CHAPTER ONE

1. DEVELOPMENT PLANNING: An Introduction

 Chapter Objectives:
The objectives of this chapter are to
µ Explain the meaning, characteristics and types of planning, quantitative
development planning techniques and planning in practice by taking
experiences from Ethiopia and other countries.
µ Discuss project implementation, monitoring and evaluation and Cost-Benefit
analysis.
µ Understand the three development thinking in three development periods
starting post war II period up to the present period
µ Briefly outline the major components of the first early war consensus
µ Equip with basic concepts with the second consensus called the Washington
consensus
µ Have highlight on the current third consensus called oscillating search and
some theoretical revisions and points with the way forward
µ Comprehend the historical periods of planning evolutions
µ Recognize how planning in the western, and eastern Europe evolved and
shaped through time
µ Be aware on how similarly planning evolved and shaped in the third world

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1.1. Historical Background of Economic planning, projection, plans and forecasting
The idea of planning has a long history and goes back to the time of Pluto [the first
person who talked about organized planning]. It was later developed, shaped and
molded by eminent thinkers and writers both in the western and eastern camp.
However, the idea of economic planning in its modern form is comparatively new. It
is the 20th century phenomena.

Ideologically, the evolution is from three perspectives:

1. Planning in eastern Europe (socialist perspective)
2. Planning in western Europe (capitalist perspective)
3. Planning in underdeveloped countries (mixed economic perspective)

1.1.1. Planning in Eastern Europe

During the 19th century, intellectual theorists, thinkers and writers in the Eastern
Europe became fed up with the inquiry and contradictions of pure capitalism.
Therefore, they developed the idea of state intervention to set matters right and to
prevent inequalities resulting from capitalism (free economy) a solution to the fallacy
of laisser-faire. But it was only state intervention that was advocated. There was no
mention of economic planning and how to interrelate was ambiguous (although they
realized that laisser-faire was not working). In 1928 the Soviet Union gave the idea of
economic planning a real shape when it formulated its first five year plan.

The main objective of the socialist (Soviet) plan was to achieve the rapid
transformation of a backward agriculture sector (traditional sector) into a modern
industrial sector.

1.1.2 Planning in Western Europe

There could be several factors that necessitate planning in Western Europe, among
others wars, great depression of 1930th, expansion of markets, and specialization. In

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 Western economics, a series of the above historical development led to the
coordination of economic policies, i.e., planning. These are:

µ The development of science and technology not only made material progress
possible, but also they made planning possible as well improve computation
facility; advances in management theory (organization coordination). The
intervening depression reminded the state of the tragedy incompleteness of
economic theory and public policy.

µ In the 1930’s, the capitalist world was in the midst of the biggest depression in
the world history. Capitalism failed an utter collapse and its inherent
contradiction came up to the surface. Economic growth collapsed and acute
misery poverty well experienced by people. Therefore, economist and politician
favored economic planning as a remedy for these and other economic ills.
People’s mind now turned to economic planning as panacea for their economic
ills while Keynes writings also in a way strengthen the belief in the efficacy and
economic planning in capitalist countries. Meanwhile there was an attempt to
plan economic life in Nazi German and Fascist Italy during the time (thirties).

Note: -The objective of the economic planning in the West was basically different from
that of the Soviet Union. The purpose of planning in Nazi Germany was primarily to
build up the war potential rather than improving the living standard of the people.

µ The outbreak of World War I and II necessitates the proper and efficient planning
of economic resources for successful prosecution of the war. [For coordinated
management of scarce resources]
µ In the post war period, the war devastated countries of Europe were compelled
to resort to economic planning to rehabilitate themselves owing to:-

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  As a condition for receiving assistance under the Marshal plan, the USA
insisted upon these countries to formulate their rehabilitation plan covering
almost every sector of the economy.
 The USA itself has recognized the significance of economic planning when
it adopts an economic program called the “new deal” to come out of the
suffering from great depression in thirties.
µ The growth of markets and increased specialization led to increased
interdependence among economic activities and to greater economic
externalities, which lead to adoption of economic planning. There is a need to
intervene public agencies to rectify the negative externalities.
µ The development of democracy also lead to the adoption of planning in order to
rectify social inequalities people could vote for those who experience an
interventionist approach.

1.1.3 Planning in Underdeveloped Countries

Economic planning was considered as important panacea (remedy) for

underdeveloped countries in their desire for industrialization. They want to achieve
rapid growth in short period of time. Economic planning, therefore, was considered
as a tool to achieve rapid economic development.
However, the development (evolution) of planning took a different course (path) than
the rich countries in the following reasons:

µ In Less Developing Countries, planning was considered as an ideology rather than

a means because in these countries planning was considered as a desire
(expression) of many things, such as:-
 Desire of self-control
 Desire (expression) of independence
 Expression of self-determination.

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  Then planning as a political and cultural goal

µ New leaders (elites) emerged when they got independence with new vision
(ideas). This brings new decision making capacity, which is to mean colonial
administrators were gone and these new leaders have to plan because it was
considered as a potential tool (instrument) to survive and prosperity. However, the
then planning was not as a result of popular participation (bottom up planning), it
was up down planning to express the need of the leaders who control the political
structure - they dictate the plan. Planning here was not as a consequent of
industrialization, which is the inverse of the Western, developed countries.

1.2. The Meaning of Economic Plan

Economic planning has become a craze in modem times especially in developing

countries. The idea of planning acquired a tremendous support after the end of World
War II when advanced but disrupted economies had to be rehabilitated and the under-
developed economies were fired with the ambition of rapid economic development.
This idea was not taken up kindly in some countries by some people. It was perhaps
due to the fact that planning came to be most actively associated with socialist
economies. Hatred of socialism was transferred to planning too. But such unreasoned
opposition to planning has now almost vanished. On the other hand, remarkable
achievements of Nazi Germany and Soviet Russia popularized the idea of economic
planning.

Even in capitalist countries, where the economy is governed and directed by market
incentives, planning are being practiced more or less in one or the other sector of the
economy. Planning has become popular owing to the basic defects of capitalism and
free enterprise arid owing to the realization that, unless a free enterprise economy is
regulated and controlled, it would not ensure stable growth or maximize social
welfare. That is why about 20 per cent of the American economy is planned, because

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to this extent current resources are controlled and disposed of by the State. Although
the distinction between planned and the unplanned economy is there, yet planning
has been universally accepted and the planned sector almost everywhere is ex-
panding.

For the under-developed countries, desirous of accelerating development after

achieving political freedom, planning is a sine qua non of progress. As Robbins said,
"Planning is the grand panacea of our age". It is no longer a forbidden fruit. To quote
Lewis: "There are no longer any believers in laissez-faire except on lunatic fringe."
The popularity of planning may be summed up in these words: "The change in
ideology of the people, their growing social consciousness and the realization of the
social and economic evils of mal distribution of income and wealth have drawn
attention to the need for directing economic growth in a manner that would bring
about not only increased production but would ensure more equitable distribution of
the larger output; egalitarian measures have, therefore, been called for, and regulation
of economic mechanism has become necessary to' ensure social justice and equality.

Although both advanced capitalistic countries and the under-developed countries

have adopted planning but there is this difference between the two: in the former it is
corrective planning to ensure economic stability, in the latter it is developmental
planning to secure rapid growth.

There is no agreement among economists with regard to the meaning of the term
economic planning. The term has been used very loosely in economic literature. It is
often confused with communism, socialism or economic development. Any type of
state intervention in economic affairs has also been treated as planning. But the state
can intervene even without making any plan. What then is planning?

Planning is a technique, a means to an end being the realization of certain pre-

determined and well-defined aims and objectives laid down by a central planning

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authority. The end may be to achieve economic, social, political or military
objectives. The idea underlying planning is a conscious and deliberate use of the
resources of the community with a view to achieving certain targets of production.
The State, through a planning authority, takes the responsibility of planning. It
represents a complete break from the policy of laissez-faire.

The two main constituents of the concept of planning are:

 A system of ends to be pursued, and Knowledge as to the available resources

and their optimum allocations.
Thus, planning is a technique for achieving certain self-defined and pre-determined
goals laid down by a central planning authority.

Professor Lewis has referred to six different senses in which the term planning is
used in economic literature.

There is an enormous literature in which it refers only to the geographical zoning of

factors, residential buildings, cinemas and the like. Sometimes this is called town and
country planning and sometimes just planning.

Planning means only deciding what money the government will spend in the future,
if it has the money to spend.

A planned economy is one in which each production unit (or firm) uses only the
resources of men, materials and equipment allocated to it by quota and disposes of its
product exclusively to persons or firms indicated to it by central order.

'Planning' sometimes means any setting of production targets by the government,

whether for private or public enterprise. Most governments practice this type of
planning if only sporadically, and if only for one or two industries or services to
which they attach special importance.

Here targets are set for the economy as a whole, purporting to allocate all the
country's labor, foreign exchange raw materials and other resources between the
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 various branches of the economy.

The word 'planning' is sometimes used to describe the means which the government
uses to try to enforce upon private enterprise the targets which have been previously
determined.

But Ferdynand Zweig maintains that planning is planning of the economy, not within
the economy. It is not a mere planning of towns, public works or separate section of
the national economy, but of the economy as a whole. Thus planning does not mean
piecemeal planning but overall planning of the economy.

Some of the definitions of economic planning given by other academicians are:

Professor Robbins defines economic planning as "collective control or super session

of private activities of production and exchange."

To Hayek, planning means, "the direction of productive activity by a central authority."

According to Dr. Dalton, "Economic planning in the widest sense is the deliberate
direction by persons in charge of large resources of economic activity towards chosen
ends."

Lewis Lord win defined economic planning, "as a scheme. of economic organization in
which individual and separate plants, enterprises, and industries are treated as
coordinate units of one single system for the purpose of utilizing available resources
to achieve the maximum satisfaction of the people's needs within a given time.

In the words of Zweig, "Economic planning consists in the extension of the functions of
public authorities to organization and utilization, of economic resources. Planning
implies and leads to" centralization of the national economy.

One of the most popular definitions is by Dickinson who defines planning as

the making of major economic decisions on:

µ what and how much is to be produced,

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 µ How, when and where it is to be produced, and
µ to whom it is to be allocated,
Even though there is no unanimity of opinion on the subject, yet economic planning
as understood by the majority of economists implies deliberate control and direction
of the economy by a central authority for the purpose of achieving definite targets
and objectives within a specified period of time.

As a working definition Planning is a technique or a means to achieve an end. End

refers to certain predetermined target (well defined objective). End might be
achieving:

 Economic objectives,
 social objectives or military objectives or both
The main point is not to have plan or not to have plan but what kind of plan do we
need to achieve the objectives. Intervention of state in all economic activities is
inevitable, i.e.; government do intervene in an economy in one way or another. But
what matters is the degree, type and nature of intervention.

1.3. The Need for Economic Plan

Developing countries need economic planning in order to achieve the following

objectives:

 To increase the rate of economic development

 To improve and strengthen the market mechanism
 To reduce unemployment and disguised unemployment
 To enhance the linkage between the agricultural and industrial sectors
 To create social overhead that enhance agricultural and industrial growth
 To expand domestic and foreign trade
 To eradicate poverty

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  To be Self-sufficient in food and raw materials
 To reduce inequality
1) Increase the rate of economic development

One of the principal objectives of planning in underdeveloped countries is to increase

the rate of economic development. In the words of D.R. Gadgil, "Planning for
economic development implies external direction or regulation of economic activity
by the planning authority which is, in most cases, identified with the government of
the state. It means increasing the rate of capital formation by raising the levels of
income, saving and investment. But increasing the rate of capital formation in
underdeveloped economies is beset with a number of difficulties. People are poverty-
ridden. Their capacity to save is extremely low due to low levels of income and high
propensity to consume. As a result; the rate of investment is low which leads to
capital deficiency and low productivity. Low productivity means low income and the
vicious circle is complete. This vicious economic circle can only be broken by
planned development. Two methods are open to underdeveloped countries. One is
planned development by importing capital from abroad which Zweig calls 'supported
industrialization, and the other is by forced saving which he characterizes as self-
sufficient industrialization.

2) Improve and strengthen the market mechanism

The rationale for planning arises in such countries to improve and strengthen the
market mechanism. The market mechanism works imperfectly in underdeveloped
countries because of the ignorance and unfamiliarity with it. A large part of the
economy comprises the non-monetized sector. The product, factor, money and
capital markets are not organized properly. Thus the price system exists in only a
rudimentary form and fails to bring about adjustments between aggregate demand
and supply of goods and services. To remove market imperfections, to mobilize and
utilize efficiently the available resources, to determine the amount and composition

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of investment, and to overcome structural rigidities, the market mechanism is
required to be perfected in underdeveloped countries through planning.

3) Reduce unemployment and disguised unemployment

The need for planning in underdeveloped countries is further stressed by the

necessity of removing widespread unemployment and disguised unemployment in
such economies. Capital being scarce and labor being abundant, the problem of
providing gainful employment opportunities to an ever-increasing labor force is a
difficult one. It is only a centralized planning authority which can solve this. In the
absence of sufficient enterprise and initiative, the planning authority is the only
institution for planning the balanced development of the economy. For rapid
economic development, underdeveloped countries require the development of the
agricultural and the industrial sectors, the establishment of social and economic
overheads, the expansion of the domestic and foreign trade sectors in a harmonious
way. All this requires simultaneous investment in different sectors which is only
possible under development planning.

4) Enhance the linkage between the agricultural and industrial sectors

The need, for developing the agricultural sector along with the industrial sector arises
from the fact that agriculture and industry are interdependent. Reorganization of
agriculture releases surplus labor force which can be absorbed by the industrial
sector. Development of agriculture is also essential to supply the raw material needs
of the industrial sector.

5) Create social overhead that enhance agricultural and industrial growth

The agricultural and industrial sectors cannot, however, develop in the absence of
economic and social overheads. The building of canals, roads, railways, power
stations etc., is indispensable for agricultural and industrial development. So are the
training and educational institutions, public health and housing for providing a

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regular flow of trained and skilled personnel. But private enterprise in
underdeveloped countries is not interested in developing the social and economic
overheads due to their un-profitability. It is motivated by personal gain rather than by
social gain. It, therefore, devolves on the state to create social and economic
overheads in a planned way.

6) Expand domestic and foreign trade

Similarly, the expansion of the domestic and foreign trade requires not only the
development of the agricultural and industrial sectors along with social and
economic overheads but also the existence of financial institutions. Money and
capital markets are undeveloped in underdeveloped countries. This factor acts as an
obstacle to the growth of industry and trade. There is economic instability generated
by international cyclical movements. Such maladjustments can only be removed by
the state. It can decide upon the setting up of a central bank and with its help a bill
market, commercial banks and other financial institutions throughout the country. It
is the planning authority which can control and regulate the domestic and foreign
trade in the best interests of the economy.

7) Eradicate poverty

The planning for development is indispensable for removing the poverty of nations.
For raising national and per capital income, for reducing inequalities in income and
wealth, for increasing employment opportunities, for all-round rapid development
arid for maintaining their newly won national independence, planning is the only path
open to underdeveloped countries. There is no greater truth than this that the idea of
planning took a practical shape in an underdeveloped country and that this is the only
hope of the resurgent underdeveloped countries of the world. The rapid development
of the USSR, a poor country at the time of the October Revolution, bears testimony
to this fact. To sum up in the words of Professor Gadgil Planning for economic

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development is undertaken presumably because the pace of direction of development
taking place in the absence of external intervention is not considered to be
satisfactory and because it is further held that appropriate external intervention will
result in increasing considerably the pace of development and directing it properly.
Planners seek to bring about a rationalization, and if possible and necessary, some
reduction of consumption, to evolve and adopt a long-term plan of appropriate
investment of capital resources with progressively improved techniques, a program of
training and education through which the competence of labor to make use of capital
resources is increased, and a better distribution of the national product so as to attain
social security and peace. Planning, therefore; means no more than better
organization, consistent and far-seeing organization and comprehensive all-sided
organization. Direction, regulations, controls, on private activity, and increasing the
sphere of public activity, are all parts-of organizational effort.

8) Self-sufficiency in Food and Raw Materials

As a preparation for more systematic and intensive planning, it may be considered

necessary first to make the country self-sufficient in food and essential raw materials.
That would provide a solid and sound base for the economy and prepare it for further
building up. Many developing countries concentrate or give priority on agricultural
development. Dependence on foreign food is dangerous. The first duty of a nation is
to feed its people. Political freedom may prove a farce without freedom from foreign
food, especially when war clouds may be hovering overhead. It is understandable,
therefore, that this objective may take precedence over other objectives when a Plan
is being conceived.

9) Reduction of Inequalities

It is now realized that political equality is illusory unless it is accompanied by

economic equality. Glaring inequalities of wealth, income and opportunities are

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shocking to the democratic conscience. Socialism is in the air; it has a very wide
appeal in modern times. In poor countries, it is a painful sight that the masses of
people should be on the border line of starvation, whereas a few rich people should
be rolling in all conceivable luxuries. It is natural, therefore, that the planners, who
are custodians of general welfare, should so shape their plans so as to make the poor
people less poor and the rich a little less rich, so that the gap between the two is
narrowed down as much as is humanly possible. The Indian planners have before
them the establishment of socialistic pattern of society as one of the objectives.

1.4. Shortcomings of Planning

As a tool, planning could not be a remedy for all economic, social and others ills.
Broadly the limitations could be on: concepts, coordination, action, follow up. The
specific limitations observed on planning are:

 Planning heavily depend on reliable data. If there are unreliable data, the
potential benefits of planning will be undermined.

 The problem of discontinuity. Planning models don’t deal with random

shocks (natural hazards, social changes and human intervention). Plans
work effectively when social and economic development unchanged
(unfolds) continuously.

 The problem of uncertainty (natural, market, state and war, international).

The problem with uncertainty could be minimized by adopting
probabilistic models but planning models are not using such methods.

 Inflation: rice instability would reduce the use of planning models.

Therefore, the use (favoring) of planning should be in line with the above limitations.

