Development Planning and Project Analysis I Module I

Module I: Development Planning Prepared by: Alemat Hagos & Mesfin Tilahun
Mekelle University
Institute of Continuing and Distance
Education
Development Planning & Project Analysis I

Module I
Prepared
by:
Alemat Hagos (M.Sc.)
&
Mesfin Tilahun (M.Sc.)
Mekelle University
Faculty of Business and Economics
Department of Economics
E-mail: mesfintila@yahoo.com
September, 2006
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Mekelle University, Department of Economics September, 2006
TABLE OF CONTENTS
I. THE EVOLUTION OF DEVELOPMENT THINKING ...................................................................... 1

CHAPTER OBJECTIVES ........................................................................................................................... 1
1.1 Introduction ..................................................................................................................................... 1
1.1.1 The Early Post War consensus ............................................................................................... 1
1.1.2 The Washington Consensus ................................................................................................... 4
1.1.3 The Oscillating Search for a Silver Bullet ............................................................................. 5
1.2 Historical background of economic planning ............................................................................. 6
1.2.1 Planning in Eastern Europe.................................................................................................... 7
1.2.2 Planning in Western Europe .................................................................................................. 7
1.2.3 Planning in Underdeveloped Countries............................................................................... 9
CHAPTER SUMMARY ........................................................................................................................... 10
REVIEW QUESTIONS............................................................................................................................. 10
2. PLANNING CONCEPTS, RATIONALE AND TYPES................................................................... 11
CHAPTER OBJECTIVES ......................................................................................................................... 12
2.1 Introduction ................................................................................................................................... 12
2.2. Meaning of Economic Planning.................................................................................................. 13
2.3 Types of Planning.......................................................................................................................... 16
2.4. The Rationale for Planning in Developing Countries ............................................................. 27
2.5. Pre- requisites for planning......................................................................................................... 31
2.6. Arguments for and against Planning......................................................................................... 38
2.6.1. Cases for Planning ................................................................................................................ 38
2.6.2. Arguments against Planning............................................................................................... 47
2.7 Limitation of Planning .................................................................................................................. 47
CHAPTER SUMMARY ........................................................................................................................... 48
3. STRATEGIC PLANNING AND MANAGEMENT ......................................................................... 51
CHAPTER OBJECTIVES ......................................................................................................................... 51
3.1 Introduction ................................................................................................................................... 51
3. 2. The strategic approach................................................................................................................ 51
3.3 The strategic planning and management process..................................................................... 53
CHAPTER SUMMARY ........................................................................................................................... 66
REFERENCES ........................................................................................................................................... 67
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CHAPTER I
I. THE EVOLUTION OF DEVELOPMENT THINKING
CHAPTER OBJECTIVES
Distance students you will be acquainted with the following objectives of evolutions of
development and planning after going through the chapter:
• Understand the three development thinking in three development periods
starting post war II period up to the present period
• Briefly outline the major components of the first early war consensus
• Equip with basic concepts with the second consensus called the
Washington consensus
• Have highlight on the current third consensus called oscillating search and
some theoretical revisions and points with the way forward
• Comprehend the historical periods of planning evolutions
• Recognize how planning in the western, and eastern Europe evolved and
shaped through time
• Be aware on how similarly planning evolved and shaped in the third world
1.1 Introduction
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
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
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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
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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.
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:
• 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
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issues of equity, poverty alleviation, etc should be taken care of at a

latter date.
• 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.
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,
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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 development dimensions like
infant mortality, life expectancy, literacy as fundamental objectives of development.
The basic efficiency - equity trade offs 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
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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
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)
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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:
a) 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.
b) 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
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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.
c) 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]
d) 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.
e) 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.
f) 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.
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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:
a) 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.
Then planning as a political and cultural goal
b) 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.
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CHAPTER SUMMARY
1. The first consensus that is the early post war consensus deal with five dominant
developments thinking namely: Dualism, need for balanced growth, international
trade scene, intervention state and technology in generating growth.
2. Dualism is the thinking of 1950s and 1960s proponed by sociological, technological,
physiocrats, and classical dualism.
3. Need for balanced growth emphasizes on mutual interdependence of all sectors and
specifically between agriculture and industry.
4. The intervention state period paves the way for adoption of planning models (such
as planning for resources and planning for multiple sectors) owing to the need of
independent countries to exercise own agenda and to enhance industrialization.
5. The last dualistic opinion gave due attention for technology as source of growth.
6. The Washington consensus emphasizes developing countries to open their markets
and deregulate control systems there by lead to privatization.
7. The oscillating search look poverty in its double side, that is on private or per capita
income and public good and for general growth both sides must be given equal
attention.
8. Planning in Eastern Europe mainly evolved due to the continuous failures observed
in western market economies. However, there was no clear understanding on the
alternate solution forwarded.
9. Planning in Western Europe evolved to seek solutions for market failures and
especially the need for Marshal Plan of the post war rehabilitation schemes
designed.
10. Planning, on the other hand, on under developed economies evolved as a means of
declaring independence and the ambitious need for fast growth.
REVIEW QUESTIONS
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1. Discuss on the main assumptions of the dualism development thinking and

