Harvey Leibenstein is of the view that UDCs are characterized by
circle of poverty (VCP) which keeps them around a low income per capita
equilibrium state. The way out of this impasse is a certain 'Critical minimum
effort' which would raise the per capita to a level at which sustained
development could be maintained. In other words, a UDC will have to introduce
'Stimulus' in an amount which should be more than a critical level for the sake
Leibenstein says that every economy is subject to
'Shocks and Stimulants'. A shock has the impact of reducing the per
capita income initially; while a stimulant tends to increase it.
Certain countries are poor and
backward because of the reason that the magnitude of stimulant is small while
that of shocks is large. On the other hand, if income raising forces are more
than income depressing forces the economy will be having critical minimum effort
which will take the economy on the path of development.
According to Leibenstein, if the income increasing forces expand at a higher
rate than the income depressing forces, then the favorable conditions for
economic development will be existing. In the process of development such
conditions are created by the expansion of 'Growth Agents'.
These growth agents
comprise of entrepreneurs, investors, savers and the innovators. The growth
contributing activities result in creation of entrepreneurship, the increase in
stock of knowledge, the expansion of production skills of people and increase in
the rate of savings and investment.
Leibenstein introduces two types of incentives for UDCs:
(i) Those incentives which do not increase national income, but they bring a
change in the distribution of income. He calls them "Zero-Sum incentives".
(ii) Those incentives which result in expansion of national income. He calls
them "Positive Sum incentives".
The entrepreneurs in UDCs are engaged in zero sum activities. They wish to
attain monopolies; political influence; and social prestige. Thus as a result of
zero sum activities the real national incomes of UDCs do not increase. They just
cause a change in the distribution of income. The positive sum activities which
are essential for development have limited scope in UDCs. Therefore, according
to Leibenstein, there is a need to direct the zero sum activities of the
entrepreneurs of UDCs to the positive sum activities. It is, therefore,
necessary that 'minimum effort' should be sufficiently large to create an
environment whereby the positive sum activities could flourish.
The following factors are responsible for depressing per capita income in UDCs:
(i) Zero sum entrepreneurial activities.
(ii) Conservative activities of organized and unorganized labor.
(iii) The resistance to new knowledge and ideas and attachment to old ideas.
(iv) Increase in consumption, and unproductive use of those resources which
could be used for capital accumulation.
(v) Increase in population.
(vi) The high capital-output ratio.
To overcome these influences which keep an economy in backwardness a
sufficiently large critical minimum effort is required to sustain a rapid rate
of economic growth. In this way, on the one side the zero sum activities could
be overcome, and positive sum activities could flourish. As a result of critical
minimum effort, the per capita income would rise leading to increase the level
of savings and investment. They will in a turn would lead to:
(i) An expansion
of growth agents. (ii) The capital-output ratio will come down. (iii) The income
depressing forces will get weaken. (iv) Such a social environment will be created
which will promote social and economic mobility. (v) The secondary and tertiary
sectors will expand and specialization will be encouraged. (vi) An
atmosphere will be created where there will be social and economic change
leading to decrease the population.
Now we use Fig. 1 to represent the role of income generating and income
The 45° line shows, the induced
increase and decrease in the per capital income. While X1 X1
curve shows income generating forces and Z1 Z1 curve
represents income depressing forces.
If due to 'Stimulants' the per capita income increases from
Oe to Om, the per
capita income will increase up to na. But here the income depressing forces 'fb'
are greater than income generating forces 'fa'. As a result, the economy will
follow the downward path 'abcd'.
In this way, the economy reaches point
'E'. Therefore, if the economy is to be put on the path of development the per
capita income will have to be increased till Ok by increasing investment. As a
result, the income will increase till SG which will in turn generate the path of
endless expansion of per capita income as shown by arrow movement rising above
G. That package of investment which leads to increase per capita income even
after point 'G' is given the name of "Critical Minimum Effort by Leibenstein".
The critical minimum effort need not to be made all at once. It would be more
effective if it is broken up into a series of smaller efforts.
Leibenstein's thesis is based upon this empirical evidence that the rate of
population growth is a function of level of per capita income. At the
subsistence level population
growth declines. According to Leibenstein, at biological determined maximum growth
rate of population, the equilibrium level of income, fertility mortality rates maximum consistent survival population.
If the per capita income is increased above the subsistence equilibrium
position, the mortality rate falls without any drop in fertility rate. As a
result, the population will grow. But it will happen only up to a point. Beyond
that the increase in per capita income lowers the fertility rate and as
development gains momentum the rate of population growth declines. According to
Leibenstein, a biological determined maximum growth rate of population is in
between 3% to 4%. Now we use Fig. 2 to demonstrate it.
Here the curve N represents that
increase in per capita income which equalizes the increase in population to
increase in national income while the curve P shows the growth
rate of population at different levels of per capita. We start with point 'a'
where the economy is in equilibrium at subsistence level. Here neither income
nor population increases. If per capita is increased till Yb, the
population growth rate and increase in national income are of 1%. If the level
of per capita income is Yc, the growth of population is greater than growth
rate of national income. Ycg > Ycc or 2% > 1%.
Therefore, the need is to
increase per capita income in such a way that increase in national income is more than increase in population.
Therefore, if per capita income increases more than Ye, the population
growth starts declining. At point e, the population growth rate is 3% per annum which is the maximum possible
growth rate of population on biological grounds. Thus according to Leibenstein,
the Ye is the minimum critical level of per capita income which is necessary for economic growth.
(i) Population, Growth and Per Capita Income: It has been assumed that the
growth of the population is an increasing function of growth of per capita
income in the beginning. While later on, it is a decreasing function. But, it is
not so. Rather, the population growth takes place along with the increase in
public health facilities.
(ii) Decline in Birth Rate and Per Capita Income: It has been assumed that
whenever per capita income exceeds the critical minimum level the population
goes on to decline. All is based upon the experience of the West. But as far as UDCs are concerned the population of UDCs decreases due to change in outlook of
(iii) Role of State in Birth Control: No UDC can wait for this, that its per
capita income could increase and then its birth rate would fall down
automatically. Therefore, state will have to interfere with to check population
growth. This was ignored by Leibenstein.
(iv) Complex Relationship Between Per Capita Income
and Growth Rate: Prof. Myint says that there exists a complex relationship between per capita
income, growth rate and national income. Leibenstein has over simplified such
all, The relationship of per capita income with savings and investment is concerned with the
distribution of income and effectiveness of financial institutions. Moreover,
the capital-output ratio also does not remain same. It goes on to change
along with changes in techniques of production.
(v) Closed Economy Model:
Leibenstein theory does not show the effects of foreign capital on the
income, savings and investment of UDCs.