Chapter two

CLASSIFICATION OF PLANNING:
CHARACTERISTICS OF DIFFERENT TYPES OF
PLANNING AND THEIR MERITS

Almost all countries in the world, realize the importance of development



planning to ;

-achieve sustainable economic growth and

-to bring about a significant change in economic development.

One of the importance of planning is

-to identify the challenges and drawbacks of nations and

-to design mechanisms to achieve an overall development of the nation.

 Cont’d…….
2.1. Pre-Requisites for any Type of Planning (General Overview)

 The formulation and success of any type of plan require the fulfillment of the following factors:

1) Planning Commission: The first pre-requisite for a plan is the setting up of a planning commission, which should be

organized in a good way.

It should be divided and sub-divided into a number of divisions and sub-divisions under such experts as economists,

statisti­cians, engineers, etc, dealing with the various aspects of the economy.

2)Statistical Data: A pre-requisite for sound planning is a thorough survey of the existing potential resources of a country

together with its deficiencies.

Such a survey is essential for the collection of statistical data and information with regard to the total available material,

capital, and human resources of the country.

 Cont’d

 Data pertaining to the available and potential natural resources along with
the degree of exploitation, agricultural and industrial output, transport,
technic­al and non-technical personnel etc., are essential for fixing targets
and priorities in planning.
 It therefore, requires the setting up of a central statistical organization
with a network of statistical bureaus for collecting statistical data and
information for the formulation of the plan.
3) Fixation of Targets and Priorities
 The next problem is to fix targets and priorities for achieving the
objectives laid down in the plan.
 They should be both global and sectoral.
 Global targets must be bold and cover every aspect of the economy
 sectoral targets pertaining to individual industries, and products in
physical and value terms for both the private and public sectors.
 Global and sectoral targets should be mutually consistent in order to attain
the required growth rate for the economy.
 Cont’d,…..
 Such schemes or projects, which are to be executed first,
should be given top priority while the less important should
have a low priority.
 The scheme of priorities should not be rigid but may be
changed according to the requirements of the country.
 Thus, sound governmental planning consists of establishing
intelligent priorities for the public investment program and
formulating a sensible and consistent set of public policies
to encourage growth in the private sector
4) Mobilization of Resources:
 A plan fixes the public sector outlay for which
resources are required to be mobilized.
 Cont’d……
 There are various internal and external resources for financing a plan.
Savings, profits of public enterprises, net marketing borrowings,
taxation, and deficit financing are the principal internal sources of
finance for the public sector.
 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.
5) Balancing in the Plan
 A plan should ensure proper balance in the economy, otherwise
shortages, or surpluses will arise as the plan progresses.
 There should be balance between saving and investment, between
the available supply of goods and the demand for them, between
work force requirements and their availabilities, and between the
demand for imports and the available foreign exchange
 Cont’d………

 In fact, two kinds of balances must be secured in a plan.

 The first is the physical balance, which consists of
balancing the planned increase in output of various goods
with the amounts and types of investment.
 It also requires the balancing of the outputs of the various
sectors of the economy.
 This is, achieved through the input-output technique.
 because the output of one sector or industry is the input of
the other for producing its output
 Physical balancing is essential for the internal consistency
of the plan, otherwise such physical obstacles as lack of raw
materials, manpower, etc., will be developed in the
economy.
 Cont’d…………

 The second is the monetary or financial balance which

consists of balancing
- the incomes of the people with the amount of goods
available to them for consumption,
- the funds used for private investment and the amount of
investment goods available to private investors,
- the funds used for public investment and
- the amount of investment goods produced by the public
sector, and
- the balancing of foreign payments and receipts.
 The lack of these financial balances will lead to ;
- disequilibrium in the supply and demand for physical goods
thereby leading to inflationary and balance of payments
pressures during planning.
 Cont’d…….

6) Incorrupt and Efficient Administration

 Lewis regards a strong, competent, and incorrupt
administration as the first condition for the success of a
plan.
 Competent administrative staff should be appointed in
various ministries, which should first prepare good
feasibility reports of proposed projects before starting them.
 It should gain experience in planning and starting a project,
keeping it on schedule, amending it in case of some
unexpected snags, and evaluating it from time to time.
 Without such administrative machinery, development
planning has no major input in an under developed country.
 Cont’d………..

7) Proper Development Policy

 The state should lay down a proper development policy for the success of a 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.
 Cont’d……….
8) 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.
9) An Education Base
 For a clean and efficient administration, a firm educational base is essential.
 Planning to be successful must take care of the ethical and moral standards
of the people.
 One cannot expect economy and efficiency in administration unless the
people possess high ethical and moral values.
 This is not possible unless a strong educational base is built up whereby
instructions are imparted both in the academic and technical fields.
 Without creating honest and efficient human beings in the country, it would
not be feasible to undertake economic planning on a big scale.
 Cont’d……

10) Public Cooperation

• Above all, public cooperation is considered to be one of the important levers for
the success of the plan in a democrat country.