briefly outline the similarities and differences thereof.
2. Analyzing the post 1991 economic performance of Ethiopian economy, what were
the main debates rose between the government of Ethiopia and The World Bank
on implementing the Structural Adjustment Programs (SAP) which is the central
issues of Washington consensus?
3. Briefly discuss on how the oscillating search and the Millennium Development
Goals (MDG) are interrelated and their implication for developing countries?
4. Comment on the planning process of Eastern Europe countries and the pros and
cons of such planning type on the economic growth of these countries.
5. Why planning in third world countries were different from the two distinct world
economies, that is the first and second world economies?
CHAPTER II
2. PLANNING CONCEPTS, RATIONALE AND TYPES
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CHAPTER OBJECTIVES
Distance students the following are major objectives on meaning, need and types of
planning:
• Realize how the meaning of economic planning was ambiguous and interpreted
by different academicians.
• Briefly understand the different types of planning and special characteristics of
each.
• Equip why planning is necessary for developing countries
• Encompass with the pre-requisites for undertaking successful planning activities
for the development of nations.
• Grasp the fundamental arguments rose on the need for planning and the need
for market economies and confidently argue or opine on the issue.
• Be familiar with the inherent planning limitation
2.1 Introduction
Economic planning has become a craze in modem times especially in developing coun-
tries. 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
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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 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.
2.2. Meaning of Economic Planning
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.
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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
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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:
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.
2.3 Types of Planning
Planning takes different forms on the basis of:

• Differences in time periods
• Institutions affected
• Extent of activities covered
• Modes of executing the plan, etc
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Therefore, the types of planning are:
Authoritarian and Democratic Planning

General and Partial Planning
Functional and Structural Planning
Planning by Inducement and Direction
Centralized and Decentralized Planning
Physical and Financial Planning
Rolling and Fixed Planning
We are now going to look the detail characteristics, advantages, dis-advantages and
limitation for each of the planning types.
1. Authoritarian and Democratic 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.
2. General and Partial 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.
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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.
3. Functional and Structural Planning
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.
4. Planning by Inducement and 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

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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 labour 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. 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.
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As against these merits, there are some demerits too:
• It fails to achieve the objectives of planning or targets of production

• The private entrepreneurs care more for profit than for the growth of the
economy
• The fiscal and monetary policies of the government are not so successful in
the underdeveloped countries; controls lead to black markets.
• 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
• The working of the market forces fail to bring about proper adjustment
between demand and supply and thus create imbalances in the economy.
Planning by direction
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 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 enter-
prises subject to them. They are duty bound to carry out the directives of the plan."
Shortcomings:
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• 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 the country. A democratic government adopts indicative planning
whereas a' socialist state will adopt planning by direction.
5. Centralized Planning and Decentralized Planning
Some other forms of planning may be centralized planning and decentralized 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
___________________________________________________________________ 21
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.
6. Physical and Financial 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 underdeveloped-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 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.
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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 over all 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
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
___________________________________________________________________ 23
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 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:
• 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.
• 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, bottle-
necks, shortages and gluts and inflationary pressures appear to thwart the
planners' effort.
• 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
___________________________________________________________________ 24
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.
7. Rolling and Fixed 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 ammunitions,
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
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
___________________________________________________________________ 25
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
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
___________________________________________________________________ 26
2.4. The Rationale for Planning in Developing Countries
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
• To be Self sufficient in food and raw materials
• To reduce inequality
a) 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.
___________________________________________________________________ 27
b) 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
of investment, and to overcome structural rigidities, the market mechanism is
required to be perfected in underdeveloped countries through planning.
c) 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 labour being abundant, the problem of
providing gainful employment opportunities to an ever-increasing labour 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.
d) Enhance the linkage between the agricultural and industrial sectors
The need, for developing the agricultural sector along with the industrial sector arises
___________________________________________________________________ 28
from the fact that agriculture and industry are interdependent. Reorganization of
agriculture releases surplus labour 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.
e) 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.
f) 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.
g) Eradicate poverty
___________________________________________________________________ 29
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 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.
h) 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,
___________________________________________________________________ 30
that this objective may take precedence over other objectives when a Plan is being
conceived.
i) 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. .
2.5. Pre- requisites for planning
The formulation and success of a plan require the fulfillment of the following
factors:
• Planning commission Administration

