CHAPTER

26
Nelsons Low-Lev Tr Nelsons Low-Level Equilibrium Trap
NELSONS THEORY
R. R. Nelson1 developed the theory of Low-level Equilibrium Trap for underdeveloped countries. Like Leibensteins Critical Minimum Effort Thesis, Nelsons theory is also based on the Malthusian hypothesis that with the increase in per capita income of a country above the minimum subsistence level, population tends to increase. Initially, population grows rapidly with an increase in per capita income. But when the growth rate of population reaches an upper 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 stable equilibrium level of per capita income at or close to subsistence requirements. At a stable equilibrium level of per capita income, the rate of saving and consequently the rate of net investment are at a low level. Efforts made to raise the rate of savings and investment through an increase in the rate of growth of total national income are accompanied by a high rate of population 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.

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 cultural inertia that leads to economic inertia, and vice versa. A study of the economic development of underdeveloped countries reveals that most of them are 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 of income. First, income is a function of the capital stock, the level of technology, and the size of the population. Second, net investment consists of capital created out of savings in the form of addition to the stock of tools and equipment in the industrial sector plus addition of new land to the amount of land under cultivation. (A) Third, with low per capita incomes, short-run U M changes in the rate of population growth are caused by changes in the death rate, and changes dp/p S O in the death rate are caused by changes in the level y/p of per capita income. Yet once per capita income dk/p reaches a level well above subsistence requirements, further increase in per capita income (B) have a negligible effect on the death rate. Given these sets of relationships, the Nelson thesis y/p O X is explained in Fig. 1 Panels (A), (B), (C). In Panel (A), y/p relates to the level of per capita income (C) which is measured on the horizontal axis, and dp/p L N is the percentage rate of growth of population dp/p measured on the vertical axis. The point S on the dy/y horizontal axis where the growth curve of O population (dp/p) equals the level of per capita (Y/P) (Y/P) S income, is the minimum subsistence level of per Per Capita Income Level capita income. At this level, population is Fig. 1 stationary. But to the left of S, population is decreasing. If we move above S, along the growth curve 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 declining from point M. In Panel (B), dk/p is the per capita rate of investment out of savings measured on the vertical axis. The curve (dk/p) is the growth curve of investment which relates the per capita rate of investment to different levels of per capita income. This curve intersects the horizontal axis at
Growth Rate of Population and Total Income Per Capita Rate of Investment Percentage Growth Rate of Population

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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 per capita rate of investment will rise even beyond the upper physical limit of growth rate of population 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 vertical axis are measured the rate of population growth and the rate of growth in total income, is the growth curve of income, and is the growth curve of population at the various levels of per capita income. The point S is so drawn that it equals the zero saving level of income X and the minimum subsistence level of per capita income S so that S=X=S. S is the point of the low-level equilibrium trap, of the zero growth rate where the growth rate of income (dy/y) equals the growth rate of population (dp/p) on the horizontal axis. For any increase in per capita income beyond S, the growth rate of population is higher than the growth rate of income, so that the economy is pushed back to S, the point of stable equilibrium. Thus, the economy is caught in the low-level equilibrium trap. This low-level equilibrium trap will be stronger the more quickly the rate of population growth responds to a given rise in per capita income and the more slowly the 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 a higher rate than the growth rate of population which is stable at the upper physical limit. Thus the rise in per capita income is cumulative beyond level till the economy reaches level, where the growth rate of income equals the growth rate of population at a new stable equilibrium point N. Again, beyond point N, further government action is required to raise the growth rate of 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 and entrepreneurship. Greater incentives should be provided to produce more, and incentives should also be provided to limit the size of the family. Third, measures should be adopted to change the distribution of income, at the same time enabling 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 fully so that income is increased from given inputs. To escape the low-level equilibrium trap in underdeveloped countries requires the simultaneous adoption of all these measures so that the growth rate of income is increased more than the growth rate of population. Once this is a achieved above a certain minimum per capita income level, sustained growth will take place without further government action until a high level of per capita income is reached.2

2. For criticism of the theory, refer to Leibensteins thesis, except point 4.