Nelson’s Theory of Low Level Equilibrium: Trapping, Equations and Explanation!
The theory of Low Level Equilibrium Trap has been developed by R.R. Nelson for underdeveloped countries. It states that when per capita income increases above the minimum specific level, population tends to increase.
But when the growth rate reaches an upper physical limit as the per capita income increases, the growth starts declining.
To put in the words of 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 this stable equilibrium level of per capita income, both rate of investment and saving are low.
If the per capita income is increased above the specific level through saving and investment, it increases a growth in population. The increase in population growth as a result pushes down per capita income to its stable level of equilibrium. Thus, the economy is caught in a low level equilibrium trap. To come from this trap, the rate of increase of growth of income must be higher than the rate of increase in population.
Conditions for Trapping:
There are certain conditions conducive to trapping as detailed below:
1. A high correlation between the level of per capita income and rate of population growth;
2. A low propensity to direct additional per capita income to increase per capita investment;
3. Scarcity of uncultivated arable land;
4. Inefficient production methods;
5. Cultural inertia and economic inertia.
Nelson uses a model with following three equations:
1. Income Determination Equation:
The income depends upon capital stock, size of population and the level of technique. Capital consists of produced goods and arable land used in production process. Economies caught in low level equilibrium trap are often marked by considerable stock i.e. the existing inputs are not producing the maximum amount of output.
2. Population Growth:
Low per capita income can bring temporary changes in the rate of population growth and this change is brought by change in death rate. The change in death rate is caused by the change in the level of per capita income. But when the per capita income reaches to a specific level, it has no effect on the death rate.
3. Net Capital Formation:
Net investment consists of capital created out of savings. Capital can be created out of current income at an alternative cost of consumption and if that is unused land then capital may be increased by putting this land to cultivation. The rate at which the additional units of land are cultivated is positively related to increase in population.
With these three relationships, it is easy to verify that an underdeveloped economy is caught in a low level trap.
Its explanation is as under:
In fig. (1) (a), per capita income y/p is expressed on X- axis and rate of growth in population on Y-axis. In this figure, the point S is the minimum specific level of per capita income, where the level of per capita income is equal to the growth curve of population. The population towards left of this point starts decreases above the certain minimum specific level, the population increasing till it reaches its ‘upper physical limit’.
For sometime, population will grow with the increase in real income i.e. from A to A’. The growth of population will continue up to the point of A’ and after this, it starts declining. This decrease is due to rise in per capita income level and at this stage, people become conscious about their living standard and try to adopt small family. Therefore, the curve pp represents the population growth path at different levels of per capita income.
In fig. 1 (b), level of per capita income is taken on X-axis and growth of per capita investment is taken on Y-axis. In the diagram, X denotes the level of income with zero saving i.e. all income is spent on consumption. There is negative investment towards the left of X because savings are negative. The per capita income rises above the zero saving level as it moves towards right of X. As a result, investment curve ‘I’ rises and it has no upper physical limit.
In fig. 1 (c), level of per capita income is represented along X-axis and rate of growth of population and total income along Y-axis. For simplicity, it is assumed that minimum specific level of per capita income S is the same as the zero saving level of per capita income. The point S in this diagram represents the point of the low level equilibrium trap. It shows that the inter-section of population growth curve PP’ and the
income growth curve YY’ occurs at the zero rate of growth. This exhibits that the growth rate of income equals the growth rate of population.
In low level equilibrium trap, any small increase in per capita income is not able to sustain itself or lead to further increase in per capita income. In fig. 1 (c), at point L, the rate of growth of population is higher than the rate of growth in the total income. Consequently, per capita income will fall to previous low equilibrium level OS, which is the point of stable equilibrium. All this happens towards left of M because here the growth in population is greater than rate of growth in total income.
Thus, the economy will be caught in the low level equilibrium. According to Prof. Nelson, this low level equilibrium trap will be stronger more quickly, the rate of population growth responds to a given rise in per capita income and more slowly the rate of growth in total income responds to an increase in investment. It is only possible when the level of per capita income is increased by a discontinuous jump beyond the level of per capita income i.e. more than SM.
In short, a country can hope to come out of low level equilibrium trap because the rate of growth of total incomes exceeds the rate of growth of population. Again, beyond point ‘R’, further action is required by the active role of Government to raise the level of income above the growth of population. For instance, if BM is taken as 3%, then Nelson says that if a country has to break the shackles of low equilibrium trap, its rate of growth must be higher than 3% per annum.
Factors Escaping Low Level Equilibrium Trap:
The following factors are suggested to escape from the low level equilibrium trap:
1. There should be favourable socio political environment in the country.
2. Capital and income should be enhanced by obtaining funds from abroad/international institutions.
3. Improved techniques should be used to utilize existing resources.
4. The requisite methods should be adopted to change distribution of income.
5. Social structure can be changed by laying stress on thrift and entrepreneurship so that there must be ample opportunities, incentives to limit the size of family.
6. Solid investment programme should be introduced by the Government.
7. Efforts should be made to increase production with modern and latest techniques of production.
To conclude the discussion, if the growth rate of income is increased more than growth rate of population, then only low level of equilibrium trap can be escaped. Once this is achieved above a certain per capita income level, the continuous growth process will take place without any further government action until a high level of per capita income is attained.