• Statistical data • Proper Development Policy
• Clear Objectives • Economy in Administration
• Fixation of Targets and Priorities • An Education Base
• Mobilization of Resources • A Theory of Consumption
• Balancing in the Plan • Public Cooperation
• Incorrupt and Efficient
___________________________________________________________________ 31
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
___________________________________________________________________ 32
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
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
___________________________________________________________________ 33
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 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
___________________________________________________________________ 34
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
input in 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:
a) investigation of development potential survey of national resources, scientific
research, market research;
___________________________________________________________________ 35
b) provision of adequate infrastructure (water, power, transport, and

communications) whether by public or private agencies;
c) provision of specialized training facilities, as well as adequate general education,
thereby ensuring necessary skills;
d) Improving the legal framework of economic activity, especially laws relating to
land tenure, corporations and commercial transactions.
e) helping to create more and better markets, including commodity markets,
security exchanges, banking, insurance and credit facilities;
f) seeking out and assisting potential entrepreneurs, both domestic and foreign;
g) promoting better utilization of resources, both by offering inducements and by
operating controls against misuse; and
h) 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.
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.
___________________________________________________________________ 36
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".
___________________________________________________________________ 37
2.6. Arguments for and against Planning
2.6.1. 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
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 steel making 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
___________________________________________________________________ 38
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.
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
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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.
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
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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.
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
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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
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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.
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
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specially strong case for the under-developed economies. In their case, it is not
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-
developed countries will come out of the morass of poverty and economic
stagnation. Only by planning can specific objectives be attained and targets of
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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.
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
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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
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
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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.
2.6.2. 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.
2.7 Limitation of Planning
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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.
CHAPTER SUMMARY
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1. Different academicians tried to give definition for economic planning and all are
relevant for better understanding of the subject matter. However, for ease of
understanding we can categorize them in to four: one, the definition given by A.
Lewis; second other academicians tried to define it; third the most popular
definitions of economic planning; and last is the working definition forwarded.
2. Cognizant of the fact that there are different definitions forwarded for economic
planning, we assume different types of planning for the complex economic
phenomenon.
3. Accordingly, there are seven types of planning presented in the module with
descriptions given for each type.
4. The need of planning for developing countries is inevitable and wide range
implications ranging from increasing rate of economic development to reducing
inequality among regions and the populations.
5. The fruits of planning will be realized if there is a mechanism of successful
planning mechanisms. Hence, in order to achieve successful planning, there
must be factors attributable such as establishment of planning commission,
statistical data collection agency, fixation of targets and priorities, and others.
6. There are two dominant views on the necessity for planning and for market
mechanism. The necessity of planning is mostly associated with the need for
state intervention and the arguments presented justify the need for intervention.
7. On the other hand, there are arguments against planning justifying the need for
market mechanisms.
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REVIEW QUESTIONS
1. Discuss the similarities of planning definition specified under A. Lewis, other

academicians, popular definition and working definition. Try to comprehend in
few words the definition of planning.
2. Referring to planning process of your organization, or if not assessing planning
processes in your locality, identify the major planning types undertaken and
comment whether it is consistence with what you have been studied or not.
3. Take any one planning type and discuss its importance to your organization, or
your locality. Support your justification with example.
4. There are different reasons why planning is needed in developing countries.
Select any three and briefly explain in connection to the current over all
economy, or regional or local economies.
5. Take in your area any Government or Non-Government or private working for
profit or not-for-profit organization and formulate a 5 year plan based on the
pre-requisites for successful planning.
6. You are now acquainted with why planning is favored or disfavored. Which of
the arguments convince you and why. Justify your argument taking concrete
examples in your area.
CHAPTER III
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3. STRATEGIC PLANNING AND MANAGEMENT
CHAPTER OBJECTIVES
Distance students, the objectives of strategic planning and management are:

know the definitions and approaches of long-term planning process and
implementation modalities
Briefly outline the major processes of strategic planning and management
Aware that how organizations will get organized before undertaking strategic
planning and management.
Formulate members with identical thinking and commitment in order to
undertake the process.
Figure out the Vision, Mission of the organization
Identify stakeholders and analyze the internal, external and SWOT analysis of
organizations
Identification of critical issues, developing strategy and drafting the plan
Finally, refining, adopting and implementing the plan
3.1 Introduction
The literature of strategic planning and management is a terminological minefield.

