CHAPTER ONE

INTRODUCTION

 In this chapter we will first discuss the historical background of economic planning
which shows the development of economic planning. Then we will see the meaning
and features of economic planning, the need for economic planning, pre-requisites for
economic planning, the case for against planning, and shortcomings of planning.

 Objectives: At the end of this chapter students will be able to:

o Understand the development of economic planning
o Understand the meanings and features of economic planning
o Understand the necessities to undertake economic planning
o Understand the requisites of economic planning
o Know the shortcomings of economic planning.

1-Historical Background of Economic Planning

 The idea of planning has a long history and goes back to the time of Pluto [the first person
who talked about organized planning].
o It was later developed, shaped and molded by eminent thinkers and writers both in
the western and eastern camp.
 However, the idea of economic planning in its modern form is comparatively
new.
 It is the 20th century phenomena.
 Ideologically, the evolution is from three perspectives:
1. Planning in eastern Europe (socialist perspective)
2. Planning in western Europe (capitalist perspective)
3. Planning in underdeveloped countries (mixed economic perspective)

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.
o Therefore, they developed the idea of state intervention to set matters right and to
prevent inequalities resulting from capitalism (free economy)
 But it was only state intervention that was advocated.
 There was no mention of economic planning
o 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.
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:

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Development Planning Lecture Note Compiled by: Muhdin M.
 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).
o 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.
o Therefore, economist and politician favored economic planning as a remedy
for these and other economic ills.
o 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.
o Meanwhile there was an attempt to plan economic life in Nazi German and
Fascist Italy during the time (thirties).
Note: - The objective of the economic planning in the West was basically different from
that of the Soviet Union. The purpose of planning in Nazi Germany was primarily to
build up the war potential rather than improving the living standard of the people.
c) The outbreak of World War I and II necessitates the proper and efficient planning of
economic resources for successful prosecution of the war. [For coordinated management
of scarce resources]
d) In the post war period, the war devastated countries of Europe were compelled to resort
to economic planning to rehabilitate themselves owing to:
 As a condition for receiving assistance under the Marshal plan, the USA insisted
upon these countries to formulate their rehabilitation plan covering almost every
sector of the economy.
 The USA itself has recognized the significance of economic planning when it
adopts an economic program called the “new deal” to come out of the suffering
from great depression in thirties.
e) The growth of markets and increased specialization led to increased interdependence
among economic activities and to greater economic externalities, which lead to adoption
of economic planning.
o There is a need to intervene public agencies to rectify the negative
externalities.
f) The development 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.
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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Development Planning Lecture Note Compiled by: Muhdin M.
 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).
o 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.
o However, the then planning was not as a result of popular participation (bottom
up planning).
o It was up down planning to express the need of the leaders who control the
political structure - they dictate the plan.
o Planning here was not as a consequent of industrialization, which is the inverse of
the Western, developed countries.
 In general, planning has been universally accepted and the planned sector almost
everywhere is expanding.
o 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 associat-
ed with socialist economies.
 Hatred of socialism was transferred to planning too.
 But such unreasoned opposition to planning has now almost vanished.
 On the other hand, remarkable achievements of Nazi Germany and Soviet
Russia popularized the idea of economic planning.
o 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
 unless a free enterprise economy is regulated and controlled, it would not
ensure stable growth or maximize social welfare.
o Although both advanced capitalistic countries and the under-developed countries
have adopted planning but there is this difference between the two:
 in the former it is corrective planning to ensure economic stability, in
the latter it is developmental planning to secure rapid growth.

