CHAPTER ONE

INTRODUCTION

1
 Objectives: At the end of this chapter students will be able
to:
 Understand the development of economic planning
 Discuss the meanings and features of economic
planning
 Explain the necessities to undertake economic
planning
 Understand the requisites of economic planning

 Analyze the cons and pros of economic planning

 Know the shortcomings of economic planning

11/10/2023 2
  1. Historical background of Planning

 2.The Meaning and Features of

Economic Planning

 3. The Need for Economic Planning

 4. Requisites for successful planning

 5. Arguments on planning

 6. Shortcomings of planning

11/10/2023 3
 Section One
Historical Background of Planning

4
 Historical Background of 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
renowned 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 planning is from three

perspectives
11/10/2023 5
 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)

 Butit was only state intervention that was

advocated.
There was no mention of economic
planning
11/10/2023 6
  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.

 In a few decades, the Soviet Union was quickly

transformed into a major industrial power.
 the share of industry in NNP increased from 28
percent to 45 percent
 its share of the labor force from 18 percent to 29
percent, from 1928 to 1940
 agriculture’s share in NNP declined from 49 percent
to 29 percent
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 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.

 Theseare:
 A-The development of science and technology
not only made material progress possible, but also
they made planning possible

11/10/2023 8
  B-Inthe 1930’s, the capitalist world was in the midst
of the biggest depression in the world history.
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
 Meanwhile there was an attempt to plan
economic life in Nazi German and Fascist Italy
during the time (thirties).

11/10/2023 9
  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.

 D-In the post war period, the war devastated

countries of Europe were compelled to resort to
economic planning to rehabilitate

11/10/2023 10
 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.

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  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-Thedevelopment of democracy also leads 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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 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:
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  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).
these new leaders have to plan because it was
considered as a potential tool (instrument) to
survive and prosperity.
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  However, the then planning was not as a result of
popular participation (bottom up planning).

 Itwas 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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  In general, Planning has been universally accepted and
the planned sector almost everywhere is expanding.

 The idea of planning acquired a tremendous support

after the end of World War II.
 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.
 However, the remarkable achievements of Nazi
Germany and Soviet Russia popularized the idea of
economic planning.
11/10/2023 16
  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

 Although both advanced capitalistic countries and the

under-developed countries have adopted planning but
there is this difference between the two:
 In developed countries, it is corrective planning to
ensure economic stability,
 In under-developed countries, it is developmental
planning to secure rapid growth.

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 Section Two
The Meaning and Features of
Economic Planning

18
  There is no agreement among economists with regard to
the meaning of the term economic planning.

 The term has been used very inaccurately 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.
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  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
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.

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  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."

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  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,

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  Even though there is no agreement the definition of
economic planning, yet for the majority of economists it
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

11/10/2023 23
 Section Three
The Need for Economic Planning

24
  Planning has been introduced in different countries for
different reasons.
 In socialist countries, where revolutions preceded
and public ownership of resources are followed,
planning became an institutional need of the
system.

 Innon-socialist countries, with private ownership,

several factors have necessitated the use of the
instrument of planning.

 Inunderdeveloped economics, development needs

have been predominant in popularizing planning.

11/10/2023 25
  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

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 Section Four
Requisites for successful Planning

27
  The formulation and success of a plan require the
fulfillment of the following factors:

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, statisti-cians,
engineers, etc, dealing with the various
aspects of the economy.

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 2-Statistical Data
 The availability of adequate, accurate and reliable
statistical information about the existing situation
in the economy is the pre- requisite of successful
economic planning.
 Planning in most of the underdeveloped countries
is severely handicapped by the lack of reliable
data in sufficient quantity.

3-Objectives
 The plan has its own objectives.

 The various goals and objectives should be

realistic, mutually compatible and flexible enough
in keeping with the requirements of the economy.

11/10/2023 29
 4-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 and sectoral targets should be
mutually consistent in order to attain the
required growth rate for the economy.

 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

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 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.

6-Balancing in the Plan

 A plan should ensure proper balance in the economy,
otherwise shortages or surpluses will arise.
 There should be balance between
 saving and investment,

 supply of goods and the demand for them

 manpower requirements and their availabilities,

 demand for imports and the available foreign

exchange.
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 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. a strong, competent and incorrupt
administration as the first condition for the success
of a plan.

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.

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 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.
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 11-A Theory of Consumption
 Underdeveloped countries should not follow the
consumption patterns of the more developed
countries.

12-Public Cooperation
 Public cooperation is considered to be one of the
important levers for the success of the plan.
 Planning requires the 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.
 a plan should be regarded as a National Plan
when it is approved by the representative of the
people.
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 Section Five
Arguments For and Against Planning

35
  There are manly arguments for and against planning,
which pro and anti-planners pose.
 We can describe such arguments as follows:

 Cases for Planning

 An unplanned economy is like a ship moving
rudderless on uncharted seas with no fixed
destina-tion and unlikely to reach it if there be
any.

 Such an economy works blindly and

haphazardly.

 Some arguments in favor of planning are:

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 1-The judgment of the State is superior to that of the
citizen
 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 indivi-dual and isolated
businessmen.
2-Planning becomes necessary for equit-able 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.
11/10/2023 37
 3-Planning helps to protect labor and harmonize wage
relations
 The State is a more effective 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

4-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.

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 5-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.

