LEIBENSTEIN’S THEORY OF CRITICAL MINUMUM EFFORT

Harvey Leibenstein has propounded his thesis of critical minimum effort as an attempt
to provide a solution to the problems of vicious circle of poverty in underdeveloped
countries.

This theory argues that there exists an environment of inertia (sluggishness), which
makes development variable (i.e., income, employment, saving, investment, etc.)
move in the backward direction and reverse the process of development. Thus,
minimum effort is needed to overcome the inertia.

In other words, minimum effort is necessary to achieve steady secular growth for
raising per capita income in the long-run.

According to Leibenstein, every economy experiences the influence of two forces i.e.,
‘Shocks’ and ‘Stimulants’.

Shocks refer to those forces which tend to reduce output, income, employment and
investment etc. Shocks dampen and depress the development forces and are called
‘income-depressing forces’.

On the other hand, stimulants refer to those forces which help raising the level of income,
output, employment, investment, etc. Stimulants impress and encourage development
forces and are called ‘income-generating forces’.

Thus, an economy is said to be underdeveloped, if the impact of shocks is stronger

than that of stimulants.
On the other hand, a country is said to be developed if the impact of shocks is
weaker than that of stimulants.

It is thus imperative for developing countries to strengthen the forces of stimulants and
weaken the shocks through policy options available to them.

This theory of critical minimum effort explains the struggle between the forces of
shocks and stimulants.
It is seen that the impact of shocks is more than that of stimulants in the early stages
of development (due to the presence of vicious circle of poverty and other
depressants), as such the economy remains in a state of underdevelopment. To lift
the economy from underdevelopment to development, minimum efforts are required.

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Leibenstein believes that it is not necessary to make critical minimum effort in a
single stroke. It can be split up into a series of smaller efforts provided these are
optimally timed. This can be explained with the help of the above figure.

In the figure, time is shown on horizontal axis and per capita income on vertical axis.

OE is the equilibrium per capita income and OM is the critical per capita income.
Suppose the level of per capita income is OA. This level is low as compared to the
critical minimum level. It would fail to take the economy out of stagnation.

The effect of income depressing forces would be strong in relation to the effect of
income-generating forces. When the level of income is raised to OB, the growth curve
will follow the path BCR. It is evident that per capita income is rising up to point C, and
thereafter per capita income is declining. It means, OB level of income is insufficient to
generate the growth momentum in the economy.

If sufficient investment is injected into the system to raise per capita income to OM,
sustained growth will occur and effect of stimulants would be strong than that of
shocks. There, any level of investment lower than the critical minimum cannot
ensure sustained growth.

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The initial injection of investment might be enough to raise per capita income to
OB. Then at time T, the second dose of investment could be injected to raise per
capita income to OM, thereby taking the economy to the critical minimum level of
income required for sustained growth.
Critical Appraisal:

The critical minimum effort thesis has been regarded as a prescription for economic
backwardness of underdeveloped countries. But, it has also been criticized on the
following grounds:

1. Leibenstein assumes that, population increases with rise in income above the
subsistence level. And beyond a particular level of income, population declines. It
implies that rise in income has a direct bearing on the growth of population.
But in reality, in underdeveloped countries growth of population is influenced
by social attitudes, customs and traditions of the people and not merely by the
per capita income.
2. The functional relation between per capita income and income growth rate is not
as simple as assumes by Leibenstein. It is complex and has two stages. In the first
stage, the level of per capita income influences the rate of saving and investment
which, in turn, depend on the pattern of income distribution and effectiveness of
financial institutions in mobilizing saving. In the second stage, the relation
between investment and resultant output depends upon the economic and social
system of the country. The relationship can be improved through innovations. The
meaningful innovation is possible when updated technology, skilled labour
and necessary infrastructure in the country. However, these are not available in
the initial phase of development, and the critical minimum runs into difficulties.
3. Leibenstein has been criticised for ignoring the role of state in tackling the
population problem. No government could afford to wait for the per capita income
to rise above the critical minimum level for the population growth to decline. The
government has to make policy to keep population growth under control
particularly in the underdeveloped countries (for example in India, we have
National Population Policy to control population growth).
4. This theory also neglects the role of external forces. In underdeveloped
countries external forces play an important role in the initial stages of
development. This theory does not explain clearly the role of external forces
like foreign capital, foreign trade, international economic relations, etc. These
forces exert a vital impact on development and these