Rift Valley University

Hachalu Campus
Department of Economics
Development Project
Planning and Analysis I

By: Tesfaye G.
 • Contents

• Evolution of Development Thinking

Unit One • Early post-war consensus
Basic Concepts of • Washington Consensus
Development • Oscillating search for the silver bullet

Planning • Theoretical revisionism

• Historical Development of Economic Planning

• Planning in Eastern Europe - socialist perspective

• Planning in Western Europe - Capitalist perspective

• Planning in underdeveloped countries - mixed economic perspective

• Meaning of economic planning

• Need for Planning

• Rationale for planning in developing countries

• Prerequisites for planning

• Limitation of planning
Evolution…
Evolution…
Evolution
…
 Evolution…
• A logical accompaniment of these views was planning models, focusing on
the flow of resources
• The planning models used were:
• 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 policymakers at that time was that
growth and efficiency should take priority and the issues of equity,
poverty alleviation etc. should be taken care of later.
• Multi-sector production function with multiple inputs and variable -
Input-Output models and Social Accounting Matrix.
E. Technology in generating growth
• Solow (1957) and Kuznets (1955):
• Emphasize the importance of technology in generating growth
• This provided a new point of departure for neo-classical growth theory
• They introduced critical elements like Research & Development etc.
Evolution… • Kuznets (1971) was interested in why some developing countries were successful
and others not

• He placed major emphasis on the sources of structural change over time as

between agriculture and other sectors.

• 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

• 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

• They insisted that a re-structuring of the rails of development was needed.

Evolution… • The main ingredients of the consensus are:
• Privatization and unified and competitive exchange rates

• Simultaneous liberalization of financial markets

• Relative openness to Foreign Direct Investment and gradual deregulation of control systems

• Emphasize on R and D

• Changes at micro level: labor market productivity, legal, financial and other institutional
reforms

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 attention has been given to the distribution of income (both private and public income
poverty is reduced)

• The public income poverty can be seen through various human development dimensions like infant
mortality and life expectancy etc. as fundamental objectives of development.
 Theoretical Revisionism

There is a need to revise some theories due to the advancement in

theoretical thinking and problems faced in global relations recently.
These are:

• New Trade Theory: The challenge to openness and favoring import

substitution leads to the two-way relationship between growth and
human development.

Recent emphasis of development economists is on:

• Micro foundations of development issues- women’s household

decision-making and poor performance of land  labor

• Micro-credit organizations and NGOs in developing countries.

 • The basic efficiency-equity trade-offs led to redistribution with a growth
approach to development

• The controversial relationship between growth and income poverty alleviation

is that growth is a necessary but not sufficient condition for poverty

Evolution… reduction.

1.2. Historical background of economic planning

• The idea of planning has a long history

• The evolution is from three perspectives:

• Planning in Eastern Europe - socialist perspective

• Planning in Western Europe - Capitalist perspective

• Planning in underdeveloped countries - mixed economic perspective

 • During the 19th century thinkers and writers in Eastern Europe
became fed up with the inquiry and contradictions of pure

1.2.1 capitalism.

• They developed the idea of state intervention to prevent

Planning in inequalities resulting from capitalism.

• But it was only state intervention that was advocated. There was

Eastern no mention of economic planning and how to interrelate

• In 1928 the Soviet Union gave the idea of economic planning a

Europe real shape when it formulated its first five-year plan.

• The main objective of the socialist plan was to achieve the rapid
transformation of a backward agriculture sector into a modern
industrial sector.
 • There could be several factors that necessitate planning in Western Europe-
• Wars
• Great Depression of 1930th

1.2.2.
• Expansion of markets and specialization.
• A series of the above historical developments led to the coordination of economic
policies or planning. These are:

Planning in
A. The development of science and technology made planning possible as well as
improved computation facilities and advances in management theory. The
intervening depression reminded the state of the tragedy incompleteness of
economic theory and public policy.

Western B. The 1930s great depression of the capitalist world.

• Capitalism failed an utter collapse, and its inherent contradiction came up to the
surface.

