CHAPTER ONE

Development Planning:
1. Introduction

1.1 Historical Background of economic Planning,

The idea of economic planning, in its present form, is comparatively new, though it seems to be
somewhat implicit in Marxian socialism. In the latter part of the 19th century, intellectuals,
theorists, thinkers and writers in western Europe had become fed up with the inequities and
contradictions of pure, unalloyed capitalism and so the idea of state intervention to set matters
right was put forth with a good deal of fervor. But it was "State intervention" which was
advocated at that time. There was little or no reference to "economic planning" to be conducted
by the state or its agencies.

The idea of planning has a long history and goes back to the time of Plato [the first person the
talk about organized planning]. It was later developed, shaped and molded by a galaxy of
eminent thinkers and writers both in the western and eastern comp. However, the idea of
economic planning in its modern form is comparatively new. It is the 20 th century phenomena.
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)
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.

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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 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:-

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  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.
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

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 express the need of the leaders who control the political structure - they dictate the
plan. Planning here was not as a consequent of industrialization, which is the inverse of
the Western, developed countries.
1.3 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.

Planning is a technique and/or a means to an end being the realization of certain pre-determined
and well-defined aims and objectives laid down by a central planning authority. The end may be
to achieve economic, social, political or military objectives. The idea underlying planning is a
conscious and deliberate use of the resources of the community with a view to achieving certain
targets of production. The State, through a planning authority, takes the responsibility of
planning. It represents a complete break from the policy of laissez-faire.
The two main constituents of the concept of planning are:-
 A system of ends to be pursued, and
 Knowledge as to the available resources and their optimum allocations.
Thus, planning is a technique for achieving certain self-defined and pre-determined goals laid
down by a central planning authority.
Professor Lewis has referred to six different senses in which the term planning is used in
economic literature. There is an enormous literature in which it refers only to the geographical
zoning of factors, residential buildings, cinemas and the like. Sometimes this is called town and
country planning and sometimes just planning. Planning means only deciding what money the
government will spend in the future, if it has the money to spend.
A planned economy is one in which each production unit (or firm) uses only the resources of
men, materials and equipment allocated to it by quota and disposes of its product exclusively to
persons or firms indicated to it by central order.
'Planning' sometimes means any setting of production targets by the government, whether for
private or public enterprise. Most governments practice this type of planning if only sporadically,
and if only for one or two industries or services to which they attach special importance.
Here targets are set for the economy as a whole, purporting to allocate all the country's labor,
foreign exchange raw materials and other resources between the various branches of the

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economy.
The word 'planning' is sometimes used to describe the means which the government uses to try
to enforce upon private enterprise the targets which have been previously determined.
But Ferdyn and 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." Choose choice school choice choose
To Hayek, planning means, "the direction of productive activity by a central authority."
According to Dr. Dalton, "Economic planning in the widest sense is the deliberate direction
by persons in charge of large resources of economic activity towards chosen ends."
Lewis Lord win defined economic planning, "as a scheme. of economic organization in
which individual and separate plants, enterprises, and industries are treated as
coordinate units of one single system for the purpose of utilizing available resources to
achieve the maximum satisfaction of the people's needs within a given time.
In the words of Zweig, "Economic planning consists in the extension of the functions of
public authorities to organization and utilization, of economic resources. Planning
implies and leads to" centralization of the national economy.
One of the most popular definitions is by Dickinson who defines planning as the making of
major economic decisions on:
 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(mulu simiminat) 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.