1.5. Problems of Planning

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Pre- requisites for planning

The formulation and success of a plan require the fulfillment of the following factors:
 Planning commission
 Statistical data
 Clear Objectives
 Fixation of Targets and Priorities
 Mobilization of Resources
 Balancing in the Plan
 Incorrupt and Efficient Administration
 Proper Development Policy
 Economy in Administration
 An Education Base
 A Theory of Consumption
 Public Cooperation

1. Planning Commission

The first prerequisite for a plan is the setting up of a planning commission which
should be organized in a proper way. It should be divided and sub-divided into a
number of divisions and sub-divisions under such experts as economists, statisticians,
engineers, etc, dealing with the various aspects of the economy.

2. Statistical Data

A prerequisite for sound planning is a thorough survey of the existing potential

resources of a country together with its deficiencies. As Baykov puts it: "Every act of
planning in so far as it is not mere fantastic castle building presupposes a preliminary
investigation of existing resources." Such a survey is essential for the collection of
statistical data and information with regard to the total available material, capital and
human resources of the country. Data pertaining to the available and potential natural

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resources along with the degree of exploitation, agricultural and industrial output,
transport, technical and non-technical personnel etc., are essential for fixing targets
and priorities in planning. It, therefore, requires the setting up of a central statistical
organization with a network of statistical bureaus for collecting statistical data and
information for the formulation of the plan.

3. Objectives

The plan may lay down the following objectives: to increase national income and per
capita income; to expand employment opportunities; to reduce inequalities of income
and wealth and concentration of economic power; to raise agricultural production; to
industrialize the economy; to achieve balanced regional development; to achieve self-
reliance, etc. The various goals and objectives should be realistic, mutually
compatible and flexible enough in keeping with the requirements of the economy.

4. Fixation of Targets and Priorities

The next problem is to fix targets and priorities for achieving the objectives laid
down in the plan. They should be both global and sectoral. Global targets must be
bold and cover every aspect of the economy. They include quantitative production
targets, so many more million tons of foodstuffs, coals, steel, fertilizers, etc., so many
kilowatts of power capacity, so many kilometers of railways and roads so many
additional training institutions, so much increase in national income, saving,
investment, etc. There are also sectoral targets pertaining to individual industries and
products in physical and value terms both for the private and public sectors. Global
and sectoral targets should be mutually consistent in order to attain the required
growth rate for the economy. This necessitates determining priorities. Priorities
should be laid down on the basis of the short-term and long-term needs of the
economy keeping in view the available material, capital and human resources.

Such schemes or projects which are required to be executed first should be given top

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priority while the less important should have a low priority. The scheme of priorities
should not be rigid but may be changed according to the requirements of the country.
Thus sound governmental planning consists of establishing intelligent priorities for
the public investment program and formulating a sensible and consistent set of public
policies to encourage growth in the private sector.

5. Mobilization of Resources

A plan fixes the public sector outlay for which resources are required to be
mobilized. There are various internal and external resources for financing a plan.
Savings, profits of public enterprises, net marketing borrowings, taxation and deficit
financing are the principal internal sources of finance for the public sector. Net
budgetary receipts corresponding to external assistance relate to the external sources
of financing the plan. The plan should lay down such policies and instruments for
mobilizing resources which fulfill the financial outlay of the plan without inflationary
and balance of payments pressures. At the same time, they should encourage
corporate and household savings of the private sector.

6. Balancing in the Plan

A plan should ensure proper balance in the economy, otherwise shortages or

surpluses will arise as the plan progresses. There should be balance between saving
and investment, between the available supply of goods and the demand for them,
between manpower requirements and their availabilities, and between the demand for
imports and the available foreign exchange.

Aggregate savings come from various sources such as voluntary savings, taxation,
profits of public enterprises, foreign remittances by nationals, etc. These must equal
planned aggregate investment in fixed capital assets and enterprise in the economy.
The balance between the supply and demand for goods requires balancing of the
available supply, of consumption goods with their demand, of the supply of capital

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goods, materials and inventories with their requirements, of the supply of
intermediate goods with their demand, and the proposed requirements of exports of
goods with their supplies. Balances are also required between planned demand and
supply of manpower, and between import requirements and the available foreign
exchange during the plan period.

In fact, two kinds of balances must be secured in a plan. The first is the physical
balance which consists of balancing the planned increase in output of various goods
with the amounts and types of investment. It also requires the balancing of the
outputs of the various sectors of the economy. This is, achieved through the input-
output technique because the output of one sector or industry is the input of the other
for producing its output. Physical balancing is essential for the internal consistency of
the plan, otherwise such physical obstacles as lack of raw materials, manpower, etc.,
will develop in the economy. The second is the monetary or financial balance which
consists of balancing the incomes of the people with the amount of goods available to
them for consumption, the funds used for private investment and the amount of
investment goods available to private investors, the funds used for public investment
and the amount of investment goods produced by the public sector, and the balancing
of foreign payments and receipts. The lack of these financial balances will lead to
disequilibrium in the supply and demand for physical goods thereby leading to
inflationary and balance of payments pressures during planning.

7. Incorrupt and Efficient Administration

A strong, efficient and incorrupt administration is the sine qua non of successful
planning. But this is what an underdeveloped country lacks the most. Lewis regards a
strong, competent and incorrupt administration as the first condition for the success
of a plan. The Central Cabinet in an underdeveloped country should not take
important economic decisions hurriedly without getting them- properly examined
from technical advisers. Competent administrative staff should be appointed in
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various ministries which should first prepare good feasibility reports of proposed
projects before starting them. It should gain experience in planning and starting a
project, keeping it on schedule, amending it in case of some unexpected snags, and
evaluating it from time to time. Without such administrative machinery, development
planning has no major inputin an under developed country. Lewis is very emphatic
when he writes, in the absence of such an administration it is often much better that
governments should be laissez-faire than they should pretend to plan. The
phenomenal success of development planning in Russia can be attributed to "a highly
trained and disciplined priestly order of the Communist Party." "In making a plan,"
writes Lewis at another place, "technique is subsidiary to policy". Hence although the
basic techniques are displayed, the emphasis is throughout on policy. The economics
of development is not very complicated; the secret of successful planning lies more in
sensible politics and good public administration.

8. Proper Development Policy

The state should lay down a proper development policy for the success of a
development plan and to avoid any pitfalls that may arise in the development process.
Professor Lewis lists the following main elements of such a development policy:
 investigation of development potential survey of national resources, scientific
research, market research;
 provision of adequate infrastructure (water, power, transport, and
communications) whether by public or private agencies;
 provision of specialized training facilities, as well as adequate general education,
thereby ensuring necessary skills;
 Improving the legal framework of economic activity, especially laws relating to
land tenure, corporations and commercial transactions.
 helping to create more and better markets, including commodity markets, security
exchanges, banking, insurance and credit facilities;
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 seeking out and assisting potential entrepreneurs, both domestic and foreign;
 promoting better utilization of resources, both by offering inducements and by
operating controls against misuse; and
 Promoting an increase in saving, both private and public. The success of a
development plan can be tested mainly by examining various proposals under
each of these heads. Good policies help, but they may not ensure success. Lewis,
therefore likens development planning to medicine which in the hands of a good
practitioner may perform useful tricks, but it is still the case that many patients die
who are expected to live, and many live who are expected to die.

9. Economy in Administration

Every effort should be made to effect economies in administration, particularly in the

expansion of ministries and state departments. The people must feel confident that
every pie that they pay to the government through taxation and borrowings is
properly spent for their welfare and development, and not dissipated away.

[Link] Education Base

For a clean and efficient administration, a firm educational base is essential. Planning
to be successful must take care of the ethical and moral standards of the people. One
cannot expect economy and efficiency in administration unless the people possess
high ethical and moral values. This is not possible unless a strong educational base is
built up whereby instructions are imparted both in the academic and technical fields.
Without creating honest and efficient human beings in the country, it would not be
feasible to undertake economic planning on a big scale.

11.A Theory of Consumption

According to Professor Galbraith an important requirement of modern development

planning is that it has a theory of consumption. Underdeveloped countries should not

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follow the consumption patterns of the more developed countries. The theory of
consumption should be democratic and prime attention must be accorded to goods
that are within the range of the model income that can be purchased by the typical
family. Cheap bicycles in a low-income country are thus more important than cheap
automobiles. An inexpensive electric lighting system for the villages is better than a
high capacity system which runs equipment, the people cannot afford. Inexpensive
radio sets are important, television belongs to another day. Above all, nothing is so
important, as abundant and efficiently produced food, clothing and shelter for these
are the most universal requirements.

[Link] Cooperation

Above all, public cooperation is considered to be one of the important levers for the
success of the plan in a democrat country. Planning requires the unstinted
cooperation of the people. Economic planning should be above party politics, but at
the same time, it should have the approval of all the parties. In other words, a plan
should be regarded as a National Plan when it is approved by the representative of the
people. For, without public support no plan can be success. As Lewis states: "Popular
enthusiasm is both the lubricating oil of planning and the petrol of economic
development, a dynamic force that makes all things possible".

1.6. Implications of Various Economic Controls in Planned Economy

Arguments for and against Planning

Cases for Planning

An unplanned economy is like a ship moving rudderless on uncharted seas with no

fixed destination and unlikely to reach it if there be any. Such an economy works
blindly and haphazardly. It caters for the rich and makes them still richer. It ignores
the real wants of the people and fails to promote general well-being. It is the profit

21
motive rather than service of the masses which is the mainspring of economic
activity in such an economy. How it operates is no guarantee of economic progress
for the less developed economies. The-economically advanced countries may not feel
enamored of the idea of planning but for the under-developed economies it is a stark
necessity as economic development is now regarded as imperative. Majority of the
under-developed countries realize very clearly that they must develop economically
and that too very soon.

As Galbraith says, "There is much that market can usefully encourage and
accomplish. But the market cannot reach forward and take great strides when these
are called for. As it cannot put a man in space so it cannot bring quickly into
existence a steel industry when there was little or no steelmaking capacity before. To
trust the market is to take an unacceptable risk that nothing or too little will happen."
It is planning alone which can guarantee quick economic growth in the under-
developed countries. This explains why there is a clear and pronounced swing of
opinion in favor of planning.

We shall now put forward a few arguments for economic planning. Some of these
arguments are in favor of planning in general for all countries and some of them
apply with a special focus to underdeveloped economies.

a) The judgment of the State is superior to that of the citizen

As Arthur Lewis remarks, "The state now claims to know better than its citizens for
how many years they should send their children to school, between what hours they
should drink, what proportion of income should be saved, whether cheap houses are
better than cigarettes, and so on." Economic development is a more serious matter
and should not be left to the individual entrepreneurs. The State represents the
accumulated wisdom of centuries and provides talent and experience beyond the
capacity of individual and isolated businessmen. Planning by collective action is

22
indispensable if a country is to develop economically on the right lines and develop at
the desired speed.

b) Planning becomes necessary for equitable distribution of economic power

The price mechanism rewards people according to the resources they possess but
contains in itself no mechanism for equalization of the distribution of those resources.
There is no wonder, therefore, that there are wide gaps between the 'haves' and 'have -
nots' which seriously offend against sense of social justice. Shocking economic
inequalities are a marked feature of an unplanned economy. Inequalities result in
heart burning and social tensions.

They also paralyze some of the ablest members of the society. Reduction of
inequalities in income, wealth and economic opportunities is, therefore, now the
avowed aim of modern welfare States and it is impossible of achievement without the
instrument of planning. In the absence of planning, inequalities will not only be
perpetuated but accentuated from generation to generation.

c) Planning helps to protect labor and harmonize wage relations

It has been seen that labor legislation alone cannot protect labor and harmonize wage
relations when market mechanism is permitted to operate freely. A planning
authority must step to regulate the economic growth of the country as to ensure to the
actual workers the fruits of their labor. If there was perfect competition and full-
employment, the price mechanism, shorn of its imperfections, would have afforded
due protection of labor rights. But this is a big 'IF'. The State is a more effective
guardian of labor rights than self-adjusting and automatic economic forces. By proper
planning, it will be possible to provide perfect social security to all workers.

d) planning helps to eliminate economic instabilities

23
Planning has also proved to be a powerful instrument for eliminating instability
which is necessary concomitant of free market economy. Private enterprise left to it
would produce trade cycles, unemployment and misery. As Barbara Wootton
remarks, "the progress of an unplanned capitalist economy has always been liable to
interruptions from the tendency of the system to fall over its own toes, from a certain
continued instability in its gait." It is not generally agreed that planning of economic
activity goes a long way in smoothening the violent oscillations and swings in
business, thus preventing undeserved gains and undue hardships. It is on this ground
that planning is advocated even for developed and advanced economies. These
countries may not need any further economic development; but they certainly need a
mechanism which would prevent violent ups and downs in the movements of
business activity and smoothen the course of business. In the last thirties, every
country suffered from Depression except Russia, which was a planned economy.

e) Planning helps to make terms of trade favorable to the country

Again, it is planning alone which can ensure that the terms of trade remain favorable
to a country. The volume and direction of foreign trade of a country admittedly plays
a very important part not only in economic development butalso in determining the
level of general well-being in a community. But handling of foreign trade by the
market has proved utterly inadequate. Foreign trade must be thoroughly planned, if
fruits of economic development are not to be thrown away. This aspect of economic
development has been paid special attention by planners everywhere.

f) To realize major economic changes

Without the aid of planning no country can cope with major economic changes. Such
changes like industrial revolution or rationalization movement, are bound to turn the
economy topsy-turvy. The economic system may be thrown out of gear altogether.
Private enterprise will feel, helpless and stand simply aghast. The planning authority
with its resources of men and money can meet all such situations and control the
24
disturbing factors. Major changes can even be anticipated and provided against in
good time. The market mechanism cannot move the resources in the desired
directions in quantity and with speed which a major change may necessitate. Only a
planning authority can eliminate bottle-necks. Under a free market economy, a few
persons receive abnormally large incomes at public expense and the scarce
commodities are unjustly distributed. Overproduction is a common phenomenon
bringing suffering to the poor. A planned action to speed up the movement of
resources at times of major changes is absolutely essential.

g) Planning eliminates wasteful competition

The merit of the free market lies in competition being perfect; but in actual life
perfect competition is a rare phenomenon. At any rate, there is nothing in the market
mechanism that establishes or maintains competition. Only State action can ensure
fair competition. Hence, market economy can also be helped to function adequately
with the positive support of the planning authority. Huge man-power need not be
dissipated in distributional trades or huge fund frittered away in advertisement and
salesmanship. Planning can be combined with a market economy in various degrees.
Only by means of planning by direction rather than by means of persuasion or
inducement can an economy achieve a desired objective. That is the only way to
direct economic life economically, wisely and safely.

h) Efficient use of resources

Only a planned economy provides for proper co-ordination and avoids unnecessary
duplication of staff and equipment. In an unplanned economy, millions of producers
work in an independent and isolated fashion without bothering as to what the other
businessmen are doing. The cumulative consequence may be confusion and chaos.
We might well question with Professor Dobb: "How could order emerge from the
conflict of a myriad of independent and autonomous wills?" An unplanned economy,
according to Lerner is like "an automobile without a driver but in which many
25
passengers keep reaching over to the steering wheel to give it a twist." It will be a
miracle indeed if the automobile reaches its destination safely.

On the whole, therefore, economic decisions in an unplanned economy are likely to

be irrational, shortsighted, self-frustrating and socially disastrous. A planning
authority, on the other hand, can take farsighted decisions and produce a balanced
economy. It can take an overall view, whereas in an unplanned economy each
entrepreneur looks to his own interest and nobody bothers about the economy as a
whole as a central planning authority can do. As Prof. Durbin remarks, "the general
officers on the hill must be able to see more than the ensign in the line of battle."

Planning makes for optimum utilization of a country's resources. A planning

authority is able to lay down what is essential and what is non-essential activity,
encouraging the former and sharply cutting down the latter. On the other hand,
private enterprise is guided solely by the profit motive regardless of social benefits or
evils. Only a planning authority can ban lipstick and face powder, otherwise valuable
national resources will be directed towards the production of useless luxuries for the
rich and starve the masses of the necessaries of life. It is to the obvious advantage of
a country to concentrate on the production of essentials and avoid wasting its
resources on the non-essentials. As Professor Harris says, "Surely no well-
functioning planned society would allow expenditure of 3 billion on education, and 2
billion on social security, as in the U.S.A. and seven billion on alcoholic beverages."

i) Planning prevents artificial shortages that can be created by monopoly

actions

A planned economy will prevent artificial shortages being created by profit-greedy

businessmen. By means of trusts, cartels, price agreements and market sharing they
increase their profits at the expense of the society. The planning authority can smash
such designs by positive action in favor of the community. It possesses enough power
to ensure the working of the economy in a healthy manner in the best interest of all
26
rather than for the benefit of the few.

j) Planning helps to minimize environmental costs of industrialization

By planning it is possible to keep down or eliminate social costs which usually take
the form of industrial diseases, industrial accidents, overcrowding and unsanitary
conditions and cyclical unemployment. These social costs are the by-products of
capitalism. Since planning extends the sphere of public ownership and control, the
evils of capitalism are mitigated. Full co-operation of labor can be secured and anti-
social 'go slow' tactics rendered unnecessary resulting in increase in national output.

k) Planning also results in higher rate of capital formation

Private enterprise is more intent on immediate gain rather than future good. It takes a
short-sighted view of things. On the contrary, the planning authority, as the custodian
of the national interests, takes a farsighted view. It can look more to the distant future
than to the immediate present. It is in a position to sacrifice petty present gains for the
future substantial benefits. The surpluses of the public undertakings add to the capital
assets of the nation instead of going into the pockets of private persons and spent on
consumption goods. That is why under planning capital formation receives great
attention.

l) Special Case of Under-developed Countries

The arguments given above apply to all countries at all stages of economic
development. They largely take their stand on the failure of laissez-faire policy and
its general abandonment. It is now realized that lack of co-ordination, recurrence of
business cycles, economic inequalities, social parasitism, economic insecurity,
wastes of competition, absence of industrial peace and huge social costs which
characterize an unplanned economy, can be done away with by resorting to planning.
An unplanned economy must act in an erratic and irrational manner. But planning
has a specially strong case for the under-developed economies. In their case, it is not
27
merely necessary to maintain the country's economy in sound health and to ensure a
rational and optimum use of the community's resources but also to speed up
economic development. They are lagging behind in the race and they are keen to
catch up with the advanced economies or at any rate reduce dependence on them as
fast as possible; This impatience for accelerating economic development leads
inevitably to economic planning. The achievements of the Russian and Chinese
economies under planning serve as an example.