2-The Meaning and Features of Economic Planning

 There is no agreement among economists with regard to the meaning of the term economic
planning.
o The term has been used very inaccurately in economic literature. It is often confused
with communism, socialism or economic development.
o 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?
o 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.
o The end may be to achieve economic, social, political or military objectives.
o 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.
o 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) A system of ends to be pursued, and
b) 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.
o Ferdynand Zweig maintains that planning is planning of the economy, not within the
economy.
 It is not a mere planning of towns, public works or separate section of the
national economy, but of the economy as a whole.
 Thus planning does not mean piecemeal planning but overall planning of the
economy.
 Some of the definitions of economic planning given by other academicians are:
o Professor Robbins defines economic planning as "collective control or super session of
private activities of production and exchange."
o To Hayek, planning means, "the direction of productive activity by a central authority."
o 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."
o Lewis Lord 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.
o 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.
o 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 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).
o End might be achieving:
o Economic objectives,
o social objectives or military objectives or both

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3-The Need for Economic Planning
 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.
 In non-socialist countries, with private ownership, several factors have
necessitated the use of the instrument of planning.
 In underdeveloped economics, development needs have been predominant in
popularizing planning.
 Countries need economic planning in order to achieve the following objectives:
a. To increase the rate of economic development
b. To improve and strengthen the market mechanism
c. To reduce unemployment and disguised unemployment
d. To enhance the linkage between the agricultural and industrial sectors
e. To create social overhead that enhance agricultural and industrial growth
f. To expand domestic and foreign trade
g. To eradicate poverty
h. To be Self-sufficient in food and raw materials
i. To reduce inequality

a. Increase the rate of economic development

 One of the principal objectives of planning in underdeveloped countries is to increase the
rate of economic development.
o Planning for economic development implies external direction or regulation of
economic activity by the planning authority.
o It means increasing the rate of capital formation by raising the levels of income,
saving and investment.
 But increasing the rate of capital formation in underdeveloped economies is
beset with a number of difficulties.
 People are poverty-ridden.
 Their capacity to save is extremely low due to low levels of income and high
propensity to consume.
 As a result; the rate of investment is low which leads to capital deficiency and
low productivity.
 Low productivity means low income and the vicious circle is complete.
o This vicious economic circle can only be broken by planned development.
 Two methods are open to underdeveloped countries.
 One is planned development by importing capital from abroad which
Zweig calls 'supported industrialization, and
 the other is by forced saving which he characterizes as self-sufficient
industrialization.
b. Improve and strengthen the market mechanism
 The rationale for planning also arises to improve and strengthen the market mechanism.
o The market mechanism works imperfectly in underdeveloped countries because of
the ignorance and unfamiliarity with it.
o A large part of the economy comprises the non-monetized sector.
o The product, factor, money and capital markets are not organized properly.

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  Thus the price system exists in only a rudimentary form and fails to bring
about adjustments between aggregate demand and supply of goods and
services.
o To remove market imperfections, to mobilize and utilize efficiently the available
resources, to determine the amount and composition of investment, and to overcome
structural rigidities, the market mechanism is required to be perfected in
underdeveloped countries through planning.
c. Reduce unemployment and disguised unemployment
 The need for planning, particularly in underdeveloped countries, is further stressed by the
necessity of removing widespread unemployment and disguised unemployment in such
economies.
o Capital being scarce and labor being abundant, the problem of providing gainful
employment opportunities to an ever-increasing labor force is a difficult one.
o It is only a centralized planning authority which can solve this.
 In the absence of sufficient enterprise and initiative, the planning authority is
the only institution for planning the balanced development of the economy.
 For rapid economic development, underdeveloped countries require the
development of the agricultural and the industrial sectors, the establishment
of social and economic overheads, the expansion of the domestic and foreign
trade sectors in a harmonious way.
 All this requires simultaneous investment in different sectors which is only
possible under development planning.
d. Enhance the linkage between the agricultural and industrial sectors
 The need, for developing the agricultural sector along with the industrial sector arises from
the fact that agriculture and industry are interdependent.
o Reorganization of agriculture releases surplus labour force which can be absorbed by
the industrial sector.
o Development of agriculture is also essential to supply the raw material needs of the
industrial sector.
e. Create social overhead that enhance agricultural and industrial growth
 The agricultural and industrial sectors cannot, however, develop in the absence of economic
and social overheads.
o The building of canals, roads, railways, power stations etc., is indispensable for
agricultural and industrial development.
o So are the training and educational institutions, public health and housing for
providing a regular flow of trained and skilled personnel.
o But private enterprise in underdeveloped countries is not interested in developing the
social and economic overheads due to their un-profitability.
o It is motivated by personal gain rather than by social gain. It, therefore, devolves on
the state to create social and economic overheads in a planned way.
f. Expand domestic and foreign trade
 the expansion of the domestic and foreign trade requires not only the development of the
agricultural and industrial sectors along with social and economic overheads but also the
existence of financial institutions.
o Money and capital markets are undeveloped in underdeveloped countries. This factor
acts as an obstacle to the growth of industry and trade.
o There is economic instability generated by international cyclical movements.

