NELSON’S THEORY

R. R. Nelson1 developed the theory of Low-level Equilibrium Trap for underdeveloped countries.Like Leibenstein’s Critical Minimum Effort Thesis, Nelson’s theory is also based on theMalthusian hypothesis that with the increase in per capita income of a country above the‘minimum subsistence level,’ population tends to increase. Initially, population grows rapidlywith an increase in per capita income. But when the growth rate of population reaches “anupper physical limit,” it starts declining with further increase in per capita income.According to Nelson, “The malady of underdeveloped economies can be diagnosed as a stableequilibrium level of per capita income at or close to subsistence requirements.” At a stableequilibrium level of per capita income, the rate of saving and consequently the rate of netinvestment are at a low level. Efforts made to raise the rate of savings and investment throughan increase in the rate of growth of total national income are accompanied by a high rate ofpopulation growth which pushes back the per capita income to its stable equilibrium level.Thus underdeveloped economies are caught in a low-level equilibrium trap.Nelson mentions four social and technological conditions which are conducive to trapping.

1. R.R. Nelson, “A Theory of the Low-level Equilibrium Trap,” AER, December, 1956.

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They are:(i) A high correlation between the level of per capita income and the rate of population growth.(ii) A low propensity to direct additional per capita income to increasing per capita investment.(iii) Scarcity of uncultivable arable land.(iv) Inefficient methods of production.He also points towards two other factors, cultural inertia and economic inertia. It is culturalinertia that leads to economic inertia, and vice versa.A study of the economic development of underdeveloped countries reveals that most of themare caught in the low-level equilibrium trap due to presence of the above noted conditions.

SETS OF RELATIONS

Nelson uses three sets of relationships to show the trapping of an economy at a low level ofincome.First, income is a function of the capital stock, the level of technology, and the size of thepopulation.Second, net investment consists of capital created out of savings in the form of addition to thestock of tools and equipment in the industrialsector plus addition of new land to the amount ofland under cultivation.Third, “with low per capita incomes, short-runchanges in the rate of population growth arecaused by changes in the death rate, and changesin the death rate are caused by changes in the levelof per capita income. Yet once per capita incomereaches a level well above subsistencerequirements, further increase in per capita incomehave a negligible effect on the death rate.”Given these sets of relationships, the Nelson thesisis explained in Fig. 1 Panels (A), (B), (C). In Panel(A), y/p relates to the level of per capita incomewhich is measured on the horizontal axis, and dp/pis the percentage rate of growth of populationmeasured on the vertical axis. The point S’ on thehorizontal axis where the growth curve ofpopulation (dp/p) equals the level of per capitaincome, is the minimum subsistence level of percapita income. At this level, population isstationary. But to the left of S’, population isdecreasing. If we move above S’, along the growthcurve of population, the growth rate of population increases up to the “upper physical limit”U, with increase in the per capita income above the minimum subsistence level. For some time,the population will grow at this level with rise in per capita income and then it starts decliningfrom point M.In Panel (B), dk/p is the per capita rate of investment out of savings measured on the verticalaxis. The curve (dk/p) is the growth curve of investment which relates the per capita rate ofinvestment to different levels of per capita income. This curve intersects the horizontal axis at

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194 The Economics of Development and Planning

point X which is the level of zero saving. To the left of this point, there is negative investment.On the other hand, if we move above point X along the growth curve of investment, the percapita rate of investment will rise even beyond the upper physical limit of growth rate ofpopulation as denoted by point U in Panel (A).In Panel (C), as usual, the horizontal axis measures the level of per capita income. On the verticalaxis are measured the rate of population growth and the rate of growth in total income, is thegrowth curve of income, and is the growth curve of population at the various levels of percapita income. The point S is so drawn that it equals the zero saving level of income X and theminimum subsistence level of per capita income S’ so that S=X=S’. S is the point of the low-levelequilibrium trap, of the zero growth rate where the growth rate of income (dy/y) equals thegrowth rate of population (dp/p) on the horizontal axis. For any increase in per capita incomebeyond S, the growth rate of population is higher than the growth rate of income, so that theeconomy is pushed back to S, the point of stable equilibrium. Thus, the economy is caught inthe low-level equilibrium trap. “This low-level equilibrium trap will be stronger the more quicklythe rate of population growth responds to a given rise in per capita income and the more slowlythe rate of growth in total income responds to an increase in investment.” To get out of this“trap” the economy requires “a discontinuous jump” beyond the per capita income level (y/p)’so as to reach the new point of unstable equilibrium L. Beyond this point, income grows at ahigher rate than the growth rate of population which is stable at the upper physical limit. Thusthe rise in per capita income is cumulative beyond level till the economy reaches level, wherethe growth rate of income equals the growth rate of population at a new stable equilibriumpoint N. Again, beyond point N, further government action is required to raise the growth rateof income above the growth rate of population.

FACTORS THAT AVOID TRAP

Nelson points towards a number of factors to escape the low-level equilibrium trap.First, there should be a favourable socio-political environment in the country.Second, the social structure should be changed by laying greater emphasis on thrift andentrepreneurship. Greater incentives should be provided to produce more, and incentives shouldalso be provided to limit the size of the family.Third, measures should be adopted to change the distribution of income, at the same timeenabling accumulation of wealth by investors.Fourth, there should be an all-pervading government investment programme.Fifth, income and capital should be increased by obtaining funds from abroad.Sixth , improved production techniques should be used to utilise existing resources more fullyso that income is increased from given inputs.To escape the low-level equilibrium trap in underdeveloped countries requires the simultaneousadoption of all these measures so that the growth rate of income is increased more than thegrowth rate of population. Once this is a achieved above a certain minimum per capita incomelevel, sustained growth will take place without further government action until a high level ofper capita income is reached.2

2. For criticism of the theory, refer to Leibenstein’s thesis, except point 4.