Machakos University

Economic planning
EAE 405
Notes II

1. PLANNING PROCEDURES
i) Planning by Inducement

Planning by inducement is often referred to as “indicative planning” or ‘market incentives’. In

such a type of planning, the market is manipulated through incentives and inducements.

Accordingly, in this system there is persuasion rather than compulsion or deliberate enforcement

of orders. Here, the consumers are free to consume whatever they like. Producers are free to

produce whatsoever they wish. But such freedoms of consumption and production are subject to

certain controls and regulations. The consumers, producers and other factors of production are

induced with the help of various fiscal and monetary devices. For example, if the planning

authority wishes to boost the production of maize in Kenya it will provide subsidies, tax holidays

and loans to the firms involved in production of maize. To encourage savings and investment and

discourage consumption, a suitable package of fiscal and monetary policies can be introduced in

the market. Therefore, the desirable results can be attained with the help of incentives and without

the imposition of orders and instructions. Moreover, in such planning there is less sacrifice and

less of economic and non-economic liberty.

Indicative or planning by inducement has three components or approaches:

a) Forecasting Approach

Under forecasting approach, the individuals are provided with the information, through

making certain forecasts. Such forecasting serves as a guide to their decision making. The

forecasting not only indicates about the feasible future, but they also specify a desirable

future in terms of growth rate of the economy.

b) Policy Approach

The second component of the indicative planning is concerned with policy approach.

Through policy approach, the inconsistent policies of Government departments are

coordinated within a coherent model framework keeping in view the set objectives.

Moreover, once the policies are coordinated, they will provide guidelines to the people,

consumers, and producers.

c) Corporate Approach

The third way to demonstrate indicative planning is through corporative approach. This

approach is practiced in France. Here, the coordination function of indicative planning

envisages at two levels. In the first place, it requires coordination of the behavior of

economic groups like business enterprises and trade unions, etc, which hold power in the

market. In the second place, it coordinates the relationship between private and public

activities.

Merits of Planning by Inducements

 1) Consumer’s sovereignty remains intact. Planning by inducement is more democratic as

compared to planning by directions.

2) There is freedom of choice of profession.

3) In planning by inducements, there is freedom of enterprise. Producers are free to produce

whatever they like but within the capacity of given rights.

4) Planning by inducements is smooth and flexible. It is more popular because it incorporates

the changes in resources, technology and taste, etc, even after the finalization and

implementation of plan.

5) Under this sort of planning, the inertia attached with standardization can be put to an end

and producers are free to produce in accordance with the desires of consumers. Therefore,

there is a variety of goods and services in the market.

6) There are less administrative costs involved in planning by inducements.

7) The problem of shortages and surpluses is solved as there is existence of automated market

system. The demand and supply is automatically adjusted and remain in balance under

market economy.

Demerits of Planning by Inducements

a) It also to achieve 100% targets of economic planning

b) Under planning by inducements, there are profit motives more than welfare of public.

Private entrepreneurs care for those products which yield high profits. Products or services

with less profit or no profit do not attract private entrepreneurs. Such products or services

include education, health, defense, security, etc.

 c) The producers may find the government policies regarding economic affairs not attractive

enough to follow. There may be disputes among entrepreneurs and Government regarding

tax rate, investment policies, interest rates, etc.

d) The mechanism of market economy may cause the prices to inflate especially with

reference to under-developed countries or in the case of oligopoly where there is a shortage

of certain products like petroleum and gas

e) There may be disharmony between labour and producers, and there may be serious

industrial disputes.

ii) Planning by directions

It is also referred to as imperative planning. This type of planning is practiced in socialist countries

like China, the former USSR, Cuba, North Korea, etc. Under planning by direction, there is one

central body / authority which plans, directs and orders execution of the plan in accordance with

the pre-determined targets and priorities. It determines the production figures, delivery schedules,

quotas regarding the production of the goods; price controls and use of foreign exchange and

allocation of resources like labour, etc. amongst different competing uses. Thus, such planning is

comprehensive and encompasses the whole economy. Planning by directions is similar to military

or defense plans which are carried out through orders and instructions. Along with the

disintegration of the former Soviet Union, the methodology of planning by directions has received

certain serious setbacks. Now, most of the developing countries tend to adopt market economic

system.