6-To realize major economic changes

 Without the aid of planning no country can cope
with major economic changes.
 Such changes like industrial revolution or
rationalization move-ment, are bound to turn the
economy topsy-turvy.

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 7-Planning eliminates wasteful competi-tion
 The merit of the free market lies in competi-tion
being perfect; but in actual life perfect
compe-tition 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.

8-Efficient use of resources

 Only a planned economy provides for proper co-
ordination and avoids unnecessary dupli-cation of
staff and equipment.

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 9-Planning prevents artificial shortages that can be
created by monopoly actions
 A planned economy will prevent artificial
shortages being created by profit-greedy
business-men.
10-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,
overcrowd-ing and unsanitary conditions and
cyclical unem-ployment.
11-Planning also results in higher rate of capital
formation
 Private enterprise is more intent on immediate

11/10/2023 gain rather than future good. 41

  Cases against Planning
 Some arguments in favor of planning are:
1-a planned economy would be a ' muddle'
economy, incapable of pursuing rational economic
activity
2-the great danger arising from centrally planned
economy is that of bureaucracy and the growth of
red-tapism.
3-there is no incentive under a socialist planned
economy on the part the workers to bring about
improvement in their performance
4-a planned economy requires a huge amount of
manpower simply to draw up the plan and then
make it work.

11/10/2023 42
 5-planned economy is that it tends to breed graft
and dishonesty among state employees.

6-a planned socialist economy, the consumer loses

his sovereignty.

7-planned economy there is no freedom available to

the workers to choose their occupations

8-a centrally planned economy shall inevitably be

unstable for political reasons.

9-there is every possibility of the state developing

under such circumstances in to a dictator ship

11/10/2023 43
 Section Six
Shortcomings of Planning

44
  Economic planning suffers from three main limitations:
1- Limitations of Uncertainty
 Every economic plan suffers from the limitation of
uncertainty.
 To get over this, the countries should accumulate
essential stocks of every kind before it embarks up
on economic planning.

2-Limitation of the market Mechanism

 The second limitation of planning is that imposed
by the market mechanism.

3-Limitation of the Time -Factor:

 Every economic plan is formulated for a specified
period of time
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11/10/2023 46
 Chapter One: Introduction
Summary
 Objectives: The main objective of the chapter is to make
students familiar with introduction to Economic Planning.

 Contents:
 1. Historical background of Planning
 2.The Meaning and Features of Economic
Planning
 3. The Need for Economic Planning

 4. Requisites for successful planning

 5. Arguments on planning

 6. Shortcomings of planning

11/10/2023 47
 Section I: Historical Background of 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].
 However, the idea of economic planning in its modern
form is comparatively new.
 It is the 20th century phenomena.

 Ideologically, the evolution planning is from three

perspectives
 Planning in eastern Europe (socialist perspective)

 Planning in western Europe (capitalist

perspective)
 Planning in underdeveloped countries (mixed
economic perspective)
11/10/2023 48
  In general, Planning has been universally accepted and
the planned sector almost everywhere is expanding.

 The idea of planning acquired a tremendous support

after the end of World War II.
 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.

11/10/2023 49
 Section II: The Meaning and Features 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 inaccurately in
economic literature.
 It is often confused with communism, socialism or
economic development.
 The majority of economists “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).
11/10/2023 50
 Section III: The need for Economic Planning
 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

11/10/2023  To reduce inequality 51

 Section IV: Requisites for successful planning
 The formulation and success of a plan requires
1-Planning Commission
2-Statistical Data
3-Objectives
4-Fixation of Targets and Priorities
5-Mobilization of Resources
6-Balancing in the Plan
7-Incorrupt and Efficient Administration
8-Proper Development Policy
9-Economy in Administration
10-An Education Base
11-A Theory of Consumption
12-Public Cooperation
11/10/2023 52
 Section V: Arguments of For and Against Planning
 There are manly arguments for and against planning,
which pro and anti-planners pose.
 We can describe such arguments as follows:

 Cases for Planning

1-The judgment of the State is superior to that of the
citizen
2-Planning becomes necessary for equit-able
distribution of economic power
3-Planning helps to protect labor and harmonize
wage relations
4-Planning helps to eliminate economic instabilities
5-Planning helps to make terms of trade favorable to
the country
11/10/2023 53
 6-To realize major economic changes
7-Planning eliminates wasteful competi-tion
8-Efficient use of resources
9-Planning prevents artificial shortages that can be
created by monopoly actions
10-Planning helps to minimize environmental
costs of industrialization
11-Planning also results in higher rate of capital
formation

11/10/2023 54
  Cases against Planning
 Some arguments in favor of planning are:
1-incapable of pursuing rational economic activity
2- bureaucracy and the growth of red-tapism.
3-there is no incentive
4-requires a huge amount of manpower
5-tends to breed graft and dishonesty among state
employees.
6-the consumer loses his sovereignty.
7-there is no freedom available to the workers to
choose their occupations
8-unstable for political reasons.
9-dictator ship

11/10/2023 55
 Section VI: The shortcomings of Planning
 Economic planning suffers from three main limitations:

1- Limitations of Uncertainty
 Every economic plan suffers from the limitation of
uncertainty.

2-Limitation of the market Mechanism

 The second limitation of planning is that imposed
by the market mechanism.

3-Limitation of the Time -Factor:

 Every economic plan is formulated for a specified
period of time

11/10/2023 56
11/10/2023 57