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  Such maladjustments can only be removed by the state.
 It can decide upon the setting up of a central bank and with its help a bill
market, commercial banks and other financial institutions throughout the
country.
o It is the planning authority which can control and regulate the domestic and foreign
trade in the best interests of the economy.
g. Eradicate poverty
 The planning for development is indispensable for removing the poverty of nations.
o For raising national and per capital income, for reducing inequalities in income and
wealth, for increasing employment opportunities, for all-round rapid development
arid for maintaining their newly won national independence, planning is the only
path open to underdeveloped countries.
o There is no greater truth than this that the idea of planning took a practical shape in
an underdeveloped country and that this is the only hope of the resurgent
underdeveloped countries of the world.
o The rapid development of the USSR, a poor country at the time of the October
Revolution, bears testimony to this fact.
o Planning, therefore; means no more than better organization, consistent and far-
seeing organization and comprehensive all-sided organization.
 Direction, regulations, controls, on private activity, and increasing the sphere
of public activity, are all parts-of organizational effort.
h. Self-sufficiency in Food and Raw Materials
 As a preparation for more systematic and intensive planning, it may be considered necessary
first to make the country self-sufficient in food and essential raw materials.
o That would provide a solid and sound base for the economy and prepare it for
further building up. Many developing countries concentrate or give priority on
agricultural development.
o Dependence on foreign food is dangerous.
 The first duty of a nation is to feed its people.
 Political freedom may prove a farce without freedom from foreign food,
especially when war clouds may be hovering overhead.
 It is understandable, therefore, that this objective may take precedence over
other objectives when a Plan is being conceived.
i. Reduction of Inequalities
 It is now realized that political equality is illusory unless it is accompanied by economic
equality.
o Glaring inequalities of wealth, income and opportunities are shocking to the
democratic conscience.
o Socialism is in the air; it has a very wide appeal in modern times. In poor countries, it
is a painful sight that the masses of people should be on the border line of starvation,
whereas a few rich people should be rolling in all conceivable luxuries.
o It is natural, therefore, that the planners, who are custodians of general welfare,
should so shape their plans so as to make the poor people less poor and the rich a
little less rich, so that the gap between the two is narrowed down as much as is
humanly possible.

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4-Requisites for Successful Planning
 The formulation and success of a plan require the fulfillment of the following factors:
i. Planning Commission
 The first prerequisite for a plan is the setting up of a planning commission which should
be organized in a proper way.
o 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.
ii. 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.
o Accurate statistical information is required to fix up priorities in investment
program and to bring about inter- industry co- ordination. Statistical data about
price changes, employment, foreign trade, foreign exchange etc; are required in
the formulation and evaluation of an economic plan.
o Planning in most of the underdeveloped countries is severely handicapped by the
lack of reliable data in sufficient quantity.
iii. 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.
o The various goals and objectives should be realistic, mutually compatible and
flexible enough in keeping with the requirements of the economy.
iv. Fixation of Targets and Priorities
 The next problem is to fix targets and priorities for achieving the objectives laid down in
the plan.
o 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.
o 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.
v. Mobilization of Resources
 A plan fixes the public sector outlay for which resources are required to be mobilized.
o There are various internal and external resources for financing a plan.