Demerits of Planning by Directions:

a) Planning by direction is undemocratic since the people are ignored all along.
 b) It is bureaucratic and totalitarian. Under bureaucratic system, the individual’s sovereignty

is completely abolished. Corruption, red tape, VIP system, tyranny and austerity are the

by-products of bureaucracy.

c) Rationing and control result in black marketing.

d) There are shortages of some goods as well as other goods. That is, there is an imbalance in

production output.

e) This sort of planning is inflexible. Once the plan is prepared, there is no room for alterations

in later phases of planning. A part of the plan cannot be changed without simultaneous

changes in many interconnected activities. Planning by direction is so complex that it is

impossible to change even a part of it as it will involve altering the whole plan.

f) The fulfillment of plan cannot be guaranteed as the planning by direction is hampered by

black marketing and corruption.

g) Planning by direction also leads to excessive standardization which impinges on consumer

sovereignty. In other words, under planning by direction the goods produced are

standardized lacking the variety. As in the case of USSR, the produced [Link], fridges, and

automobiles were identical having no differentiation.

h) It also involves huge administrative costs, as the planning by direction involves in elaborate

census, numerous forms and army of clerks.

iii) Physical and Financial Planning

Physical planning is involved with physical allocation of resources on the one side, with the

products/yields on the other side. Its aim is to bring physical balance between investment and

output. Accordingly, investment coefficients are computed. These coefficients show how much

amount of investment will be required for a given amount of output. Moreover, in such planning
also analyzed is what will be the composition of investment to obtain an increase in output. For

example, how much iron, how mush coal, oil and electricity will be required to produce some

specific amount of steel. While making physical planning, an overall assessment is made regarding

the real resources of the economy like raw materials and manpower.

In financial planning, equilibrium is established between demand and supply to avoid inflation and

bring economic stability. The difference between physical planning and financial planning is that

physical planning tells us the size of investment in terms of money. In financial planning, the

planner determines how much money will have to be invested in order to achieve predetermined

objectives. Total outlay is fixed in terms of money on the basis of growth rate to be achieved, the

various targets of production, estimates of the required quantity of consumer goods and the various

social services, expenditure on the necessary infrastructure, etc. as well as revenue from taxations,

borrowings and savings.

LECTURE TEN

iv) Centralized Planning and Decentralized Planning.

Under centralized planning, all the economic decisions are undertaken by the central authority or

the Government. It is the Government which formulates economic plans, determines objectives,

and sets target and priorities. Every member has simply to carry out the instructions without

questioning about its viability. There are more chances of failure as the individuals are not allowed

to carry out the plans in accordance to their needs and preferences. It is the Government which

takes responsibility of the successes or failure of the plan. It is the Government which takes all the

decisions of consumption, production, wages and prices. What amount of investment is to be

made? What should the price? What should be the output? How the products are to be distributed?
How much amount of the loans is to be granted? What should be the rate of interest, etc.

Centralized planning is mostly executed in socialist or communist countries.

Decentralized planning is connected with capitalistic economies. The decentralized planning is

implemented through market mechanism. Decentralized planning empowers the individuals or

small groups to carry out their plans of achievement of a common goal. Under decentralized

planning, the operation is from bottom to top. The planning authority formulates the plan by having

made consultation with different administrative units of the economy. The plans regarding

different industries are designed by the representatives of these industries. In such a type of

planning, the planning authority issues the instructions to central and local bodies regarding

incentives given over to private sectors.

v) Structural and Functional Planning

The planning which is aimed at bringing changes in socioeconomic set-up of a country is termed

as structural planning. This type of planning is attributed to the planning which was made in USSR

in 1929 when the existing land-lord system was abolished, collective farming was introduced and

trade, industries, and transport system was nationalized.

Functional planning is a type of planning where hardly any big change is brought about in the

existing socio-economic set-up of the country. It means when planning is made in the presence of

existing institutions. In France, Germany, UK, etc planning is being made in the existing

framework of capitalism.

vi) Democratic and Totalitarian Planning.

Under democratic planning, the philosophy of democracy is followed. From formulation to the

execution of the plan, the people are taken into confidence. Whenever the plan is prepared, the
ruling party takes a dialogue with the public firms and even with opposition parties. The purpose

of such arrangements is to satisfy different segments of the economy regarding growth and welfare

programs. After the formulation of the plan, an open discussion is made in the parliament. Under

democratic planning, whole of the activities are performed through price mechanisms. The

government influences the private sector through fiscal and monetary policies. Moreover, the

Government passes anti-monopoly laws to protect the consumer’s sovereignty.

