Chapter 1economics (1).economics course.
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DEVELOPMENTPLANNINGLECTURE NOTE
CHAPTER ONE
INTRODUCTION
1
CHAPTER ONE
INTRODUCTION
1
CONT’D 1.1. Historical background of economic planning
Historically, the idea of central economic planning was
associated with the
criticism
of
capitalism
as a system
of
anarchy
andgreed.
The idea of planning has a long history and goes back
to the time ofPlato[the first person to talk about
organized
planning]
.
organized
planning]
.
It was laterdeveloped,shapedandmoldedby a
number of eminent thinkers and writers both in the
WesternandEasternpart.
The idea of economic planning in its modern formis
comparatively newthough it seems to be some what
implicit inMarxiansocialism. It is the20
th
century
phenomena.
2
Historically, the idea of central economic planning was
associated with the
criticism
of
capitalism
as a system
of
anarchy
andgreed.
The idea of planning has a long history and goes back
to the time ofPlato[the first person to talk about
organized
planning]
.
organized
planning]
.
It was laterdeveloped,shapedandmoldedby a
number of eminent thinkers and writers both in the
WesternandEasternpart.
The idea of economic planning in its modern formis
comparatively newthough it seems to be some what
implicit inMarxiansocialism. It is the20
th
century
phenomena.
2
The first author who included the existence of
planning in his definition of economic activity was the
Norwegiantheorist, professorkristain
Schonleyderin the year1910.
The idea was given some practical shape inGermany during
the
First
World
War
when
it
was
used
for
during
the
First
World
War
when
it
was
used
for
carrying on war administrationinthe country.
The idea was also seized upon in Allied countries,
particularly inGreat Britain.But it was only a
temporaryacceptance of the idea.
As soon as the war was over, the idea of economic
planning was discarded and the state withdrewin to
itsformershell.
3
The first author who included the existence of
planning in his definition of economic activity was the
Norwegiantheorist, professorkristain
Schonleyderin the year1910.
The idea was given some practical shape inGermany during
the
First
World
War
when
it
was
used
for
during
the
First
World
War
when
it
was
used
for
carrying on war administrationinthe country.
The idea was also seized upon in Allied countries,
particularly inGreat Britain.But it was only a
temporaryacceptance of the idea.
As soon as the war was over, the idea of economic
planning was discarded and the state withdrewin to
itsformershell.
3
Ideologically, the evolution is fromthree
perspectives:
Planning in Eastern Europe (socialist
perspective)
Planning
in
Western
Europe
(capitalist
Planning
in
Western
Europe
(capitalist
perspective)
Planning in underdeveloped countries (mixed
economicperspective)
4
Ideologically, the evolution is fromthree
perspectives:
Planning in Eastern Europe (socialist
perspective)
Planning
in
Western
Europe
(capitalist
Planning
in
Western
Europe
(capitalist
perspective)
Planning in underdeveloped countries (mixed
economicperspective)
4
I. PLANNINGINEASTERNEUROPE
During the19
th
century, intellectual theories, thinkers
and writers in the Eastern Europe became fed up with the
requiresand contradictions of pure capitalism.
Therefore, they developed the idea of state intervention to
set matters right and to prevent inequalities resulting
fromcapitalism(free economy).
A solution they thought/advocated to the fallacy of laisser -
faire was only state intervention but there was no mention
of
Economic
planning
and
how
to
intervene
was
of
Economic
planning
and
how
to
intervene
was
ambiguous (although they realize that laisser-faire was
notworking).
In
1928 the Soviet Union
gave the idea of economic
planning a real shape when it formulated its first five year
plan(1928–1932).
The main objective of the socialist (Soviet) plan was to
achieve the rapid transformation of a backward
agriculture sector (traditional sector) into a modern
industrialsector.
5
During the19
th
century, intellectual theories, thinkers
and writers in the Eastern Europe became fed up with the
requiresand contradictions of pure capitalism.
Therefore, they developed the idea of state intervention to
set matters right and to prevent inequalities resulting
fromcapitalism(free economy).
A solution they thought/advocated to the fallacy of laisser -
faire was only state intervention but there was no mention
of
Economic
planning
and
how
to
intervene
was
of
Economic
planning
and
how
to
intervene
was
ambiguous (although they realize that laisser-faire was
notworking).
In
1928 the Soviet Union
gave the idea of economic
planning a real shape when it formulated its first five year
plan(1928–1932).