The private enterprise in India has not taken India any far on the road of economic
progress. It has left untouched and undeveloped some of the off vital sectors of the
Indian economy. The entrepreneurial ability is lacking in India or exists only in an
insignificant measure. The Indian entrepreneurs take up worn-out lines and give no
evidence of innovation. They are more intent on rich quick methods and pursue
speculative profits, rather than long-term industrial development. They have been
attracted more by commerce than by industry. In such countries, it becomes
necessary for the State to intervene and provide the right type of entrepreneurship to
bring about economic development.

Even in advanced countries, the edge of price mechanism has been blunted. It has
failed to function efficiently on account of economic rigidities and structural
disequilibria; but in the underdeveloped countries, intent upon accelerated economic
development, little reliance can be placed on price-mechanism for the optimum
utilization of resources and for giving a right direction to the productive machine of
the community. It will only function erratically, fitfully and irrationally. There will be
no guarantee that the quality and quantity of production is what the nation needs.
Much more positive action is needed to give right direction to productive activity. In
order to speed up the rate of economic development, price-mechanism, as governing
economy development, must go or its functioning confined to unimportant sectors of
the economic like the purchase and sale of consumer goods. Only then, the under-

28
developed countries will come out of the morass of poverty and economic stagnation.
Only by planning can specific objectives be attained and targets of production
achieved. At every five-year period, progressively higher tar gets can be fixed and
effective means to achieve them adopted.

Capital formation and skill formation are of crucial importance for any stage of
economic development. These two determinants of economic growth have a very
tardy and unsatisfactory development in backward and under-developed economies.
Planning is essential to build up these necessary elements of productive power.
Planning authority can launch a vigorous savings drive and control and guide
investment of the mobilized resources in the desired channels. Normally in backward
countries, rich people prefer investment in land, housing, property and jeweler. This
sort of investment is no good for speedy economic development of the country. That
is why Indian government has come hard upon the gold hoardings; drastic measures
have to be taken to take over hoarded wealth lying unproductively in lockers and
private hoards in order to help capital formation. This can only be done under
planning.

Voluntary savings can be supplemented by revenue surplus 'Disguised

unemployment, which is a special feature of an under-developed economy, is another
source that can be tapped. We have surplus labor in agriculture which represents
disguised unemployment. Such labor can be withdrawn from agriculture and put to
more productive employment. The State, in an under-developed country, can also
resort to deficit financing and thus increase the financial resources available for
economic development. Even then foreign aid may become necessary. For planned
economic development, foreign aid is readily made available. A country which has
no plan and which may rightly be considered as going nowhere, cannot hope to
secure foreign financial assistance, but planned economies can.

Plan and foreign aid given to Pakistan and India are the examples which can be cited.

29
These are a few measures by means of which financial resources of a country can be
built up under planning.
Glaring inequalities of wealth and income and of economic opportunities is another
painful feature of under-developed countries. These inequalities can also be reduced
through planning. Slogan of equality whips up the enthusiasm of the people and
induces them to put in their best effort.
The demographic factor is another hindrance in backward countries which can also
be overcome by planning. A country with increasing population must run fast in
order to keep up its present position, Increase in national wealth is swallowed up by
still many more mouths. There is no escape from planning in such countries.

The socio-religious attitudes of the people also call for an effective State action to
make them act in a more rational manner. It is well known that social and religious
institutions of India have hindered economic growth in the past. A planned program
is essential to neutralize the adverse effect of such obsolete notions and institutions.
The paucity of trained, competent and honest administrators in backward countries
has also to be made up and calls for a planned endeavor.

Conclusion: These are some of the special problems which an under-developed

country has to tackle. It is now already realized and universally admitted that these
problems can be effectively tackled by planning and by planning alone. Planning in
such countries is needed, above all, for accelerating economic development. There is
need in such countries, as Galbraith says, not only for development "but an urgent
demand that it should occur promptly."

Prof. D.R. Gadgil indicates the need for, and justification of, planning in these words,
"Planning for economic development is undertaken presumably because the pace or
direction of development taking place in the absence of external intervention is not
considered to be satisfactory and because it is further held that appropriate external
intervention will result in increasing considerably the pace of development and

30
directing it properly. Planning seeks to bring about a rationalization and, if possible
and necessary, some reduction of consumption to evolve and adopt a long-term plan
of appropriate investment of capital resources with progressively improved
techniques, a program of training and education through which the competence of
labor to make use of capital resources is increased, and a better distribution of the
national product so as to attain social security and peace. Planning therefore means in
a sense, no more than better organization, consistent and far-seeing organization and
comprehensive all-sided organization. Direction regulation controls on private
activity and increasing the sphere of public activity, are all parts of organizational
effort.
Arguments against Planning

1. Inherently markets are not imperfect. Markets could be perfect by man

mechanisms (increase competition, information) and therefore there is no need
for state intervention- planning.
2. The best approach to minimize the difference between marginal net benefits of
social and private is through use of fiscal measures (taxation and subsidy).
3. In order to prepare and execute a plan needs competent administration (skilled
manpower) which is in short supply in Less Developing Countries. Therefore,
planning is only to exacerbate skilled manpower shortages.
4. Planning requires information in quantity and quality which is limited in Less
Developing Countries. The information even available is not reliable; hence
markets rather than planning should be favored.
5. The cost of planning in Less Developing Countries is enormous in the form of
administration, licensing, etc.

31
 CHAPTER TWO

2.0. CLASSIFICATION OF PLANNING: Meaning, Characteristics of

Different Types of Planning and Their Relative Merits and Demerits
Chapter objectives

After reading this chapter you must be able to;

 Define planning.
 Explain Planning by Direction and Planning by Inducement
 Short term, medium term and long term planning
 Financial Planning and Physical Planning
 Perspective Planning and Annual Planning
 Indicative Planning and Imperative Planning
 Democratic Planning and Totalitarian Planning
 Rolling and Fixed Plans
 Centralized and Decentralized Planning
Introduction

Planning takes different forms on the basis of:

 Differences in time periods
 Institutions affected
 Extent of activities covered
 Modes of executing the plan, etc.
Therefore, the types of planning are:
1. Authoritarian and Democratic Planning
2. General and Partial Planning
3. Functional and Structural Planning
4. Planning by Inducement and Direction

32
 5. Centralized and Decentralized Planning
6. Physical and Financial Planning
7. Rolling and Fixed Planning

We are now going to look the detail characteristics, advantages, dis-advantages and
limitation for each of the planning types.

2.1. Planning by Direction and planning by Inducement

Planning by direction is an integral part of a socialist society. It entails complete
absence of laissez-faire. There is one central authority which plans, directs, and
orders the execution of the plan in accordance with pre-determined targets and
priorities. Such planning is comprehensive and encompasses the entire economy.
Planning by inducement is democratic planning. It means planning by manipulating
the market. There is no compulsion but persuasion. There is freedom of enterprise,
freedom of consumption and freedom of production. But these freedoms are subject
to state control and regulation. People are induced to act in a certain way through
various monetary and fiscal measures. Thus, planning by inducement is able to
achieve the same results as are likely to be achieved in planning by direction but with
less sacrifice of individual liberty.

Planning by direction implies minute and detailed instructions being given both to
producers and consumers. A list of all commodities to be produced with the quantity
of each has to be prepared as well as a separate list for each of the complements and
substitutes. Planning by direction is very comprehensive. It covers the entire
economy. There is complete concentration of economic authority in the state. There
is one authority which is in sole charge of planning, directing and execution of the
plan in accordance with pre-determined targets and priorities. Only planning by
direction can guarantee the success of the plan, otherwise the targets would turn out
to be mere pious wishes. This means that the economic plan should have at its back

33
the full authority of the state not merely in planning but also in its implementation or
execution. As Dr. Oskar Lange observes, "With regard to the socialist sector the
national plan represents a binding directive. The targets of the national plan and its
financial provisions represent orders to be carried out of the various ministries and
the enterprises subject to them. They are duty bound to carry out the directives of the
plan."

Shortcomings:

 It is undemocratic since the people are ignored all along. It is bureaucratic and
totalitarian and, as such, involves the treatment of human beings as mere pegs
in a big bureaucratic machine. There' is no economic freedom. Rationing and
control result in black marketing and corruption.
 Owing to the complexity and many-sidedness of modern economic system,
planning by direction does not yield satisfactory results. It is too formidable a
task. No person or body of persons can perform this task satisfactorily.
 There is bound to be shortage of some and surplus of other commodities.
 Besides, this sort of planning is bound to be inflexible. The plan once prepared
must be adhered to, no part of the plan can be altered affecting the whole plan.
 The fulfillment of the plan cannot be anticipated, because conditions keep
changing. Black markets emerge to overcome the imperfections of the plan
 Planning by direction also leads to excessive standardization which impinges
on consumer's sovereignty.
 It also involves huge administrative costs-elaborate censuses, numerous forms
and army of clerks.
As Lewis remarks, "When government is doing only a few things we can keep an eye
on it, but when it is doing everything it cannot even keep an eye on itself." These are
a few difficulties or shortcomings of Planning by direction. But the choice between
these two types of planning is determined by the system of government prevailing in

34
the country. A democratic government adopts indicative planning whereas a' socialist
state will adopt planning by direction.

Sometimes countries try to achieve objectives of planning in an indirect manner.

There is private enterprise throughout the economy and market mechanisms in full
operation. The State just offers certain inducements and incentives. This is what a
predominantly capitalistic economy like the American economy would do. As
against induced planning or indicative planning, there is compulsory planning or
planning by direction under a central directing authority.

Planning by inducement

Planning by inducement is often referred to as indicative planning. In this type of

planning, the planner either subsidizes production or controls prices, if it is intended
to increase the consumption of a commodity. The first acts on the supply side and
the latter, on the demand side. Cheaper price is an inducement for the consumer and
subsidy an inducement for the producer. This is, planning through the market
mechanism. The citizen wants freedom of choice in consumption. This freedom
exerts pressure for free adjustment of production to consumption. Similarly, the
worker demands freedom to choose his own job. This means that besides consumers'
market there must also be a labor market. This leaves a narrow sphere for State
control.

The basic idea is that the market controls the entrepreneur and State can control the
entrepreneur by controlling the market. The State tries to manipulate the market by
means of incentives and inducements through price fixation, taxation and subsidies.
The government seeks to influence economic and investment decisions by offering
incentives to entrepreneurs via fiscal and monetary policies but does not control or
regulate the functioning of the economy directly. Planning by inducements avoids
swollen bureaucracy. Thus, it is planning by persuasion rather than compulsion.

35
There is freedom of enterprise, freedom .of production and consumption subject to
some regulation or control by the state.

However, immobility of resources imposes serious limitations on planning by

inducement. This immobility creates shortages which cannot be eliminated merely
by price control and rationing. Measures have to be taken not only to distribute
supplies equitably but also to augment supplies. There are writers who are not
prepared to consider indicative planning as planning in the real sense of the word.
According to them, there can be no planning without direct orders or directions so as
to compel economic activities to conform to the plan programs and objectives.

The merits of indicative planning are:

 Consumer's sovereignty remains intact

 There is freedom of enterprise
 It is flexible
 It is democratic.
 As against these merits, there are some demerits too:
µ It fails to achieve the objectives of planning or targets of production
µ The private entrepreneurs care more for profit than for the growth of the
economy
µ The fiscal and monetary policies of the government are not so successful in
the underdeveloped countries; controls lead to black markets.
µ The producers may not find the incentives offered by the state attractive
enough to follow the state guide-lines. The disincentives for the consumers
may not be deterrent enough to curb wasteful consumption
µ The working of the market forces fail to bring about proper adjustment
between demand and supply and thus create imbalances in the economy.

36
2.2. Short term, Medium term and Long term Planning
Perspective Planning and Annual Planning:

Perspective planning refers to long-term planning in which long range targets are set
in advance for a period of 15, 20, or 25 years. A perspective plan, however, does not
imply one plan for the entire period of 15 or 20 years. In reality, the broader
objectives and targets are to be achieved within the specified period of time by
dividing the perspective plan into several short-period plans of 4, 5 or 6 years.

Not only this, a five year plan is further broken up into annual plans so that each
annual plan fits into the broad framework of the five-year plan. Plans of either kind
are further divided into regional and sectoral plans. Regional plans pertain to regions,
districts and localities and sectoral plans pertain to plans for agriculture, industry,
foreign trade etc.

Business owners develop plans to reach their overall goals, and they usually find it
useful to separate planning into phases. This allows you to track immediate
improvements while evaluating progress toward eventual goals and targets. The
different time frames of the planning process place the focus on time-sensitive
aspects of the company's structure and environment. You can differentiate planning
based on the time frames of the inputs and expected outcomes.

Many businesses develop strategic planning within a short-term, medium-term and

long-term framework. Short-term usually involves processes that show results within
a year. Companies aim medium-term plans at results that take several years to
achieve. Long-term plans include the overall goals of the company set four or five
years in the future and usually are based on reaching the medium-term targets.
37
Planning in this way helps you complete short-term tasks while keeping longer-term
goals in mind. Short-term planning looks at the characteristics of the company in the
present and develops strategies for improving them. Examples are the skills of the
employees and their attitudes. The condition of production equipment or product
quality problems are also short-term concerns. To address these issues, you put in
place short-term solutions to address problems. Employee training courses,
equipment servicing and quality fixes are short-term solutions. These solutions set the
stage for addressing problems more comprehensively in the longer term.

Medium-Term

Medium-term planning applies more permanent solutions to short-term problems. If

training courses for employees solved problems in the short term, companies
schedule training programs for the medium term. If there are quality issues, the
medium-term response is to revise and strengthen the company's quality control
program. Where a short-term response to equipment failure is to repair the machine, a
medium-term solution is to arrange for a service contract. Medium-term planning
implements policies and procedures to ensure that short-term problems don't recur.

Long-Term

In the long term, companies want to solve problems permanently and to reach their
overall targets. Long-term planning reacts to the competitive situation of the
company in its social, economic and political environment and develops strategies for
adapting and influencing its position to achieve long-term goals. It examines major
capital expenditures such as purchasing equipment and facilities, and implements
policies and procedures that shape the company's profile to match top management's
ideas. When short-term and medium-term planning is successful, long-term planning
builds on those achievements to preserve accomplishments and ensure continued
progress.

38
 • In general, Short term planning typically covers time frames of less than one
year in order to assist their company in moving gradually toward its longer
term.

• Examples are the skills of the employees and their attitudes. The condition of
production equipment or product quality problems are also short-term
concerns.

2.3. Fixed and Rolling Planning

Professor Myrdal was the first economist to advocate a rolling plan for developing
countries in his book Indian Economic Planning in its Broader Setting. India did not
experiment it for the first time in 1978. It was introduced for purposes of defense
after the Chinese aggression in 1962 and has been a great success in making the
country almost self-sufficient in the manufacture of sophisticated arms and ammuni-
tions, frigates and aircrafts, and helped to prepare it face Pakistan twice. It was
introduced in Indian planning by the Junta Government on April 1, 1978 and was
given up on April 1, 1980 with the coming to power of the India Government.

In a rolling plan, every year three new plans are made and acted upon. First, there is a
plan for the current year which includes the annual budget and the foreign exchange
budget. Second, there is a plan for a number of years, say three, four or five. It is
changed every year keeping with the requirements of the economy. It contains targets
and techniques to be followed during the plan period, along with price relationships
and price policies. Third, a perspective plan for 10, 15 or 20 or even more years is
presented every year in which the broader goals are stated and the outlines of future
development are forecast. The annual plan is fitted into the same year's new three-,
four- or five-year plan, and both are framed in the light of the perspective plan. For
example, if planning is started in 1970 in a country, there would be three plans under
39
the technique of rolling plan: an annual plan for 1970, a five-year plan for 1970-75,
and a 20-year plan for 1970-90. The broad aims and objectives are laid down in the
20-year perspective plan. When the plan starts in 1970, there will be an annual plan
in every subsequent year that is, 1971, 1972 and so on. The five-year plan for 1970-
75 will also roll on for the subsequent periods by shedding each previous year so as
to become a plan for 1971-76, 1972-77 and so on. Since planning is a continuous
process, every year the plan is revised in the light of new information, improved data
and improved analysis. At each revision it will be well to look into the future a
number of years which is determined by the nature of the factual circumstances If
five years is deemed to be a suitable horizon, this number of years may be applied at
each of the yearly revisions in the sense one would always be working in the
beginning of a five-year period.

The concept of rolling plan is devised to overcome the rigidities encountered in the
fixed five-year plans. In the rolling plan, there are plan targets, projections and
allocations that are not fixed for the five-year period but are liable to revision every
year in keeping with the changing conditions of the country. It not only provides
greater flexibility but also a clearer perspective and a better view of the priorities.

Being flexible, a rolling plan is more realistic than a flexible plan. It takes into
consideration such unforeseen natural and economic changes as floods, drought, war,
hike in oil prices, etc. which may affect the economy adversely. Under a rolling plan,
financial and physical targets can be revised in keeping with such changes. But such
revisions are not possible under a fixed plan. Thus the rolling plan combines the
advantages of both perspective and flexible planning

But critics are not lacking in pointing towards certain demerits of this technique of
rolling plan. They point out that since the targets are likely to be revised every year, it
is not possible to achieve the targets laid down in the plan within a fixed time period.
Such frequent revisions also make it difficult to maintain proper balances in the

40
economy which are essential for its balanced development. Again, when the plan is
continuously revised, it creates uncertainties in the private and public sectors of the
economy. Both sectors lose the urge to make changes in their production plans or to
proceed in accordance with the previously laid down targets. To achieve bigger
targets becomes out of question. Moreover, constant revisions of the targets of the
plan develop an attitude of non-commitment and apathy among the planners

2.4. Democratic and Totalitarian (Authoritarian) planning

In authoritarian planning, the government is the sole centralized agency which draws
the plan and implements it. It is more comprehensive, systematic and rigid and is
more efficient. In democratic planning, the plan is prepared by an expert body called
the planning commission, which is outside the government or the executive and it is
finally approved by legislature which represents the people. It is based on the system
of free enterprise, but economic activity outside the public sector is sought to be
regulated and guided indirectly by providing incentives for investment through fiscal
or monetary policies.

