Low Level Equilibrium Trap
Notion of low-level equilibrium
Two main inter-related reasons why rapid population growth may be regarded as retarding influence on
development are:
i) Rapid Population growth may not permit a sufficiently large rise in per capita income to provide the
savings necessary for the required amount of capital formation for growth.
ii) If population growth out strips the capacity of industry to absorb new labour, either urban
unemployment will develop or rural underemployment will be exaggerated depressing productivity in
agricultural sector.
The models of low-level equilibrium trap attempt to integrate population and development theory by recognizing
the inter-dependence between population growth, per capita income and national income growth. This type of
model which originated in 1950s first demonstrated the difficulties that the developing nation may face in
achieving a self-sustaining rise in their standard of living. Once such model is developed by Nelson in 1956 which
we have discussed below.
Capital Formation
Capital formation takes place through savings. It is assumed that all savings are invested. The rate of savings per
capita is related to income per capita/output per capita in the model by the following equation,
𝑑𝐾 𝑂
=𝑃 −𝑋
𝑃 𝑃
= −𝐶
Where; >
P = population
If per capita income is so low upto the level then there is disinvestment (there will be dissaving) assumed to
be at a constant rate C. beyond the rate of savings per capita rises linearly with per capita income.
Population growth
With a rise in per capita income the population growth is first assumed to be increased due to the falling
death rate. Then at a critical level of per capita income ”, population growth reaches its maximum *.
Since Nelson’s model is short run the effect of per capita income on birth rate in ignored.
The relationship can be explained in terms of the following equations:
=𝑃 −𝑆 where; < "
= * Where; ≥ "
In this case S is the subsistence level in per capita income. Below S, is -ve since death rate will exceed birth
rate.
Fig. 2 shows the relationship
between the growth of
population and level of per
capita income . S = X,
represents the subsistence
level of per capita income at
which population growth is 0
and output growth is also 0
because at subsistence level
there is no saving and
investment.
Population growth rises with
per capita income and then
levels off at a biological
maximum. Output growth
rises with per capita income
because the savings ratio also rises with per capita income, but then levels off (even declines). Output growth
eventually falls as capital labour ratio falls. If the output growth curve cuts the population growth curve from
above at point S = X,
It can be seen that any increase in per capita income above the subsistence level upto a point -a will lead to
population growth in excess of output growth pushing income per capita back to the subsistence level.
Conversely, any per capita income level beyond ‘a’ will mean a substantial rise in per capita income until the two
curves cut again at ‘q’. This would be a new stable equilibrium with output growth curve again cutting the
population growth curve from above.
To escape from the low level eqm trap, per capita income must be raised to ‘a’ through a massive investment
programme. If the countries are in a trap situation much greater hope lies in the curve drifting upwards over
time through technological progress or in the sudden drop in the curve from the reduction in birth rate.
Leibenstein’s Approach
Prof. Leibenstein says that poor economy can come out of the low eqm income if an investment of critical
minimum is made. The main objective of critical minimum effort thesis is to determine minimum amount of
investment which is required to pull the economy from the low income eqm level.
Fig. 3 illustrates Leibenstein’s
approach. The curve
representing income
depressing forces ‘zt’ is
measured horizontally from
the 45. Line and the curve
representing income raising
forces ‘xt’ is measured
vertically from the 45. Line. Per
capita income level ‘a’ is the
point of stable eqm. between
‘a’ and ‘q’ income depressing
forces are greater than income
raising forces and per capita
income will slip back to ‘a’.
Suppose OT is an income level
higher than Oa but less than
Oq. Income increasing forces
are given by na’ and income depressing forces by fb. Now na’ = fa’ because vertical distance = horizontal distance
from 45. Line but fb> fa’ => fb > na’ i.e., magnitude of income depressing force greater than income increasing
force such that per capita income will decline by a’b the economy will come back to subsistence level of income
Oa. Only beyond q are the income raising forces greater than income depressing forces such that sustained
increase in per capita income become possible. ‘q’ is the critical per capita income level necessary to escape from
the low level eqm trap.
Critical Minimum Effort
CME thesis refers to the effort needed normally measured by investment requirements to rise PCI to that level
beyond which the further growth of PCI will not be associated with income depressing forces exceeding income
rising forces. While it is important to recognize the interdependence between population growth, PCI and income
growth models of low level eqm trap, tend to be unduly pessimistic and restrictive in the assumption. Faster fall in
the birth rate compare to the death rate, technological progress and irreversible additions to the capital stock
shift the income growth curve upwards overtime so that the level of PCI representing stable eqm is continuously
rising over time.
Consider a small rise in PCI level from X (subsistence level) to X1. The increase in PCI will be accompanied by
permanent change in the quality of capital stock, skills and so on such that PCI will not fall back to X but to some
higher level say X2. Income growth in the range of PCI X to X2 is permanently higher. If X2 becomes the new stable
eqm and the sequence of events are repeated, PCI will reach ‘a’. No critical minimum effort will be needed. With
continuous productivity growth, due to all firms TP countries might take off.