In totalitarian planning, there is a central control, and all economic activities are governed by the

Central Authority. In totalitarian planning, all consumption, production, distribution, and exchange

like activities are controlled by the Central Planning authority. Totalitarian allows no consumer

sovereignty and democratic freedom.

vii) Corrective and Developmental Planning

The planning consisting of fiscal and monetary measures with the aim of removing the imbalances

of the economy is known as ‘corrective’ planning. As to control inflation, if the government

follows a very strict fiscal and monetary package ; controls aggregate demand by checking

consumption, investment and government expenditure - this will be the case of corrective

planning. On the other hand, the planning which is aimed at developing the whole economy is

known as development planning. Development planning involves the application of rational

system of choices among feasible courses of investment and other development actions.

viii) Capitalist and Socialist Planning

A capitalist economy is also known as ‘a free-enterprise economy’. Under capitalism, there

was no authority governing the planning activity. All the economic activities were controlled
 by the private sector. The state function was limited to tax collection and defense. There were

no public welfare measures, no developmental planning and no labour rights. But with the

capacity of time, especially after the great depression of the 1930s and development of

economic, social and political economic thoughts, the capitalist economies adopted the modern

functions like:

a) Formulating and implementing monetary, fiscal and trade policies.

b) Promulgating anti-monopoly and anti-cartel laws

c) Working for the sake of communities benefits

d) Formulating and implementing development plans

e) Providing basic facilities of health, education, transportation, communication and

recreation, etc.

In socialism, the central planning board formulates the plan which covers the whole economy. The

Central planning board has unlimited powers regarding allocation of resources and production of

goods and services. The central planning authority determines the goals and priorities regarding

distribution of national income, employment, economic needs, capital accumulation and economic

growth. Under socialism all factories, resources, financial institutions, shops, stores, ware houses,

foreign and domestic trades, means of communication and transportation are under government

control.

ix) Planning Under Mixed Economy

Most economists suggest the operation of mixed economy because both extreme capitalistic and

socialistic system are not suitable. Capitalistic or free enterprise economy are characterized by lots

of problems including misallocation of resources, market imperfections, monopolies, oligopolies,

labour exploitation, widening gap between haves and have not, and consumer exploitation. On the

other hand, socialistic form of economy may create the problems like State’s monopoly and

supremacy, bureaucratic hold, corruption, red tape, VIP system, loss of consumer’s sovereignty,

standardization of products, poor quality of products, less foreign trade, etc. While in the case of

mixed economy, consumer’s sovereignty, private ownership, and operation of price mechanism

are ensured. The public sector also works parallel to private sector. The public sector in a mixed

economy consists of those projects which require heavy funds like railways, air transportation,

roads, bridges, flyovers, underpasses, power generation, irrigation, telecommunication, research,

etc. The Government also addresses people’s basic needs like employment, health and education.

In under-developed countries, the government also provides housing facilities to poor families. To

avoid labour exploitation, and consumer’s exploitation, the Government promulgates anti-

monopoly and anti-cartel laws. In mixed economies, the Government even adopts safety measures

against pollution and unhealthy working conditions in factories, offices, etc. In case of agricultural

sector, the Government provides short term loans to farmers and imports farm machines

LECTURE TWELVE

TYPES OF DEVELOPMENT PLANS

Fixed Plans

In a fixed plan, the contents of the plan are fixed in relation to a fixed time period. These contents

consisting of targets, priorities, strategies and resources, etc. will not be changed during the

particular time period for which the plan has been prepared except for severe unforeseen events.

Merits of fixed plans

a) There is boldness in planning. This is the essence of planning that the planners and

implementing machinery will not bow down before the obstacles.

 b) There is effective implementation of plan.

c) The targets of fixed plan are certain and this certainty in objectives brings stability to

the economy.

d) Fixed plans ensure discipline for the planning process.

Demerits of fixed plans

a) Fixed plans are inflexible plan. They cannot be altered in later phases.

b) There is no revision of economic objectives and targets as there is no alteration allowed

under fixed planning

c) If the state is an under-developed country, the fixed plan would give the economy a hard

time to achieve the basic objectives like employment, industrialization, education, health,

etc.

d) Fixed plans, if not properly formulated and implemented, lead to wastage of resources.

Rolling plan

Rolling plan refers to the rolling of a plan at intervals usually one year, so that it continues to be a

plan of certain number of years. It is usually the medium term plan.