Difference between Autocratic & Democratic planning:

Autocratic

• An environment of mutual distrust exists.

• Planning is done by the manager/head only.
• “I” feelings predominate.
• Manager or Head tells the teachers what to do.
• The Head sometimes embarrasses teachers before children.

• Manager/Head/Princi--pal takes credit for all success.

• Faculty meetings are only planned by the Head.

41
 • Text books are selected by the manager.

• Students are teacher -dominated.

• Teachers plan activity without discussing with pupils.

• Teachers spring awe and fear.

Democratic

• An environment of mutual trust exists.

• Cooperative planning is done by the entire staff.
• “We” feelings prevail.
• Manager/Head discusses problems with teachers and accepts suggestions.
• The Head respects teachers’ personality.
• The Head gives credit of success to co-workers.
• Faculty meetings are only planned by the entire staff.
• Teachers participate in selection of books.
• Students are teacher-guided.
• Teachers plan many activities according to students’ interest.
• Teachers are sympathetic.

2.5. Anti-Cyclical and Development planning

Several other varieties of planning are now known to the students of Economics.
There is general planning in which a comprehensive and integrated plan .is
conceived, initiated and executed by a central authority. The plan covers all aspects
of the economy and the central authority completely controls the investment and
utilization of resources.

As against general planning, there is partial planning, a sort of piece-meal planning in

which the plan covers only some important sectors of the economy.

42
Then again, planning may be attempted within the existing socio-economic
framework or it may seem to change the existing order radically. The former is
known as, functional planning and the latter structural planning.

Functional planning assumes that planning is possible even in a capitalistic

economy, whereas advocates of structural planning think that planning and
capitalism are incompatible. Quite respectable opinions have taken sides on this
question. For instance, Dr. Ludwig Von Mises is of the view that planning and
capitalism are utterly incompatible. On the other hand Professor Landauer holds the
opinion that planning and capitalism could be reconciled. We are inclined to agree
with the latter view and hold that even capitalist countries can have a measure of
planning and benefit from its technique in order to carry the economy forward on
the road of economic progress or eliminate serious imbalances in the economy.

This is the French system of planning which is based on the principle of

decentralization in the operation and execution of the national plans. This type of
planning is not imperative but flexible. In indicative planning the private sector is
neither rigidly controlled nor directed to fulfill the targets and priorities of the plan.
Even then, the private sector is expected to fulfill the targets for the success of the
plan. The state provides all types of facilities to the private sector but does not direct
it, rather indicates the areas in which it can help in implementing the plan.
On the other hand, under imperative planning all economic activities and resources of
the economy operate under the direction of the state. There is complete control over
the factors of production by the state. The entire resources of the country are used to
the maximum in order to fulfill the targets of the plan. There is no consumers’
sovereignty in such planning. What and how much to produce – such decisions are
taken by the managers of firms and factories on the direction of the planning
commission or a central planning authority. Since the government policies and
decisions are rigid, they cannot be changed easily.

43
 2.6. Physical planning Vs financial planning

Financial planning refers to the technique of planning in which resources are

allocated in terms of money. Financial planning is essential in order to remove
maladjustments between supplies and demand and for calculating costs and benefits
of the various projects. Thus, financial planning is thought to secure a balance
between demands and supplies, avoid inflation and bring about economic stability.

Physical planning refers to the allocation of resources in terms of men, materials and
machinery. In physical planning, an overall assessment is made of the available real
resources such as raw materials, manpower, etc., and how they have to be obtained so
that bottlenecks may be eliminated during the plan. Physical planning requires the
fixation of physical targets with regard to agricultural and industrial production,
socio-cultural and transportation services, consumption levels and in respect of
employment, income and investment levels of the economy. Physical planning has to
be viewed as an overall long-term planning rather than a short-term piecemeal
planning.

Here we come to the question whether we fix the size of investment in terms of real
resources which is known as physical planning or in terms of money which is known
as financial planning. Ultimately, however, financial resources will have to be
translated into real resources for money as such serves no purpose. If adequate
finance is not available, it can be created through deficit financing. In under-
developed-countries, there always exist unutilized or under-utilized resources, for
instance, uncultivated land, unemployed labor, hoarded wealth, etc. These resources
can be mobilized by "creating" money.

i. Financial Planning

In the case of financial planning, the planners determine how much money will have
to be invested in order to achieve the pre-determined objectives or targets. Total
44
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 taxation, borrowings and savings. This money is then used to
mobilize the required resources. There has thus to be an integration between physical
planning and financial planning. Indian planning has been mostly financial planning
although some targets have been set in concrete and real terms, e.g., the output of
food grains.

The essence of financial planning is to ensure that the demands and supplies are
matched in a manner which exploits physical potentialities as fully as possible
without major and unplanned changes in the price structure.

Finance holds the key to the success of a plan. If the country is able to raise adequate
financial resources, the success of the plan is assured. But failure to raise the enquired
resources will spell its failure. It will not be able to achieve the targets set out for it.

Financial planning has its own limitations:

 An attempt to raise taxes to too high a level will adversely affect the
capacity of the people to save which may hamper the development process.
 Owing to smallness of organized money sector and the existence of a larger
non-monetized sector, the estimates of financial resources may go wrong.
Even the physical targets may be upset. Imbalances between the monetized
and non -monetized sectors may result in shortages and in inflationary
pressures. Hence financial planning is more suitable for sector planning
than for overall planning.
 Financial planning may not provide for the expansion of employment
opportunities at a scale so as to absorb the new entrants to the labor market.
Hence people's needs both for work and employment may remain

45
 unsatisfied.

ii) Physical Planning

In physical planning, the planning authority has to work out how much land, labour,
materials and capital equipment will be required to implement the plan and achieve
the targets set out for it. Physical planning makes for concreteness in planning.. As is
stated in India's Second Five Year Plan, physical planning "is an attempt to work out
the implications of the development effort in terms of factor allocations and product
yield's so as to maximize incomes and employment". It is an input-output analysis. It
implies proper evaluation of the relationship between investment and output. In
physical planning, the planners have to determine not only the amount of investment
but also work out its composition in terms of the various goods and services required
to' obtain a certain increase of output of product. For instance, it has to be worked out
as to how much of cotton, coal or electric power and other ingredients will go into an
output of 1,000 meters of cloth. That is how calculations have to be made for each
type of goods to achieve the targeted quantity. In this way, planned increase in the
output of various goods is matched with the amounts and various types of
investments. Financial planning is only a means to achieve the various targets laid
down in the plan.

Thus, in physical planning, we make an overall assessment of the available real

resources like raw materials, manpower and capital equipment and devise ways and
means to mobilize them in amounts sufficient to enable us to achieve the various
targets of production. These targets are laid in physical terms, e.g., so many tons of
steel, food grains, coal, sugar and so many million meters of cloth, etc., in
agricultural and industrial sectors and also for economic overheads like roads and rail
kilometers) etc., or so many buildings to be created, so many doctors and engineers to
be trained and the number and type of educational institutions, and so on. But the

46
various targets have to be properly matched and balanced. The test of the soundness
of planning lies in the avoidances of imbalances, stresses and strains of any type in
the economy.

It is not to be understood that physical planning is a straight and simple affair and
presents no difficulties. Rather, there are formidable difficulties in the following
ways:

µ In the under-developed countries, there is statistical blackout so that adequate

and reliable statistics regarding the various types of real resources are lacking.
It, therefore, becomes really difficult to lay down the targets with any degree of
certainty.

µ To build up a sound sectoral balance is also a tight ropedancer. That is why

when the plan is being implemented all sort of stresses and strains, bottlenecks,
shortages and gluts and inflationary pressures appear to thwart the planners'
effort.

µ Physical planning is not enough to prepare a sound plan for economic

development. It has to be supplemented with financial planning. If this is not
done, the economic plan will go down against financial rocks. Lack of
adequate financial resources have been a major cause of the failure on planning
in India.

Thus, physical and financial planning are necessary to assure the success of the plan.
They are complementary to each other just as the right and left legs are needed for
walking. There has to be a proper balance between the two. Both techniques must be
integrated in the development process.

2.7. Centralized and Decentralized planning

Some other forms of planning may be centralized planning and decentralized

47
planning. In the case of the former, planning is done by a central authority. It is done
from the top. Each citizen, producer or consumer, has simply to carry out the
instructions or the job or duty assigned to him. In the case of decentralized planning,
however, we plan from the bottom. For instance, each village panchayat (locally
called it village shengo or village council) may be asked to prepare a plan for the
economic development of the village and each industry may be asked to prepare its
own plan. Out of these plans, an integrated plan may then be evolved for the country
as a whole.

Under centralized planning, the entire planning process is under a central planning
authority. The authority formulates a central plan, fixes objectives, targets, and
priorities for every sector of the economy. The principle problems of the economy –
what and how much to produce, how and for whom to be produced etc, are decided
by this authority. The entire planning process is based on bureaucratic control and
regulation. Naturally, such planning is rigid. There is no economic freedom and all
economic activities are directed from above.

On the other hand, decentralized planning refers to the execution of the plan from the
grass roots. Under it, a plan is formulated by the central planning authority in
consultation with the different administrative units of the country. The central plan
incorporates plans under the central schemes, and plans for the states under a federal
set-up. The state plans incorporate district and village level plans. Under
decentralized planning, prices of goods and services are determined by the market
mechanism despite government control and regulation in certain fields of economic
activity.

The Rationale for Planning in Developing Countries

Developing countries need economic planning in order to achieve the following

objectives:

48
  To increase the rate of economic development
 To improve and strengthen the market mechanism
 To reduce unemployment and disguised unemployment
 To enhance the linkage between the agricultural and industrial sectors
 To create social overhead that enhance agricultural and industrial growth
 To expand domestic and foreign trade
 To eradicate poverty
 To be Self-sufficient in food and raw materials
 To reduce inequality
1) Increase the rate of economic development

One of the principal objectives of planning in underdeveloped countries is to increase

the rate of economic development. In the words of D.R. Gadgil, "Planning for
economic development implies external direction or regulation of economic activity
by the planning authority which is, in most cases, identified with the government of
the state. It means increasing the rate of capital formation by raising the levels of
income, saving and investment. But increasing the rate of capital formation in
underdeveloped economies is beset with a number of difficulties. People are poverty-
ridden. Their capacity to save is extremely low due to low levels of income and high
propensity to consume. As a result; the rate of investment is low which leads to
capital deficiency and low productivity. Low productivity means low income and the
vicious circle is complete. This vicious economic circle can only be broken by
planned development. Two methods are open to underdeveloped countries. One is
planned development by importing capital from abroad which Zweig calls 'supported
industrialization, and the other is by forced saving which he characterizes as self-
sufficient industrialization.

2) Improve and strengthen the market mechanism

The rationale for planning arises in such countries to improve and strengthen the

49
market mechanism. The market mechanism works imperfectly in underdeveloped
countries because of the ignorance and unfamiliarity with it. A large part of the
economy comprises the non-monetized sector. The product, factor, money and
capital markets are not organized properly. Thus the price system exists in only a
rudimentary form and fails to bring about adjustments between aggregate demand
and supply of goods and services. To remove market imperfections, to mobilize and
utilize efficiently the available resources, to determine the amount and composition
of investment, and to overcome structural rigidities, the market mechanism is
required to be perfected in underdeveloped countries through planning.

3) Reduce unemployment and disguised unemployment

The need for planning in underdeveloped countries is further stressed by the

necessity of removing widespread unemployment and disguised unemployment in
such economies. Capital being scarce and labor being abundant, the problem of
providing gainful employment opportunities to an ever-increasing labor force is a
difficult one. It is only a centralized planning authority which can solve this. In the
absence of sufficient enterprise and initiative, the planning authority is the only
institution for planning the balanced development of the economy. For rapid
economic development, underdeveloped countries require the development of the
agricultural and the industrial sectors, the establishment of social and economic
overheads, the expansion of the domestic and foreign trade sectors in a harmonious
way. All this requires simultaneous investment in different sectors which is only
possible under development planning.

4) Enhance the linkage between the agricultural and industrial sectors

The need, for developing the agricultural sector along with the industrial sector arises
from the fact that agriculture and industry are interdependent. Reorganization of
agriculture releases surplus labor force which can be absorbed by the industrial
sector. Development of agriculture is also essential to supply the raw material needs
50
of the industrial sector.

5) Create social overhead that enhance agricultural and industrial growth

The agricultural and industrial sectors cannot, however, develop in the absence of
economic and social overheads. The building of canals, roads, railways, power
stations etc., is indispensable for agricultural and industrial development. So are the
training and educational institutions, public health and housing for providing a
regular flow of trained and skilled personnel. But private enterprise in
underdeveloped countries is not interested in developing the social and economic
overheads due to their un-profitability. It is motivated by personal gain rather than by
social gain. It, therefore, devolves on the state to create social and economic
overheads in a planned way.

6) Expand domestic and foreign trade

Similarly, the expansion of the domestic and foreign trade requires not only the
development of the agricultural and industrial sectors along with social and
economic overheads but also the existence of financial institutions. Money and
capital markets are undeveloped in underdeveloped countries. This factor acts as an
obstacle to the growth of industry and trade. There is economic instability generated
by international cyclical movements. Such maladjustments can only be removed by
the state. It can decide upon the setting up of a central bank and with its help a bill
market, commercial banks and other financial institutions throughout the country. It
is the planning authority which can control and regulate the domestic and foreign
trade in the best interests of the economy.

7) Eradicate poverty

The planning for development is indispensable for removing the poverty of nations.
For raising national and per capital income, for reducing inequalities in income and

51
wealth, for increasing employment opportunities, for all-round rapid development
arid for maintaining their newly won national independence, planning is the only path
open to underdeveloped countries. There is no greater truth than this that the idea of
planning took a practical shape in an underdeveloped country and that this is the only
hope of the resurgent underdeveloped countries of the world. The rapid development
of the USSR, a poor country at the time of the October Revolution, bears testimony
to this fact. To sum up in the words of Professor Gadgil Planning for economic
development is undertaken presumably because the pace of direction of development
taking place in the absence of external intervention is not considered to be
satisfactory and because it is further held that appropriate external intervention will
result in increasing considerably the pace of development and directing it properly.
Planners seek to bring about a rationalization, and if possible and necessary, some
reduction of consumption, to evolve and adopt a long-term plan of appropriate
investment of capital resources with progressively improved techniques, a program of
training and education through which the competence of labor to make use of capital
resources is increased, and a better distribution of the national product so as to attain
social security and peace. Planning, therefore; means no more than better
organization, consistent and far-seeing organization and comprehensive all-sided
organization. Direction, regulations, controls, on private activity, and increasing the
sphere of public activity, are all parts-of organizational effort.

8) Self-sufficiency in Food and Raw Materials

As a preparation for more systematic and intensive planning, it may be considered

necessary first to make the country self-sufficient in food and essential raw materials.
That would provide a solid and sound base for the economy and prepare it for further
building up. Many developing countries concentrate or give priority on agricultural
development. Dependence on foreign food is dangerous. The first duty of a nation is
to feed its people. Political freedom may prove a farce without freedom from foreign

52
food, especially when war clouds may be hovering overhead. It is understandable,
therefore, that this objective may take precedence over other objectives when a Plan
is being conceived.

9) Reduction of Inequalities

It is now realized that political equality is illusory unless it is accompanied by

economic equality. Glaring inequalities of wealth, income and opportunities are
shocking to the democratic conscience. Socialism is in the air; it has a very wide
appeal in modern times. In poor countries, it is a painful sight that the masses of
people should be on the border line of starvation, whereas a few rich people should
be rolling in all conceivable luxuries. It is natural, therefore, that the planners, who
are custodians of general welfare, should so shape their plans so as to make the poor
people less poor and the rich a little less rich, so that the gap between the two is
narrowed down as much as is humanly possible. The Indian planners have before
them the establishment of socialistic pattern of society as one of the objectives. .

CHAPTER THREE

3.0. Quantitative Development planning Techniques

Chapter objectives
Distance students Welcome to the third chapter. The following are objectives of
chapter four on aggregated models and its application to planning:
 After completing this chapter you must be able to;
 Appreciate the meaning, uses, advantages, disadvantages of models as well as
how to classify models according to their characteristics as an introductory note
to second module.

53
 Briefly outline the formula for the famous aggregated model called the Harrod-
Domar model.
 Understand the applications of Harrod-Domar model with the real problems of
developing countries by reputation economists and the World Bank
 Have highlight on Harrod-Domar model consistent with some countries such as
India and Kenya as a practical experience
 Grasp the extension of the Harrod-Domar model call the Two Gap Model and its
association with the assistance debate and Millennium Development Goals
(MDG)
 Realize the basic mechanics of poverty trap and foreign aid and how to break the
poverty trap
 Be familiar with the eight MDG Goals, eighteen Targets and forty eight
Monitoring Indicators
 Know how to finance investment needs of poor countries in order to alleviate or
reduce poverty.

