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Leibensteins Leibensteins Critical Minimum Effort Thesis Minimum Ef fort Thesis
LEIBENSTEINS THEORY 1
Harvey Leibenstein has developed the thesis that underdeveloped countries are characterized by the vicious circle of poverty that keeps them around a low per capita income equilibrium state. The way out of this impasse is a certain critical minimum effort which would raise the per capita income to a level at which sustained development could be maintained. In order to achieve the transition from the state of backwardness to the more developed state where we can expect steady secular growth, it is a necessity, though not always sufficient condition that at some point or during some period, the economy should receive a stimulus to growth that is greater than a certain critical minimum size. According to Leibenstein, every economy is subject to shocks and stimulants. A shock has the impact of reducing per capita income initially; while a stimulant tends to increase it. Certain countries are underdeveloped because the magnitude of the stimulants has been small and that of shocks large therein. It is only when the income-raising factors are stimulated much beyond the income-depressing factors that the critical minimum is reached and the economy would be on the path to development.
1. Harvey Leibenstein, Economic Backwardness and Economic GrowthStudies in the Theory of Economic Development, 1957.

Growth Agents. The rationale of the critical minimum effort thesis rests on the existence of certain favourable economic conditions so that the income-increasing forces expand at a rate higher than the income-depressing forces. In the development process such conditions are created by the expansion of the growth agents. They are the quantum of capacities residing in the members of the population to carry out growth contributing activities. The typical growth agents are the entrepreneur, the investor, the saver, and the innovator. The growth-contributing activities result in the creation of entrepreneurship, the increase in the stock of knowledge, the expansion of the productive skills of the people and the increase in the rate of saving and investment. Incentives. According to Leibenstein, whether or not the growth agents expand will depend on the anticipated outcome of such activities, the actual result and on the incentives for further expansion or contraction generated by the interaction of the anticipation, the activities and the results. The incentives are of two types: (i) the zero-sum incentives which do not raise national income but have only a distributive effort; (ii) the positive-sum, incentives that lead to expansion of national income. It is apparent that only the positive-sum type of activities lead to economic development. But conditions in underdeveloped countries are such that entrepreneurs are engaged in zerosum activities. They are the non-trading activities for securing a greater monopolistic position, political power and social prestige; the trading activities leading to a greater monopolistic position that do not add to aggregate resources; the speculative activities which do not utilize savings but do waste scarce entrepreneurial resources; and finally, such activities that do use up net savings, but the investments involved are in enterprises of such nature that their social value is either zero, or their social value is very much lower than their private value. Thus, the zero-sum activities are not real income creating activities but simple transfers of liquidity from some holders to others. On the other side, the positive-sum activities which are essential for economic development have a limited scope in stagnant underdeveloped economies. Even if some entrepreneurs undertake real investment projects in anticipation of profits, their positive-sum activities will degenerate and be directed towards zero-sum activities in the absence of net growth in the economy. It is, therefore, necessary that the minimum effort should be sufficiently large to create an environment congenial to the persistence of positive-sum incentives. But in underdeveloped economies there are certain influences averse to change that tend to depress per capita incomes. They are: (i) the zero-sum entrepreneurial activities directed towards the maintenance of existing economic privileges through the inhibition and curtailment of potentially expanding economic opportunities; (ii) the conservative activities of both organized and unorganized labour directed against change; (iii) the resistance to new knowledge and ideas, and the simultaneous attraction of classical knowledge and old ideas; (iv) increase in essentially non-productive conspicuous public or private consumption expenditures that use resources that could otherwise be used for capital accumulation; and (v) population growth and the consequent labour force growth that has the effect, other things being equal, of diluting the amount of capital available per worker, and (vi) a high capital-output ratio. To overcome these influences which keep the economy in a state of economic backwardness, a sufficiently large critical minimum effort is required to sustain a rapid rate of economic growth