• Planning requires the unstinted cooperation of the people.

• Economic planning should be above party politics, but at the same time, it
should have the approval of all the parties.

• In other words, a plan should be regarded as a National Plan when it is approved

by the representative of the people.

• without public support no plan can be success.

• As Lewis states "Popular enthusiasm is both the lubricating oil of planning and
the petrol of economic development, a dynamic force that makes all things
possible".
 2.2 classification of planning

2.2.1 Planning by Direction and planning by Inducement

Planning by Direction
 This is a type of development plan practiced mostly by socialist
countries such as the former Soviet Union (USSR), former East
Germany, North Korea, Cuba, and Ethiopia during the Derg era, etc.
 In this type of development plan, there is a single planning authority
which formulates the national plan, directs and orders the execution of
the plan in accordance with predetermined targets and priorities
 The central planning authority fixes objectives, targets and priorities
for each sector and enterprise, fixes prices and wages and takes all
investment decisions.
 In order to execute the plan, the government controls the entire
agricultural, industrial, transport and communication, banking &
insurance etc sectors through its nationalization program.
 This type of planning is also known as centralized planning or
command socialist planning or imperative planning.
 Cont’d
Drawback of planning by direction
 it is totalitarian in its nature.
 There is no consumer sovereignty.
 Prices are controlled and goods are rationed.
 All markets including the commodity markets and the resource markets are
under control and hence labor and other inputs are allocated as per the plan
requirements.
Planning by Inducement
 In this kind of planning, economic agents in the private sector (individual
firms and industries) are induced to behave in a certain predetermined way:
usually through the use of discussions as well as policy instruments such as
fiscal and monetary policies.
 It is also known as indicative or decentralized planning or planning through
the market.
 people are left with all possible choices in making economic decisions such
as investing in alternative areas, switching freely between consumption
and saving, etc.
 Cont’d….
people are left with all possible choices in making economic
decisions such as investing in alternative areas, switching freely
between consumption and saving, etc.
 This type of planning is characterized by market manipulation in
which the private sector is given incentives in the form of
subsidies, tax exemptions, tax holidays, manipulation of interest
rates, liberalizing credit conditionality, etc.
The government role in the economy is limited to enforcing laws
and regulations and investing in some selected areas like -the
development of basic infrastructure such as roads, power,
communication, etc,
- the initiation and development of scientific and technical research,
- the introduction of long-term cost reduction methods, etc.
 This type of planning is also known as indicative planning or
decentralized planning.
 Drawback
 incentives to the private sector may not be adequate to
guarantee the required behavior of economic agents
 fiscal and monetary measures may not be sufficient to
increase the rate of capital formation and realize rapid
economic growth.
2.2.2 Short term, Medium term and Long term planning
 based on the life span , project can be classified as short term,
medium term and long term .
Perspective (long-term) planning
 the plan stretched from 10 up to 25.
 it has broad objective , target and goal .
 achieved through short and medium term planning .
 cover broad scope .
Q 1 state the merit and demerit of long term planning?
 Cont’d………
Merit
 provide background for short and medium term planning.
 educative : take lesson from the process
 explanatory:
Demerit : uncertainty
Medium term plan
 It takes from 1 to 5 year . Sometime it is extended up to 10 year .
 it link between short and long term plan
 plans draw up on the horizon chalked out in the long- term perspective plan, and
 present a frame work for drawing up of short period plans.
Demerit : uncertianty
Short term plan
 It is annual plan
 Extended to one year
 it is action plan
 Demerit : less freedom and limited scope
 Cont’d……………
2.3 Fixed and rolling Planning
 rolling plan : every year three new plans, i.e., (annual plan, medium-
term plan and perspective plan) are prepared and are acted upon.
 The annual plan for every year is fitted into each corresponding new
medium-term plan and both are framed in the light of the perspective plan
 planning is a continuous process, every year the plan is revised in the
light of new information, improved data and improved methods of data
analysis.
Characteristics of Rolling Plans:
 Un fixed dates i.e. no commencement and ending dates.
 Revisions and adjustment are possible
 It is subject to big changes.
Demerit :
 It lacks targets and objectives that are meant to be achieved within a
fixed period of time
 It creates uncertainties in the private and public sectors of the economy.
 Cont’d
 The success of a rolling plan mainly depends on the
availability of efficient and high-tech communication
system, efficient and continuous data flow, trained
manpower, a computerized system of analyzing data, the
capacity and commitment of the planning body to cope
with the work load, day-to-day knowledge on the progress
and shortcomings of projects under implementation, etc.
The fixed plan
 It refers to the unchanging period of time for which a plan
is prepared
 Fixed implies here: time is fixed and targets are fixed and
there fore the means are fixed.
 Q 3 identify the merit and demerit of fixed plan?
 Cont’d

