Critical Minimum Effort Thesis Notes

Critical Minimum Effort Thesis

The Critical Minimum Effort Thesis, developed by Harvey Leibenstein, addresses the challenges faced by underdeveloped countries (UDCs) in escaping a low-income per capita equilibrium.
The thesis posits that a 'critical minimum effort' is necessary to propel a UDC to a level where sustained development can be maintained.

UDCs are often trapped in a VCP, characterized by persistent neediness that keeps them at a low-income per capita balance.

Economies are subject to both 'shocks' (reducing per capita income) and 'stimulants' (increasing per capita income).
In poor countries, the magnitude of stimulants is small, while that of shocks is large, hindering development.
If income-raising forces outweigh income-depressing forces, the economy can achieve the critical minimum effort needed for development.

Economic improvement relies on the expansion of 'development agents'.
These agents include entrepreneurs, investors, savers, and trailblazers which contribute to job creation, knowledge expansion, production capability enhancement, and increased savings and investment.

Lose Incentives: Incentives that do not increase national income but alter income distribution.
Positive Sum Incentives: Incentives that lead to growth in national income.

Entrepreneurs often engage in 'lose activities' aimed at achieving monopolies, political influence, and social distinction rather than increasing national income.
Positive sum activities are limited in scope.
A 'base effort' is needed to create an environment for positive sum activities to thrive.

Zero-sum entrepreneurial activities.
Conservative activities of organized and disorderly labor.
Resistance to new knowledge and attachment to old ideas.
Increased consumption and inefficient use of resources that could be used for capital accumulation.
Population increase.
High capital-output ratio.

An adequately large critical minimum effort is needed to sustain rapid economic growth and overcome backwardness.
This effort can help the positive total activities thrive, which in turn increases per capita income, leading to higher savings and investment.

The induced increase and decrease in per capita income is represented using a 45-degree line.
X1X1 curve: represents income generating powers.
Z1Z1 curve: represents income discouraging forces.
If 'Stimulants' increase per capita income from Oe to Om, the per capita income will initially increase to na.
However, if income-depressing forces (fb) are greater than income-creating forces (fa), the economy will follow a downward path (abcd) and reach point 'E'.
To put the economy on the path of development, per capita income must be increased to Ok through increased investment.
The income will increase to SG, leading to perpetual growth of per capita income, as indicated by the upward arrow from G.
The investment bundle that leads to an increase in per capita income beyond point 'G' is known as the "Critical Minimum Effort".
The critical minimum effort can be divided into a series of smaller efforts.

Leibenstein's thesis is based on the observation that the rate of population growth is a function of the level of per capita income.
At subsistence levels, population growth declines.
At a biologically determined maximum growth rate of population the economy is at equilibrium level of income, fertility and mortality rates and the population is at the maximum sustainable level.
If per capita income increases above the resource balance position, the death rate falls without a corresponding drop in fertility rates, leading to population growth.
As improvement accelerates, the increase in per capita income reduces the fertility rate, and the rate of population growth declines.
Leibenstein estimates a biologically determined maximum growth rate of population to be between 3% to 4%.

Curve N: Represents the increase in per capita income needed to balance the increase in population with the increase in national income.
Curve P: Shows the growth rate of population at different levels of per capita income.
Point 'a': Economy is in equilibrium at the subsistence level, with no increase in income or population.
If per capita income increases to Yb, both population growth rate and increase in national income are at 1%.
If per capita income reaches Yc, population growth (Ycg) exceeds national income growth (Ycc) (2% > 1%).
Per capita income must increase beyond Ye for population growth to decline.
At point 'e', the population growth rate is 3% per annum, the maximum possible growth rate on biological grounds.
Ye represents the minimum critical level of per capita income needed for economic development.

The assumption that population growth initially increases with per capita income and later decreases isn't always valid, as population growth often coincides with improvements in general health facilities.

The assumption that population declines once per capita income exceeds a critical level is based on Western experiences but may differ in UDCs, where population decline results from changing individual perspectives.

UDCs cannot wait for per capita income to rise before birth rates decline naturally; state intervention is necessary to manage population growth, which Leibenstein overlooked.

Prof. Myint argues that the relationship between per capita income, growth rate, and national income is complex, which Leibenstein oversimplified.
The relationship between per capita income and savings and investment depends on income distribution and the effectiveness of financial institutions.
The capital-output ratio is not constant and changes with production techniques.

Leibenstein's theory does not account for the effects of foreign capital on the income, savings, and investment of UDCs.