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  Savings, profits of public enterprises, net marketing borrowings, taxation
and deficit financing are the principal internal sources of finance for the
public sector.
 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.
vi. Balancing in the Plan
 A plan should ensure proper balance in the economy, otherwise shortages or surpluses
will arise as the plan progresses.
o 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.
vii. Incorrupt and Efficient Administration
 A strong, efficient and incorrupt administration is the sine qua non of successful planning.
o 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.
viii. Proper Development Policy
 The state should lay down a proper development policy for the success of a development
plan and to avoid any pitfalls that may arise in the development process. Professor
Lewis lists the following main elements of such a development policy:
a. investigation of development potential survey of national resources, scientific
research, market research;
b. provision of adequate infrastructure (water, power, transport, and
communications) whether by public or private agencies;
c. provision of specialized training facilities, as well as adequate general
education, thereby ensuring necessary skills;
d. Improving the legal framework of economic activity, especially laws relating
to land tenure, corporations and commercial transactions.
e. helping to create more and better markets, including commodity markets,
security exchanges, banking, insurance and credit facilities;
f. seeking out and assisting potential entrepreneurs, both domestic and foreign;
g. promoting better utilization of resources, both by offering inducements and
by operating controls against misuse; and
h. Promoting an increase in saving, both private and public. The success of a
development plan can be tested mainly by examining various proposals under
each of these heads. Good policies help, but they may not ensure success.
Lewis, therefore likens development planning to medicine which in the hands
of a good practitioner may perform useful tricks, but it is still the case that
many patients die who are expected to live, and many live who are expected
to die.
ix. Economy in Administration
 Every effort should be made to effect economies in administration, particularly in the
expansion of ministries and state departments.

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 o 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.
x. An Education Base
 For a clean and efficient administration, a firm educational base is essential.
o Planning to be successful must take care of the ethical and moral standards of the
people.
o 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.
xi. A Theory of Consumption
 Underdeveloped countries should not follow the consumption patterns of the more
developed countries.
o The theory of consumption should be democratic and prime attention must be
accorded to goods that are within the range of the model income that can be
purchased by the typical family.
 Cheap bicycles in a low-income country are thus more important than
cheap automobiles.
 An inexpensive electric lighting system for the villages is better than a
high capacity system which runs equipment, the people cannot afford.
 Inexpensive radio sets are important; television belongs to another day.
 Above all, nothing is so important, as abundant and efficiently produced
food, clothing and shelter for these are the most universal requirements.
xii. 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.
o Planning requires the unstinted cooperation of the people.
o Economic planning should be above party politics, but at the same time, it should
have the approval of all the parties.
o In other words, a plan should be regarded as a National Plan when it is approved
by the representative of the people.

5-The Case 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

 An unplanned economy is like a ship moving rudderless on uncharted seas with no fixed
destination and unlikely to reach it if there be any.
o Such an economy works blindly and haphazardly.
o The-economically advanced countries may not feel enamored of the idea of planning
but for the under-developed economies it is a stark necessity as economic develop-
ment is now regarded as imperative.

