Economic Planning

Planning refers to estimation and use of one’s resources for some specific and determine
objectives in an organized and systematic manner.
The resources include land, property, money, materials and human abilities.
Planning is the essence (core) of all human activities. Planning is applied in social, political,
religious, educational and of course economic fields
 Need for Economic Planning
In 21st century when more and more human activities are being computerized, it is generally
agreed that every country must adopt some form of planning.
An unplanned economy is just like a rudderless ship, which has no clear direction to go.
Following reasons to show the need of planning:
1. To remove imperfections of free market economy: In an unplanned economy, monopolies are
established which interfere with free working of prices system.
Human and material resources of the country may be used against common interest of people.
Shortage of essential commodities are created
2. To keep balance of Economic power: economic planning are needed to keep balance in
economic power and achieve equitable distribution of income. Unplanned economy and free
market system reward people according to resource that they possess. Which favor the rich
only.
3. Economic Stability: working of an unplanned economy creates business fluctuations. For
example, if industrial output drops, the govt can give concession in taxes, provide loans to firms
and increase its own expenditure on various projects.
4. Elimination of wasteful competition: Planning can be used to eliminate wasteful competition
and save national resources. For example, huge funds are wasted on advertisements. There are
excessive varieties of a good just because one firm wants to remain different from others. This
raise the cost of production.
5. Coordination: in an unplanned economy, millions of producers are working independently
with little coordination. Each entrepreneur looks to his own profit and no body cares for the
economy as whole. This may result in unnecessary duplication in working of firms. When chance
look better, all firms expand out put and there may be over production. Planning can be used to
coordinate the efforts of individual firms.
6. Optimum Utilization of Resources: Private enterprise is guided solely by profit motives. To
earn higher profits, the firms may produce useless luxuries for the rich whereas a lot of people
are deprived from basic necessities. Through planning, such situation can be avoided and
resources of the country can be diverted to essential commodities.
 Objectives of Planning
Planning is always adopted to achieve certain objectives. These objectives are not the same for
all countries and nor even the same for a country at all time.
They are determined in the light of prevailing economic situation and are changed according to
new problems arising from time to time. The important objectives commonly found in plans of
different countries are the following:
Increase in National Income: low national income or per capita income is supposed to be a key
of underdevelopment. So almost all underdeveloped countries include this objective in their
national plans.
Rapid industrialization: the standard of living can not be raised unless through industrialization
their incomes are raised and abundant quantity of consumer goods is made available to them.
The fact that all developed countries are industrialized shows the importance of this objective.
Economic equality and social justice: Economic development will fail in its purpose, if its fruits
are not fairly distributed over the whole population. Inequalities of income, wealth and
economic opportunities are not acceptable to modern democratic mind. Planning can help to
change this situation and establish social justice.
Development of backward region: with the help of proper economic planning we can develop
backward areas of the countries. Because with out the development of backward region of the
country economic development.
5. Balanced economy: Economic development of a country can continue only if all sector of the
economy grow simultaneously. If industry grows faster while agriculture decline than the pace
of development will soon slow down. If transport or energy sector lags (delay) behind, it effects
industrial and agriculture output. Planning is used to achieve balance in development of various
sector.
6. Achievement of full employment: Achievement of full employment is an important aim of
planning. Unemployment not only mean wastage of resources but also create social and political
problems. Like murder, robberies, car lifting are the social problems that arise mostly because of
unemployment.
7. Self Reliance: Dependence on foreign countries for investment funds, foods and essential raw
materials can create trouble at any time and make the economy unstable. Thus planning can be
used to avoid such a situation.
8. Correction of balance of payment: many developing countries do not export sufficient
quantity of goods and services and so have to face persistent deficit in their balance of payment.
Through planning they aim to promote export on the one hand and control imports on the other
hand.
 Levels and ranges of planning
We have annual, medium, long or perspective plans
Annual Plans: This is a plan that runs or span within a fiscal year. It is incorporated in the annual
budget and achievable within the budget year. This type of plans does not involve huge capital
projects.
It ranges from repairs and renovations, research and development, recruitment and training,
credit facilities and promotions aimed at effecting certain dramatic positive changes in the
economy. Annual planning mostly emanates from the review of the past year government
activities and provides an opportunity for the operation teams to iterate on operations from the
past year and incorporate those experiences into the upcoming plans.
Medium term Plans: This is a plan that entails strategies that focus on finding permanent
solutions to economic problems that cannot be addressed through short or annual plan. It's the
implementation of policies and procedures to ensure short-term problems do not recur. It is a
Planning over a period of between about 2 and 10 years into the future, which is intermediate
between annual planning and long or perspective planning.
This type of planning involves projects that could be executed beyond a fiscal year. It ranges
from road construction, building and industry construction, agricultural plantation development,
mining exploration and exploitation, power plant, dams and energy constructions, air and
seaports construction. This type of plan is being refers to Medium Term Expenditure Framework
(MTEF). The plan is drawn for the period and incorporated in the annual budget throughout the
years covered by the plan.
Long or Perspective Plans: This is a plan executable for a long period of time where targets are
fixed for long period say 10 to 25 years.
The long years covered by this plan does not imply that one plan is drawn for the complete
period. In practice, the broader plan objectives subdivided into a period of about 4 to 6 years.
A blueprint regarding the objectives and targets of long run growth are so divided into short-run
that one by one all the objectives are achieved in the long long-run.
 Characteristics of Planning
Planning for Development should possess the following characteristics
1. Goal Orientation: Every planning must have a goal to which it aims at achieving. Development
or economic plans should be attached to certain goals. Planning should not be done aimlessly.
2. Decision Making: Planning in any country should be done at making certain decision relating
to the development and growth of the economic sectors of the economy.
Pervasiveness: Whether sectoral or spatial planning is involved, it should be able to affect the
whole lot of economic variables either directly or in its multiplier effect. Its impact should be felt
across the economy.
Continuity: Planning should be a continuous exercise which means, it should not be once and for
all but areas of strength should be explored and failure or challenges should be addressed for
future planning.
Futuristic: Economic or development Planning should be forward looking and not backward looking. The past is
gone and whatever economic lapses recorded should be evaluated for future corrections and possible
improvement for future development.
Executable/Effective: Projects, programmes and policies contained in planning should be feasible for execution
or implementation within the available resources of the nation. Meaningful planning should not be an
abstraction but realistically designed for implementation.
Flexibility: Flexibility in government activities will promote necessary adjusted where necessary. Planning should
be designed as to allow for possible adjustment to accommodate needing injections for objective realisation.
Innovative: Economic/development plans should not be naïve but appeals to the introduction of variables that
can affect the economy and bring in new course of economic ideas and thinking.
Choice making: The need for planning is to record positive changes that can lead to improvement in the
economy. Therefore, economic/development planning should have a target at what and what is to addressed
and how to get such addressed so as to record improvement in the economy. Some sectors of the economy
should be identified for attention in economic planning.
 Planning decision models