Merits of rolling plan:

a) Rolling plans are flexible and can be altered in later phases.

b) The rolling plan allows for revisions and adjustments. In rolling plan, review of the plan is

a continuous exercise.
 c) Rolling plans enable the planners to keep the time horizon moving, along with making

revisions and adjustments so as to prepare a new plan every year in accordance with the

changing circumstances.

Demerits of Rolling Plans

a) Rolling plan is furnished with uncertainty, as there is no fixation of economic objectives.

b) In rolling plans, the planners are always reluctant in taking difficult decisions or taking

courageous decisions.

c) Under rolling plan, there is lack of commitment. As there is no fixity attached with the

plans, the enthusiasm on the part o planning and administrative machinery will be hardly

found.

Short – term, Medium and long term plans

Short term plans are also known as ‘controlling’ plans. They encompass the period of one year,

therefore, they are also known as “annual plans”. In annual plans or budgets, the financial aspects

of the plan, i.e. financial sources and applications are shown. In the annual development plans the

items pertaining to capital budgets, i.e. the capital revenue and expenditure are listed. The main

objective of short- term planning is to raise the revenue, attain the short–term economic targets,

and bring price stability, and remove deficit in BOP.

The medium–term plans last for the period of 3 to 7 years. But normally, the medium term plan is

made for periods of 5 years. The medium term planning is not only related to allocation of financial

resources but also physical resources. The main objectives of medium- term economic planning is

to raise per capita income, raise the level of employment, create self –sufficiency in the economy,
reduce dependence over foreign aid and raise revenues through domestic sources, and to remove

regional and intra-regional disparities.

Long–term plans last for the period of 10 to 30 years. They are also known as ‘perspective plans’.

The origin of long-term planning goes back to USSR where Goelro plan 1920 – 35 was formulated

and implemented in 1920. The basic purpose of that plan was to electrify the rural areas. The basic

philosophy behind long-term planning is to bring structural changes in the economy. Under long-

term planning, there is greater freedom of choice and there is a wide scope of planning.

Economic plans can also be categorized using three perspectives:

i. The scope or coverage of the plan
ii. The plan’s underlying motive
iii. The timeframe for the plan

a. Plan Categories According to Scope

i. Comprehensive Plan
It is a plan covering the entire economy. It brings into focus all the major sectors of
the economy with the aim of achieving consistency in its requirements, predictions
and actual achievements. Nationwide plans compiled by the technique of input –
output analysis are comprehensive plans.

i. Partial plan
It is a plan that targets only some portion of the nation’s economy. It is partial in that
it does not cover the entire national economy. In an economy, at any time, several
types of partial plans can be identified:

iv. Resource plan: A plan for the development and

management of a specific resource e.g. manpower
plan, an energy plan.
 v. Regional plan: Deals with a given area within the
country e.g. Plans under the Lake Basin
Development Authority and Kerio Valley
Development Authority.

vi. Sectoral Plan: Concerns one sector e.g. Agriculture

Development plan.

vii. Project plans: Concerned with a specific issue within

a given sector, or it could be an integrated set of
activities addressing some interrelated multi-sectoral
issues within a given geographical area.

b. Plan Categories According to the Underlying Motive

i. Control plan
In the Former Soviet Union, planning was used as a tool for assigning commodity
production targets and issuing orders to the various sectoral and industrial managers.

This kind of planning goes well with a dictatorial administrative regime, which
prevailed in the former USSR under Communism. It is no longer practiced in the World
after the breaking up of the USSR in the early 1990’s.

ii. Indicative plans

Used in the mixed economies of the West and Third World as a channel to guide and
influence economic events in the country. Government affects economic proceedings
by raising and using resources towards the Public cause.

It has Government economic policy aimed at stimulating and directing the behavior of
the private sector in certain ways.

c. Plan Categories by Timeframe

i. Perspective plans
Are long - term plans covering periods of 15 years or longer. These plans cannot be
specific due to a high likelihood of unforeseen events occurring. They offer a general
direction of the desired or likely economic changes, e.g. The Kenya Vision 2030.

They highlight likely development of social overheads, such as transport and

communication network, whose benefits diffuse and take a long to be felt.

[Link] –Term plans

Cover periods of 3 – 5 years. Contain more details than perspective plans, specifying
annual targets and relating them to changes in instrumental variables. Most national
development plans fall in this category.

iii. Annual (Operational) plans

They break a medium – term plan into operational (i.e. actionable) components, with
specific targets and resource allocations. The state’s annual budget and its sectoral
(ministerial) components is such a plan.