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which should stimulate the positive-sum incentives and create forces for counteracting zerosum activities. As a result of the critical minimum effort, the per capita income would rise and tend to increase the level of saving and investment, which in turn, would lead to : (a) an expansion of the growth agents; (b) an increase in their contribution to per unit of capital as the capital-output ratio declines; (c) a decrease in the effectiveness of factors inhibiting growth; (d) the creation of social and environmental conditions that promote social and economic mobility; (e) increased specialization and expansion of secondary and teritiary sectors; and (f) the development of an atmosphere that leads to changes is more conducive to economic and social changes, and especially an environment that leads to eventual fertility decline and an eventual decline in the rate of population growth. Leibensteins criticial minimum efforts thesis is explained in Fig. 1 where the 45 line measures induced increases and 450 zt decreases in per capita income which are equal on any point f xt on this line. The curve xt xt represents the per capita incomes k raising forces and the curve ztzt the per capita income-depressing m a G n forces. E is the equilibrium point where the two forces are in c balance. If the stimulants raise per capita income from the b equilibrium level Oe to Om, the income-raising forces, e zt x E d generated will raise the per capita income level by na. But t at this level, the income-depressing forces ,fb generated by O Per Capita Income and zt are greater than the income-raising forces generated by Induced Income Growth xt. These will, therefore, generate the downard path abcd, Fig. 1 until it reaches the equilibrium position E. It is only when the investment programme raises the per capita income to Ok level that the path of sustained growth starts. The income-raising forces generated at Ok will raise the income level to sG which will, in turn, generate the path of endless expansion of per capita income, as shown by the arrows rising above G. Raising per capita income to Ok level and beyond point G is the critical minimum effort case. It should be noted that Leibenstein regards the critical minimum efforts as a minimum minimorum of all possible efforts that would lead to sustained real income Area III d m m growth involving an optimum time pattern of expenditure or effort. c c For sustained development, it is imperative that the initial investment b effort must be above a certain minimum Area II f f level so as to generate a sufficiently large per capita income level in order to a overcome autonomous or induced y Area I e e income-depressing forces. But the critical minimum effort need not be made all at once. It would be more effective, if it is O t Time broken up into a series of smaller efforts of which the applications to the economy Fig. 2
Per Capita Income Per Capita Income and Induced Income Declines

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are optimally timed. This is illustrated in Fig. 2 where the line ee represents the low per capita income level and mm the critical minimum per capita income level. The gap between the two is divided into Area I and Area II. The Area III above mm is of self-sustained growth. If Oa is the per capita income to start with, the initial injection of investment would raise per capita income to Ob level. Then at time t the second injection of investment would raise per capita income by cd so that the critical minimum level mm is reached. If investment is not optimally timed, the per capita income would follow the cy path of the curve bcy toward the low equilibrium level ee. Population Growth a Function of Per Capita Income. Leibensteins thesis is, however, based on the empirical evidence that the rate of population growth is a function of the level of per capita income. It is closely related to the different stages of economic development. To start with, at the subsistence equilibrium level of income, fertility and mortality rates are the maximum consistent with survival rate of population. If the per capita income is raised above the subsistence equilibrium position, the mortality rate falls without any drop in the fertility rate. The result is an increase in the growth rate of population, Thus, an increase in per capita income tends to raise the growth rate of population. It is only upto 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. The Leibenstein argument is based on Dumonts Social-capillarity Thesis, which states that with the increase in per capita income, the desire to have more children to supplement perental income declines. Increased specialization following rising income levels and the consequent social and economic mobility make it a difficult and costly affair to rear a large family. Therefore, the growth rate of population becomes constant and then starts declining gradually as the economy advances towards the path of sustained development, as has happened in the case of Japan and Western countries. There is, according to Leibenstein, a biologically determined maximum growth rate of population between 3 and 4 per cent. In order to overcome this population hump, there should be a larger increase in per capita income. This is discussed with the help of Fig. 3 where the rate of population growth or national income growth is measured along the horizontal axis and level of per capita income on the vertical axis. Y N P The curve N measures the level of per capita income which generates a level of national income growth equal to the ye e growth rate of population. The curve P indicates the rate of population growth at each level of per capita income. c yc g Starting from point a which represents the subsistence equilibrium point where there is absence of population and yb b income growth, if the per capita income is raised to Oyb , a the population growth rate is 1 per cent while the income growth rate is less than 1 per cent. At the Oyc level of per X O 1% 2% 3% capita income, the rate of population growth is higher than Rate of Population Growth or the rate of national income growth, i.e., yc g>ycc, the former of National Income Growth is 2 per cent while the latter is 1 per cent. Therefore, the Fig. 3 per capita income level should be so raised as to increase the national income by more than the rate of population growth. This is only possible after Oyc level of per capita income whence the rate of population growth starts declining. Point e is the 3 per cent maximum biologically determined growth rate of population assumed by Leibenstein. Oye is thus the critical minimum per capita income level
Level of Capital Income