Different organizations use the same terms to describe different things, or different
terms to describe the same thing. So what are the differences if any, between strategic
management and strategic planning?
Strategic planning concentrates on long-term purpose and direction on the key issues
which face the organization in the longer term. Strategic management on the other hand
tends to cover like analyzing the environment, making choices about direction and
Implementation
3. 2. The strategic approach
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The strategic approach or mentality consists of four main elements:
1. It is future oriented
It recognizes that the environment will change and tries to anticipate events rather than
simply react as they occur.
The strategic approach leads the official to ask:
• Where his commission/Bureau want to be after a certain period;
• What it will need to get where it wants;
• How to develop strategies and the means to get there, and;
• Finally, how to mange those strategies, to achieve the goals and objectives.
Strategic approach recognizes that the future cannot be controlled. But argues that by
anticipating the future the commission or Bureau can help to shape and modify the
impact of environmental change.
2. It has an external emphasis
It takes into account several components of the external environment (Political,

Economic, Social and Technological or PEST); and recognizes that each of these can
either constrain or facilitate the commission or Bureau as it seeks to implement policy.
Politics will determine the policies that are to be implemented; while Economics will
determine the commissions and Bureau’s level of resources; Social factors might well
determine who the commission’s or Bureau’s beneficiaries will be; and Technological
factors might affect the commission’s or Bureau’s early warning capacity; Strategic
thinking recognizes and emphatically takes into account politics and the exercise of
political authority.
3. The commission or Bureau is not free to do anything they decide
The commission and Bureau must be sensitive to the needs of and respond to
demands, which constituents over whom they have little or no control. Among those
constituents, political actors are perhaps the most important.
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The strategic approach concentrates on assuring a good fit between the environment
and the commissions or Bureau (including its mission, objectives, strategies, structures
and resources) and attempts to anticipate what will be required to assure continued fit.
Under conditions of rapid political, economic and social changes, strategies can quickly
become outmoded or no longer serve useful purpose, or the resources traditionally
required by the commission to produce its goods and services may suddenly become an
available.
It recognizes that to maintain a chose fit with the environment, the different elements of
the commission or Bureau will need to be continuously reassessed and modified as the
environment evolves.
4. The strategic approach is a process
It is continues and recognizes the need to be open to changing goals and activities in
light of shifting circumstances within the environment. The strategic approach is a
process that requires monitoring and review mechanisms capable of feeding
information to managers continuously.
3.3 The strategic planning and management process
1. Get organized
The first step in Strategic Planning Management is to get organized i.e. deciding
whether to develop a strategic plan. Before investing considerable effort in Strategic
Planning Management, it is advisable to pause for a moment and consider why the
Bureaus are planning and have Strategic Planning Management. You should consider
the benefits or payoffs you anticipate from the planning. This is because strategic
planning takes time and requires resources. When you decide to have it, analyze and
discuss the benefits the commission will gain by developing a strategic plan as well as
some concerns or constraint that you may encounter. After deciding to develop a
strategic plan, you have to get the commitment of the leaders of the commission or
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Bureau particularly the commissioner, deputy commissioner or Bureau heads. Don’t