The main objective of the socialist (Soviet) plan was to
achieve the rapid transformation of a backward
agriculture sector (traditional sector) into a modern
industrialsector.
5
There was an attempt to plan economic life in
Nazi Germany and Fascist Italy, during the
1930’s.
The objective was, however, basically different from
that
of
the
soviet
union
;
it
was
primarily
from
that
of
the
soviet
union
;
it
was
primarily
to build up thewar potentialrather than to
bring about improvement in people's living
standards.
6
There was an attempt to plan economic life in
Nazi Germany and Fascist Italy, during the
1930’s.
The objective was, however, basically different from
that
of
the
soviet
union
;
it
was
primarily
from
that
of
the
soviet
union
;
it
was
primarily
to build up thewar potentialrather than to
bring about improvement in people's living
standards.
6
II. PLANNINGINWESTERNEUROPE
In western Europe, economic planning is adapted to a
diversified economic structure, a
dynamic
class of business
managers, and a long tradition of political and economic
liberty.
There could be several factors that necessitated planning
in Western Europe; viz: Wars, great depression of 1930
th
,
expansionof markets, specialization,etc.
In Western economics, a series of historical develo pment
In Western economics, a series of historical develo pment led to the coordination of economic policies, i.e., planning.
These are:
a.
The development of science and technology not only made
material progress possible, but also they made planning
possible as well to improve computation facility; advances in
management theory (organizational coordination). The
intervening depression reminded the state of the tragedy
incompleteness of economic theory and public policy.
7
In western Europe, economic planning is adapted to a
diversified economic structure, a
dynamic
class of business
managers, and a long tradition of political and economic
liberty.
There could be several factors that necessitated planning
in Western Europe; viz: Wars, great depression of 1930
th
,
expansionof markets, specialization,etc.
In Western economics, a series of historical develo pment
In Western economics, a series of historical develo pment led to the coordination of economic policies, i.e., planning.
These are:
a.
The development of science and technology not only made
material progress possible, but also they made planning
possible as well to improve computation facility; advances in
management theory (organizational coordination). The
intervening depression reminded the state of the tragedy
incompleteness of economic theory and public policy.
7
CONT’D
b. In the 1930’s the capitalist world was in the midst of
the biggest depression intheworld history capitalism
faced an utter collapse and its inherent contradiction
came up to the surface. Economic growth collapsed
and acute misery of poverty is well experienced by
people.
Therefore,
economist
and
politician
favored
Therefore,
economist
and
politician
favored
economic planning as a remedy for these and
othereconomicills.
People’s mind at the time was 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.
8
b. In the 1930’s the capitalist world was in the midst of
the biggest depression intheworld history capitalism
faced an utter collapse and its inherent contradiction
came up to the surface. Economic growth collapsed
and acute misery of poverty is well experienced by
people.
Therefore,
economist
and
politician
favored
Therefore,
economist
and
politician
favored
economic planning as a remedy for these and
othereconomicills.
People’s mind at the time was 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.
8
Meanwhile, there was an attempt to plan
economic life in Nazi German and Fascist Italy
duringthetime(thirties).
NB:Theobjectiveoftheeconomicplanninginthe West
was
basically
different
from
that
of
Soviet
West
was
basically
different
from
that
of
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.
TheoutbreakofWorldWarIandIInecessitates
the proper and efficient planning economic
resourcesforsuccessfulprosecutionofthewar.
9
Meanwhile, there was an attempt to plan
economic life in Nazi German and Fascist Italy
duringthetime(thirties).
NB:Theobjectiveoftheeconomicplanninginthe West
was
basically
different
from
that
of
Soviet
West
was
basically
different
from
that
of
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.
TheoutbreakofWorldWarIandIInecessitates
the proper and efficient planning economic
resourcesforsuccessfulprosecutionofthewar.
9
CONT’D d.
In thepostwar period, thewardevastated countries
of Europe were compelled to resort to economic
planningtorehabilitatethemselvesowingto:-
As condition for receiving assistance under theMarshal
plan the USAinsisted upon these countries to formulate
their rehabilitation plan covering almost every sector of
the
economy
.
the
economy
.
The USA itself has recognized the significance of economic
planning when it adopts an economic programcalled the
“newdeal” to come out of the suffering fromgreat
depression in 1930’s.
10
In thepostwar period, thewardevastated countries
of Europe were compelled to resort to economic
planningtorehabilitatethemselvesowingto:-
As condition for receiving assistance under theMarshal
plan the USAinsisted upon these countries to formulate
their rehabilitation plan covering almost every sector of
the
economy
.
the
economy
.