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which can sustain itself and generate the process of sustained economic development. Leibensteins Projections. Leibenstein has also estimated the size of the critical minimum effort in the case of an underdeveloped economy with a starting population of one million. His calculations with regard to fertility and mortality rates are based on life expectancy and confirm with those of underdeveloped countries in actuality. He makes several projections based on different assumptions. But we take only projection 4b which appears to apply to those underdeveloped countries which hope to check the growth rate of population as the development process gains momentum and is in keeping with the critical minimum thesis of Leibenstein. With the annual rate of population growth at 2.03 per cent, the capital-output ratio 3:1, the required rate of investment is 13.2 per cent for the first five-year period. In the 25th-30th years the population growth rate is the maximum, 2.42 per cent, which requires an investment of 14.5 per cent. Then the population starts declining, and in the 50th-55th years it is 1.49, thus requiring an investment of 13.08 per cent. The required annual rates of national income growth during these periods is 4.40, 4.84, and 4.36 respectively. A CRITICAL APPRAISAL In the preface to his book, Leibenstein writes that his aim has been explanation and understandingnot prescription. But like Rostows take-off stage, his critical minimum effort thesis has caught the imagination of economists and planners in underdeveloped countries and is regarded as a prescription to economic backwardness. The Leibenstein thesis is more realistic than Rosenstein-Rodans big push theory. Giving a big push to the programme of industrialization all at once is impracticable in underdeveloped countries, whereas the critical minimum effort can be properly timed and broken up into a series of smaller efforts to put the economy on the path of sustained development. This theory is also consistent with the idea of democratic planning to which the majority of underdeveloped countries are wedded. Its Defects. But it has its shortcomings: 1. Population Growth Rate Related to Death Rate. The theory is based on the assumption that the rate of growth of population is an increasing function of the level of per capita income up to a point, but beyond that it is a decreasing function of the latter. But the first process is related to the decline in the mortality rate due to advancements in medical science, and improvement in public health measures in underdeveloped countries, and not to an increase in the level of per capita income. In India, there has been a decline in crude death rate from 24 per thousand in 1960 to 13 in 1982, not due to a rise in the per capita income which is almost stationary but as a result of the above mentioned factors. 2. Decline in Birth Rate not due to Increase in Per Capita Income. Similarly, the decline in the birth rate cannot be attributed to increase in the per capita income at the critical minimum level which surpasses the growth rate of population, as is supposed by Leibenstein. His conclusions are based on the experience of advanced Western countries and Japan. But in underdeveloped countries the problem of declining birth rate is mostly socio-cultural in nature. What is required is change in the attitude, understanding, education, social institutions and even certain intellectual perceptions. Rise in per capita income alone cannot perform the trick. There is no guarantee that with the decline in the birth rate, population would start decreasing as per capita income increases in underdeveloped countries. 3. Ignores State Efforts to Reduce Birth Rate. Leibenstein ignores the state action in bringing down the fertility rate. As the experience of Japan has shown, no underdeveloped country can

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afford to wait for per capita income to rise above the critical minimum level so that the birth rate may start declining automatically. In such a situation, she may reach the stage of the population explosion thereby creating more problems than she can solve by rise in the per capita income. 4. Higher than 3 per cent Growth Rate does not Lead to the Take-off. Suppose a country has succeeded in crossing the population barrier of 3 per cent by increasing the growth rate of income above this. According to Leibenstein, when an economy has reached Ok level of per capita income in Fig. 1 or ye in Fig. 3, it enters the path of endless expansion. Myint questions the correctness of this contention. For it is possible to find cases where abortive take-offs take place in which a country may for a time succeed in raising its saving and investment ratio above 10 per cent to 12 per cent and raising the rate of growth in its total income above 3 per cent level, but subsequently relapses into a slower rate of growth and stagnation. 5. Neglects Time Element. The theory fails to take into account the time element which is required for sustained efforts during which fundamental changes in the institutional and productive structure should be taking place for ensuring a successful take-off. To quote Myint, We may therefore question how far this type of analysis, originally designed to illustrate the gear shifts in short-run economic activity of fully developed engine of growth in the advanced countries, is useful for the study of the problem of the long-term economic development of the underdeveloped countries which is concerned with the construction of the engine of growth itself. 6. Complex Relation between Per Capita Income and Growth Rate. Again, according to Prof. Myint, the functional relationship between the level of per capita income and the rate of growth in total income is more complex and not so simple, as has been shown by Leibenstein. Firstly, the relation of per capita income with the rate of saving and investment depends on the distributional pattern of income and the effectiveness of financial institutions in mobilizing savings. Secondly, the relation between investment and the resultant output is not determined by a constant capital-output ratio, as is assumed by Leibensten but depends on the extent to which the productive organization of the country can be improved and how far land-saving innovations can be adopted to overcome the tendency to diminishing returns on additional investment even after the growth rate of population has reached the 3 per cent level. 7. Applicable to Closed Economy. The Leibenstein theory does not explicitly explain the influence of foreign capital and other external forces on the levels of income, saving and investment in underdeveloped countries.