begin without it. The commitment of department heads and key staffs is also important.
The third issue in organizing your planning is deciding on whether you need help to
complete the plan. Several resources are available: Consultants, books or articles on
strategic planning, courses and seminars, and learning from other organizations with
good planning systems.
Consultants can help you in several ways. Some of the help they can provide are:
♦ Assist in designing the planning process;
♦ Orient or train participant;
♦ Lead you through the whole process;
♦ Keep you get started;
♦ Provide advice or assistance if you get stuck;
♦ Provide technical advice;
Decide if you need assistance in developing your plan. If so, what kind of assistance?
Get the help needed.
2. Form a Planning Team
Most organizations use teams to do much of their planning. The team is usually
composed of 5-8 people but may be as small as 3 or as large as 12 or more. The size of
the planning team will depend on the size of the commission’s or Bureau’s staff who
can qualify to participate in the process. Generally, the larger the team, the more
structure is required in team meetings and may not be manageable and efficient.
Make sure that the people to be involved in the planning team are ready to sacrifice
their time and are committed. The composition of the team is important. It is useful to
have different viewpoints represented on the team. Yet, it is difficult to assemble such a
group that can function together effectively.
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3. Vision, Mission
The second step in Strategic Planning Management is defining your vision and mission.
The following quotations explain what a vision is:
“Where there is no vision the people perish”
“Whatever, the mind of man can conceive and believe it can achieve”
“A man becomes what he thinks about most of the tie”.
“Belief creates the actual fact”
“Your imagination is your preview of life’s coming attractions”
“What ever you want, wants you:”
Mission is used to indicate the continuing broad general purpose for which the
commission or Bureau exists.
In identifying the commissions or Bureau’s mission it is useful to ask the following
questions: -
What is our basic function?
Why does our commission or Bureau exist?
What groups were we created to serve?
If we did not do what we do would someone else do it, if so who?
Where (within what geographical limits) do we offer our service?
Who pays us?
4. Identifying stakeholders
Stakeholders are those individuals, groups, and organizations who believe, rightly or
wrongly those they have a stake in the commissions or Bureau’s future.
The power of stakeholders to affect the commission or Bureau can be split in to four
categories:
Those who have direct power over resources (donors, government)
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Those who have power or political influence (council of ministers, parliament,

regional councils and executive committee members)
Those who have power over service, people on whom the commission or Bureau
depends to provide the service) the community, beneficiaries)
Those who have power over the environment.
Analysis of stakeholders of the commission or Bureau and their relative influence is

very much associated with the strategic planning process.
5. External Environment Analysis
What the commission or Bureau wants to be in the future is highly influenced by the
environment which is external to the commission or Bureau. The external environments
of the commission / Bureau may be favorable or highly uncertain and hostile. If the
environment of the commission/Bureau is favorable less management time is required.
On the other hand, if the commission’s/ Bureaus environment is uncertain and hostile,
then much more management time and attention is required.
In analyzing external environnemental conditions, techniques like :
• Customers/clients needs analysis;

• Competitors and allies analysis;
• PEST (political, economic, societal and technological) analysis must be
conducted and opportunities and threats identified.
In doing so, the commission/ Bureau has to pay special attention to governmental
policies that influence the commission/ Bureau and its stakeholders. The commissions/
Bureau’s top management should recognize that government polices are important
factors for their behaviors. Successful leaders will identify and monitor key
governmental polices. In analyzing external threats and opportunities the
commissions/Bureaus leadership should identify:
• Those that the leader can influence and;
• Those that must be appreciated as constraints.
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To manage the environment the leaders of the commission/ Bureau should develop a
strategy that responds to the threat and opportunities of the commission/Bureau by
constantly monitoring the activities of the commission /Bureau. This is because over
years:
• The environment will evolve;
• Key stakeholders will change;
• Their interest will change;
• Government and donors polices will be changed and;
• Resource levels will fluctuate.
6. Internal Environment analysis
The “Getting there” of the commission/Bureau, will also be affected by its internal
factors. Internal environment analysis focuses on strength and weaknesses in relation to
structures systems, processes and people within the commission /Bureau.
It provides the answer to the question “what are the things about ourselves which are
likely to help us or hinder us in our attempts to be what we want to be.
Two techniques could be employed to analyze the internal environment of the

commission or Bureau.
• Benchmarking and;
• The 7-S framework;
i) Benchmarking
Is a systematic attempt to compare the commissions or Bureaus performance with other

commission or Bureaus, but with an emphasis on comparison with the best, in order to
identify where you can and should improve your own performance. It involves looking
not so much at overall performance as a performance in particular key area. This is how
it helps the commission or Bureaus to identity issues to be addressed, areas to be
tackled, in your own planning process. The idea is the commission or Bureau is able to
___________________________________________________________________ 57
compare its own performance with the best institution in its sector being defined to
ensue that the comparisons are between commissions or Bureaus which deal with
similar types of activities and work load.
Using this technique you can compare the performance of groups and individuals in
commissions or Bureaus. This must be seen as learning from the experience of others.
Management style could also be compared to engender a healthy competitive spirit.
Internal benchmarking should be cheap. The data can be collected as part of normal
management information.
The key steps in setting up a bench marking process are:

