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Critical Minimum Effort Theory

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197 views4 pages

Critical Minimum Effort Theory

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aditidocmoc
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Study Notes

Critical Minimum Effort


Theory
Critical Minimum Effort Theory

Introduction

 The theory of critical minimum effort is associated with the name of Harvey Leibenstein.
 The theory is based on the relationship between the three factors, viz.

(i) per capita income,

(ii) population growth, and

(iii) investment.

The theory

 Leibenstein identified population as an income-depressing factor (or a 'shock'), whereas


investment is an income-generating factor (or a 'stimulant').
 Growth in an economy is possible when the income-generating factors turnout to be more
powerful than the income-depressing 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 generate 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., it is necessary that the initial
effort or the initial series of efforts must be above a certain minimum magnitude.
 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 times.
 In 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 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 the per capita
income is declining.

2
Critical Minimum Effort Theory

 It means, OB level of income is insufficient to generate the growth momentum in the


economy.
 If sufficient investment is infected into the system to raise per capita income to OM,
sustained growth will occur and effort of stimulants would be relatively strong than that of
shocks.
 There, any level of investment lower than the critical cannot ensure stained growth.
 The term 'critical' is indicative it the fact that the investment should at least be of such a level
which could raise per capita income to OM for achieving sustained growth.
 However, it would be more convenient and cheaper to make the effort in two doses.
 The initial infection of investment might be enough to raise per capita income to OB.
 Then at time T, the second dose of investment could be infected to raise per capita income
to OM, thereby taking the economy to the critical minimum level of income required for
sustained growth.

Reasons for Critical Minimum Effort

Critical minimum effort, in Leibenstein’s opinion is necessitated by the following factors:

1. Some of the factors of production are indivisible, so that unless they are used in full or in
minimum amount, they will lead to internal diseconomies. To overcome these diseconomies,
some minimum critical investment may be necessary.
2. There is a sort of mutuality and interdependence between a number of firms and industries.
As these develop, there emerge external economies. Apparently, these economies can be
reaped only when there are at least that minimum number of industries operating which
make these economies possible. In their absence, these economies may not arise at all.
3. At any `time, the economy may be subjected to autonomously generated income depressing
factors and at the same time be subject to depressants induced by some aspect of the
process of growth. A certain minimum investment is necessary to overcome these and to
initiate sustained growth.
4. There are some attitudes which are to be developed for growth. Among those, more
important are:
(i) "Western Market Incentives" implying a strong profit incentive,
(ii) a willingness to accept entrepreneurial risks, and
(iii) an eagerness to promote scientific and technical process.

These attitudes come in only when the economy undertakes same level of investment.

The above, factors make it necessary that some minimum level of investment is undertaken
in an economy to make it possible for the growth promoting forces to set in. The investment
must be made in sizeable lump, and not through marginal increments that result from a set
of unrelated individual decisions.

Criticisms of the theory

3
Critical Minimum Effort Theory

 The theory is more realistic than Rosenstein-Rodan's "big pushy theory because critical
minimum effort can be broken up into a series of smaller efforts which can be properly timed
to put the economy on the path of sustained growth.
 However, the theory is open to criticisms on the following grounds:
1. Leibenstein assumes that population increases as the income rises above the subsistence
level. Beyond a particular level of income, population declines. This assumption implies that
rise in income has a direct bearing on the growth of population. But, in reality, this relation is
not so simple. Growth of population is influenced by social attitudes, customs traditions of
the people, and not merely by the per capita income.
2. According to Myint, the functional relation between per capita income and income growth
rate is not as simple as assumed by Leibenstein. It is complex and has two stages.
a. In the first stage, the level of per capita income influences the rate of saving and
investment which, in turn, depends on the pattern of income distribution and the
effectiveness of financial institutions in mobilizing saving.
b. 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 is present in the country.
However, these are not available in the initial phase of development, and the critical
minimum effort runs into difficulties.
3. 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 factors play an important role in the development process.

Notwithstanding the above shortcomings, the theory shows the way for breaking vicious circle of
poverty. The path of sustained growth is not even and smooth. It is rather difficult and complex
one. Minimum efforts are essentially required to overcome the difficulties and achieve sustained
growth, which is the ultimate objective of a development strategy.

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