Nelson has presented the theory of low level equilibrium trap for the UDCs.
This theory is based upon 'Malthus' view that when per capita income of a
country rises above the 'Minimum Subsistence Wage', the population will tend to
increase. Initially population grows rapidly with increase in per capita. But
when the growth rate of population reaches an upper physical level, it starts
declining with further increase in per capita.
In other words, in the beginning the
increase in per capita income leads to increase the population. Afterwards, the
increase in the per capita income leads to decrease population.
According to Nelson, the UDCs have a stable equilibrium of per capita income
which is close to subsistence requirements. Hence, the savings and investment
remain at very low level. Thus whenever, the efforts are made to raise the level
of NI, savings and investment they also resulted in increase of the population.
Accordingly, the per capita income remained at its stable equilibrium level. All
this means that UDCs are caught in low level equilibrium trap.
Factors of Nelson's
According to Nelson following factors
are responsible for such trap:
(i) There is a high correlation between the level of per capita income and
rate of population growth.
(ii) There is a little propensity to direct additional per capita income to
(iii) There exists a shortage and scarcity of uncultivable area of land.
(iv) The economy is having inefficient techniques of production.
(v) The economy is furnished with social and economic inertia.
Nelson presents three sets of
relationships to show the trapping of an economy at a low level of income:
(i) Y = f (K, L, Tech.).
(ii) The new investment consists of capital which is created out of savings in
the form of additions to the stocks of machine tools etc. in the
industrial sector plus the additions of new lands to the amount of land under
(iii) With low per capita incomes, short run changes in the rate of population
growth are caused by changes in death rate; and the changes in death rate are
caused by changes in the level of per capita income. Whenever, the per capita
income reaches a level above the subsistence level, further increase in per
capita income will have a negligible effect on death rate.
Now we present Fig. 1 to demonstrate this theory.
In the (1) part of Fig. the dP/P curve represents percentage rate of growth of population, while the
Y/P curve represents per capita income. The
point J is minimum subsistence per capita income where dP/P = Y/P.
Here, the population is
stationary. But to left of J, the population is decreasing while to the right of J, the growth
rate of population increases to the upper physical limit, shown by 'U'.
This happened due to increase in per capita income above subsistence level as
shown by the arrow movement on the horizontal axis in the (1) part of Fig. For
some time the population will grow at this level with rise in per capita income
and then it will start falling at point M.
In (2) part of Fig., dK/P is
per capita rate of investment out of savings. The curve dK/P is the growth,
curve of investment which relates the per capita of investment to
different levels of per capita income. At point 'X', there are zero savings.
While to its left, there are negative savings. If we move above point 'X' along
the growth curve of investment, the per capita rate of investment will rise
beyond the upper physical limit of the growth rate of population as denoted by
'U' in (1) part of Fig. 1.
In (3) part of Fig., Y/P is again per
capita income. While dY/Y is rate of
growth of total income, and dP/P income, is growth curve of population at various levels of per
capita. The point 'S' is so drawn that it equals the zero savings level of income (point
X in (2) part) and minimum subsistence level of per capita income 'J'. So the
situation where J = X = S the low level equilibrium trap exists in the economy.
Here: dY/Y = dP/P. For any increase
in per capita income beyond point S, the growth rate of population is higher
than the growth rate of income, (dP/P > dY/Y). This will push the economy
back to point S, the point of stable
equilibrium. Thus the economy is caught in low level equilibrium trap. This
low level of trap will be stronger the 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 an increase in investment.
Methods to Escape
The economy requires a discontinuous jump beyond the per capita income level
of (Y/P1). Here, the national income grows at a higher rate than population growth which
is stable at an upper limit. Ultimately, the economy reaches (Y/P2) level where
growth rate of income equals the growth rate of population, as shown by point 'N' in (3) part of
Fig. Nelson says that, to escape this trap:
(i) There should be a favorable socio-economic political environment in the
(ii) Social structure be changed by greater emphasis on theft and
(iii) The size of the family by reduced.
(iv) Measures be taken to change the distribution of income.
(v) The proportion of public investment be increased.
(vi) In order to enhance capital and investment the loans be obtained from
(vii) Improved techniques of production be used to utilize the existing