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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,(kaan hin
hafnee) i.e.; government do intervene in an economy in one way or another. But what matters is
the degree, type and nature of intervention.
1.4 The Need of Economic Planning
The main purpose of economic planning is to keep a proper balance between production and
social needs. The demands or social needs are always presented by the people, which are
changing with the variations of income, habit and fashion of the people, and hence the planner
has to be cautious for maintaining balance between the two.
The planning, thus, related to a predetermined end. The end of economic planning may be
economic or non-economic. In other words, the objectives of planning may be concerned with
political or socio-economic achievements. But mostly they are interlinked with each other. The
main objectives of planning that have been accepted by the planned economics in the world are:
Political Objectives and Economic Objectives. However the objectives of planning largely
depend upon the natural, social, political and economic environment prevalent in a country at a
specific time.
Despite the large number of factors contributing for the need of planning, one can nevertheless
broadly list the major ones as follow:
a) Institutional requirement
Planning, in some countries, has been used to meet the institutional needs of people. In socialist
countries, planning has been used to abolish private ownership/ sectors. Likewise, a country free
from a colonial yoke may use planning as a medium to achieve bright future. In non‐socialist
countries, planning is used to strengthen competitiveness.
b) Economic consideration
Planning is necessary:
 To meet the changes of modern economics

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  To help the entrepreneurs to undertake various developmental activities taking in to
consideration the constraint of resources.
 To make the policies of the government rational and effective
 Important for new products to take shape smoothest without upsetting existing productive
capacity to much.
 Provide for the multifarious activities to ensure that the cost and the price of mass
produced goods are kept minimum.
c. Pre‐requisite for Development

For many countries, whether they are developed or developing, development has been the major
reason for the adoption of planning. Planning also organizes resources for investment and
balancing the economy.

1.4.1 Need of Planning for Developing Countries

a) Rapid economic development: The objective of planning in underdeveloped countries is to

increase the rate of economic development. Planning for economic development implies external
direction or regulation of economic activity by planning authority. 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 developing countries economy is hindered 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. Low productivity means low income and the vicious circle of
poverty. This vicious circle can only be broken by planned development.

b) Balanced development: In the absence of sufficient enterprise and initiative, the planning
authority is the only institution for planning balanced development of the economy. For rapid
economic development, underdeveloped countries require the development of agricultural and
industrial sectors, the establishment of social and economic overheads, and the expansion of the
domestic and foreign trade sectors in a harmonious way. All these require simultaneous
investment in different sectors, which is only possible under development planning.

c) 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
developing countries because of the ignorance and unfamiliarity with it. The product, factor,
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money and capital markets are not organized properly. Thus, the price system exists in only
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 planning. Finally

e) Poverty alleviation: The planning for development is indispensable for removing the poverty
of nations. For raising national income and per capita income, for reducing inequalities in
income and wealth, for increasing employment opportunities, for all-round rapid development
and for maintaining newly own national independence, planning is the only path open to
developing countries.

f) Proper utilization of natural resources: In the unplanned economy, natural resources are
underutilized, miss-utilized and wasted. Therefore, in an underdeveloped economy, concrete
action is essential for making the use of natural resources for production purpose and it is safe
which implements this action through economic planning.

g) Reduction in unequal distribution of income and wealth: Inequalities of income and wealth
exist in underdeveloped economies. Private enterprise system does not secure an equal
distribution of the benefits of economic development among different classes of the community.
The developing social conscience of the people cannot tolerate the existence of such grave
inequalities. This would secure a better distribution of national income among all classes of
people in the country.

h) Structural Changes: In an un-developed or under- developed country, the main economic

sector is predominantly agriculture. The secondary and tertiary sector are substantially less
developed. This results into structural dis-equilibrium. Thus, for increasing the overall
productivity, it is very essential that optimum labor force be diverted and employed on secondary
and tertiary sectors of the economy. This is possible only by proper planning in different sectors
of the economy.

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1.5 Pre-Requisites for successful Planning

The formulation and success of a plan require the fulfillment of the following factors:

a. 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.

b. 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.

c. 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.

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 d. Fixation of Targets and Priorities

The next problem is to fix targets and priorities for achieving the objectives laid down in the
plan. They should be both global and sectoral. Global targets must be bold and cover every
aspect of the economy. They include quantitative production targets, so many more million tons
of foodstuffs, coals, steel, fertilizers, etc., so many kilowatts of power capacity, so many
kilometers of railways and roads so many additional training institutions, so much increase in
national income, saving, investment, etc. There are also sectoral targets pertaining to individual
industries and products in physical and value terms both for the private and public sectors.
Global and sectoral targets should be mutually consistent in order to attain the required growth
rate for the economy. This necessitates 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.

e. 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.