3.1. Choice of Planning techniques- pro and cones of labor and capital Intensive
techniques

Organisations need to make decisions on whether to be capital or labour intensive

and this depends upon:

ï The amount to be produced

ï The product – is it a standardised product or unique
ï Who you are selling to – is it a luxury item or not
ï Whether the product / service requires the “personal touch”

54
3.1.1. Advantages of Labour Intensive production:

 Workers can be flexible

 People can think for themselves
 Labour can be used to do many different tasks
 Personal touch – people can interact better with customers – a lot of services
cannot be provided by machinery e.g. hairdressing
3.1.2. Disadvantages of Labour Intensive Production:
 Wage costs are high
 Employees can only work limited hours
 Workers can become ill, need holidays, take industrial action etc
3.1.3. Advantages of Capital Intensive Production
 Can work 24/7
 Quality of work is consistent
 Work is accurate and precise
 Can do work which is too dangerous and unpleasant for people
 More productive than labour – a machine can produce more output per hour
than labour
 Machines don’t need breaks or holidays etc.
3.1.4. Disadvantages of Capital Intensive Production
 Initial cost is high – have to spend a lot of money to buy machinery at first
 Machinery needs to be maintained
 Machinery can break down – if it does it can halt production
 Can only be used for the tasks they were designed to do
 Can cause unemployment

In general,
ï Business will use a combination of people and machines

55
 ï Important factors which will decide what combination of labour and
machinery used is – how a business’s profits will be affected and if it can
afford to buy the machinery
ï Mechanisation is labour being substituted by machinery, but labour still
operates the machines
ï Automation means labour is replaced by machines and machines work
automatically and are computer controlled. Workers supervise.
ï Reasons for Automation and Mechanisation are – to reduce costs and increase
productivity.
3.2. Appropriate techniques for developing countries

Which type of technology is to be chosen depends upon the availability of resources

and the problems facing the economy. In underdeveloped countries, there exists
large-scale unemployment of labor. So, if the objective is to create more employment
opportunities to the growing labor force, the appropriate technology should be labor –
intensive. Other advantages of labor – intensive technology could be that small and
medium industries are more suited to this technology rather than heavy and large-
scale industries. It would be possible to decentralize the process of industrialization
in the economy. The gestation period is much shorter as compared to that of the large
industries, which use capital-intensive technology. Consumer goods sector can easily
adopt the labor – intensive technology rather than heavy and large scale industries
which use capital – intensive technology. The technology also fits in agricultural and
allied activities.

However, when viewed from the point of view of the rate of growth of output and
rate of capital accumulation, labor – intensive technique is not an appropriate one.
Labor – intensive methods will not be able to make use of the most modern
technological innovation and as a result, it will not be able to maximize the
productivity of labor. This means that investment projects which maximize
employment do not maximize labor productivity. Another argument advanced against

56
the labor intensive technique is that the demand for consumer goods in the economy
would increase in greater proportion than that of the output. It means that
employment generation results in more demand for consumer goods more there by
leaving to inflation, if adequate attention is not paid to the type of goods being
produced. Still another reason is that the volume of investible surplus would get
reduced as a greater proportion of the increment in output is consumed as wages by
choosing this type of technology.

Walter Galenson and Harvey Libenstein have favored the use of capital-intensive
technique instead of labor – intensive methods.

If the objective of development planning is to maximize the rate of growth of output

and the volume of employment in future, they argued in favor of capital – intensive
technology.

By adopting capital-intensive techniques, the marginal per capita reinvestment

quotient can be maximized. Capital – intensive techniques are more suited to
development of the basic and heavy industries. As the developing countries suffer
from lack of adequate the infrastructure it is very essential that capital-intensive
techniques are adopted to create the same for achieving accelerated economic
development.

Although the gestation period is long in the case of capital – intensive technology, it
is advantageous in so far as the producing of important capital goods like heavy
machinery defense equipment, etc. is concerned. Sufficient availability of capital
goods is a pre-condition for the economy to grow fast. The capital – intensive
technology creates less employment potential for the present but more employment
potential in the future.

The capital-intensive technology could not be adopted extensively in the developing

economies due to the lack of real (i.e., physical), resources. Given the resources, it is

57
necessary for the planners to decide whether they should be used to producing
consumer goods or capital goods.

The neo‐classical approach which assumes a wide range of choice of technique is

rejected as being unhistorical in its view of technological development; the
technological determinist view which concludes that there is virtually no choice of
technique at all ignores crucial aspects of scale, product and process which widen the
choice available. The question of choice of technique is a question of product (in
scale, type and quality) as well as method of production, and must be viewed
dynamically—the choice available changes over time and is itself subject to choice in
the sense that a country or countries can choose to develop techniques in one
direction rather than another.

Choice of techniques in developing countries and suggests some alternative lines of

approach that might be helpful. The neo-classical approach which assumes a wide
range of choice of technique is rejected as being unhistorical in its view of techno-
logical development; the technological determinist 1 view which concludes that there
is virtually no choice of technique at all ignores crucial aspects of scale, product and
process which widen the choice available. The question of choice of technique is a
question of product (in scale, type and quality) as well as method of production, and
must be viewed dynamically—the choice available changes over time and is itself
subject to choice in the sense that a country or countries can choose to develop
techniques in one direction rather than another.

The question of choice of technique is that of which methods of production to use. It

has been interpreted almost exclusively as a question of capital-intensity of the
method of production to be adopted to produce a given output (given in both quality
and quantity).

THE NEO-CLASSICAL APPROACH

58
The simplest neo-classical approach assumes substitutability of labor and capital, and
a wide variety of efficient techniques available to produce any given output. The
assumption is summarized in the convex (to the origin) iso-product curve to be found
in most textbooks.2 Capital intensity is here defined as capital per worker (or K/L
ratio). The complex and perhaps insoluble problems of measurement of capital are
ignored; labor is also assumed homogeneous and unambiguously measurable.

Capital and labor intensity may also be defined in terms of capital and labor required
per unit of output. The two definitions, capital per worker and capital per unit of
output, will rank techniques in the same order if only efficient techniques are
considered. Inferior techniques are those which produce the same output as some
other technique using more of at least one factor and no less of any other. Efficient
techniques are those which are not inferior to any other technique among those
available.

Since efficiency, as defined here, is a relative concept, involving comparison of one

technique with another, a technique which is initially efficient may become inferior
as new techniques are developed. Thus before the

When comparing an efficient with an inefficient technique the two criteria of capital
intensity may give different results with the less capital intensive technique in terms
of capital per worker requiring more capital per unit of output than the efficient
technique. Given positive cost attached to the use of each factor it will never pay to
adopt an inefficient technique. This is likely to be the case for most factors most of
the time. Some might argue that the use of labor in developing countries with surplus
labor confers a benefit on society and not a cost. This argument, which involves
various complications of time preference among other factors, is considered
elsewhere [Stewart and Streeten, 1971].For the moment we shall assume that it only
pays society to adopt efficient techniques.

59
The assumption of an infinite or very large number of efficient techniques of varying
capital intensity means that full employment may be attained with any amount of
capital available in relation to labor. The developing countries, with relatively little
capital available per head, can attain full employment by choosing techniques which
are labor intensive as compared with those appropriate to the developed countries.
The developed country may have more of both factors than the developing country
and is thus able to achieve a higher level of output. On the assumption of constant
returns to scale (the Cobb-Douglas assumption) the relative factor availability, or
capital per head, determines the full employment capital intensity of techniques and
output per head. The absolute amount of factors available simply determines how
many heads there are, and therefore the absolute scale of output. The assumption of
constant returns to scale is the only assumption consistent with the marginal
productivity. Sociological explanations of the observed unemployment and
apparently fairly high capital intensity of production in developing countries have
also been suggested in particular they have been attributed to the tendency of
Western and Western trained managers to prefer to adopt the techniques of
production to which they are accustomed, and their dislike of handling large numbers
of men involved in the labor-intensive solution. The latter suggestion introduces a
third factor of production, managerial effort, and illustrates the over-simplification
involved in the two factor analysis adopted above.

TECHNICAL PROGRESS

The simple neo-classical approach just described ignores technical progress. The
assumption of neutral technical progress allows the efficiency of all techniques to
increase over time. This can be depicted as a steady inward movement of each
isoquant so that each level of output becomes attainable with less of both factors, or
by a movement outwards of the entire production function.

60
Choice of an infinite number of efficient techniques remains, as does the possibility
of ensuring full employment, given appropriate relative prices. The
embodied/disembodied controversy does not affect the nature of the choice available:
both types of technical progress affect the potential efficiency of all techniques, i.e.
techniques of all capital-intensities, the only difference being that embodied T.P. only
affects the efficiency of new machines; the existing capital stock is unaffected—
while disembodied T.P. affects all capital whether installed or not.

REINVESTMENT CRITERIA

One aspect of the neo-classical view of choice of technique in developing countries

has been challenged by Galenson and Leibenstein[1955], Dobb [1968],Sen[1968]
and others. They do not challenge the basic assumption—of wide availability of
techniques but the optimum choice within that range. They argue that the neo-
classical solution choosing the technique which ensures, as near as possible, current
full employment of factors, or relatively labor intensive techniques for most
developing countries—ignores the effect of choice of technique on distribution of
income and hence on savings available. If the aim is to maximize growth of output
(and also possibly growth of employment) a more capital intensive technique should
be chosen than that appropriate to maximizing current employment. The validity of
this argument depends on consumption being directly related to employment levels.
This is the case if all employees have a certain real income, which they largely or
wholly consume, and which leads to a higher consumption level than would occur if
they were not employed; and if the propensity to save out of profits is higher than the
propensity to save out of wages.* In addition, the overall savings rate must be sub-
optimal, and choice of technique considered to be the best way of raising savings. At
its most extreme this approach recommends choosing the technique which maximizes
savings per unit of investment. However, this places no value at all on increases in

61
current levels of consumption. In other models some value is placed on the additional
consumption generated as well as on investment.

The relevance of the discussion of both neo-classical approach and reinvestment

criteria depends on the assumption they both share of the existence of a wide range
of possible efficient techniques of production. If only a single efficient technique is
available its use will generally maximize savings as well as output in comparison
with the inferior techniques; the reinvestment criterion and the output maximization
criterion lead to the same results. 9 However, even with a single technique the
discussion remains relevant, to some extent, in terms of a choice between products
whose techniques may be of varying labor and capital intensity.

TECHNOLOGICAL DEVELOPMENT

As described above the neo-classical approach assumes the existence of a wide

range of techniques; the introduction of technical progress does not alter this basic
assumption but simply raises the efficiency of all techniques. This view is
completely unhistorical. Techniques of production are ways of producing goods—
generally machines. Each method of production has to be invented, developed and
used at a particular point in time. The range of techniques available to produce a
particular good arises from the historical development of the industry in question.

Suppose we take a single country which produces its own machinery and assume a
new industry develops. Initially there will be a single method of production,
developed in the light of the prevailing state of scientific and technical knowledge
and factor prices. As time proceeds technical developments may occur so that the
same product can be produced with less capital or less labor or less of both capital
and labor. A choice of two techniques will then be available to anyone wishing to
enter the industry, the initial technique, to, and the improved technique, Ti. If Ti
requires less capital and less labor for the same output compared with To, To will

62
become technologically inferior and will never be chosen so long as the price of
both capital and labour are positive. However, if Ti requires less of one factor but
more of the other than To a genuine choice of techniques will emerge, in the sense
that To will be chosen in preference to Ti for some relative prices of capital and
labor, and To will be chosen in preference to Ti for others. Over time an array of
techniques will develop as a result of technical developments, To, Ti, Tii ... Tn. All
those techniques which do not become technologically inferior will constitute the
choice of techniques. The production function is thus gradually built up from past
technical developments. The choice of techniques available will depend on these
developments.

3.3. An Overview of the characteristics of development planning models

General Introduction to Models

Distance students, this third chapter exclusively deals with planning models, with
Harrod-Domar and Two Gap Models; Input Output model, with Linear Programming
models, and with Social Accounting Matrix.
However, before going directly to what these models are all about and their
implications to national and regional development policies, it would be good to
acquaint you with the definition, advantages, and disadvantages of models and more
importantly how models could be classified based on their characteristics.

Planning involves a set of social and economic variables. These variables are
assumed to be interrelated and the relationship can be very complex. Therefore, in
order to understand the complex relationship between these variables, we need
analytical tools or models. Models are used to analyze the complex relationships
between the different variables; however, some of the variables may be unrelated.

One of the advantages of models is that they are essential aids for clear understanding
or different relationships between variables. In order to make explicit relationship

63
(rigorous relationships) models are needed. As an example vague (ambiguous)
relationships can be clearer using models

Analytical models have advantages:

1. Deductive values (or a thought value). Models, therefore, are simplification of

the complex reality or simplified version of a reality.
2. It can have also communicative value because different organizations or
individuals want to communicate each other the complex nature of the
economy, i.e. they want to interact about economic or social behavior of the
country.
3. Example- Economists (or planners or policy makers) want to communicate
with politicians or bureaucrats or other professionals.
4. Models attempt to establish a relationship between the goals of the society and
the instruments to achieve these goals. Then, planners do to quantify the goals
in terms of target & see their achievements by looking the means to achieve
the goals.
5. Models enable to give alternatives in terms of resource constraints or capacity
to achieve the goals.
6. Models provide a frame work with which the different agents to carry out
meaning full dialogue regarding the possibilities and tradeoffs.

Limitations of analytical tools:

i. Models may not necessarily provide the intended solutions. i.e. models do not
provide the solution for everything. They only help to find the solutions or
provide the frame work (skeleton) for solution. The fields & blood of the
analysis has to come from experience or common sense on detail knowledge of
the economy.

64
 ii. Models can’t replace the value judgment (intuitive) that is required through
experience. That is why we say models don’t provide the solutions but the way
to approach for solutions.
iii. Furthermore, no single model is the best model as remedy. Depending on the
situation, different models can be used for different problems.

Characteristics of analytical models

Models have some common characteristics. Using these characteristics we can

distinguish between different types of models.
The most common characteristics include:-
1. Coverage: - this refers to scope. On the basis of coverage, we can classify models
into
µ Overall (national) models
µ Sect oral (regional) models
µ Project
2. Degree of aggregation
o aggregated models :- treats the economy in its entity ( the whole economy
is treated as one producing /consuming sector)
o Main sector models: - dividing the economy in to major sectors.
o Example: Lewis model dichotomizing the economy into agriculture and
non-agriculture sectors.
o Mahalonob is model by divides the economy in to consumption and
capital goods producing sector.
o Multi sector models: - the economy is divided into large number of sectors
which are interrelated. Ex Input-Output model, Social Accounting Matrix.

3. Time dimension
i. based on the capacity to predict the future development

65
 Long-term models
Medium-term models
Short-term models
ii. based on time treatment with in the models
Static models: - if models try to compare future development with present
development but don’t necessarily consider the path of development
Dynamic models: - if models try to provide the path (movement) of future
development of the economy.
4. Behavioral relationships
i. Stochastic models: - if the behavioral relationship between variables include
a stochastic (error) term.
Econometric models are stochastic models because there is a certain
disturbance term included in the model.
Example: Y=XB + U;
Where Y is the independent variable; X dependent variable; B the
coefficient or parameter and U is the error or stochastic term
All short run macroeconomic models are stochastic models.
ii. Deterministic models: - if the behavioral relationship between variables
doesn’t include a stochastic term. The relationship is administratively
(exogenously) determined.
Ex Y=X B that is an exact relationship between dependent & independent
variables.
All mathematical models are deterministic models.
5. Degree of closure: - if there is a system of equations, the number of equations
should be equal to the number of unknown variables in order to solve the
equation.
i. Open models:-if the variables (unknown) are not explained within the
system. As an example open input output models (when the final demand is
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 assumed to be given, and not something that is solved with in the model).
ii. Fully closed models: - if the variables can be calculated within the system
itself.
iii. Partially closed models: - if more than one value of the variables is possible
to calculate within the system. In optimization (maximization of benefits or
minimizing of costs) given certain constraints in linear programming.
6. Accounting Frame work: - if models have an explicit or implicit relationship
accounting framework. It establishes an identity between various variables of
the economy.
i. Consistency models: - when models provide a consistency relationship
between the identity of variables Ex. aggregate modes H-D models, i-D
marks
ii. Programming models; - when models proved inequity relationship between
the identities of variables.

3.4. Growth Models

Development planning models can be aggregative. Here the entire economy is taken
into account and the behavior of some of the major variables such as output, income;
saving and capital are taken into consideration. These are also regarded as macro
models and as an example the use of the Harrod-Domar model can be cited.
Sometimes macro-econometric models are constructed for the whole economy to
achieve some specific targets. The applications of these models will be shown later.

In many Less Developing Countries, relevant data for the entire economy may not be
available although enough information could be obtained for a single project. In such
cases sectoral models are developed and different sectoral plans are combined
together to form an overall sectoral-project plan (e.g. Ghana 1958-64; Kenya 1964 to
1969-70; Pakistan 1956; Nigeria 1963-8). The main defect of the sectoral plans lies in
the lack of co-ordination among them. Thus the heterogeneous collection of plans for
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different projects may neither be consistent with each other nor feasible when they
are taken together. Also, in the absence of a unified contour of analysis, different
roles could be applied to assess different sectors.

As aggregative models do not provide a detailed description of the inter industry

relationships between supply and demand, to achieve greater balance or consistency
between various sectors, inter-industry models are now being used to determine the
demand for intermediate goods plus imports. Relationships among different sectors
are described by linear equations between output produced by a sector and its input
requirement, and the model can only be applied where some industrialization has
taken place and the information about the linkages between inputs needed to produce
outputs is known and available. These models are useful.

1. To achieve consistency between demand and supply in different sectors;

2. To know whether investment demand will be enough to produce a target

output;

3. To determine intermediate demand for inputs including capital and labor;

4. To provide the basis for the use of programming models in which, apart from
achieving consistency, the planner can test the feasibility and optimality of
different projects within a plan.

3.4.1. Aggregate Models: The Harrod-Domar Models

In the aggregate models only a few crucial variables are taken into consideration. The
model which is most used is the one developed by Harrod and Domar (H-D) in the
context of growth theory. In a simple form, the model could be set out as follows:

St= I t 1

It= Kt+1- KI 2

St= sYt-t 3
68
 Kt= vYt-1 4

Where S is savings, I is investment, K is capital stock, Y is income, v is the capital-

output ratio or capital coefficient and s is the propensity to save.
After making the necessary substitutions from equations 1, 2 and 3we get:
i.e. sYt-t = vYt - vYt-1 5

i.e. sYt-t = v(Yt - vYt-1) 6

Yt − Y t −1 S
=
Y t−1 V 7

Since growth of income (g) is defined as:

Y t − Y t−1
g =
Y t−1
We get the familier HD equation :
s
g= −−−−−−−−−−−−−−−−8
v
The model helps the planner to predict the required savings rate once the target
growth rate and the capital-output ratio v are given. In any economy, if the actual
growth rate is 3 per cent per annum, given s = 9 per cent and v = 3: 1, then in order to
achieve a target growth rate (g) of 5 per cent, the planner will have to recommend a
rise of s to 15 per cent with given v (3: 1). Thus, fiscal (e.g. high taxation) and/or
monetary policies have to be used to acquire a desired rate of saving. The model is
also helpful to find out the extent of foreign resources that would be necessary to
realize the target growth rate should domestic savings be inadequate. For example, if
the use of fiscal and monetary policies yields only 12 per cent rather than 15 per cent

69
savings, then the difference between planned savings and actual savings would be 3
per cent (i.e. 15 per cent - 12 per cent) and this amount of resources could represent
the amount of foreign resources necessary to realize the target.