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 oMajority of the under-developed countries realize very clearly that they must develop
economically and that too very soon.
 Some arguments in favor of planning are:
1. The judgment of the State is superior to that of the citizen
o Economic development is a more serious matter and should not be left to the
individual entrepreneurs.
o The State represents the accumulated wisdom of centuries and provides talent
and experience beyond the capacity of individual and isolated businessmen.
o Planning by collective action is indispensable if a country is to develop
economically on the right lines and develop at the desired speed.
2. Planning becomes necessary for equitable distribution of economic power
o 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.
o There is no wonder, therefore, that there are wide gaps between the 'haves' and
'have nots' which seriously offend against sense of social justice.
o Shocking economic inequalities are a marked feature of an unplanned economy.
 Inequalities result in heart burning and social tensions.
o Reduction of inequalities in income, wealth and economic opportunities is,
therefore, now the avowed aim of modern welfare States and it is impossible of
achievement without the instrument of planning. In the absence of planning,
inequalities will not only be perpetuated but accentuated from generation to
generation.
3. Planning helps to protect labor and harmonize wage relations
o It has been seen that labor legislation alone cannot protect labor and harmonize
wage relations when market mechanism is permitted to operate freely.
 A planning authority must step to regulate the economic growth of the
country as to ensure to the actual workers the fruits of their labor.
 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
o Planning has also proved to be a powerful instrument for eliminating instability
which is necessary concomitant of free market economy.
 Private enterprise left to it would produce trade cycles, unemployment
and misery.
 It is on this ground that planning is advocated even for developed and
advanced economies.
 These countries may not need any further economic development; but
they certainly need a mechanism which would prevent violent ups and
downs in the movements of business activity and smoothen the course of
business.
5. Planning helps to make terms of trade favorable to the country
o Again, it is planning alone which can ensure that the terms of trade remain
favorable to a country.

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  The volume and direction of foreign trade of a country admittedly plays a
very important part not only in economic development but also in
determining the level of general well-being in a community.
 Foreign trade must be thoroughly planned, if fruits of economic
development are not to be thrown away.
 This aspect of economic development has been paid special attention by
planners everywhere.
6. To realize major economic changes
o Without the aid of planning no country can cope with major economic changes.
 Such changes like industrial revolution or rationalization movement, are
bound to turn the economy topsy-turvy.
 The planning authority with its resources of men and money can meet all
such situations and control the disturbing factors.
 A planned action to speed up the movement of resources at times of major
changes is absolutely essential.
7. Planning eliminates wasteful competition
o The merit of the free market lies in competition being perfect; but in actual life
perfect competition is a rare phenomenon.
 At any rate, there is nothing in the market mechanism that establishes or
maintains competition.
 Only State action can ensure fair competition.
 Hence, market economy can also be helped to function adequately with
the positive support of the planning authority.
8. Efficient use of resources
o Only a planned economy provides for proper co-ordination and avoids
unnecessary duplication of staff and equipment.
 In an unplanned economy, millions of producers work in an independent
and isolated fashion without bothering as to what the other businessmen
are doing.
9. Planning prevents artificial shortages that can be created by monopoly actions
o A planned economy will prevent artificial shortages being created by profit-
greedy businessmen.
o By means of trusts, cartels, price agreements and market sharing they increase
their profits at the expense of the society.
o The planning authority can smash such designs by positive action in favor of the
community.
10. Planning helps to minimize environmental costs of industrialization
o By planning it is possible to keep down or eliminate social costs which usually
take the form of industrial diseases, industrial accidents, overcrowding and
unsanitary conditions and cyclical unemployment.
o These social costs are the by-products of capitalism. Since planning extends the
sphere of public ownership and control, the evils of capitalism are mitigated.
11. Planning also results in higher rate of capital formation
o Private enterprise is more intent on immediate gain rather than future good.
o It takes a short-sighted view of things.
 On the contrary, the planning authority, as the custodian of the national
interests, takes a farsighted view.

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  That is why under planning capital formation receives great attention.

