin of big push theories of
development and the concept of a
critical minimum effort is the belief that,
to escape from Nelson’s trap, it will be
necessary to raise the per capita income
above OA in one go.
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CRITICAL
MINIMUM
EFFORT
THEORY
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Introduction
This model was outlined by Harvey Leibenstein in
his 1957 book ‘Economic Backwardness and
Economic Growth’.
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● Harvey Leibenstein (11 August
1922 – 28 February 1994) was an
Ukrainian-born American
economist
● One of his most important
contributions to economics was
the concept of X-inefficiency and
the critical minimum effort thesis
in development economics. .
HARVEY LEIBENSTEIN
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Introduction
According to Prof. Harvey Leibenstein the
overpopulated and underdeveloped countries are
characterized by the vicious circle of poverty.
They have low per capita income.
His ‘theory of critical minimum effort’ is an
attempt to provide a solution to this economic
problem. According to him, critical minimum
effort is necessary to achieve a steady economic
growth raising per capita income.
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Theory
“In order to achieve the transition from the state of
backwardness to the more developed state, where
we can expect steady secular growth, it is
necessary, though not always sufficient condition,
that at the same point or during the same period,
the economy should receive a stimulus to growth
that is necessary than a certain critical minimum
size.”
- Harvey Leibenstein
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● Economic growth in the underdeveloped and over
populated countries in not possible unless a
certain minimum level of investment is injected
into the system.
● This minimum level of investment is called
‘critical minimum effort’.
● According to Leibenstein, every economy is
under the influence of two forces—’shocks’ and
‘stimulants’
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Shock
● Shocks refer to those forces which reduce the
level of output, income, employment and
investment etc. shocks dampen and depress
the development forces.
● Stocks depress development forces which
reverse the wheel of development.
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Stimulants
● Stimulants refer to those forces which raise the
level of income, output, employment and
investment etc.
● In other words, Stimulants impress and
encourage development forces.
● They are called ‘Income Generating forces’
which lubricate the wheel of development.
● Stimulants have the capacity to raise per
capita income above equilibrium level.
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Attitudes,
Motivation and
the
Incentives
generation of stimulants
depends on : incentives given to
attitudes
them
motivation of the people
The main factors of economic development are :
entrepreneurs discoverers innovators
inventors accumulate accumulate skills and
and utilize spread knowledge
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Incentives
According to Leibenstein, there are two
types of incentives that are found in the
underdeveloped countries:
(i) Zero-sum Incentives.
(ii) Positive sum Incentives
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Zero Sum Incentives
● Zero effect on economic growth.
● The zero-sum incentives have distributive effect
only.
● In short, we may say that zerosum incentives
are not conducive for economic growth.
● It includes:
transference of
trading risk
income and profit
non trading or from one section of
speculative people to another.
activities
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Positive Sum Incentives
● Lead to economic growth and enhance the
national income.
● Activities are essential for economic
development.
● These are conducive for economic growth as
they change the attitudes, motivations and
aspirations of the people.
use of scientific
productive
discoveries
use of
investment exploration and innovation
technical exploitation of
know-how the new markets
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The following factors are responsible for
depressing per capita income in UDCs:
zero-sum
entrepreneurial Increase
activities in population.
conservative attitude
of both organized The high capital-
and unorganized output ratio.
workers.
The resistance to new Increase in
knowledge and ideas consumption, and
and attachment to old unproductive use of
ideas. those resources which
could be used for
capital accumulation
As a result of critical minimum effort, the per capita 32
income would rise leading to increase the level of
savings and investment.
An expansion of The capital-output
growth agents. ratio will come
down
a social environment will
The income
be created which will
depressing forces will
promote social and
get weaken.
economic mobility.
secondary & tertiary social and economic
sectors will expand and change leading to
specialization will be decrease the population.
encouraged
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Leibenstein
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Criticism
1. Population, Growth and Per Capita Income
2. Decline in Birth Rate and Per Capita
Income
3. Role of State in Birth Control
4. Complex Relationship Between Per Capita
Income and Growth Rate
5. Closed Economy Model
6. Neglects Time Element
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Reference
1. A.P Thirlwall, Growth and Development With
Special Reference to Developing Economies
2. Are Low-Level Equilibrium Trap and Dualistic
Theories Applicable to Indonesia? By :
Sukanto Reksohadiprodjo
3. A Theory of the Low-Level Equilibrium Trap in
Underdeveloped Economies Author(s):
Richard R. Nelson Source: The American
Economic Review, Vol. 46, No. 5 (Dec., 1956),
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