3.4.2. The invention of development (A. Lewis)

For centuries, nobody had paid much attention to the economic problems of poor
countries. But it changed after World War II and having ignored poor countries for
centuries, called for attention to their urgent problems. Everyone suddenly agreed
that the poor countries should develop. Economists rushed to give policy advice to
the newly independent governments of the poor countries.
The development economists were influenced by two simultaneous historical events.
i) Like Domar, the great depression, and
ii) The industrialization of the USSR through forced saving and investment.
The Depression and large number of unemployed rural people in poor countries
motivated A. Lewis to suggest a surplus labor model in which only capital was a
constraint. A. Lewis suggested that building factories would soak up this labor
without causing a decline in rural production.
How many new machines? Lewis and other development economists assumed a
fixed ratio in production between people and machines, ie, Leontief production
function. Since there is surplus labor, machines were the binding constraint on
production. Production was proportional to machines, just as in Domar because the
supply of available workers was unlimited. Lewis cited a particular example of an
economy that had grown through pulling in excess labor from the countryside of the
Soviet Union.

Economists usually discussed the growth to investment ratio the other way round, ie,
the ratio of required investment to desired growth. They call this ratio the incremental
capital output Ratio (ICOR), and thought it was somewhere between 2and 5.

70
Lewis said the central fact of economic development is rapid capital accumulation. A
country that wanted to develop had to go from an investment rate of 4 percent of
GDP to 12-15 percent of GDP.
Investment had to keep a head of population growth. Example: a country with an
investment rate of 4% of GDP and an ICOR of 4 will have growth one percent per
year. This doesn’t even keep up with population growth of 2% a year. If the country
gets investment up to the Lewis magic number of 12% of GDP, then it will have
GDP growth of 3% a year. Then, the country's GDP per capita increase at one percent
per year.

How do we get investment high enough? Say current national saving is 4 % of

GDP. The early development economists thought that poor countries were so poor
that they had little hope of increasing their saving. There is a financing gap of 8% of
GDP between the required investment (12% of GDP for 3% GDP growth) and the
current 4% of GDP level of national saving. Therefore, western donors should fill the
financing gap with foreign aid in order to achieve the target output growth.

The stages of growth (Rostow)

The next step in the evolution of the financing gap was to persuade rich nations to fill
the gaps with aid is Rostow’s stages of growth (1960). Anticipating the self-help
boom, Rostow figured out five stages of growth (traditional society, pre-take off, take
off, self-sustained maturity, and high consumption) and the stage that stuck in
people’s mind was the take off into self-sustained growth.
But how was take off accomplished? The only determinant of output take off that
Rostow cited was investment increasing from 5-10% of income. This is exactly the
same as what Lewis said earlier; take off just reasserted donor and Lewis with
examples.

71
Rostow tried to show that the investment led take off fit the stylized facts. Stalin’s
Russia influenced Rostow a great deal, as it had everyone else, because it fit the
takeoff story. Then Rostow considered a number of historical and third world cases.
However, his evidences were weak because only three out of fifteen cases he cited fit
the story of an investment led takeoff. Many economists noted that soviet’s economy
grow faster than other because of their willingness to extract large forced savings.
There was a danger that the third world may be attracted by certain advantages and
would go to communist camp.
Rostow wanted to show the third word that communism was not the only form of
effective state organization that can launch a takeoff. Rostow tried to offer a non–
communist way, that is Western nations should provide third world nations with aid
to fill the financing gap between the necessary investment for takeoff and actual
national saving. He used the Harro-Domar growth model to figure out the necessary
investment (using on ICOR of 3-3.5) for takeoff.
Under US presidency of Kennedy, advised by Rostow, foreign aid reached at $14
billion in 1985 dollars, equivalent to 0.6 % of America GDP. Therefore, over the
entire period of 1950-95, the western countries gave one trillion dollars (measured in
1995 dollars) in aid. Since virtually all of the aid advocates used the Harrod-
Domar /Financing gap model/ this was one of the highest policy experiments ever
based on a single economic model.

Don’t forget to save- Need for national saving (Bhagwati, Chenery)

While there was a remarkable degree of consensus that aid to investment for growth
was substantially valid, there was a warning (by Bhagwati) about excessive
indebtedness to donors. He noted that debt servicing problems by some countries on
past aid loans.

72
Therefore, it was argued that foreign aid is necessary to enable underdeveloped
countries to service the subsidized loan under earlier foreign aid agreements. The
obvious way to avoid a debt problem with official donors was to increase national
saving through raising taxes. Hollis Chenery stressed the need for national saving in
famous application of the Harrod-Domar / financing gap model/ that is aid will fill
the temporary gap between investment ability and saving ability. Investment then
goes into growth with the usual ICOR formulation assumed as a matter of
convenience.

Getting prices right (Meier, Todaro)

The neoclassical critics thought resource allocation more important than resource
quantity. They pointed out growth failures in some countries with high investment
but wrong prices. This is to mean that although physical accumulation may be
considered a necessary condition for development, it had not proved sufficient.

The basic reason why investment–led take of didn’t work was not because more
saving and investment is not a necessary condition but rather because it is not a
sufficient condition, Todaro.

The necessary but not sufficient consensus gave Harrod-Domar model a new lease on
life. In the donor community, aid now often carried strict conditions on getting price
right. The idea was that Harrod-Domar model gave the financing requirements for the
necessary investment while conditions on getting prices right would give the
sufficient conditions for growth.

Harrod – Domar in the new growth literature (Solow and Rebelo)

At first the new growth literate seemed to support the Harrod-Domar linear growth
and investment relationship. The Solow model (Y=AK aL1-a) suggested that there was
a learning by doing, that is externality from physical capital to technological
knowledge (KB ) so that production function was given by:
73
 Y = AK a L1−a K B ------------------------------- 9

If we assume that A+B =1, then growth was significantly and linearly related to the
investment rate, however, latter changed with the arbitrary that physical capital
would lead to technological spillover. Then, emergence to models of endogenous
growth models tend to creation of new ideas and new goods, which is far from linear
relationship between output and physical capital. Developing countries suffer not
from an object gap (like lack of physical capital) but rather on idea gap (lack of
technology).
Another production function in the new growth literature that seemed in the spirit of
Harrod–Domar was Rebelo’s classically simple model that Y=AK. He said to mean k
to include not just physical capital, but all kinds of capital such as human capital,
organizational capital and technological knowledge.

The Harrod-Domar (HD) model: India's First Five Year Plan

The HD model has been applied as a basis to develop more comprehensive plans for
some LDCs. In India, for example, the HD model has been used to formulate the First
Five Year Plan (1950-1 to 1955-6). The following equations illustrate the use of the
HD model; most of the notation has already been explained in the previous section.

It = St 10

St = aYt – c 11

Yt= vKt 12

It = Kt 13
Where Ktis the incremental capital stock (ie. dK/dt).
Substituting we get
Kt = avKt - c 14
Time-path of capital accumulation is thus
74
 c avt c
Kt = ( K o − )e +
av av 15
Unlike the HD model, the growth rate in this model can be increased from period to
period if a >Sol Yo, i.e. if the marginal rate of savings is higher than the average rate
of savings. The asymptotic relative growth rate is given by the expression av.

The use of the HD model has its advantages. Its clarity and simplicity deserve
attention. Also, the model is complete in the sense that it covers the entire economy:
it is selective and fairly realistic. Moreover, the model does not suffer from any
internal inconsistencies. However, it is highly aggregated and does not provide any
idea about the internal relationships between different sectors. Thus it fails to give us
any idea about the consistency between different sectors. The use of the concept of
capital output ratio has its limitations. For one thing, it is necessary to distinguish
between marginal and average capital-output ratios (v). For another, planned v and
realized v may not be the same and global v may be different from local (i.e.
regional) v. The estimation of capital in LDCs is always a rather difficult task.
However, the HD model has been disaggregated into two sectors for planning
purposes in Kenya and this is shown in the next section.

A Two-Sector Harrod-Domar Model for Planning: The Kenyan Case

Let the total output Y be divided into two forms: consumer goods Y1 and capital
goods Y2. Thus we have:

Y= Y1+ Y2 16

YI = m (Y1+ Y2) 17

Where m is the marginal propensity to consume, the ratio of the outputs of the two
sectors would then be given by

75
 Y1 m
=
Y2 1 − m 18

If m = 0.80 the ratio of consumer goods output (YI) to capital goods output is fixed at
4: 1. If m falls because of a rise in savings, output of Y2 will tend to grow at a higher
rate. However, more of Y2 (capital goods) would have to be used in order to release
the bottleneck in the production of more consumer goods, and the production of
capital goods is then given by the following relationship:

Y 2 = v1 ΔY 1 + v 2 ΔY 2 19

Where VI is the capital-output ratio in Y1and V2is the capital-output ratio in Y2. Then
the overall growth would be given by:

ΔY 1 + ΔY 2 1−m
g= =
Y1 + Y 2 mv 1 + (1 − m)v 2 20

Given the values of m, v1> v2and the productive capacity of the Y1and Y2sectors at
the base level, it is possible to work out the rate of economic growth for the whole
economy.
The type of dis-aggregation described above is not sufficient for planning for LDCs.
More comprehensive sectoral planning has been attempted in some other countries.
Such a case of sectoral planning is described in the next section.

Harrod- Domar in the 90s and computer technology

World Bank economists developed Minimum standard model (MSM) with the initial
motivation for the modeling to try predict w/c countries were going to get into
difficulties. The minimum model was having a useful life of about six weeks. It was
expected country economists to build more elaborate country specific models.

76
Later, they developed Revised MSM (RMSM), the growth rate of GDP was equal to
investment /GPD (lagged by one year) divided by the ICOR, or target growth times
the ICOR Gave investment requirements. In 1990, they developed an extended
version call RMSM-X, to the framework by adding fiscal and monetary balances.
The Harod-Domar /Financing Gap Shows up not only in the quantitative calculation
of the RMSM-X; it also shows up in the thinking about development expressed by
many international organization. Case studies of several countries as example are:

Total GDP in Guyana fell sharply from 1980 to 19990, as investment was increasing
from 30-42-% of GDP and while foreign aid every year was 8% of Guyana’s GDP.
Work Bank argued that Guyana will continue to need substantial levels of foreign
capital inflows to provide sufficient resources to sustain economic growth.

World Bank economists programmed the Uganda economy in 1996 to grow rapidly
at the ubiquitous 7% with little own savings & an ICOR of 3 implying substantial
investment requirements, this implied high foreign aid inflows. The World Bank’s
public report on the economy argued for high aid because anything less could be
harmful for medium term growth, which requires external inflows.

Economists also used the model amongst the chaotic transition from communism to
capitalism. The Bank's 1993 report on Lathunia said that large amounts of external
assistance will be required in order to provide the resources for critical investments to
stem the output decline.

Economist used the model in the aftermath of macroeconomic crises. The Bank in
1995 told Latin Americans that enhancing saving and investment by 8 % of GDP
would raise the annual figure by around 2 percentage points, i.e. an COR of 4.

Conclusion: The World Bank is not alone, virtually all international institutions
addressing the needs of poor countries stress the short- run necessity of both
investment & aid for growth. So the circle of irony closes. The communist economies

77
have partly inspired the ICOR, the cold war inspired foreign aid, & now the
capitalist economies gave foreign aid to ex-communist economies in amounts
influenced by the ICOR.

3.5. Planning Models

3.5.1. Two Gap Model

In the previous discussion we have seen how various economists and academicians
applied the Harrod- Domar model to show that foreign capital can raise the growth
rate by raising the availability of capital for reproduction, when the COR is held
constant.
The two-gap approach introduces the assumptions that an imported commodity not
produced domestically is essential for the production of investment goods. If the
availability of foreign exchange to purchase these imported capital goods constrains
the growth of the economy, the growth would be Exogenous, since it depends on
foreign investment goods and technology. Foreign capital can be in introduced in the
form of official flows, or foreign direct investment (FDI).
On the other hand, if the above assumption does not hold, and the economy can
domestically produce investment goods, then a shortage of domestic savings could
be an essential constraint on growth. If the economy produces only enough
consumption and investment goods to maintain the current production level, it
doesn’t save or grow. If the availability of foreign capital to compensate for the lack
of domestic savings constrains the growth of the economy, we may call the growth
Endogenous, since the economy has own technology and human resources.
Most of the successful economic growth in the Asian countries during the 1990s
initially took an exogenous and export-led development path. Latter, the foreign
exchange earned by strong exports increased their domestic saving and changed their
development pattern to fit in the endogenous growth path.

78
Therefore, it was argued that the impacts of the foreign assistance be studied
carefully, based on the individual micro economic analysis, not by the prevalent
cross-country data analysis. This is because it has been observed that although the
World Bank and other oriental Development Banks had provided enough foreign
capital to developing countries for filling the two gaps calculated by the Harrod-
Domar model, few of them successfully attained endogenous growth.
3.5.2. Social Accounting Matrix (SAM)
A Social Accounting Matrix (SAM) is a comprehensive and economy-wide database
recording data about all transactions between economic agents in a specific economy
for a specific period of time. A SAM extends the classical Input-Output framework,
including the complete circular flow of income in the economy.
A SAM is a square matrix in which each account (representative of an activity,
commodity, factor or institutional sector) is represented by a row and a column. Each
cell shows the payment by column account to the account in the row. Therefore,
“receipts” or incomes of an account are shown along the row and
“expenditures/payments” by the column. Because the double entry system of
accounting (4), for each SAM account total revenues correspond exactly to the total
payments, and, as a result, the total of each row corresponds to the corresponding
column total. A SAM is an extension of the Symmetric Input-Output Table (SIOT).
The traditional Input-Output framework is a key tool in the economic analysis since
its origins (Leontief, 1936) as it provides useful description of inter-sectorial relations
(5). Nevertheless, the usefulness of these analyses is limited as they lack the complete
behavior of the economic system and do not incorporate all economic transactions of
the system. A SAM overcomes some IOT limitations.

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 3.5.3. Linear Planning Models: Linear Programming and Development
Planning

Linear programming (LP) is really a mathematical tool which is now

being increasingly used in economic analysis. Its use in the field of
development planning is of much interest chiefly because it helps
the planner to allocate resources optimally among alternative uses
within the specific constraints. At the micro level, the technique
could be used to find out optimal and efficient (least expensive)
methods of production. Actually, LP can be regarded as a powerful
and complementary tool which can be used to analyze the 10 tables in order to solve
the problems of choice of techniques on the supply side as well as the problem of
choice of final demand. It is important to emphasize that the LP technique helps to
tackle the major problems of investment planning, namely;
i) Consistency between sectors;
(i) feasibility of plans; and
(ii)Optimality in resource allocation.

However, it should be pointed out that the important assumption that is made in
linear programming analysis is that variables are interrelated in a linear way. This
assumption may not be very realistic in all cases. But if it is, then LP is indeed very
useful for planning. On the other hand, if the relationships among the variables are
non-linear, then non-linear programming can be used to solve the problems.

Conditions and Generalizations to Linear Programming

The application of linear programming (LP) techniques to any problem rests on

certain conditions and generalizations. These are:

1. There is a definite objective. It may be the maximization of profit or national

income or employment or the minimization of costs. Every maximization

80
 problem has its dual problem, that of minimization. If the primal pertains to
maximization, the dual involves minimization and vice versa.
2. There should be alternative production process for achieving the objective. The
concept of process or activity is the most important in linear programming.
3. There must be certain constraints or restraints of the problem. They are the
limitations or restrictions pertaining to certain conditions of the problem.
They are also called inequalities.
4. There are choice variables, the various production processes or activities so as
to maximize or minimize the objective function and to satisfy all the
restraints.
5. There are the feasible and optimal solutions. Given the income of the
consumers and the prices of goods, feasible solutions are all possible
combinations of the goods that a consumer can feasibly buy.
Before dealing with the general formulation of Lp problems or models, let's look at
the underlying assumptions:
 The decision making body is faced with certain constraints or resource
restrictions
 A limited number of alternative production processes avail
 Linear relations among the different variables which implies constant
proportionality between inputs and outputs with in a process
 Input - output prices and coefficients are given and constant
 Continuity and divisibility in products and factors

. General formulation of LP problems

In an LP exercise, usually the objective is to maximize or minimize some linear

function of the variables given, say, r variables. The programmer seeks to obtain non-
negative values of these variables subject to the constraints and maximize (or
minimize) the objective function. More formally

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 Max V = c1x1+ . . . crxr
With m inequalities or equalities in r variables, i.e.

a i1 x 1 + . . . air xr { ¿, = , ≤ } bi i = 1, . . ., m
and

x j ≥ 0 j = 1, . . ., r
Where aij, bi and Cj are given constants. The problem is sometimes written in a more
compact way, e.g.
n
max Z = ∑ c ij xi
j =1

Subject to:
n
∑ aij x j ≤ r i
j=1
I = 1, 2,…, m

xj ≥ 0
j = 1, 2, …, n

Where Cj and aij are the given coefficients and ri are the constraints. Note that in
matrix form aij helps us to find the exact location of each coefficient.