1) What are we going to benchmark?
2) Who are we going to benchmark against?
3) How will we get information?
4) How will we analyze the information?
5) How will we use the information?
As mentioned earlier, while benchmarking is felt to fit primarily within the category of
internal analysis, information on the performance of competitors can also contribute to
the external analysis.
The 7-S framework
The 7-S framework is an example of a checklist technique. The main assumption is that,
successful implementation of strategy. There must be a match of the seven elements in
the framework.
The 7-S represents:
Skill, Staff,
Structure, Style and
Systems, Strategy
Shared values,
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These elements may be used initially to look at the commissions or Bureaus present
position to help to identify problems and weaknesses, which need to be addressed. It
can also be used, as strategy is developing, to check that new gaps are not appearing.
After internal environmental analysis, Strategic Planning Management planning teams

should be able to identity the STRENGTH AND WEAKNESS of the
commission/Bureau and design a strategy how to redress the weaknesses.
7. SWOT (Strength, Weakness, Opportunity and Threat) Analysis
After conducting external and internal analysis, the planners should also conduct a
matching analysis, i.e. the internal strengths and weakness of the commissions or
Bureaus must be analyzed in relation to the opportunities and threats from the external
environment. This matching analysis will show us the position of the
commission/Bureaus and the type of intervention needed.
8. Identification of critical issues for the future
The final element of the analysis stage (which ever techniques have been used) in the
identification of critical (strategic issues) some issues may emerge directly from the
external analysis, some from the internal environmental analysis. However, most
strategic issues may well emerge from putting the internal and external environment
analysis together. The strategic issues that may emerge from this analysis might be
fundamental policy choices affecting the commission’s or Bureau’s:
Vision;
Mission;
Values;
Services;
Beneficiaries;
Financing;
Organization or management;
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Although the commission or Bureau may face many important issues or choices, we
suggest that you try to identify the 4-8 issues that are most crucial to the commissions
or Bureaus future success.
9. Developing a strategic
After identifying strategic (Critical) issues, the commission/ Bureau can select a
planning approach that will enable the planning team to identify alternative strategies
for the commission /Bureau/. Basically there are three methods or approaches for
formulating an organizations strategy for the future.
These are:
Scenario approach
Critical issue approach
Goal approach
These approaches may be used individually or in combination. It is recommended that

you begin developing your strategy by selecting one of the approaches around which to
organize your planning.
Most texts on strategic planning, written primarily for large profit corporation or
business organization, suggest the Goal approach experience has shown that many
public sector agencies find the scenario or critical issues approach a more productive
way to begin. Developing your strategy goals can be set later in the planning.
Each approach is described below as follows:
i. Scenario approach
With scenario approach you develop several alternative pictures of what the
commission /Bureaus might look like in the future. You then pick the best scenario and
refine it.
The following are steps to be taken in the scenario approach:
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1. Each planning team member shares his/her vision /scenario for the future.
2. The planning team members list and discuss the similarities and differences among
scenarios.
3. The planning team members rate each scenario based on several factors (fit with
mission, fit with government policy, financial capacity and feasibility), and list the
relative advantages and disadvantages of each scenario.
4. The most promising scenario gets identified.
5. The planning team discuses this scenario with officials of the commission or Bureau
and staff and receives authorization from officials to further test whether this
scenario is feasible.
6. The planning team translates the preferred scenario in to the first draft of strategic
plan.
7. The draft plan gets reviewed by the commissioner /Deputy Commissioner, or

Bureau heads and full staff.
8. The plan gets refined and approach by the commissioner or Bureau head and
submitted to the administration and social sector of the prime ministers office of the
social sector of the regional council.
This, in essence, is the scenario approach for developing a strategic plan. The approach
has the following advantages:
It is quick;
It holds people’s interest;
It uses “Big picture” thinking and it is useful in thinking about major
shifts in emphasis or direction.
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Critical issues approach
A second method of developing your strategy for the future is the critical issue
approach. The following are the steps to be taken in the critical issue approach:
1. The planning team sequences critical issues in some logical order;