A model expresses the relationships among economic variables which explain and predict past
and future events under a set of simplifying assumptions. In other words, a model consists of a
series of equations each of which represents the association among certain variables.
Planning Model therefore is a series of mathematical equations which help in the drawing up of
a plan for economic development.
 Types of Planning Models

We have various types of development planning models. Most development plans have
traditionally been based initially on some more or less formalized macroeconomic model. Such
economy wide planning model can be divided into three basic categories.
1. Aggregate growth, Macroeconomic or Simple Models: Aggregate growth, macroeconomic or
simple models involves macroeconomics estimate of planned or required changes in principal
economic variables. As the name implies, It deals with the entire economy in terms of a limited
set of macroeconomic variables deemed most critical to be determined by levels and growth
rates of national output; that is savings, investment, capital stock, exports, imports, foreign aid
etc. The model provides a convenient method for forecasting output (and perhaps also
employment) growth over a three to five year period.
2. Multi-Sector Models: It is a sophisticated approach to development planning in which the
activities of the major industrial sectors of the economy are interrelated by a means of a set of
simultaneous algebraic equations expressing the specific production processes or technology of
each industry. All industries are viewed both as producers of outputs and users of inputs from
other industries. For example, the agricultural sector is both a producer of output e.g. (wheat)
and a user of input from the manufacturing sector e.g. (machinery, fertilizer). Therefore there is
interdependence of industry which could lead to direct and indirect repercussions of planned
changes in the demand for the products of any one industry on outputs, employment, and
imports of all other industries. This can be traced throughout the entire economy in an intricate
web of economic interdependent. This inter-industry model can be used to determine
intermediate material, import, labour and capital requirements with the result that a
comprehensive economic plan with mutually consistent production levels and resource
requirements can in theory be achieved.
3. Decentralised Models: This type of models are useful in the early stages of a country‘s
economic development when information is available for only individual sectors or projects,
project evaluation or project appraisal and social cost benefit-analysis are techniques that fit
into this category. The most important component of plan formulation is the detailed selection
of specific investment projects within each sector. It is the type that have sector of project level
variables which are used to prepare models for individual sectors or projects.