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 f. Balancing in the Plan

A plan should ensure proper balance in the economy, otherwise shortages or surpluses will arise
as the plan progresses. There should be balance between saving and investment, between the
available supply of goods and the demand for them, between manpower requirements and their
availabilities, and between the demand for imports and the available foreign exchange.

Aggregate savings come from various sources such as voluntary savings, taxation, profits of
public enterprises, foreign remittances by nationals, etc. These must equal planned aggregate
investment in fixed capital assets and enterprise in the economy. The balance between the supply
and demand for goods requires balancing of the available supply, of consumption goods with
their demand, of the supply of capital goods, materials and inventories with their requirements,
of the supply of intermediate goods with their demand, and the proposed requirements of exports
of goods with their supplies. Balances are also required between planned demand and supply of
manpower, and between import requirements and the available foreign exchange during the plan
period.

In fact, two kinds of balances must be secured in a plan. The first is the physical balance which
consists of balancing the planned increase in output of various goods with the amounts and types
of investment. It also requires the balancing of the outputs of the various sectors of the economy.
This is, achieved through the input-output technique because the output of one sector or industry
is the input of the other for producing its output. Physical balancing is essential for the internal
consistency of the plan, otherwise such physical obstacles as lack of raw materials, manpower,
etc., will develop in the economy. The second is the monetary or financial balance which
consists of balancing the incomes of the people with the amount of goods available to them for
consumption, the funds used for private investment and the amount of investment goods
available to private investors, the funds used for public investment and the amount of investment
goods produced by the public sector, and the balancing of foreign payments and receipts. The
lack of these financial balances will lead to disequilibrium in the supply and demand for physical
goods thereby leading to inflationary and balance of payments pressures during planning.

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 g. 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 g

h. 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:

I. Investigation of development potential survey of national resources, scientific research,

market research;
II. Provision of adequate infrastructure (water, power, transport, and communications)
whether by public or private agencies;
III. Provision of specialized training facilities, as well as adequate general education, thereby
ensuring necessary skills;
IV. Improving the legal framework of economic activity, especially laws relating to land
tenure, corporations and commercial transactions.

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 V. helping to create more and better markets, including commodity markets, security
exchanges, banking, insurance and credit facilities;
VI. seeking out and assisting potential entrepreneurs, both domestic and foreign;
VII. promoting better utilization of resources, both by offering inducements and by operating
controls against misuse; and
VIII. 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.
i. 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.

j. An Education Base

For a clean and efficient administration, a firm educational base is essential. Planning to be
successful must take care of the ethical and moral standards of the people. One cannot expect
economy and efficiency in administration unless the people possess high ethical and moral
values. This is not possible unless a strong educational base is built up whereby instructions are
imparted both in the academic and technical fields. Without creating honest and efficient human
beings in the country, it would not be feasible to undertake economic planning on a big scale.

k. 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

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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.

1. 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".

1.5.2 Arguments against Planning

A. 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.
B. The best approach to minimize the difference between marginal net benefits of social and
private is through use of fiscal measures (taxation and subsidy).
C. 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.
D. 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.
E. The cost of planning in Less Developing Countries is enormous in the form of
administration, licensing, etc.

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1.6 Limitations of Planning

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:

I. Planning heavily depend on reliable data. If there are unreliable data, the potential
benefits of planning will be undermined.
II. The problem of discontinuity and uncertainty. Planning models don’t deal with random
shocks and future uncertainty (natural hazards, social changes, market, war and human
intervention). Plans work effectively when social and economic development unchanged
(unfolds) continuously.
III. Cost of planning administration and implementation in LDCs is too high.
IV. Constant Prices. A development plan is based on the assumption that prices remain
constant during the plan period. In this case, estimates are likely to go awry because price
changes are inevitable under development planning. Price changes may be related to
internal factors, to rise in exports or/and rise in import prices. Moreover, pricing of
products and services are not linked with the physical or financial outlays of the plan
which make the calculation of physical or financial targets and their achievements
unrealistic. Therefore, the use (favoring) of planning should be in line with the above
limitations.

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