Let us assume a simple case of two variables to illustrate diagrammatically the LP

solution. Let the objective function be

Max V= 5Xl+ 3X2

Subject to
¿
3Xl+ 5X2 15
¿
5X1 + 2X2 10
¿
Xl ,X2 0

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The graphical solution of this LP problem will be shown first and
then the numerical solutions will follow.
Let us first convert the inequalities into equalities, i.e.
3Xl + 5X2= 15 1
5Xl+ 2X2= 10 2
Accordingly we get lines like AB for equation 1 and CD for 2 (see Figure 6.1). Note
that any point on or below AB satisfies the inequality 3Xl + 5X2¿ 15, just as any
point on or below CD satisfies the inequality 3Xl + 5X2¿ 10. Also, there is no point
above, say, AB (or CD) which satisfies the above inequalities. The points which will
satisfy both the non- negativity restrictions are given by the area OAKD. This area is
then regarded as a feasible region. Any point such as P is regarded as feasible
because production of Xl and X2 at point P does not violate the constraints. Note that
a feasible solution could lie at a point like 0 (at the origin). But such a feasible
solution should imply that no production of Xl and X2 would take place. In order to
obtain the optimum feasible solution it is necessary to find the point at which the iso-
profit curve is tangent to any point lying on AKD. Any iso-profit line such as V 1
which lies inside the area OAKD does not yield the optimum profit because profit
could always be increased by moving further away to a higher iso-profit line like
V2which just touches the area AKD at K. Similarly, the iso-profit line V 3 although
indicating higher profit, is not attainable. Thus, the optimum profit is given at the
point K where OM of Xl and ON of X2 will be produced. Thus at K the objective
function V= 5X1+ 3X2is at a maximum. It is necessary to point out here that, given
the above profit equations, iso-profit lines are straight lines. Since constant returns to
scale operate, the further we move away from the origin along the iso-profit line, the
greater is the level of profit. The iso-profit lines, i.e. VI, V2 etc., are parallel to one
another because the slope of VI, V2 etc. is -5/3 and is independent of VI, V2.

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 X2

5X1 + 2X2 = 10
C

V3
A

V1 K
N * P 3X1 + 5X2 = 15
V2
X1
O M D B

To obtain the optimal values of XI and X2, it is necessary to solve the two equations
for lines AB and CD at K. Thus, we have

3X1+ 5X2= 15

5X1+ 2X2= 10

Solving for XI we have X1= 1.053; X2= 2.368. The maximum profit now is V= 12.37.

The line V could lie along one edge of the polygon AKD. In such a case, no unique
values of X1 and X2 would maximize V. Indeed, there will be more than one optimal
solution which would imply that there exists more than a single way to juxtapose
resources to obtain highest profit.

The above example can also be solved by evaluating the objective function at each
vertex (corner point) of the solution space OAKD as shown below.

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 Vertex of the Coordinate Value of the objective function
Solution (X1, X2) V= 5X1 + 3X2
space OAKD
O (0 , 0) V= 5(0) + 3(0) = 0
A (0 , 3) V = 5(0) + 3(3) = 9
D (2 , 0) V = 5(2) + 3( 0) = 10
K ( 1.053, 2.368) V= 5(1.053) + 3(2.368) = 12.368
Compared to all the values at the four vertices of the solution space, the objective
function assumes maximum value at point K. However, if our objective is to
minimize V, the solution will be at point O, where X1=X2=0.

The above example of solving the LP problem is highly simplified. In reality, it is

generally found that an optimum solution has to be found subject to some inequalities
in the constraints. These inequalities are usually converted into equalities by adding
extra or 'slack' variables for solving the equations. Optimum solutions are then
derived by using the simplex' method. In the simplex method, the optimum solution
is reached via an iterative procedure. According to the rules of LP, any corner solu-
tion such as 0, A, K, D in the figure is a basic solution. In the simplex method,
starting from any basic solution (e.g. 0), we move to the adjacent corner solution (e.g.
either A or K) to improve upon the value of the objective function until the optimum
is reached (i.e. any further move will worsen the situation). At each corner the
simplex procedure states whether the corner point is optimal, and if not, what the next
corner point will be.

To show the use of the slack variables, we first state the system of inequalities, i.e.

Max V= 5X1+ 3X2

3X1 + 5X2¿ 15
5X1+ 2X2¿ 10
X1, X2¿ 0

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 With the slack variables, we can now write
3X1 + 5X2 + X3 = 15
5X1 + 2X2 + 43 = 10
Where X3and X4are the slack variables.
After the choice of a 'pivot', the optimum solution is found in successive steps.

Duality

LP problems are also solved by the application of the principle of 'duality'. Previously
we have observed how to maximize an objective function, e,g. profit. Corresponding
to every maximization of profit problem, which is regarded as a 'primal', a 'dual'
involves minimization, say, of cost. Note that if the constrained equations are given
by :::;; signs, the dual would imply ;::: signs. The profit constants will be replaced by
the capacity constraints Ci and a different set of variables appears in the dual. More
formally, we can write the primal as
Max V= r1X1+ r2X2+ . . . + rnXn
Subject to
b11X1+ b12X2+ . . . + b1nXn ¿ L1
bm1X1+ bm2X2+ . . . + bmnXn¿ Lm
X1¿ 0, . . .,Xn¿ 0
The dual can be written as
miny= L1C1 + L2C2+... + LmCm
Subject to
allC1 + a21C2 + .., + am1 Cm¿ r1
alnCn + a2nCn + .., + amn Cm¿ rn
C1¿ 0, C2¿ 0, ..,Cm¿ 0
Note that, in the constrained inequalities, while the coefficients appear in the rows in
the primal, they are observed in the columns in the dual. Also a new set of variables
C1, C2 . . . Cm appears in the dual. If the slack variables are introduced, the system of
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equations can be written as follows:
Primal
Max V= r1X1+ . . . + rnXn
Subject to
b11X1+ . . . + b1nXn + S1 = L1
bm1X1+ . . . + bmnXn +Sm = Lm
X1¿ 0, . . . ,Xn¿ 0, S1¿ 0, . .. .,Sm¿ 0
Dual
Min y = L1C1 + . . . + LmCm

Subject to
a11C1+ . . . + am1Xm + K1 = r1
a1nC1+ . . . + amnCm + Kn = rn
C1¿ 0, . . . , Cm¿ 0, K1¿ 0, . .. ., Kn¿ 0
The economic interpretation of the dual is not difficult. The structural variables CI
>C2, etc. of the dual are really the 'shadow prices' assigned to each input or resource.
They represent the marginal product of each resource included in the optimal
solution. The link between the shadow prices of an input as its marginal yield to
profit can be seen through changes in profit resulting from the subtraction of a single
unit of an input from its use. Also, in the dual, the objective function, i.e.
minimization of cost, shows the total value of the inputs as it is the product of
shadow prices of the inputs (C I > C 2' ...) and their respective input capacities. The
constrained inequalities in the dual suggest that profits made from the production of
goods must be wholly imputed to the resources used in their production. At the point
of optimal solution, all inputs would be valued according to their marginal product
and the total profit will be exhausted. Should the value of an input used in the
production of an additional unit of any output be greater than the unit profit of that
output, a loss will be indicated and the size of this loss is given by the slack variable
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in the constrained equations of the dual. It is now easy to see the main argument in
one of the major theorems of the duality in relation to the primal solution. First, at the
optimal point of the feasible solution, the shadow prices of each unit of resources
should be such that there would not be any profit which could be made from
anywhere and hence, at the optimal point, the highest profit V is equal to the
minimum cost of resources, i.e. y, in the dual. The other duality theorem states that
should the 'shadow' cost of inputs to produce a unit of output exceed the unit profit
that could be made from that output, and then at the optimal point such a product
should not be produced as its production means a loss. At the optimal point, those
goods should be produced whose loss is nil. It is now clear that wherever the values
of the slack variable KI, K2, ...,Kn are positive (which would mean loss), such
activities should be excluded from the optimal solution. Thus, LP shows the utility of
the use of shadow prices for inputs for efficient allocation within the context of
planning.

It should be mentioned, however, that in an LP solution prices are regarded as the

indicators of the marginal worth to the society. But in the LDCs, where the market is
mostly imperfect, prices will usually be higher than the marginal cost. Second, the
relationships in the LP analysis are assumed to be linear. On the other hand, many
constraints in the LDCs are non-linear functions of structural variables. However,
here the problem is not insuperable as non-linear programming methods could be
used. Finally, if the society attaches considerable weight to the growth objectives and
if the market price of labor is overestimated (because wages are artificially high
despite the abundance of labor) and/or that of capital is underestimated (since the
interest rate is kept low despite capital scarcity), then some necessary corrections
ought to be made by using “accounting prices” for a more efficient allocation of
resources. In practice, some such corrections are attempted using cost-benefit
analysis (CBA), which will be discussed in your course project Planning II.

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89
 CHAPTER FOUR

4. Planning in Practice: Experiences from Ethiopian and other countries

Introduction:

The evolution of economic planning in developing countries is very much related to

the breakup of colonial fetters and the attainment of independence. The political
independence of these countries had unleashed high expectations for accelerated
socio-economic development. To meet this challenge, the newly independent
countries embraced planning as an effective means to accelerate their socio-economic
development. The Marshall Plan (as the US AID for reconstruction of Western
Europe is known), the World Bank and the various UN agencies have, in one way or
another, influenced the emergence and spread of planning in developing countries.
The rationale is that planning is considered effective in mobilizing resources and
allocating them into priority areas of development -- thereby helping developing
countries to break out of their vicious circle of poverty.

It is also essential to note that deliberate planning of the economy does not in any
way mean that planners may act as they think fit or set up any proportions and tasks
they wish. Planners have to adapt their plan to the demands of objective economic
laws and realities. The efficiency of planning depends to an enormous scale on the
ability to comprehend the mechanism of these economic laws.

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4.1. An Overview Of Ethiopia's Planning Experience

It is over three decades since Ethiopia adopted a planned approach to development. In

the immediate post-World War II period, separate programs and plans, which were
not integrated into a general framework of a national plan covering the entire
economy, were drawn up by various government agencies and served as the bases for
government policy. Subsequently, sectoral programs of varying durations were
prepared for agriculture, industry, forestry, transport and telecommunications,
education and water resources development.
These sectoral plans and programs were mostly proposed schedules of public
expenditure. However, they served the useful purpose of focusing attention on
planning, and their inadequacies helped reveal the limits and weaknesses of partial
planning. Recognition of these facts, combined with several other factors such as the
rising preference of planning in developing countries by western countries providing
loans and grants, led the government to formulate an overall development plan. Thus
administrative machinery for formulating plans called the National Economic
Council was established in 1955. The Council consisted of a Planning Board and a
Secretariat to the Board, specifically charged with the task of drawing up plans. The
Executive Committee of the Planning Board was chaired by the country's Prime
Minister and had the following members: 1) Minister of Finance; Mining and State
Enterprises; 2) Minister of Health; 3) Minister of Public Works and Communications;
4) Minister of Agriculture; 5) Minister of National Community Development; 6)
Governor of the State Bank; 7) Minister of Posts, Telegraphs and Telephones; 8)
Minister of Commerce and Industry; 9) Minister of Information; 10)Vice Minister of
Education and Fine Arts; and 11) Vice Minister of the Planning Board, Secretary.
Ethiopia's First Five Year Development Plan (1957-61) and its Second Five Year
Plan (1962-67) were prepared under this arrangement.

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A number of developments, important to the economy as well as to the structure of
the government itself, have taken place during these years. The First Five Year Plan,
which marked the start of national planning for the country's integrated development,
offered something much needed but heretofore unavailable, namely, the first
comprehensive picture of the economy, and much new information came to light.
Even for those areas where serious obstacles stood in the way of complete
knowledge, a start was made to overcome these obstacles; and the Second Five Year
Plan not only continued this effort but applied it more widely. One significant
outcome of this effort was the realization of the importance of statistics for planning.
The Central Statistical Office (CSO) was established during these years, originally
under the Ministry of Commerce and Industry under which the Planning Board
Secretariat was also administered.

The First and Second Five Year Plans also drew attention to the need for creating
other important institutions, many of which have been established by the government.
A development plan is essentially a general guideline of policies to be pursued and
measures to be adopted, consonant with such policies; it defines broad areas of
economic and social activity to be promoted and describes how they are to be
implemented. What gives substance to this broad action programme are the specific
projects -- the roads to link the people and markets of the country and to open up new
areas, the hydroelectric installations to generate power for industrial plants and cities,
the factories to transform the nation's raw materials into manufactures, and so on.
These projects require specialized institutions both for their elaboration and for their
financing.

In this regard, not only have existing project-oriented institutions from before the
First Five Year Plan been strengthened (e.g., Imperial Highway Authority, Ethiopian
Electric Light and Power Authority, Imperial Board of Telecommunications of
Ethiopia), but new ones have been created. Among these were the previously

92
mentioned Central Statistics Office, the Technical Agency, which was responsible for
appraising development projects and the so-called Ethiopian Investment Corporation.
A number of proposals had also been worked out for the implementation of the
Second Five Year Plan. Notable among these were the establishment of planning
units within each ministry and government agency and effective coordination of
economic and social policies both at the higher and lower levels of the government.
In fiscal administration, the most important proposal was the relation of the budget to
the annual plan. In view of this, the government had announced policy statements
with regard to the relation of the budget with the Second Five Year Plan through the
medium of annual plans. However, the indispensable administrative mechanism
through which these policies could be put into effect was not strong enough as
expected.

In the field of monetary and credit institutions, the recommendations of the Second
Five Year Plan were fully implemented. The former State Bank of Ethiopia was split
into the new National Bank of Ethiopia becoming a Central Bank, and the
Commercial Bank of Ethiopia operating as a normal business bank. More broadly,
the nation's experience with planning showed the need for reforming the
administrative machinery of the government. It was acknowledged that planning, to
be truly operative, required a modem administrative structure different from that
inherited from the pre-planning past. Accordingly, the government created a high-
level Administrative Reform Committee towards the end of the First Five Year Plan.
Among the leading objectives of this Administrative Reform Committee were:
 the simplification of the then existing ministerial structure by the elimination
of unnecessary ministries; and
 the transfer of certain functions from one ministry to another in order to avoid
duplication and overlapping of responsibility.

93
In 1962 the Committee submitted its report in which it made a number of proposals
for creating new ministries, and dissolving or reformulating the functions of others.
Consequently, in 1966 the order defining the powers and responsibilities of ministers
was promulgated. Among the ministries established by Order No. 46 of 1966 was the
Ministry of Planning and Development which had the following duties and
responsibilities:

1) It was generally responsible for the conduct of the government's planning

activities;
2) It supervised and coordinated the activities of the government's planning
administration;
3) In cooperation with other ministries and public authorities concerned, initiate,
prepare and organize long-term development plans and submit them for approval
by the Council of Minsters;
4) Receive each year from the ministries and public authorities concerned, or, if the
same are not so received, initiate and prepare annual development programs and
the supporting development budget proposals; analyze, evaluate and consolidate
the said annual development programs and development budgets and present them
to the Ministry of Finance for consolidation into the annual government budget;
5) In agreement with other ministries and public authorities concerned, establish
appropriate and effective procedures to ensure that approved development plans
and programs are properly implemented and that the development budget is
properly expended for the purposes for which it was allocated;
6) Carry out or cause to be carried out technical and economic feasibility studies of
individual development projects;
7) Be responsible for the securing, compilation, analysis, collation and publication of
data and statistics;
8) Negotiate and conclude, in accordance with approved projects, programs and
plans, agreements and arrangements regarding the provision of bilateral and
94
 multilateral assistance, and coordinate the same with other ministries and public
authorities concerned; Formulate and enforce general credit policies of government
financial institutions and corporations engaged in the financing of development
plans and programs; and
9) Be principally responsible, together with other ministries and public authorities
concerned, for representing and protecting the interests of the government in
public financial institutions and corporations engaged in the financing of
development plans and programs.

The country's ambitious Third Five Year Development Plan (1968-1973) was
compiled under the supervision of this ministry. Regarding the plans themselves, the
first two Five-Year Plans were conservative as testified by the low or modest levels
of investment and growth rate targets they set to achieve, while the Third Five Year
Plan was ambitious in both regards and ended up with serious under implementation.

In 1970 the Ministry of Planning and Development was reorganized to become the
Planning Commission with more or less identical duties and responsibilities. On the
eve of the 1974 revolution, the Planning Commission was headed by a minister who
was aided by three vice ministers. It had ten departments and employed about seventy
national and expatriate professionals. After 1974, this Commission was renamed the
Central Planning Commission by
Proclamation No. 128 of 1977. By late 1978, however, the planning machinery was
re organized to form the National Revolutionary Development Campaign and Central
Planning Supreme Council (NRDC & CPSC).NRDC & CPSC prepared and executed
six annual Development Campaign Programs popularly known as Zemechas. The
campaigns were essentially designed to attain limited and immediate objectives to
address urgent problems of the times. Moreover, formulated in the absence of long-
and medium-term plans with the appropriate perspectives and strategies, they could
not be effective for laying the foundations for the economic growth of the country.

95
They also proved to be inadequate in solving pressing problems which result from the
basic weaknesses of the economic structure itself.

It was, therefore, decided to launch a long-term perspective plan to serve as a policy

tool for the realization of Ethiopia's long-term objectives. Once again, the planning
institution underwent a restructuring process to enable it perform this task. As a
result, the Office of the National Committee for Central Planning (ONCCP) was
established in 1984.
Since its establishment, the ONCCP has been the organ responsible -for the
preparation of integrated short-, medium- and long-term plans of the country. As is
well-known, the first major assignment of the ONCCP was the launching of a Ten-
Year Perspective Plan covering the period 1984/85-1993/[Link] the contents of
the over-ambitious Perspective Plan were the overall and sectoral orientation of
development as well as production (see Table 1) and investment targets, financial and
manpower requirements and policy and organizational measures needed to attain the
targets. The implementation of the Perspective Plan was undertaken through the
elaboration of short- and medium- term plans.

The Planning Process

Planning can be defined as "a continuous process which involves decisions or

choices, about alternative ways of using available resources, with the aim of
achieving particular goals at some time in the future" [Conyers and Hills 1984]. The
national economic plan is usually made up of a system of plans which, though they
differ from each other in terms of the time period that is covered and the degree of
detail with which various indicators are elaborated, together make up a single
coherent economic plan. This system of plans includes a perspective (long-term)
plan, a medium-term plan and a short-term (annual) plan. All three types of plans
have, at one time or other, been prepared in Ethiopia.