2. The team members suggest and list possible solution to each issue;
3. The best suggestion to each issues are chosen by the team;
4. The team reviews the clarity and soundness of the commissions or Bureaus
overall strategy for the future;
5. The officials of the commission/Bureau check to see that the planning team
has developed a clear and sound strategy for the commission /Bureau.
6. The planning team /official of the commission/Bureau and staff review,
revise, and adopt the plan.
The goal Approach
A third way to develop a strategy is to set several major goals or targets for the
commission/Bureaus in the coming years, and then determine the best strategy to reach
each goal.
However, the goal approach is often used by for profit corporations that focus on a few
major goals or targets that drive the organization for example, profitability or market
share. Goals are set for these areas; strategies are developed to reach each goal and
more detailed plans of work are formulated for accomplishing each strategy.
The commission or Bureau may have difficulty using the goal approach early in
developing the strategy because their goals are not yet clear. It is preferable to begin to
develop your strategy with the scenario or critical issue approach, and then set specific
goals for the organization later after your strategy for the future becomes clearer.
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Large public agencies sometimes use the goal approach to set an overall emphasis or
direction for the organization. Departments, divisions and units or program of the
agency then incorporate those goals in their strategic plans.
The steps in the Goal Approach are:
1. Set Goals;
2. Identify possible strategies or objectives to reach each goal;
3. Select the best strategies;
4. Outline specific plan to accomplish each strategy;
Decide which planning approach to use in developing your strategy (scenario, critical
issues, goal or some combination). Then use this approach to determine what the
commission or Bureau should look in the future and how you will get there.
10. Draft and refine the plan
Your major tasks after developing the strategy is to get a first draft of the plan on paper
refine it then adopt the plan.
Common activities in this include:
Agree on a format for the plan;
Develop a first draft;
Refine the plan;
Adopt the plan;
Agree on format
Your planning team should agree on a format for your plan before someone attempts a
first draft. It would be better to agree early on a rough outline that show how the plan
may look like because planning team members may have completely different images
of what a strategic plan is.
Develop a first draft strategic plan

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After your strategy for the future is relatively clear, one or two planning team members
should develop a first draft of your strategic plan.
It is strongly suggested that your strategic plan includes a section outlining how you
will implement the plan. Identify the major tasks or objectives that need to be
accomplished, who is responsible for each tasks and timelines.
Refine the plan
In step 1 (get organized), it was suggested that you consider people or groups with
whom you may want to review the plan. If you have not decided who needs to review
the plan and how it will be reviewed, do so now.
Drafts of the plan are commonly reviewed with:
Planning team
Staff
Decision makers
Interested people outside the commission or Bureau who have a
stake in your future.
An agenda for review meetings that often work well is:
Overview of the plan’
What is your general reaction to the plan? Is it in the ballpark?
What specifically do you liked about each section of the plan?
What problems, soft sports or omissions do you see in each section?
What specific suggestions do you have about how the plan can be
strengthened or improved?
Next steps to complete the plan:
When your plan is near its final form, it is suggested that you ask if
there was any risk in this plan and if so at what level?
Do you want to live with this level of risk or should you do
something to reduce the risk?
Your task in the review is to develop a plan that people understand, is both sound and
manageable and can be easily implemented. Remember that you will never have a
___________________________________________________________________ 64
perfect plan. The commission or Bureau will change continually and will the conditions
in the world around you. As time goes by your plan will get new information which
may require adjustments in your vision of the future or in your plan to getting there.
Adopt the plan
Review your plans with the appropriate people and groups, then make the necessary
corrections. It is recommended that your strategic plan be reviewed and approved by
the commissioner, deputy commissioner or Bureau heads and management group.
11. Implement the plan (strategic Management)
A common misconceptions is when your strategic plan is approved your planning is

complete. A better view is when your plan is approved, a new phase of planning have
begun.
Remember that implementing the plan, monitoring progress; making mid course
corrections and updating your plan are all part of the strategic planning and
management process.
Make sure that the directions and strategies in your strategic plan are incorporated in to
the coming year’s objectives and budget. A good plan needs good implementation
action. Review progress toward the plan at six-month intervals.
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CHAPTER SUMMARY
1. Strategic Planning and Management (SPM) is a long-term and unified