Europe • Economic growth collapsed and acute misery and poverty well experienced by
people.
• Therefore, economists and politicians favored economic planning as a remedy
for these and other economic ills.
• Meanwhile there was an attempt to plan economic life in Nazi German and
Fascist Italy during the 1930s.
 Planning…
• 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 improve the living
standard of the people.

C. The outbreak of World War I and II necessitates the proper and efficient
planning of economic resources for the successful prosecution of the war.

D. The war-devastated countries of Europe were compelled to resort to

economic planning to rehabilitate themselves owing to:

1. 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.
Planning…

2. The USA itself recognized the significance of economic planning when

it adopted an economic program called the New Deal to come out of
the suffering from the great depression in the 1930s.

E. The growth of markets and increased specialization led to increased

interdependence among economic activities and to greater economic
externalities which led to the adoption of economic planning. There is a
need to intervene in public agencies to rectify the negative externalities.

F. The development of democracy also led 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 an important remedy for
underdeveloped countries in their desire for industrialization.
• Economic planning was considered a tool to achieve rapid economic
development
• However, the development or evolution of planning took a different
path than the rich countries for the following reasons:
A. In Less Developing Countries, planning was considered as an
ideology rather than a means because in these countries planning
was considered as an expression of many things such as:
• Desire of self-control
• Desire or expression of independence
• Expression of self-determination
• Then planning as a political and cultural goal
 Planning…
B. New leaders or elites emerged when they gained independence with new visions and
ideas. This brings new decision-making capacity.
• These new leaders have to plan because it was considered as a potential tool to
survive and prosperity
• Planning here was not a consequence of industrialization which is the inverse of the
Western.
1.3. Meaning of Economic Planning
• There is no agreement among economists with regard to the meaning of the term
economic planning
• It is often confused with communism 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.
• Planning is a technique or a means to an end, the end being the realization of certain pre-
determined and well-defined aims and objectives
 Planning…
• The end may be to achieve economic, social, political, or
military objectives
• Planning is a conscious and deliberate use of resources with a
view to achieving certain targets of production.
• 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 of the available resources and their optimum
allocations.
• Professor Lewis has referred to six different senses in which the
term planning is used in economic literature
• 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.
• 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 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

Planning… only for one or two industries or services to which they attach special
importance.

• Here targets are set for the economy as a whole and intending to
allocate all the country’s resources between the various branches of
the economy.

• The word planning is sometimes used to describe the means that the
government uses to try to enforce upon private enterprise the targets
which have been previously determined.
Planning…
• But Ferdynand Zweig maintains that planning is the planning of the economy not within
the economy

• It is not a mere planning of towns and public works or separate sections of the
national economy but of the economy as a whole

• Professor Robbins: Economic planning is collective control or super session of private

activities of production and exchange.

• Hayek: The direction of productive activity by a central authority.

• Dalton: The widest sense is the deliberate direction by persons in charge of large
resources of economic activity towards chosen ends

• Lewis Lord win: Economic planning is a scheme of economic organization in which

individual and separate 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.
 • Zweig: Economic planning consists of 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.

Planning…
• One of the most popular definitions is by Dickinson who defines
planning as the making of major economic decisions on:

• What and how much is to be produced

• When and where it is to be produced and

• to whom it is to be allocated

• Economic planning as understood by most 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
Planning…
• As a working definition Planning is a technique or a means to achieve an end.

• End refers to a certain predetermined target or well-defined objective.

• End might be achieving:

• Economic objectives, social objectives military objectives, or both.

• The main point is not to have a plan but what kind of plan we need to achieve
the objectives.

• Intervention of the state in all economic activities is inevitable. Governments do

intervene in an economy in one way or another. But what matters is the degree
and nature of intervention.
 1.4. Need for planning
• Planning has been introduced in different countries for different reasons.

• Though one can describe many different factors for the adoption of planning, the major ones are the
following:

• Institutional

• Technological

• Economic Development.

A. An institutional Requirement

• One aspect of planning in socialism is the abolition of private ownership of the means of production and its
replacement by state ownership.

• Another aspect of planning is the character of ideology that has inspired people in this structural change of
ownership.

• Planning has been found to be the most effective institutional medium for newly independent countries.

• Public Ownership: -Once means of production are owned by the state the need for planning
emerges automatically.
 • Replacing obstructive capitalism: Marx predicted that capitalism
is doomed to fail because of the inherent weaknesses in the system
itself

• Ideological considerations: The ideology that motivates socialist

countries also requires for its practice the instrument of planning.

Planning… • National Resurgence: for the fulfillment of the national aspirations

of countries recently liberated from centuries of colonial rule.

• Almost all such countries adopted planning right from the inception of their
independence.

• Symbol of sovereignty: newly independent countries found in

planning a symbol of asserting their liberation and sovereign status.

• Development planning enabled these countries to set their

common goals and gave them a sense of being sovereign in
respect of what to do and how to do it.
 B. Technological and economic factors

• Technological Reasons

• Modern technologies can be put to proper use if there is planning on a

national scale.

• Economic Reasoning

Planning… • The need to overcome the deficient functioning of the market system

C. Pre-requisite for Development

• For many countries development has been the major reason for the
adoption of planning.

• Planning is an essential tool for the comprehensive and integrated

development of economies that require coordinated effort.
 1.5. The Rationale for Planning in Developing Countries

• Developing countries need economic planning 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 enhances 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
1.6. Prerequisites for successful planning

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.

• Involves experts like Economists, statisticians, engineers etc.

2. Statistical data

• Thorough survey of the existing potential resources of a country together with its deficiencies

• Such a survey is essential for the collection of statistical data and information about the total available
material, capital and human resources of the country

• It 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.
 Planning…
3. Clear Objectives

• 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 and to achieve self-reliance etc.

• The various goals and objectives should be realistic, mutually compatible, and flexible enough to keep up with the
requirements of the economy.

4. Fixation of Targets and Priorities for achieving the objectives.

• They should be both global and sectoral. Global targets must be bold and cover every aspect of the economy.

• They include quantitative production targets

• The 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.

• Priorities should be laid down based on the short-term and long-term needs of the economy keeping in view the
available material, capital, and human resources.
 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
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 a balance between saving and investment,
between the available supply of goods and the demand for
them, between manpower requirements and their availabilities,

Planning… and between the demand for imports and the available foreign
exchange
• In fact, two kinds of balances must be secured in a plan.
• Physical Balance and the monetary or financial balance
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.
Planning… 8. Proper Development Policy

• Professor Lewis lists the following main elements of such a

development policy:

• Investigation of development potential survey of national

resources, scientific research, and 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;
 Planning…
• 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 savings, both private and public

• Good policies help, but they may not ensure success.

9. Economy in Administration

• Every effort should be made to affect 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.
 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

11. A Theory of Consumption

According to Professor Galbraith it is an important

Planning…
•
requirement of modern development planning

• Underdeveloped countries should not follow the

consumption patterns of the more developed
countries

• Cheap bicycles in a low-income country are more

important than cheap automobiles. An inexpensive
electric lighting system for the villages is better
than a high-capacity system that runs equipment,
the people cannot afford
 Planning…

12. Public Cooperation

• Above all, public cooperation is one of the important levers for

the success of the plan in a democratic 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
 1.8. Limitation of Planning
• As a tool planning could not be a remedy for all economic and other ills.

• Broadly the limitations could be on:

• Concepts

• Coordination

• Action

• Follow up

• The specific limitations observed in planning are:

• Planning heavily depends on reliable data. The potential benefits of planning will
be undermined if there are unreliable data.

• The problem of discontinuity. Planning models do not deal with random shocks.
Plans work effectively when social and economic development is unchanged
continuously.

• The problem of uncertainty. The problem with uncertainty could be minimized

by adopting probabilistic models but planning models are not using such
methods.

• Inflation: price instability would reduce the use of planning models.