Cases against Planning

 Some arguments in favor of planning are:
1. It is pointed out by the anti- planner that a planned economy would be a '
muddle' economy, incapable of pursuing rational economic activity (amounting
to almost a "leap in the dark") because of the absence of an automatic guide to
productive activity provided by the pricing system. As such, there would be
complete confusion and chaos in the field of production.
2. It is pointed out that the great danger arising from centrally planned economy is
that of bureaucracy and the growth of red-tapism. As such, it is argued, there is
bound to be a certain amount of loss in the efficiency of management. To this the
planner replies: the danger of red-tapism is, no doubt, inherent in government
administration. But it is a difficulty that could be surmounted and as such it
should not prejudice the general case for economic planning.
3. It is often said that there is no incentive under a socialist planned economy on the
part the workers to bring about improvement in their performance, the reason
being that under socialism all the workers are state employees with fixed grades
of salary and other working conditions.
4. It is also pointed out that a planned economy requires a huge amount of
manpower simply to draw up the plan and then make it work. To this the planner
replies: what about the army of middlemen, advertisers, distributors, salesman
etc, which unplanned economy maintains to enable it to function? These people
are not only not creating weather, but they are actually impeding the process of
wealth- creation
5. Another objection against planned economy is that it tends to breed graft and
dishonesty among state employees. As professor Meade remarks "A system of
direct quantitative controls is the breeding ground for spidery and corruption. It
is the father of black - markets and carries with it an insidious threat to public
morality." To this the planner replies: The chief incentive to graft and dishonesty
on the part of government officials will gradually disappear as the right to private
property and inheritance is brought under state control.
6. It is argued that under a planned socialist economy, the consumer loses his
sovereignty. He/ she cannot dictate, but, on the other hand, must accept what is
offered to him/her. He/she would have to consume what the state wishes him/
her to consume.
7. It is further argued that under planned economy there is no freedom available to
the workers to choose their occupations according to their desire or aptitude, and
that the workers are diverted in to different occupations according to the
requirements of the state or the exigencies of the situation.
8. The critics of centralized planning further contend that there is every possibility of
the state developing under such circumstances in to a dictator ship of the worst
type, constituting a serious threat to democratic rights.
9. It is also pointed out that in the transition from an unplanned to a planned
economy, there is bound would reduce the living standards of the masses.

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Development Planning Lecture Note Compiled by: Muhdin M.
 10. It is also argued that a centrally planned economy shall inevitably be unstable for
political reasons. One which favors and unplanned economy, the changeover will
involve surgical operations supersedes when a government pledged to plan.

6-Shortcomings of planning
 Economic planning suffers from three main limitations: -
1. Limitations of Uncertainty:
o Every economic plan, how so ever well formulated it may be, suffers from
the limitation of uncertainty. The element of uncertainty increases several
folds in the economic planning of an overwhelmingly agricultural country
or a country overwhelmingly dependent up on foreign trade. A failure of
crops or a stoppage of imports or a decline in exports will surely upset the
economic plan of such a country. To offset such a danger, the country
concerned should have adequate food stocks to make it independent
weather conditions or there should be large stocks of raw materials to
make it independent of imports.
o To get over this limitation of uncertainty, the country concerned should
accumulate essential stocks of every kind before it embarks up on
economic planning.
2. Limitation of the market Mechanism:
o The second limitation of planning is that imposed by the market
mechanism. How so ever comprehensive a plan may be it has to leave
some sections of the economy to the free and uncontrolled working of the
market mechanism. The vagaries of the market mechanism can play
destruction with the smooth functioning of the planned economy. In times
of stresses and strains a black market is sure to crop up in the economy up
setting all the fine and intricate calculations of the planners.
3. Limitation of the Time -Factor:
o Every economic plan is formulated for a specified period of time, say, a
five-year period, though there are countries which have formulated plans
for as long a period as 10, 15 or even20 years. The longer the period of the
plan, the more propounded is the limitation of the time -factor. In other
words, the longer the period, the greater the possibility of the plan
becoming obsolete and out of date. The reason is obvious. There are so
many changes taking place in the natural and international spheres all the
time that there can be no finality about any plan. To get over this
difficulty, it is, therefore, essential that every economic plan should be
constantly reviewed, altered, amended and adapted to the new conditions.
Planning has to be a constant battle with the "unforeseen". The above
limitations of planning show that it is not yet an exact science and that it is
still subject to "political pressures, hunches and guess work.

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Development Planning Lecture Note Compiled by: Muhdin M.