Development Planning and Project Analysis I

CHAPTER ONE
1. DEVELOPMENT PLANNING: An Introduction
1.0. Introduction

Meaning of planning

There is no agreement among economists with regard to the meaning of the term ‘economic
planning’. According to Prof. L. Robbins economic planning is “collective control or suppression of
private activities of production and exchange.” To Hayek, planning means, “the direction of
productive activity by a central authority.” According to Dalton, “Economic planning in the widest
sense is the deliberate direction by persons in charge of large resources of economic activity towards
chosen end.”

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.

In developing countries, we can identify two main features of economic planning:

(i) The governments mobilize domestic resources and also raise foreign finance to carry out such
projects which are expected to induce productive activities in the private sector. This involve the
development of infrastructure and heavy industries.
(ii) The governments adopt certain monetary and fiscal policies to stimulate private economic activity
and to ensure harmony between the social objectives of the government and the behaviour of the
private producers and businessmen.
From the above characteristics of planning in mixed developing economy, it is clear that the market
and economic planning are complementary to one another.

1.1. The evolution of development thinking

can be summarized in to three different periods:
 The Early Post War Consensus
 The Washington Consensus
 The Oscillating Search for Silver Bullet

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1.1.1 The Early Post War consensus

This period covers immediately after cease of World War II up to the end of 1960's and beginning
of 1970's. This is the interesting period for the developing world because it gets attention by
academicians how growth and development could be achieved in these countries. That is why in the
1950's and 1960's, the previously neglected sub-fields of Development Economics were rediscovered.
Available economic models seemed to offer only limited insights into the practical problems facing
the so-called Third World. The dominant one-sector macro models of the day, from Keynesian to
Harrod-Domar to Solow seemed to have relatively little relevance for societies not primarily
concerned with business cycles or steady state properties.

The period, for ease of understanding could be looked into five important sub- periods.

a) Dualism

It attracted due attention during the 1950s and 1960s. The components under dualism are:
 Sociological dualism: Boeke, 1953 is the major proponent. The central theme of sociological
dualism was differences between western and non-western objectives and cultures are the major
source for dualism.
 Technological dualism: Higgins, 1956 is the major proponent. Differences between variable
factor proportions in the traditional sector and fixed coefficients in modern sector as major
source for dualism.
 Physiocrats: viewing land as the source of all wealth, agricultural surplus supporting the non-
agricultural sector.
 Classical dualism: Ricardo and Lewis 1951 are major proponents. Surplus labor as potential for
growth when transferred from agriculture to non-agriculture. Lewis also asserts dualism in
labor markets (competitive wage in non-agriculture versus institutional wage in agriculture as
basis for dualism).

b) Need for Balanced Growth (structuralism)

Rosenstein - Rodan, 1943 and Nurkse, 1953 and others emphasized the need for balanced growth not
only between agriculture and non-agriculture but also with in each sector, so that Say's law could
come in to play and both shoes and socks should be produced to fill both the demand and supply
sides.

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c) International Trade Scene

Prebisch, 1962 stated that the international trade scene painted in colors and was unfriendly for
development and demanded for equitable exchange.

d) Interventionist State

The current theoretical thinking indicates that there is strong inclination to turn to the intervention
state as a key instrument for development. The reasons that this was considered as key instrument for
development are first pre-colonial independent countries want to exercise their own development
agenda. At home the interventionist felt the need to create infrastructure, and the institutions required
to permit the functioning of a national entity. Second industrialization was synonymous with
development (2nd industrialization revolution). The motivation was to promote industry, with
relatively less attention paid to what was viewed as a stubbornly stagnant agriculture portrayed as a
drag on the economy, and with peasants seen as non-responsive to prices and profit opportunities.

A logical accompaniment of these views were PLANNING MODELS, focusing on the flow of
resources, domestically financed investment supplemented by foreign capital and paying relatively
little attention to changes in the behavior of the system or the relevance of technology.

The planning models used were:

1. Planning for resources: such as Simple Harrod - Domar and Mahalonobis models. These
models are all silent on price, and foreign exchange rate flexibility. The predominant view of
policy makers at that time was that growth and efficiency should take priority and the issues
of equity, poverty alleviation, etc should be taken care of at a later date.
2. Multi - sector production function with multiple inputs and variable (Input-Output
models, Social Accounting Matrix). The real focus of planning shifted from resources focus
to devising strategies for policy change to accommodate the changing requirements of
transition.
e) Technology in generating growth

Solow, 1957 and Kuznets, 1955 contribute to emphasize the importance of technology in generating
growth. This provided a new point of departure for neo-classical growth theory, not only replacing
Harrod-Domar with a substitutable production function, but also enthroning exogenous technology
change. They introduced critical elements like Research & Development (R and D), patents and other
forms of scientific endeavors leading to new growth theory.

