Development Planning and

Project Analysis I

Mihretu.T (MA)
 Chapter One
Meaning of Development Planning
• Planning is the one the fundamental function of manag‟t. It
is the basis of all other managerial functions including:
organizing, staffing, directing & controlling.
• It involves looking in to the future, anticipating it, &
attempting to influence it through anticipatory decisions.
These include:
 Determination of objective,
 Formulations of programmes & courses of actions for their
attainment,
 Dev‟t of schedules and time of action, and
 Assignment of responsibilities for their implementation,
 Dev‟t of criteria for evaluating performance & performance
control.
 Cont’d…
• There are many types of planning: corporate
planning, Firm planning, Economic planning,
Strategic Planning etc.
• Economic planning w/c the main concern of the
module is one type of planning w/c is concerned
with the dev‟t of the country/ nation.
• What is economic planning?
• Prof H. Levy “Economic planning means securing a
better balance b/n dd & ss a conscious &
thoughtful control; either of production or
distribution or of both; rather than leave these
balances to be affected by automatically
working, invisible & uncontrollable force”.
 Cont‟d….
• For Delton “Economic planning is
deliberate direction, by persons in charge
of large resources of economic activities
to wards chosen ends”.
• Generally‟ “Economic planning can be
defined as a conscious effort on the part
of any gov‟t to follow a definite pattern of
economic dev‟t in order to promote rapid
& fundamental changes in economy &
society”
1.2. Evolution of Development
Planning
• The idea of planning has a long history &
goes back to the time of Pluto.
• In 20th c phenomena the evolution of
economic planning ideologically 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)
 Planning in Eastern Europe
• During the 19th century, intellectual theorists, thinkers
& writers in the Eastern Europe became fed up with
the inquiry & contradictions of pure capitalism.
• They developed the idea of state intervention to
set matters right & to prevent inequalities resulting
from capitalism a solution to the fallacy of laisser-faire.
• There was no mention of economic planning &
how to interrelate was ambiguous.
• In 1928 the Soviet Union gave the idea of economic
planning a real shape when it formulated its first five
year plan.
• The major objectives of these plan was to achieve the
rapid transformation of a backward agriculture sector
(traditional sector) into a modern industrial sector.
Planning in Western Europe
• The factors that necessitate planning in Western
Europe, among others wars, great depression
of 1930th, dev’t of democracy, expansion of
markets, dev’t of science & technology, &
specialization.
• In Western economics, a series of the above
historical dev‟t led to the coordination of economic
policies, i.e., planning.
• Note: - The objective of the economic planning in
the West was basically d/t 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.
 Planning in Underdeveloped
Countries
• Economic planning was considered as important
panacea (remedy) for underdeveloped countries in
their desire for industrialization.
• Economic planning, therefore, was considered as a
tool to achieve rapid economic dev‟t.
• The dev‟t (evolution) of planning in LDCs took a d/t
course (path) than the rich countries in the following
reasons:
a) In LDCs, planning was considered as an ideology rather than
a means b/c in these countries planning was considered as a
desire (expression) of many things, such as:- desire of self-
control, expression of independence, self –determination &
Then planning as a political and cultural goal.
b) New leaders (elites) emerged when they got
independence with new vision (ideas).
 1.3. Evolution of dev’t thinking &
planning
 The Early Post War consensus (1960’s
&1970’s)
• The devastating war in d/t countries raised many
problems of growth & dev‟t unanswered by the
available economic models.
• The available models couldn‟t help the developing
countries rather it became knife edge.
• 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.
• This period was divided in to five important sub-periods.
a) Polarity:-The concept of dualism is taken to explain “…of
two opposing ideas or principles.
• It attracted due attention during the 1950s & 1960s. The
components under dualism are:
 Classical dualism: Ricardo & Lewis 1951 are major
proponents. Surplus labor as potential for growth when
transferred from agriculture to non-agriculture.
 Physiocrats: viewing land as the source of all wealth,
agricultural surplus supporting the non-agricultural sector.
 Sociological dualism: according to Boeke, 1953
“sociological, cultural & objectively discrepancies b/n western
& non western block of the world is the source of dualism.”
 Technological dualism: Higgins, 1956 is the major
proponent. D/cs b/n variable factor proportions in the
traditional sector & fixed coefficients in modern sector as
major source for dualism.
b) Need for Balanced Growth (structuralism)
• According to Rosenstein - Rodan, 1943 & Nurkse,
1953 sectors of economy i.e. agricultural sector &
non-agricultural sectors need to be grown in
balanced way to meet say‟s law. Unbalanced
growth is said to bring long run crawling.
c) International Trade Scene
• Prebisch, 1962 stated that the international trade
scene painted in colors & was unfriendly for dev‟t
& 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 dev‟t.
• Under interventionist the planning models used were:
 Planning for resources: such as Simple Harrod -
Domar & Mahalonobis models. These models are all
silent on price, & foreign exchange rate flexibility.
 Multi - sector production function with multiple
inputs & variable (Input-Output models, Social
Accounting Matrix).
e) Technology in generating growth: Solow, 1957 &
Kuznets, 1955 contribute to emphasize the importance
of technology in generating growth.
• It was, however, Kuznets 1971, though mainly
concerned with describing modern growth rather than
analyzing the transition process
• Kuznets was interested in why some developing
countries were successful and others not & placed major
emphasis on the sources of structural change over time
as b/n agriculture, industry & services.
 The Washington Consensus
• It is unfair to thank or realize only that
policy change is the key ingredient of
successful dev’t to the international
financial institutions.
• It rather would give more credit for the
realization that prices matter more &
that macroeconomic stability matters less.
• The major contributors of the idea are:
Little, Scitovsky, & Scott 1970, Bhagwati
1978, Krueger 1978, Cohen and Ranis, 1971,
among others, who insisted that a re-
structuring of the rails of dev‟t was needed.
The main ingredients of the consensus are:
• Privatization & unified & competitive
exchange rates
• Simultaneous liberalization of financial
markets (domestic & international)
• Relative openness to FDI & gradual
deregulation of control systems
• Emphasize on R & D
• Changes at micro level: labor market
productivity, legal, financial & other
institutional reforms
• Program lending changes in to structural
adjustment lending.
 The Oscillating Search for a Silver Bullet
• Viewing per capita income growth as the key
objective has been questioned.
• Serious mainstream attention has been given to
the distribution of income, to the extent to
w/c private income poverty is reduced & public
income poverty is being addressed.
• The public income poverty can be seen
through various human dev‟t dimensions like
infant mortality, life expectancy, literacy as
fundamental objectives of dev‟t.
• Growth is a necessary but not sufficient
condition for poverty reduction.
  Theoretical Revisionism
• Recently with the advancement in theoretical thinking &
problems faced in global relations, there arises a need to revise
some theories. These are:
• New Trade Theory: globalization & import substitution
• Recent emphasize of development economists are on:
micro foundations of dev‟t issues & micro-credit organizations
and NGO's in developing countries.
Best Guesses as to the Way Forward
• Going towards a set of small number comparative historical
studies encompassing typologically ''neighboring'' countries.
• Need to pursue on the two-way r/nship b/n growth & human
dev‟t.
• Closer look on the pros & cons of decentralization & its r/n to
democratization & decision making by the broader body
politics.
1.4.The rational for dev’t planning
• Planning is indispensable for any economy:
 To root out the evils & drawbacks of economic
structure of a country &
 To achieve an overall dev‟t of the nation.
• Some of the specific rational for dev‟t planning are:
1. Planning is needed to increase the rate of
economic dev’t.
• In the world 2/3 of the countries are underdeveloped
this is due to cause & consequences of poverty.
• The vicious circle of poverty that tends to perpetuate
the low level of dev‟t in LDCs in circular manner. (See
fig.1.1).
Cont’d…
• Dev‟t planning provides useful set of analytical
technique for economic decision making & policy
formulation, & interventions is used to breaking
vicious circle of poverty.
• Further more; planning accelerates the path of
growth in LDCS.
2. Need for removing widespread unemp’t
including disguised unemp’t. In most LDCs
unemp‟t (excess labor ) is widespread while
capital resources is relatively scarce.
3. Market imperfection: In many LDCs, product
& factors markets are imperfect & forces of
market fails to attain efficient allocation of
resources.
4. Planning is important to bring about
balanced dev’t of the economy.
• Without intervention of concerned bodies in
the system, the market may result in,
unbalanced distribution of reward for:
 Factors of production,
 accumulation of capital in a few hands
resulting in unequal distribution of wealth,
 exploitation of laborers, poor, & creation of
monopoly, &
 uneven economic cycles which the system
cannot cheek.
5. Externalities.
1.4.2The case against planning
• Economic planning, though having numerous
advantages, is not fully free from demerits.
• Some of the disadvantages of economic
planning are:
• First market imperfection, it is argued
that if planning is necessary to avoid the
imperfections of the market mechanisms
then what is necessary are to make the
market more perfect, rather than planning.
• Second, lack of information & information
asymmetric in market in LDCs.
• Planning requires a large amount of
information about many branches of the
economy.
• The availability of such information is
doubtful. Further more, the cost of
acquiring and planning are quit large for
LDCs.
• Third, lack of resource & competent
administration, or skilled man power.
 1.5. Requisites for successful dev’t
planning
• The formulation & success of a plan require the fulfillment
of the following factors:

 Planning commission  Incorrupt and efficient

 Statistical data administration
 Clear objectives  Proper development
 Fixation of targets and policy
priorities  An education base
 Mobilization of resources  A theory of consumption
 Balancing in the plan  Public cooperation
Cont‟d….
• Planning commission: dev‟t planning is the
setting up of a commission w/c should be
organized in a proper way.
• It consists of experts such as economists,
statisticians, engineers, etc, dealing with the
various aspects of the economy.
• Statistical data: sound planning is a thorough
survey of the existing potential resources of a
country together with its deficiencies.
• Objectives: it has the following objectives; to
increase national income & per capita income; to
expand employment opportunities; to reduce
inequalities of income etc.
• Fixation of Targets and Priorities: They should be both
global and sectoral.
• Global targets must be bold & cover every aspects of the
economy.
• Sectoral targets pertaining to individual industries & products
in physical & value terms both for the private & public sectors.
• Mobilization of resources: There are various internal &
external sources for financing a plan.
 Internal sources of finance for the public sector:-
saving, profits of public enterprises, net marketing
borrowings, taxation & deficit financing are the principal are
internal sources of finance.
 Net budgetary receipts corresponding to external
assistance related to the external sources of financing the
plan.
• Balancing in the plan: In fact, two kinds of
balances must be secured in a plan.
 The first is the physical balance w/c consists of
balancing the planned increase in output of
various goods & types of inv‟t as well as balancing
of outputs of the various sectors of the economy.
 The second is the monetary or financial
balance w/c consists of balancing the incomes of
the people with the amount of goods available to
them for consumption, inv‟t, & balancing of
foreign payments & receipts.
• Incorrupt and Efficient Administration
• Proper development Policy: Professor Lewis
lists the following main elements of such a
development policy:
 Cont‟d…
a) Investigation of dev‟t potential survey of national resources,
scientific research, market research.
b) Provision of adequate infrastructure 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 & commercial transactions.
e) Helping to create more & better markets, including commodity
markets, security exchanges, banking, insurance & credit facilities.
f) Seeking out & assisting potential entrepreneurs, both domestic and
foreign.
g) Promoting better utilization of resources, both by offering
inducements and by operating controls against misuse.
h) Promoting an increase in saving, both private and public.
