Leibenstein

Leibenstein’s critical minimum efforts theory

This theory evolved as a result of a PhD thesis submitted by Leibenstein. The essence of this theory is that if the development efforts are of size less than the ‘critical minimum size’, they will come to nothing. There are always some factors that pull down development and some factors that push up development. There are positive sum factors, negative sum factors and zero sum factors of economic development. The economy can move forward only when the first set is greater than the last two sets. The first set of factors should be at least of critical minimum size.

The theory is based on the relationship between the three factors, viz.

(i) per capita income,

(ii) population growth, and

(iii) investment.

Leibenstein identified population also as an income-depressing factor, whereas investment
is an income-generating factor. Growth in an economy is possible when the income- generating factors turnout to be more powerful than the incomedepressing factors.

A small additional investment may generate a small income. The additional income would be eaten up by the additions to the population which may come in the wake of the additional income, and hence the effort may fail to generalise a cumulative process of growth. What is required is an initial substantially large volume of investment that may create conditions which should outweigh the growth of population, i.e., if necessary it is necessary that the initial effort or the initial series of efforts must be above a certain minimum magnitude.

The critical minimum efforts thesis suggests some conditions that are required to push development. These conditions are as follows:

1. Development requires that economic variables of positive sum set be greater than the sum total of negative sum set and zero sum set

The positive sum activities include all production activities. The first task of development planning is to see that the positive sum activities are much more than the sum total of zero sum and negative sum activities. The negative sum activities are population pressure, inflation, balance of payment problems, corruption etc. Zero sum activities include opportunities for exploitation. Distribution activities are zero sum activities because they just transfer the income from ‘haves’ to ‘have nots’. Distribution activities involve individual gains but not social gains.

2. Development will require that positive sum incentives persist and do not degenerate and disappear as also they do not stimulate zero sum activities

One of the problems of development is the degeneration of positive sum activities into zero sum activities. Some such examples are the reduction of mortality due to development which again leads to increase in population (here the positive sum activity of reduced mortality is leading to increased population which he considers as an income depressing factor), inflation brought about by massive development expenditure and technological improvement rendering many unemployed.It should be seen that these degenerated zero sum and negative sum effects become positive sum effects as soon as possible.

3. Development will require growth and development of growth agents

Factors of production have to be made effective growth agents. The same population can become doubly effective if its training, motivation and efficiency go up. Capacities are more important than mere size or number. Entrepreneurs and technical organizers are very important growth agents. Entrepreneurs discover investment opportunities, invest resources of production, promote new ventures and most efficiently engage other agents of production. Entrepreneurial function is promoted only when government provides facilities for entrepreneurs to flourish. They should be allowed to earn their legitimate profits.

4. Positive sum activities to be of critical minimum size

The vicious circle of poverty can be broken only if the initial thrust given to the economy is of a critical minimum size. For example, if agriculture develops at a rate lower than the critical minimum size, whatever is produced will be consumed and there will be no reinvestibe surplus. Critical minimum efforts are necessary to overcome production, technical and psychological indivisibilities to get out of the vicious circle trap.

5. Critical Minimum Effort most relevant in the stage of demographic transition or explosion

Leibenstein says that a large population is a big drag on development but one cannot wait for reduction in birth rate to bring down population to such level that it is no longer a burden. Leibenstein was of the opinion that if development efforts are of critical minimum size, the decline in birth rate itself will surely take place whereas if the efforts are not of critical minimum size, demographic transition will always be a depressing factor for growth.

In an economically poor nation, the efforts to bring down birth rate will not show quick results because the fertility decline in such nations lags behind the mortality decline. Leibenstein’s thesis is “the less the fertility lag, the less the critical minimum effort necessary for growth. The point at which fertility decline sets in will determine the height of critical minimum level.”

Leibenstein discusses four critical points of population growth:

(a) When income levels are low

When the levels of income are low, fertility rates are high and mortality rates are also high. There exits an antagonism between individual survival and fertility. Fertility has to be kept high because mortality is high and hence more children are needed for possible losses. Then because of high fertility mortality is high because child care is poor. The costs of rearing children are low and utilities from them are high.

(b) When income levels rise above ‘very low levels’

Mortality declines due to some development efforts. However, there is a lag in decline in fertility. This lag is due to late realization by the families that they are saddled with children. The utilities are declining, though not low and hence there is no motivation for reducing fertility.

(c) When income levels go still further

The security and production utilities go down substantially and the direct and indirect costs go up and hence the number of children desired by the parents will be low.

(d) When per capita income is very high

Birth rates come down and the gap between mortality and fertility closes gradually and the country starts on the stage of self-sustaining growth. The critical minimum effort becomes necessary when the country is passing through the second stage of the demographic transition. The critical minimum effort will shorten the period of transition or will reduce the fertility lag period.

Inter-relation between Per Capita Income Level and the Rate of Population Growth

Leibenstein states that for every level of per capita income above the subsistence level, the rate of national income growth will always be larger than the rate of population growth. In this type of progressive economy, the critical minimum efforts thesis will not apply.

Rising income may lead to a rising population but only to a maximum point. Upto subsistence levels of income; neither population nor national income grows. Beyond this level, population grows at a faster rate than income till the critical minimum income is attained. It is only at and beyond the critical minimum point that we reach a level of per capita income that generates rates of national growth that are equal to or greater than the induced rates of population growth. In developed countries however, the growth rate of per capita income is higher than population growth and hence critical minimum thesis does not apply.

6. Investment in Physical and Human Capital Formation on Critical Minimum Effort Criterion

Leibenstein says that investment in terms of both physical and human capital should be made in such a manner that it brings adequate gains to the investors to enable them to reinvest. He argues that for a given tempo of change, a certain minimum per capita income level has to be achieved in order to generate sustained per capita income growth in the economy. If the per capita income is below the critical minimum level, it can be raised to a necessary minimum level by a sufficiently large investment from outside the economy.

7. Higher Productivity key to Development, as Incremental-Capital- Output Ratio will Decline

Leibenstein rejects the hypothesis that Incremental-Capital-Output Ratio (ICOR) will rise during the process of development. He argues that ICORs will go down and gives the following arguments:

i) As investment in education, training and public health measures is made, the quality of labour goes up and output rate shall also go up.

(ii) Increasing national income and investment will help in extension of the division of labour, and when all sectors develop in a complementary manner, external economies are generated on a wider scale which will enable the firms to avail greater internal economies.

(iii) In a developing society, new resources are discovered and the use of old resources in a new way is found. ICORs will go down.

Critical Appraisal of Leibenstein’s theory:

Some economists do not agree with Leibenstein’s assumption that if initial investment is less than the critical minimum size, population will increase. In a low income country also, population decline can set in, provided the government action is rigorous as in China in recent years.

It is not necessary that the economy shall slide back to the low level equilibrium level if the effort is of less than critical minimum size. Things cannot be exactly the same as before. One cannot come back to the same level or standard, or structure and volume of the income. Alternatively, it is also not necessary that once the critical minimum effort has been made, there will follow a period of uninterrupted and sustained take off and growth.

Leibenstein is also not on sure grounds that the fertility decline will be the consequence of growth. It is now increasingly being found that first the fertility increase is to be checked and then only anything like critical minimum is possible. If substantial fertility decline sets in, even less than critical minimum effort may suffice.

 

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