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It was, however, Kuznets 1971, though mainly concerned with describing modern growth rather than
analyzing the transition process in getting there, which provided another essential ingredient focused
precisely on the developing world at the end of the post-war consensus era. Kuznets was interested
in why some developing countries were successful and others not and placed major emphasis on the
sources of structural change over time as between agriculture, industry and services. He viewed policy
as either basically accommodative or obstructive to the play of underlying economic forces and did
not view it as an exogenous variable.

1.1.2. The Washington Consensus

It is undoubtedly unfair to attribute the realization that policy change is the key ingredient of
successful development to the international financial institutions. It rather would give more credit for
the realization that prices matter more and that macroeconomic stability matters less. The major
contributors of the idea are: Little, Scitovsky, and Scott 1970, Bhagwati 1978, Krueger 1978, Cohen
and Ranis, 1971, among others, who insisted that a re-structuring of the rails of development was
needed.

The main ingredients of the consensus are:

 Privatization and unified and competitive exchange rates

 Simultaneous liberalization of financial markets (domestic and international)
 Relative openness to Foreign Direct Investment (FDI) and gradual deregulation of control
systems
 Emphasize on R and D
 Changes at micro level: labor market productivity, legal, financial and other institutional
reforms
 Program lending changes in to structural adjustment lending. Both program and structural
adjustment lending were subject to debates ranging from cost effectiveness of the resources
spent to all the way the conditionality lists imposed on internal affairs of the recipient country.

1.1.3. The Oscillating Search for a Silver Bullet

Viewing per capita income growth as the key objective has been questioned for sometimes. Serious
mainstream attention has been given to the distribution of income, to the extent to which private
income poverty is reduced and to the extent to which public income poverty (the distribution of
public goods) is being addressed. The public income poverty can be seen through various human
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development dimensions like infant mortality, life expectancy, literacy as fundamental objectives of
development.

The basic efficiency - equity tradeoffs led to redistribution with growth approach of development.
The controversial relationship between growth and income poverty alleviation is that growth is a
necessary but not sufficient condition for poverty reduction.

Theoretical Revisionism

Recently with the advancement in theoretical thinking and problems faced in global relations, there
arises a need to revise some theories. These are:
 New Trade Theory: the challenge to openness (globalization) and favoring import substitution
(infants) leads to the two-way relationship between growth and human development.
 Recent emphasize of development economists are on: micro foundations of development
issues (women household decision making; poor performance of land, labor and credit
markets) and micro-credit organizations and NGO's in developing countries.
 Best Guesses as to the Way Forward
 Avoid dealing with large number and going towards a set of small number comparative
historical studies encompassing typologically ''neighboring'' countries.
 Need to pursue on the two-way relationship between growth and human development.
 Closer look on the pros and cons of decentralization and its relation to democratization and
decision making by the broader body politics.

1.2. 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)

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3. Planning in underdeveloped countries (mixed economic perspective)

1.2.1 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.

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

 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.

 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).

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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.

 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]
 In the post war period, the war devastated countries of Europe were compelled to resort to
economic planning to rehabilitate themselves owing to:-
 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.
 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.
 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.

1.2.3 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:

 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

 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.

1.3. 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, plan-
ning 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
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 expanding.

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

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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 plan-
ning 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 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.
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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 various branches of the economy.

The word 'planning' is sometimes used to describe the means which the government uses to try to en
force 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:

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 what and how much is to be produced,
 How, when and where it is to be produced, and
 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.

1.4. The Need/Rational 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

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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 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

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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 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 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

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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 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.

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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;
 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.

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10. An 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 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.

12. Public 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".

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1.7. Implications of Various Economic Controls in Planned Economy

Arguments for and against Planning

Arguments in favor of 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 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 develop-
ment 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 under-
developed 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 indispensable if a
country is to develop economically on the right lines and develop at the desired speed.

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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

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.

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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 but also 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 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.

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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 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 rather than for the benefit of the few.

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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 unem-
ployment. 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.
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.

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