approach intended to bring change in consciousness and results in an
organization.
2. The main concepts in strategic approach are: the approach is future oriented;
the approach deals with internal and external emphasis; the approach assures a
good fit between the external and internal environment; and the approach is a
continuous process.
3. The first step in strategic approach is to decide and organize in order to
undertake necessary preparations for the process.
4. Formulating a team is the second step of the approach where there should be
feasible size and commitment of the members to work SPM.
5. The third step is to work out the Vision and Mission of the organization with
pertinent bodies.
6. Fifth step is to identify stakeholders, who are expected to share or have power
on resources, politics, services or the whole environment.
7. The seventh step is to analyze the external environment using clients;
competitors/allies; and PEST analysis.
8. Analyzing the internal environment using some benchmarks and the seven S's
is the next step of the strategic approach.
9. Position your organization, based of the above two analyses, internally as
Strength, or Weakness; and externally as Opportunity, or Threat. This step is
termed as SWOT analysis.
10. Identification of critical issues for the future is the next step.
11. Then after, the organization is expected to develop a strategy in either scenario,
or critical issue, or goal approaches.
12. Drafting, refining and adopting the plan is the next step.
13. Lastly, implement the plans, which are termed as the strategic management.
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REVIEW QUESTIONS
1. Select any local organization and try to work out Strategic Planning and
Management Processes of the organization (follow the basic steps).
2. Consistent with review question number one, formulate a tactical
planning for the organization, specifically the first step of planning, that
is identify the problem, define objective, set a target, and specify the
detail actions for each year.
3. Develop the other tactical methodology that is how to adopt a plan,
implement a plan and monitor and evaluate a plan for the above tactical
plan formulated.
REFERENCES
Agrawal, A.N. and Kundan Lal., Economic Planning, Vikas Publishing House, New Delhi,
1981.
DPSA. Guide Lines to Project Planning In Ethiopia, Addis Ababa, 1990.
Ghatak, S. , Introduction to Development Economics, 3rd ed. , Routledge, London, 1995.
Gittinger, Price., Economic analysis of Agricultural Projects, the Johns Hopkins University
Press, London, 1974.
Jhingan, ML., The Economics of Development and Planning, 35th ed., Vikas Publishing
House, New Delhi, 1997.
K.K., Dewett and Adarsh Chand, Modern Economic Theory, 21st ed. S. Chand and Company
LTD., New Delhi, 2001.
Shanner, W.U., Project Planning for Developing Economies, Praeger Publishing, New York,
1979.
Todaro, Michael, Development Planning: Models and Methods, Oxford University Press,
Nairobi, 1985.
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Module I: Development Planning Prepared by: Alemat Hagos & Mesfin Tilahun

Development Planning & Project Analysis I

I. THE EVOLUTION OF DEVELOPMENT THINKING ...................................................................... 1

The evolution of development thinking can be summarized in to three different

1.1.1 The Early Post War consensus

of Development Economics were rediscovered. Available economic models seemed to

b) Need for Balanced Growth (structuralism)

c) International Trade Scene

A logical accompaniment of these views were PLANNING MODELS, focusing on the

The planning models used were:

• Planning for resources: such as Simple Harrod - Domar and

issues of equity, poverty alleviation, etc should be taken care of at a

e) Technology in generating growth

1.1.2 The Washington Consensus

The main ingredients of the consensus are:

• Privatization and unified and competitive exchange rates

1.1.3 The Oscillating Search for a Silver Bullet

Best Guesses as to the Way Forward

1.2 Historical background of economic planning

1.2.1 Planning in Eastern Europe

1.2.2 Planning in Western Europe

economic planning in capitalist countries. Meanwhile there was an attempt to

e) The growth of markets and increased specialization led to increased

f) The development of democracy also lead to the adoption of planning in order

1.2.3 Planning in Underdeveloped Countries

Economic planning was considered as important panacea (remedy) for underdeveloped

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

Desire of self control

1. Discuss on the main assumptions of the dualism development thinking and

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

2.2. Meaning of Economic Planning

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

The two main constituents of the concept of planning are:

• A system of ends to be pursued, and

Thus, planning is a technique for achieving certain self-defined and pre-determined

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

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

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

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

Lewis Lord win defined economic planning, "as a scheme. of economic

In the words of Zweig, "Economic planning consists in the extension of the

functions of public authorities to organization and utilization, of economic

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

2.3 Types of Planning

Planning takes different forms on the basis of:

Therefore, the types of planning are:

Authoritarian and Democratic Planning

1. Authoritarian and Democratic Planning

2. General and Partial Planning

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

3. Functional and Structural Planning

Then again, planning may be attempted within the existing socio-economic

Functional planning assumes that planning is possible even in a capitalistic economy,

4. Planning by Inducement and Planning by Direction

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

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

However, immobility of resources imposes serious limitations on planning by

The merits of indicative planning are:

As against these merits, there are some demerits too:

• It fails to achieve the objectives of planning or targets of production

5. Centralized Planning and Decentralized Planning

6. Physical and Financial Planning

Financial planning has its own limitations: