Chapter 2: Characteristics and Classification of Economic Planning

2.1. Characteristics of Economic development Planning

Some of the most important features of economic planning are as follows:
i. Definite Objective: The most significant characteristic of economic planning is that it should possess
definite objectives. Planning means conscious and deliberate undertaking for a definite objective. For
instance, economic planning has the objective to accelerate the rate of growth, elimination of trade cycles,
bringing the stability and attain full employment in the economy.
ii. Central Planning Authority: The existence of a central planning authority is another feature of
economic planning. This central planning authority is responsible to prepare different schemes of
development and coordinating the various activities. The central planning authority takes all decisions
relating to production and consumption in an economy.
iii. Democratic Character: Another pioneer feature is its democratic nature. No doubt, various plans are
prepared by experts but at the same time, adequate opportunities are provided to the people to actively
participate at various levels. Being federal structure of Ethiopian Constitution for example, the Union
Government only uses its fiscal, monetary and physical controls to guide and give direction in
consequence with the plans.
iv. Only an Advisory Role of Planning Commission: In the decentralized set up of planning. Planning
Commission is the apex body. It provides the necessary perspective, guidance and coordination.
Furthermore, it serves as a close link between different agencies so that functioning may be smooth. In
this regard, Planning Commission is an advisory character.
v. Comprehensiveness: Another important characteristic of planning is its comprehensiveness in scope.
As central planning authority takes all decisions regarding production, consumption and distribution, thus,
it must cover the entire economy which must be comprehensive in scope. In other words, planning must
be effective so that the planning of one sector may not be nullified by the absence of planning in other
sectors.
vi. Planning for Consumption: In a centrally planned economy, it should not be confined to production
alone but at the same time, it must cover the distribution and consumption also. In other words, the
planning authority should not decide what and how to produce but it must keep in mind and decide
accordingly among whom it is to be distributed.
vii. Rational Allocation of Resources: Generally, in under-developed countries, available resources are
scarce and these resources are allocated in such a manner as to get maximum social welfare. It needs to
fix up priorities relating to economic development, thus, allocation of resources in accordance to these
fixed priorities.

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These scarce resources are also allocated to eliminate wastages for maximizing social welfare,
coordinating inter-sector and international plans into a single unified unit which, in turn, promotes
economic development in an economy.
viii. Feasible Policies and Targets: A good planning is based on the initial resources of the country to
achieve the feasible goals and policies. In this way, domestic resources are planned for attaining
economic stability.
2.2. Classification of Economic Planning
Planning is a technique/means to an end being the realization of certain predetermined 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. Therefore, the issue is not between plan and no plan, it is between
kinds of plans. There are different categories of planning based on the type of the economic system,
resources available, duration, and people involved, etc.
2.2.1. Planning by Direction and planning by Inducement
Planning by direction:
Is an integral part of socialist society. It entails complete absence of laissez-fair. There is one central
authority which plans, direct and orders the execution of the plan in accordance with pre-determined
targets and priorities. Comprehensive and encompasses the entire economy. The national plan represents
binding directives. The state holds the ‘commanding post’ in its hand by taking over the entire private
industrial and agriculture sectors and banking and transport. The state owns the task of planning.
Limitations;
 Associated with bureaucratic and totalitarian regime. There is complete absence of consumer
sovereignty. People are not allowed to consume and spend according to their choice. Even the
right to choose ones occupation doesn’t exist. No economic freedom.
 Is unsatisfactory because the present economic system is exceedingly complex.
 Inflexibility- revision of the plan ones drawn is impossible in case circumstance necessitate.
 Due to resource limitation the fulfillment of target is difficult.
 It leads to excessive standardization because it makes production process easy. Production of
only one type of standard good in each line of production unfavorable to growth of initiative and
enterprise.
 Requires huge resource thus costly to conduct survey and census.
Planning by inducement:
Is democratic planning. Planning by manipulating the market. There is freedom of consumption, freedom
of enterprise and freedom of production. But these freedoms are subject to state control and regulations.
People are induced to act in a certain way through various monetary and fiscal measures. Planning by

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inducement is able to achieve the same result as are likely to be achieved in planning by direction but
with less sacrifice of individual liberty.
Difficulties;
 The incentives offered may not be adequate for producers and consumers to act the way the state
desires them to behave. May upset the government plans.
 Since the actual working of the plans is left to market forces, surplus or shortages are bound to
arise. Shortages are frequent and they necessitate price control and rationing which are the forms
of planning by direction. In such a situation planning by inducement merges with planning by
direction.
 Monetary and fiscal measures alone are inadequate to induce planned development of the
economy by raising the rate of capital formation. Because of low level of income and saving,
capital formation in LDCs is difficult. People have tendency to use their saving in unproductive
channels (consumption).
Conclusion:
Whether a country adopts planning by direction or planning by inducement depends on the system of
government. Socialist countries adopt planning by direction, while capitalist economies adhere to the
technique of planning by inducement. But both planning technique are complementary. In mixed
economy both planning technique are used. Eg. India
2.2.2. Perspective planning and annual planning
Perspective planning- Refers to long term planning in which long rage targets are set in advance for a
period of 15, 20 or 25 years. Indicates development to be undertaken over a longer period. It however
doesn’t mean one plan for the entire period of 15 or 20 years. In reality the broader objectives and targets
are to be achieved with in the specified period of time by dividing the perspective plan into several short
period plans of 4,5,6 years. Shorter period plan makes for greater precision. There for a perspective plan
is always split up into short term plans. Not only is this five year plan further broken into annual plans
(operational plans) so that each annual plan fits into a broader framework of the five year plan (strategic
plan). Plans of either kind are further divided into regional and sectional plans.
 Regional plans pertain to regions, districts, and localities being further split up into sectional and
branches for various sectors.
 Sectional (sectoral) plans further sub divided into sub plans for each branch. All these plans and
sub plans are related to perspective plans.
Current plan and sub plans are the necessary support to perspective plan to achieve those targets. Planning
is a continuous process and can’t be isolated for a short period. Thus, a five year plan is a projection and
continuation of the previous plans and it will lend to the subsequent plans.

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The main purpose of a perspective plan is thus to provide a background to the shorter term plans, so that
the problems that have to be solved over a long term can be taken into account in planning over a shorter
term.
Limitation;
 Rigidity- adjustment of targets set in the perspective plan to unforeseen change may not be made.
 Revision of the plan when provision is not made can have psychological demoralizing effect.
2.2.3. Fixed and rolling planning
Roll plan- every year three new plans are made and acted up on. These are;
1. Plan for the current year which includes annual budget & foreign exchange budget.
2. Plan for a number of years 3, 4, 5 years changed every year to keep with the requirement of
the economy.
3. A perspective plan for 10, 15, 20, 25 even more years is presented every year, in which the
broader goal are stated and the outlines of future development are forecast.
Since planning is a continuous process, every year the plan is revised in the light of new information,
improved data and improved analysis.
Merit- devised to overcome the rigidity encountered in the fixed plans. Provides clear perspective and
better view of priorities. Combines the advantage of perspective and fixed planning.
Demerits-
 Since the target is revised every year, it is not possible to achieve the targets laid down in the plan
within a fixed time period.
 Continuous revision creates uncertainty in the private and public sector of the economy.
 Continuous revision develops an attitude of non-commitment among the planners and the public.
 Requires trained manpower and strong base for information exchange and data updating. Strong
and reliable data base is required.
 Needs up to date knowledge of progress as well as shortcoming in the implementation of projects.
Fixed plan- lay down definite aim and objectives which are required to be achieved during the plan
period. Physical targets are fixed along with the total outlay. Physical and financial targets are seldom
changed except under emergencies.
Merit:
 Fixes targets and priorities rigidly for achieving the objectives laid down in the plan.
 Helps to maintain proper balance in the economy.
 Ensures public cooperation and political will to make the plan success.

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 Demerit:
 Failure to consider unforeseen changes. But operational plan can help to overcome.
 Lacks flexibility
The demerits of fixed plans are not so serious as to discard it in favor of rolling plan.
2.2.4. Democratic and totalitarian (authoritarian) planning
Democratic planning Totalitarian planning
 Planning within democracy  Central control and direction of all
 People are associated at every step in the formulation & economic activities in accordance with
implementation of the plan a single plan
 Consultation of government & private enterprises at the  Planning by direction. Economic
stage of plan preparation activity controlled by the state
 The plan is fully debated parliament, private forum  Planning authority is the supreme body
 The plan prepared by planning institution can be accepted,  Absolutely no option to the plan.
modified, or rejected by the parliament of the country. People accept & rigidly implement the
 The plan is not forced up on the people from above, it is plan.
planning from below
 Respects the institution of private property
 Fiscal & monetary measures are used by the state to
influence economic and investment decision of private
sector.
 Private sectors operate side by side with public sector.

2.2.5. Corrective (ant-cyclical planning and development planning

Corrective planning:
A number of maladjustment arises in a capitalist economy. When the government plans and adopts
various fiscal, monetary and direct control measures to rectify them, this is called corrective planning. If
the economy suffers from inflationary pressures, the government adopts such corrective measures as a
contractionary monetary policy, raising tax rates, reducing consumption, investment and public
expenditure. In the event of a depression; corrective planning includes an expansionary monetary policy,
reduction in tax rate, stimulation of consumption, increase in private and public investment, and a deficit
budgetary policy. Planning on excessive inequality of income distribution and monopoly power. Eg.
Planning in USA and other capitalist countries is of the corrective type.
Development planning:

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Meant to develop the economy as a whole. The government formulates development plan for the whole
economy. The government doesn’t use force on the private sector to get the plan implemented, rather it
provides incentives through monetary, fiscal and direct control measures. Primarily related to the
development of under developed countries. Since such countries are:
Lewis; Good policy help, but don’t ensure success. Development planning in this respect is like medicine;
the good practitioner knows some use full tricks, but it is still the case that many patients die who are
expected to live, and many live who are expected to die.
2.2.6. Physical planning v/s financial planning
Financial planning
Refers to the technique of planning in which resources are allocated in terms of money. Finance is the
main key to economic planning. If sufficient finance is available it is not difficult to achieve physical
targets. Important to remove maladjustment between supply and demand to calculate cost- benefit of
various projects. The essence of financial planning is to ensure that demands and supplies are matched in
a manner which exploits physical potential as fully as possible without major and un planned changes in
the price structure. In the case of financial planning outlays are fixed in terms of money. Hence the plan is
to cover those outlays by taxation, savings, donation/ aid etc.
Limitation;
 Measures to mobilize financial resources through taxation, may adversely affect the propensity to
save.
 In LDCs there is a vast non-monetized subsistence sectors and small organized money sector
(lack of stock market).
 Supplies can be increased through import, but leads to balance of payment difficulties (X-M).
 Effect of inflation rise in price.
Physical planning
Is the allocation of resource in terms of men, materials, and machinery? An attempt to work out the
implication of the development effort in terms of factor allocation and product yields so as to maximize
incomes and employment. Requires the fixation of physical targets.
Limitations:
 Lack of statistical data and information on available resources.
 Due to inherent structural difficulties of LDCs to attain internal consistency is impossible (input-
output matrix).
 Shortage in physical target may lead to inflationary pressure through an increase in prices.
 Physical planning without financial planning is always a negation of planning in LDCs.

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  If plans are drawn on the basis of physical resources without any regards to the availability of
financial resources, plan target can never be fulfilled.
Conclusion;
The use of financial planning or physical planning technique depends on the political structure of the
country. In Socialist state there is physical planning since there is absence of private property and all the
resources belong to the state. In capitalist country financial planning is as much important as physical
planning. Both are complementary. Both are mutually consistent. For effective planning both are needed
together. Both techniques are required to integrate in development planning. Physical targets should be
balanced in terms of the available financial resources, while larger financial resources should be
mobilized in order to fulfill physical targets for accelerating the pace of development.
2.2.7. Centralized and decentralized planning
Centralized planning:
The entire planning process in a country is under a central planning authority. This authority formulates a
central plan, fix objectives, targets and priorities for every sector of the economy. It takes all investment
decision in accordance with the goals and targets of the plan.
Decentralized planning:
Execution of the plan from the grassroots. A plan is formulated by a central planning authority in
consultation with the different administrative units of the country.
2.2.8. Indicative planning and imperative planning
Indicative planning Imperative planning
 Based on the principle of  Comprehensive planning in which the planning
decentralization in the operation & authority decides about the amount to be invested
execution of national plan. in each sector, fixation of prices, & type of
 Flexible planning. Eg. French product to be produced.
 Peculiar to mixed economy, the public  Has rigidity. Distortion in one sector adversely
& private sectors work together. affects the entire economy.
 The state provides all types of facilities to  There is complete control over the factors of
the private sector but doesn’t direct it, production by the state.
rather indicates the areas in which it can  No consumers’ sovereignty. Consumers get
help in implementing the plan. commodity in fixed quantity at fixed price. Often
the commodities are rationed.
Eg. China & Russia