Cont‟d…
• An education base
• A theory of consumption: According to
Professor Galbraith an important
requirement of modern dev‟t planning is
that it has a theory of consumption
• Public cooperation: Economic planning
should be above party politics, but at the
same time, it should have the approval of
all the parties.
 1.6. The need for planning in LDCs,
Ethiopia
• Planning is beneficial for the developed &
underdeveloped countries.
• For the developed countries to maintain
or accelerate growth already
achieved, and
• For under developed countries, like
Ethiopia, to overcome poverty & to
raise the standard of living.
• Planning has been introduced in d/t
countries for d/t reasons.
 Cont‟d…
• In socialist countries, where revolutions
preceded & public ownership of resources
followed, planning became an
institutional need of the system
• In non-socialist countries, with private
ownership, several factors have
necessitated the use of the instrument of
planning.
• In underdeveloped countries, dev’t
needs have been predominant in
popularizing planning.
 Cont‟d….
• The following arguments reveal an urgent
need of planning in underdeveloped &
developing countries.
• The Market Failure Argument
• The Resource Mobilization and
Allocation Argument
• Attitudinal or Psychological Impact
Argument
• Foreign Aid Argument
• Development Argument
 Cont‟d….
• The Market failure argument: This refers to a
condition where both factor markets &
commodity markets in LDCs are characterized
by imperfections in structure as well as in
operation.
• Hence there exist price distortions w/c give
wrong signals to both consumers & producers
such that these signals & incentives are a poor
reflection of the real cost to society of the goods,
services & resources utilized.
• Moreover, the failure of the market to determine
price of factors of production correctly is further
assumed to lead to gross disparities b/n social &
private valuations of alternative inv‟t projects,.etc.
• Market failure can be explained under the
following three contexts:
I. A case where the market can’t
function properly or no market exists:
The existence of public goods gives rise to
the problem of „free rider‟.
II. A case where the market exists but
involves an inefficient allocation of
resources: Market power occurs when
firms can influence price by restricting
quantity produced.
III.A case where the market produces
undesirable results as measured by
social objectives: Externalities
• In particular, it is argued (by proponents of
economic planning) that the market economy
is not geared to the principal operational
task of poor countries:
• That of mobilizing limited resources in a
way that will bring about the structural
change necessary to stimulate a
sustained & balanced growth of the
entire economy.
• Planning came to be accepted, as an
essential & pivotal means of guiding &
accelerating economic growth in almost
all developing countries.
 Cont‟d….
• The Resource Mobilization & Allocation
Argument: This mainly refers to prioritizing the
economic sectors that will guarantee economic
transformation in the long run.
• For instance, it may be required to mobilize resources
so as to reallocate them from consumer goods
producing sectors to capital goods producing sectors.
• Attitudinal or Psychological Impact Argument:
A detailed statement of national economic & social
objectives in the form of a specific dev‟t plan can have
an important attitudinal or psychological impact on a
diverse & often fragmented population.
• It is argued that enlightened central gov’t, through
its economic plan, can best provide the needed
incentives to overcome the inhibiting & often divisive
forces of sectionalism & traditionalism in a common
quest for widespread material & social progress.
 Cont’d….
• Foreign Aid Argument: The formulation of
detailed development plans has often been a
necessary condition for the receipt of bilateral
and multilateral foreign aid.
• Development Argument: The economic
vicious circle of poverty must be broken and
it can be done only by planning.
• Planning is like a shot in the arm w/c enables
a sick person to overcome his sickness.
• Planning alone can create more jobs and
remove the wide spread unemp‟t & disguised
unemp‟t w/c is a common feature of
underdeveloped countries.
• One of the principle objectives of the
planning in underdeveloped countries is to
increase the rate of economic dev‟t.
• In the words, D.R.Gadgil “Planning for
economic dev’t implies external
direction or regulation of economic
activity by the planning authority w/c
in most cases identify with the
government of state.”
• It means planning increases the rate of
capital formation by raising the levels of
income, saving & investment.