Economics of Planning

Lecture 01
Date: 20-10-2024

Lecture: Role of Planning in an Underdeveloped Country

Introduction

Planning plays a crucial role in addressing the unique challenges faced by underdeveloped
countries, including poverty, inequality, unemployment, and underutilization of resources. These
nations often suffer from market inefficiencies, poor infrastructure, and institutional weaknesses,
which hinder economic growth. By adopting well-structured economic planning, governments can
direct resources towards priority areas, promote balanced development, and accelerate economic
progress.

1. Role of Planning in an Underdeveloped Country

a. Resource Allocation

 In underdeveloped economies, resources (land, labor, capital) are often underutilized or

misallocated. Planning helps allocate these scarce resources towards sectors like
agriculture, infrastructure, and education to achieve growth objectives.
 Example: Bangladesh's Five-Year Plans have focused on improving agriculture and
education as key sectors to boost development.

b. Correcting Market Failures

 Due to the prevalence of market failures, such as monopolies, externalities, and imperfect
competition, planning enables the government to correct these inefficiencies and ensure a
more equitable distribution of resources.
 Example: India's Five-Year Plans focused on industrialization and building heavy
industries that the private sector was unable or unwilling to develop.

c. Promoting Balanced Regional Development

 Underdeveloped countries often face uneven development, with urban areas developing
faster than rural ones. Planning helps in promoting balanced regional development by
directing investments in underdeveloped regions.
  Example: Brazil's National Development Plan (Plano Nacional de Desenvolvimento)
sought to develop the northeastern region, which lagged behind the country's industrial
south.

d. Reducing Unemployment and Poverty

 Economic planning helps create job opportunities through public investment in

infrastructure and industry, and by encouraging the growth of key sectors like agriculture
and manufacturing.
 Example: Ethiopia’s Growth and Transformation Plan (GTP) targeted infrastructure
development to create employment and reduce poverty.

e. Controlling Inflation and Economic Stability

 Planning can be used to control inflation and achieve macroeconomic stability by

coordinating investment and consumption. Governments can also adjust fiscal and
monetary policies to stabilize the economy.
 Example: South Korea’s Five-Year Economic Plans successfully controlled inflation
and achieved rapid industrialization by maintaining a balance between demand and
supply.

f. Human Capital Development

 Planning in underdeveloped countries often focuses on education, healthcare, and skill

development, recognizing that human capital is essential for long-term economic growth.
 Example: China’s Economic Planning in the 20th century focused on improving
literacy rates and healthcare infrastructure to boost labor productivity.

2. Supportive Economic Theories

a. Big Push Theory (Rosenstein-Rodan)

 This theory suggests that underdeveloped countries need a significant initial investment
or "big push" to escape the cycle of poverty. Large-scale investment in various sectors
can create complementarities that boost overall economic growth.
 Relevance to Planning: Government planning helps coordinate large investments across
sectors (infrastructure, industry, education), which individual markets may fail to
provide.

b. Balanced Growth Theory (Ragnar Nurkse)

 Nurkse argues that developing countries should invest in multiple sectors simultaneously
to create a balanced growth trajectory, avoiding bottlenecks in one sector that might
impede the overall economy.
  Relevance to Planning: Centralized planning allows governments to direct resources
towards several key sectors to ensure balanced growth.

c. Harrod-Domar Growth Model

 This model emphasizes the importance of savings and investment for economic growth,
suggesting that underdeveloped economies should focus on increasing capital formation.
 Relevance to Planning: Planning helps mobilize domestic savings and channel them into
productive investment, which accelerates growth.

d. Lewis Dual Sector Model

 Lewis’s model focuses on the structural transformation of an economy from a

predominantly agrarian one to an industrialized one. He emphasizes labor transfer from
the subsistence agricultural sector to the modern industrial sector.
 Relevance to Planning: Government planning can support this transition by promoting
industrialization and creating jobs in urban areas, pulling labor from agriculture.

3. Examples of Real Development Plans

a. India’s Five-Year Plans

 India’s First Five-Year Plan (1951-1956) was focused on agricultural development and
land reform to address food security. The subsequent plans aimed at industrialization,
education, and poverty reduction.
 Impact: These plans helped establish heavy industries, increase literacy rates, and
achieve food self-sufficiency.

b. China’s Economic Planning

 China’s Five-Year Plans, starting from 1953, played a pivotal role in transforming the
country from an agrarian society into a global manufacturing hub. The focus was on rapid
industrialization, infrastructure development, and export-oriented growth.
 Impact: China’s planning resulted in sustained economic growth and poverty reduction,
making it one of the world’s largest economies.

c. South Korea’s Economic Miracle

 South Korea’s Five-Year Economic Development Plans from the 1960s focused on
export-driven industrialization, infrastructure, and human capital development.
 Impact: These plans transformed South Korea from a war-torn, low-income country into
a high-income, technologically advanced economy.
d. Bangladesh’s Five-Year Plans

 Bangladesh’s plans have emphasized poverty reduction, agricultural development, and

industrialization. The Sixth Five-Year Plan (2011-2015) focused on boosting export-
oriented industries and infrastructure development.
 Impact: Significant improvements in GDP growth, poverty reduction, and literacy have
been achieved through focused planning.

e. Malaysia’s Vision 2020

 Malaysia’s Vision 2020 is a long-term development plan aimed at transforming the

country into a fully developed economy by 2020. The plan emphasized infrastructure,
education, and innovation.
 Impact: Malaysia experienced rapid industrialization, diversification of the economy,
and improved living standards through planned development.

f. Ethiopia’s Growth and Transformation Plan (GTP)

 Ethiopia’s GTP focused on infrastructure, industrialization, and poverty reduction. Key

areas included improving energy, transport, and agricultural productivity.
 Impact: Ethiopia achieved significant GDP growth and improvements in infrastructure,
though challenges in poverty reduction remain.

Planning is essential for underdeveloped countries to achieve sustained economic growth, social
development, and structural transformation. Through the proper allocation of resources,
coordinated investments, and corrective measures against market failures, governments can
guide their economies toward higher productivity, poverty reduction, and long-term stability. By
drawing from economic theories and real-world examples, we see that well-executed planning
can play a transformative role in the development process.