96
As in other countries, here in Ethiopia, the planning process at all levels passes
through a series of iterative stages. These are:
1) the preliminary stage;
2) the analytical stage;
3) adjustments and directive stage;
4) plan elaboration stage;
5) plan adoption stage; and
6) Plan implementation stage.

1. The Preliminary Stage

At the initial stage, the highest organs of the state and government (Council of
Representatives and/or Council of Ministers) give general guidelines and directives
on the economic, social and political tacks of the coming period, which serve as the
starting point for the planning institution to initiate the planning process.

2. The Analytical Stage

At the analytical stage, evaluation of socio-economic conditions in the country as

well as the international economic situation, analysis of the state of the economy at
the beginning of the plan period, assessment of the implementation of the previous
plan, identification of major socio-economic problems, development constraints,
development possibilities and alternatives and other similar planning tasks are
undertaken.
On the basis of this analysis as well as state and government directives, the national
goals and objectives of development in the plan period are determined.
Consecutively, the rates and main proportions of development needed to attain the set
objectives are calculated by: preparing alternative growth scenarios that could bring
about the achievement of the specified objectives under various assumptions;
analyzing the pros and cons for each scenario and selecting the best growth scenarios;
97
and integrating the above processes to serve as the macro-framework(guidelines)
which contains mainly: the analysis of current economic situation; overall objectives,
goals and strategies; GDP and sectoral growth variants; investment ceilings (sectoral
and global);the budget frame; and balance of payments projection.

3. Adjustments and Directive Stage

This stage involves the selection of the most appropriate course of development
requirements at various levels with the available resources. This evolved into
guidelines for the drawing up of Sectoral and regional plans (see Table 2 and 3).In
Ethiopia, at this stage the planning institution transmits the plan guidelines(i.e.,
macro-framework) to sectoral ministries, agencies and regional planning offices with
instruction to prepare and submit their own plan proposals according to a specified
time schedule.

Planning and the transition period

The transitional period's draft economic policy, which was recently distributed for
discussion, envisages Ethiopia as moving towards a market-oriented mixed economy
where all forms of ownership and enterprises will operate on the principle of
profitability and competitiveness. The cornerstones of the draft economic policy are:
 Limiting the participation of the state sector in the economy; intensifying the role
of the private sector; and encouraging popular participation in development.
 Evidently, the draft economic policy entails a change in the role of planning.
 It can be argued that Ethiopia's so-called central planning has never been a fully
operative central planning in its classical form as that made operative in the
Soviet Union and Eastern Europe. This is because the private sector is dominant
in the country's economy and it is very difficult to control and direct a
predominantly peasant economy through a central plan.

98
The focus of Ethiopia's planning has always been the state sector where attempt was
made to set targets and allocate skilled manpower, investment and foreign exchange.
As such, it is quite easier to bring about reorientation of the state sector. During the
transition period, planning is expected to have strengthened capacity for
macroeconomic management. In general, its role are likely to be:
ï identifying priorities and indicating the development strategy;
ï planning and guiding the state sector;
ï assist in harmonizing the activities of the private sector through economic
instruments;
ï serve as center for policy analysis and forecasting;
ï appraising projects requiring public sector financing;
ï prepare medium- and long-term indicative plans; and
ï Formulating strategies for promoting regional development as well as the
coordinated utilization and conservation of natural resources.
In general, the system of economic management of the transition period will utilize
both plan and market in a complementary way. The emphasis, however, should be
towards market orientation, except where there is private and social cost divergence
and where economies of scale exist.
4.2. Planning Experiences of Some World Countries
A. Planning experience of France
France utilized indicative planning and established a number of state owned enterprises in
strategic sectors of the economy. The concept behind indicative planning is the early
identification of oversupply, bottlenecks and shortages so that state investment behavior can be
modified in a timely fashion to reduce the incidence of market disequilibrium, with the goal of
sustaining stable economic development and growth. Under this system France experienced its
"Trente Glorieuses" period of economic prosperity. France also anchored its economic blue
print by successive government on economic indicators of growth and development, indices of
food security, water supply, adequate housing, efficient education, affordable health care
system, employment opportunities and provision of infrastructures through which sustainable

99
economic development can be achieved. However, according to the Economist Intelligence
Unit, (2015), the global food security index of France is 83.8%, which placed the country as one
of the most secured in terms of food security. France is also among the most developed nations
in the world that other less developed countries are now patronizing.

B. Planning experience of the Soviet Union (Dissolved in 1991) Now Russia.

The Soviet model of economic planning is an economic system where decisions regarding
production and investment are embodied in a plan formulated by Gos plan (State planning
agency) through the process of material balances. Economic information, including consumer
demand and enterprise resource requirements, are aggregated and used to balance supply (from
available resource inventories) with demand (based on requirements for individual economic
units and enterprises) through a system of iterations. The Soviet economy operated in a
centralized and hierarchical manner where directives were issued to lower-level organizations.
As a result, the Soviet economic model was often referred to as a command economy or an
administered economy because plan directives were enforced through inducements in a vertical
power structure, where planning played little functional role in the allocation of resources. The
Soviet anchored their economic plan on socialist ideology bearing in mind all economic
indicators of growth and development, indices of food security, water supply, adequate housing,
efficient education, affordable health care system, employment opportunities and provision of
infrastructures which were shouldered by the planning authority, that is the government.
Although, Soviet Union have broken up but the economic planning system of countries like
Russia, Croatia, Slovenia, Serbia, Georgia, Hungary etc., still have major traces of this system
and that is why they are referred to as socialist states. However, according to the Economist
Intelligence Unit, (2015), the global food security index of Russia is 63.8%, which placed the
country as one of the most secured in terms of food security.
C. Planning experience of the USA
The United States utilized economic planning during the First World War. The Federal
Government supplemented the price system with centralized resource allocation and created a
number of new agencies to direct important economic sectors; notably the Food Administration,
Fuel Administration, Railroad Administration and War Industries Board. During the Second
World War, the economy experienced staggering growth under a similar system of planning. In
the postwar period, US governments utilized such measures as the Economic Stabilization
Program to directly intervene in the economy to control prices, wages, etc. in different
100
 economic sectors. From the start of the Cold War and up until the present day, the United States
Federal Government directs a significant amount of investment and funding into research and
development (R&D), often initially through the Department of Defense. The government
performs 50% of all R&D in the United States, with a dynamic state-directed public- sector
developing most of the technology that later becomes the basis of the private sector economy.
As a result, Noam Chomsky has referred to the United States economic model as a form of State
capitalism. Examples include laser technology, the internet, nanotechnology,
telecommunications and computers, with most basic research and downstream
commercialization financed by the public sector. This includes research in other fields including
healthcare and energy, with 75% of most innovative drugs financed through the National
Institutes of Health.

The economic plan of US was also anchored on economic indicators of growth and
development indices of food security, water supply, adequate housing, efficient education,
affordable health care system, employment opportunities and provision of infrastructures
through which sustainable economic development can be achieved. The US economy has been
the cynosure of all eyes thereby attracting migrants from all parts of the world. However,
according to the Economist Intelligence Unit, (2015), the global food security index of USA is
89.0%, which placed the country as one of the most secured in terms of food security.

D. Planning experience of China

In China planning experience took so many dimensions most especially coming from the angle of
the communist cum socialist ideology and economic system canvassed for by the then Soviet Union
of which China was an ally. China witnessed a gradual economic development transformation with
emphasis on indicative and perspective planning strategy using available manpower resources and
investment on ‗ICT‘ information and communication technology. Today, China can be seen as a
market based economy with socialistic ideology and a competitive economy which other developed
economies are afraid of. In 1953, China launched its first five-year plan, modeled on the Soviet
materials balance planning system. China adopted the ―Big Push‖ strategy. Investment spending
was promoted greatly while consumption was restricted. Large industrial projects were favored
despite China‘s large number of workers and shortage of capital goods. Between 1952 and 1978,
the share of Chinese GDP accounted for by industry rose from 18% to 44%. In the planning system,

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prices were artificially set by the government i.e., prices did not reflect demand and supply. Prices
were artificially high for industrial goods and artificially low for agricultural goods, wages were
also set by the government and they were low and were rarely changed. This continued until 1993
after the cold war and the fall of Soviet Union, when central planning was phased out and decision
making decentralized thereby opening up China‘s economy to the global world market. With a
population of about 1.3 billion people which is the largest in the world, China‘s economy is one of
the largest in the world. Let us now discuss the recent economic plan of China.

The Twelfth Five-Year Plan (2011–2015) Guideline was debated in mid-October 2010. A full
proposal for the plan was released following the plenum and approved by the National People's
Congress on March 14, 2011, with the goals of addressing rising inequality and creating an
environment for more sustainable growth by prioritizing more equitable wealth distribution,
increased domestic consumption, and improved social infrastructure and social safety nets. The plan
was representative of China's efforts to rebalance its economy, shifting emphasis from investment
towards consumption and development from urban and coastal areas toward rural and inland areas -
initially by developing small cities and Greenfield districts to absorb coastal migration. The plan
also continues to advocate objectives set out in the Eleventh Five-Year Plan to enhance
environmental protection, accelerate the process of opening and reform, and emphasize Hong
Kong's role as a center of international finance. The targets for the Twelfth Five-Year Guideline in
2011 were to grow the GDP by around 8%, 7% annual growth of per capita income, spend 2.2% of
GDP on research and development by 2015, bring the population below 1.39 billion by 2015,
readjust income distribution to stop the yawning gap, firmly curb excessive rise of housing prices,
implement prudent monetary policy, intensify anti- corruption efforts, accelerate economic
restructuring, and deal with the complex situations in development in 2011.

Other set targets were as follows:

1. Urbanization rate reaching 51.5%

2. Value-added output of emerging strategic industries accounting for 8% of GDP
3. Inviting of foreign investment in modern agriculture, high-tech, and environment protection
industries
4. Moving coastal regions from being the "world's factory" to hubs of research and
development, high-end manufacturing, and the service sector
5. More efficient development of nuclear power under the precondition of ensured safety.
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6. Increased momentum for large-scale hydropower plants in southwest China
7. Length of high-speed railways reaching 45,000 km
8. Length of highway networks reaching 83,000 km
9. A new airport being built in Beijing
10. 36 million new affordable apartments for low-income people In a bid to remain focused.
China has also adopted the Thirteenth Plan (2016–2020) of which the focus areas are:

1. Innovation: Move up in the value chain by abandoning old heavy industry and building
up bases of modern information-intensive infrastructure
2. Balancing: Bridge the welfare gaps between countryside and cities by distributing and
managing resources more efficiently
3. Greening: Develop environmental technology industry, as well as ecological living and
ecological culture
4. Opening up: Deeper participation in supranational power structures, more international
co-operation
5. Sharing: Encourage people of China to share the fruits of economic growth, so to bridge
the existing welfare gaps
The Policies also aimed at the following:

a. Everyone is an entrepreneur, creativity of the masses by 2025

b. Made in China 2025
c. Aims to address four worrying trends in current situation and have them changed: i.
nationally vital technologies lack a domestic core platform ii. Chinese industrial
products are perceived internationally as inferior quality iii. Domestic industrial
competition is fierce due to overly homogeneous structure iv. Poor conversion of
academic research results to practical application d. Economy needs a Rule of Law
e. National defense reform Organizational reform of the army, slashing number of
highest generals, as well as concentrating branches' functions, moving some under
Defense Ministry f. Urbanization with Chinese characteristics g. Reform one-child
policy; Soon it could be called "two-child policy However, according to the
Economist Intelligence Unit, (2015), the global food security index of China is
64.2%, which placed the country as one of the most secured in terms of food
security. There is no doubt that China is a rich nation that will be ready to partner

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 with any country for development of their infrastructure even with giving out of
loans to such nations.
E. Planning experiences of India and Asian Tigers

Planning experience of India

India was known to be a developing nation because of the strategic economic plan embarked
upon to salvage the economy which was in shamble in the past. It is a country with about a
billion people in terms of population second after China. India has been seen to be a
growing economy adopting indicative, rolling and perspective type of planning with
emphasis on manufacturing, industrialization and medicine. Since 1947, the Indian economy
has been premised on the concept of planning. This has been carried out through the Five-
Year Plans, developed, executed, and monitored by the Planning Commission known now
as ‗‗NITI Aayog after 2014‘‘. For easy understanding, we shall only discuss the current
Indian plan, although India has a series of economic development plans which are in this
progression. First Plan (1951– 1956), Second Plan (1956–1961), Third Plan (1961–1966),
Fourth Plan (1969–1974), Fifth Plan (1974–1979), Rolling Plan (1978–1980), Sixth Plan
(1980–1985), Seventh Plan (1985–1990), Annual Plans (1990– 1992), Eighth Plan (1992–
1997), Ninth Plan (1997–2002), Tenth Plan (2002–2007), Eleventh Plan (2007–2012) and
Twelfth Plan (2012– 2017) The Eleventh Plan completed its term in March 2012 and the
Twelfth Plan is currently underway. Prior to the Fourth Plan, the allocation of state
resources was based on schematic patterns rather than a transparent and objective
mechanism, which led to the adoption of the Gadgil formula in 1969. Five-Year Plans
(FYPs) are centralized and integrated national economic programs.
India launched its First FYP in 1951, immediately after independence under socialist
influence of first Prime Minister Jawaharlal Nehru. The First Five-Year Plan was one of the
most important because it had a great role in the launching of Indian development after
Independence. Thus, it strongly supported agriculture production and it also launched the
industrialization of the country (but less than the Second Plan, which focused on heavy
industries). It built a particular system of mixed economy, with a great role for the public
sector (with an emerging welfare state), as well as a growing private sector. There are series
of FYP‘s embarked upon by India till the Twelfth Plan (2012- 2017) which is also tagged as

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12th Five-Year Plan (India). Let us briefly look at it. The Twelfth Five-Year Plan of the
Government of India had been designed for growth rate at 8.2% but the National
Development Council (NDC) on 27 Dec 2012 revised it to 8% growth rate. The plan was
further anchored on the following aims. 1. Rapid and inclusive growth. (Poverty reduction
by 10%) 2. Emphasis on social sector and delivery of service therein. 3. Empowerment
through education and skill development.
4. Reduction of gender inequality. 5. Environmental sustainability. 6. To increase the
growth rate in agriculture, industry and services to 4%,10% and 9% respectively.
7. Reduce Total Fertility Rate to 2.1 8. Provide clean drinking water for all by 2014. The
document presented by the Planning Commission was aimed to attract private investments
of up to US$1 trillion for infrastructural growth, which was also ensure a reduction in
subsidy burden of the government to 1.5 percent from 2 percent of the GDP. However,
according to the Economist Intelligence Unit, (2015), the global food security index of India
is 50.9%, which placed the country as one of the secured in terms of food security.
Planning experience of Asian Tigers
The economic development models of the East Asian Tiger economies involved varying
degrees of economic planning and state-directed investment in a model sometimes described
as "state development capitalism" or the "East Asian Model". The Asian Tigers have been
seen to be growing economies adopting indicative, rolling and perspective type of planning
with emphasis on education, manufacturing, industrialization and medicine The
governments of Malaysia and South Korea instituted a series of macroeconomic plans (First
Malaysia Plan and Five-Year Plans of South Korea) to rapidly develop and industrialize
their mixed economies. The economy of Singapore was partially based on economic
planning involving an active government industrial policy and high levels of state-owned
industry in a free-market economy. They also based their economic plan to be anchored on
economic indicators of growth and development, indices of food security, water supply,
adequate housing, efficient education, affordable health care system, employment
opportunities and provision of infrastructures through which sustainable economic
development could be achieved. There was a significant growth and development in these
economies as a result of disciplined execution of their economic plans, set goals and
objectives which made them to be referred to as Asian Tigers.

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The vision of Singapore to become developed country in the first league Singapore is one of
the major Asian Tigers, it is therefore important to discuss its vision strategies that moved
the country to a developed nation. The strategic economic plan sets the strategies and
programs for Singapore to realize a vision to attain the status and characteristics of a first
league developed country within the next 30 to 40 years. Key facets of the Vision are
economic dynamism, a high quality of life, a strong national identity and the configuration
of a global city. Strategies for the long term, which will also produce some benefits for
Singapore in the short to medium term, are directed at maintaining and extending the
nation's international competitiveness. Eight strategic thrusts have been identified to help
propel Singapore's economic and social progress to that of a developed country.
They are: 1. Enhancing Human Resources 2. Promoting National Teamwork 3. Becoming
Internationally Oriented 4. Creating a Conducive Climate for Innovation 5. Developing
Manufacturing and Service Clusters 6. Spearheading Economic Redevelopment 7.
Maintaining International Competitiveness 8. Reducing Vulnerability When change is as
rapid and dynamic as in the international economic environment, the planning process is
fraught with risks. Looking at it in this course, world shattering events in the Gulf and the
Soviet Union occurred. No one could have predicted these events or the degree of impact
they would have on the world economy now and in the future. But it is evident and shows as
reference points in the World. Singapore cannot hope to predict such dramatic events at
home or abroad. But through scenarios and contingency plans it would take into account
various contributory factors, and weigh up other more gradual shifts and trends in
international politics, trade and economics. With clear lessons from the recent past of the
World economy and Singapore's experience, the writing on the wall currently is that
economic strategies for Singapore need to evolve from the past single dimensional type to a
multidimensional one in order to remain viable in an increasingly complex environment. In
this context, the Economic Planning Committee was charged with the task of preparing a
Strategic Economic Plan for Singapore to provide for the medium to long term.
This plan aims to: 1. Provide an overview of the economic landscape over the next 20 to 30
years 2. Define a clear vision for the economy and analyses its implications3. Initiate a national
planning process, which is consultative and evolutionary in character 4. Help build a shared vision
among labor, business and government on national economic aspirations However, according to the
Economist Intelligence Unit, (2015), the global food security index of Singapore is 82.2%, which
placed the country as one of the most secured in terms of food security
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