Merit of fixed plan

 Makes for boldness instead of revising the plan rather you
take some difficult decisions to remove the bottleneck.
 Provides for the stability and certainty of the functions of
the system
 Provides for the adequate test for checking because there
is fixed time to compare with the fixed target.
 There is commitment for plan effective implementation
because we are sure the targets will not be changed.
Demerit of fixed plan
 Inflexibility of such plans
 If therefore involves wastage of resources (the result of
inflexibility).
 Cont’d
2.2.4 Authoritarian and Democratic Planning
 In authoritarian planning, the government is the sole centralized
agency which draws the plan and imple­ments it.
 It is more comprehensive, systematic and rigid and is more efficient.
 In democratic planning, the plan is prepared by an expert body
called the planning commission, which is outside the govern­ment or
the executive .
 it is finally approved by legislature which represents the people.
 It is based on the system of free enterprise, but economic activity
outside the public sector is sought to be regulated and guided
indirectly by providing incentives for investment through fiscal or
monetary policies.
 Q 4 state the merit and demerit of this types of planning ?
 Cont’d

2.2.5 Corrective and Development Planning

 Corrective planning: It implies a state attempt to correct certain
unfavorable trends on economy just as government of USA corrects the
recessionary trend in economy.
 The corrective planning will aim at lifting it from the depths of depression .
 corrective planning suggests two types of measures to accelerate the process
of recovery:
- measures to raise consumptions of the masses and
- measures to stimulate private investment.
 Government attempts to correct any shortcomings in the economy through
policy instruments such as Fiscal policy, monetary policy, and foreign trade
policy.
 For instance greater employment and fair distribution of income would be
achieved through:
-Expansionary monetary policy
- Increased government spending
- Tax Rate adjustment
 Cont’
 Development planning: It can be split up under two heads; sectoral planning
and over all planning.
 Sectoral planning deals at best with a few major industries or a few important
sectors of the national economy as, agriculture, transport, foreign trade, etc.
 Overall planning is well-integrated planning covering all the sectors of all
national economy.
2.2.6 Physical planning V/s financial planning
Physical planning:
 Physical planning is an attempt to work out the implications of the
development effort in terms of factors allocations and product yields to
maximize incomes and employment.
 The point is that while working out a programme , it is necessary to assess the
significance (cost and benefit) of a program in terms of the reactions .
 The mobilization of real resources has to be viewed in the light of the
prgoramme of development as a whole and not merely in relation to individual
projects.
 There is a need for a balance between output of the various sectors
 Cont’d
Q5 identify the limitation of physical plan ?
 Lack of statistical data with regard to physical resources
Difficulties of balancing the different segments of the economic sector
especially in developing countries as they are constrained by different
factors such as poor technology, lack of input- output model… etc.
It needs financial availability i.e the balance to be achieved in the plan has
to be both in real and financial terms.
Financial planning
 The essence of financial planning is to ensure that demands and supplies
are balanced in a manner which exploits physical potentialities as full as
possible without major and unplanned changes in price structure.
 Planning for balanced growth both in physical and financial terms opens
up new fields for study and investment.
the objective is to secure the various balances in the economy at
continually higher levels.
 Cont’d
2.2.7 Centralized and Decentralized planning
Planning in command economy
 the performance of the economy centrally controlled by government
through a central decision making process.
 The government owns and operates all the major economic sector and
resources.
 Basically all economic activities will be controlled through a central plan
with well defined objectives and priorities and targets.
 The government own and controls not only the material means of
production but also the sources of distribution and exchanges: banking
and insurances, system, transports and communications system], trade
and commerce...etc.
 It determines what to produce, how to produce, and how to distribute
them.
 The central authority has to plan production and relate to consumers.
 The market economy may not exist at all, and if it did exist, it played a
minor role.
 Cont’d
Planning under mixed economy:
 mixed economy appreciate the role of self-interest and private
profit , competition etc in bringing about rapid economic
development , efficient use of resources and rising standard of
living of the masses as evidenced in Western European countries.
 It also recognizes that self –interest may run counter to social
welfare, that it may be disadvantageous to those without
productive assets, specialized skills and the poor, that competition
may lead to private monopoly with all associated evils.
 Most of the developed countries while become independent after
World War II and which have all been suffering from
unemployment, underdevelopment, and poverty , have all started
to develop their economies through economic planning where in
expanding public sector has been expected to play prominent role
 Cont’d

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