Definition and Explanation:
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 Trap:
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 increase investment.
(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 cultivation.
(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 part (1) 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 part (2) 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 part (3) 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 from Trap:
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 country.
(ii) Social structure be changed by greater emphasis on theft and entrepreneurship.
(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 foreign countries.
(vii) Improved techniques of production be used to utilize the existing resources.