Eco 403: Economic Growth &

Development 1

STRATEGIES AND POLICIES OF ECONOMIC

DEVELOPMENT
The Model of Low Level Equilibrium Trap

• Models of low level equilibrium trap attempt to integrate population

and development theory by recognising the interdependence
between population growth, per capita income and national income
growth.
• This type of model which originated in the 1950’s is designed first, to
demonstrate the difficulties that less developed countries may face in
achieving self-sustained rise in living standards and secondly, to
provide guide to policy action.
 The Model of Low Level Equilibrium Trap

• The main elements of the model are

• (1) rapid population growth may not permit a rise in per capita income sufficient
to provide savings necessary for the required amount of capital formation for
growth.
• (2) If the population growth outstrips the capacity of industry to absorb new
labour either unemployment will increase depressing productivity in the rural
sector.
• (3) rise in per capita income may induce population growth in excess of income
growth.

One such model by Nelson (1956) contains three(3) basic notions dealing with the
determination of net capital formation, population growth and income growth.
Growth rate of physical capital (capital formation)

• The growth rate in the physical capital stock (dK/K) is assumed to be a

positive function of per capita income above a zero net saving level.
• dK/K = g(y ± x)
• where x = level of per capita income where the (net) saving rate
equals zero and y = per capita income. If y < x, then dissaving and
disinvestments take place, and dK/K < 0. The capital stock would be
wearing out faster than it could be replaced. An extreme example
would be peasant farmers facing starvation who eat the seeds
intended for the next crop’s planting. If y > x, then the saving
forthcoming exceeds the investment necessary just to maintain the
capital stock. Consequently, the capital stock grows (dK/K > 0).
 Population Growth

• The population growth rate is assumed to be directly related to per

capita income above the subsistence level ie
• dp/p = h (y ± s)
• where s = the subsistence level of per capita income.
 Growth of National Income

• At the point z population will be stationary. The rate of savings created per head
is zero and therefore income will be stationary (ie dy/y = 0). With rising per
capita income beyond this stationary equilibrium, growth accelerates owing to
increase in the labour force and capital per head. As population growth reaches a
maximum, however, and savings as a percentage of national income approach a
constant, income growth will level off.
 Escaping the low-level equilibrium trap

• If the last two diagrams are combined we have a diagrammatic

representation of the possibility of a low level equilibrium trap
situation in which per capita income is permanently depressed.
• Any level of per capita income between the subsistence point s = z
and ‘a’ will be accompanied by a growth of population faster than the
growth of income forcing per capita income down.
• The equilibrium level of per capita income will be where the
population growth curve cuts the income growth curve from below.
• One such point is to the left of ‘a’ where s = z and this point represent
the low level equilibrium trap.
• Any level of per capita income below ‘a’ will force per capita income
down to this subsistence level.
• On the other hand any per capita income level beyond ‘a’ will mean a
sustained rise in per capita income until the two curves cross again at
the point q.
• This will be a new stable equilibrium with the population curve
cutting the income growth curve from below.
•
• To escape from the low level equilibrium trap per capita income must
either be raised to ‘a’ or dy/y and dp/p curves must be favourably
shifted.
• The origin of the big push theories of development and the concept
of the critical minimum effort was the belief that to escape from the
trap it would be necessary to raise per capita income to ‘0a’ in one go.
• If countries are in the trap situation however, much greater hope
probably lies in the dy/y curve drifting upwards over time owing to
technological progress, which increases output and income for any
levels of capital and labour or
• a sudden drop in the dp/p curve from the reduction in the birth rate.
Capital from abroad raising the dy/y curve could free the economy
from such a trap.
 The Critical Minimum Effort Thesis

• If a low level equilibrium trap exists, it has been argued that a critical
minimum effort will be required to escape from it. The effort is
normally measured by the investment required to raise per capita
income beyond income depressing forces.
The Ratchet Effect
• Consider a small rise in per capita income level from 0Z (subsistence level) to
0Z1.
• The traditional argument is that it will be accompanied by population growth
in excess of income growth causing per capita income to fall back to the
subsistence level but it is possible to argue that increase in per capita income
from 0Z to 0Z1 will be accompanied by permanent changes in the quality of
capital stock such that per capita income will not fall back to 0Z but to some
higher level say 0Z2.

• Income growth in the range of per capita income 0Z to 0Z2 is now

permanently higher represented by the curve (dy/y)2.
• Three reasons are assigned for this, namely
• (i) technical progress (ii) improvement in human skills and (iii)
learning by doing which enables people to increase their productivity
through constant practice.
• If 0Z2 becomes the new stable equilibrium and the sequence of events
is repeated, per capita income will reach the level 0a in a series of steps.
No critical minimum effort will be needed.
• With continuous productivity growth due to all forms of technical
progress, the ratchet mechanism just described is quite feasible and it is
probably by this mechanism that in practice countries typically develop.
 Policy Implications

• The policy implications of the theory of the low-level equilibrium trap centre on
physical capital formation as the key to economic growth and, by extension,
economic development.
• Measures to encourage saving and investment are advocated.
• Foreign aid and foreign direct investment are desirable, not only as contributors
to capital formation, but as vehicles for the transfer of foreign technology.
• Moreover, if superior technologies are embodied in the new machinery and
equipment, then technological change would accompany the capital formation.

• This would increase the growth rate of output. Thus dy/y curve would be
shifted up and per capita output (y) would be rising.
• Birth – control programmes not only have the beneficial effect of
slowing population growth (eventually shifting down the dp/p curve)
but also work to reduce the current youth burden of dependency.
• Resources that would have been used for the social welfare
maintenance of the young (eg. education, health care, and housing)
are freed up for more directly productive investments in physical
capital (eg. transportation systems, power generation and factories).
 Appraisal of the Model of Low Level Equilibrium Trap

• The model of low level equilibrium trap cannot operate in reality as a

result of continuous productivity growth due to all forms of technical
progress.
• However, the model is still of value because it suggests valuable policy
which can be pursued particularly by an economy which appears to
be operating in a very long time in a low level of income.
 CLASS EXERCISE
• 1. What is low level equilibrium trap?
• 2. Draw a diagram and indicate the point of low level
equilibrium trap.
• 3. State any two possible ways of escaping the low
level equilibrium trap.
• 4. What is the major difference between the Harrod –
Domar model and the Solow model?