The USA itself has recognized the significance of economic
planning when it adopts an economic programcalled the
“newdeal” to come out of the suffering fromgreat
depression in 1930’s.
10
CONT’D e.
The growth of markets and increased specialization
led to increased interdependence among economic
activities and to greater economic externalities,
whichleadtoadoptionofeconomicplanning.
There is a need to intervene public agencies to
rectifythenegativeexternalities.
f.
The
development
of
democracy
also
lead
to
the
f.
The
development
of
democracy
also
lead
to
the
adoption of planning in order to rectify social
inequalities people could vote for those who
experienceaninterventionistapproach.
Therefore, economic planning in the West was as
the consequence of industrialization (increased
specialization).
11
The growth of markets and increased specialization
led to increased interdependence among economic
activities and to greater economic externalities,
whichleadtoadoptionofeconomicplanning.
There is a need to intervene public agencies to
rectifythenegativeexternalities.
f.
The
development
of
democracy
also
lead
to
the
f.
The
development
of
democracy
also
lead
to
the
adoption of planning in order to rectify social
inequalities people could vote for those who
experienceaninterventionistapproach.
Therefore, economic planning in the West was as
the consequence of industrialization (increased
specialization).
11
III. PLANNINGINUNDERDEVELOPEDCOUNTRIES
Economic planning was considered as
important panacea for underdeveloped
countriesintheirdesireforindustrialization.
They want to achieve rapid growthinshort
periodoftime.
The
economic
planning,
therefore,
was
The
economic
planning,
therefore,
was
consideredasatooltoachieverapideconomic
development.
However, the development (evolution) of
planning tooka different paththanthe rich
countriesinthefollowingreasons:
12
Economic planning was considered as
important panacea for underdeveloped
countriesintheirdesireforindustrialization.
They want to achieve rapid growthinshort
periodoftime.
The
economic
planning,
therefore,
was
The
economic
planning,
therefore,
was
consideredasatooltoachieverapideconomic
development.
However, the development (evolution) of
planning tooka different paththanthe rich
countriesinthefollowingreasons:
12
CONT’D a.
In LDC planning was considered as an ideology rather than a means
because in these countries planning was considered as a desire of
many things, such as:-
•
Desire of self control
•
Desire of independence
•
Expression of self determination
b.
New leaders (elites) emerged when they got independence with
Then planning as a
political and cultural
goal:
b.
New leaders (elites) emerged when they got independence with new vision (ideas).
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 to survive and
prosperity.
However, the then planning was not as a result of popular
participation (bottom up planning). it wasup down planningto
express the need of theleaderswho control the political structure –
they dictate the plan.
C. Planning here was not as a consequent of industrialization, whichis
the inverse of the Western, developed countries.
13
In LDC planning was considered as an ideology rather than a means
because in these countries planning was considered as a desire of
many things, such as:-
•
Desire of self control
•
Desire of independence
•
Expression of self determination
b.
New leaders (elites) emerged when they got independence with
Then planning as a
political and cultural
goal:
b.
New leaders (elites) emerged when they got independence with new vision (ideas).
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 to survive and
prosperity.
However, the then planning was not as a result of popular
participation (bottom up planning). it wasup down planningto
express the need of theleaderswho control the political structure –
they dictate the plan.
C. Planning here was not as a consequent of industrialization, whichis
the inverse of the Western, developed countries.
13
1.2 THEMEANING OFECONOMICPLANNING
There is no unique definition of planning that
satisfieseveryone.
There are controversies over planning owing to
misconception.
The termhas been used very loosely in economic
literature.
It
is
often
confused
with
communism,
socialism
or
It
is
often
confused
with
communism,
socialism
or
economicdevelopment.
This has its own historical reason in that Soviet
Union (USSR) was the first country to come up with
planning.
Planning is also considered as state intervention but
stateinterventionispossiblewithoutanyplan.
14
There is no unique definition of planning that
satisfieseveryone.
There are controversies over planning owing to
misconception.
The termhas been used very loosely in economic
literature.
It
is
often
confused
with
communism,
socialism
or
It
is
often
confused
with
communism,
socialism
or
economicdevelopment.
This has its own historical reason in that Soviet
Union (USSR) was the first country to come up with
planning.
Planning is also considered as state intervention but
stateinterventionispossiblewithoutanyplan.
14
WHATIS PLANNING?
Different definitions
1.
According to A. Lewis, Planning can be
understoodinsixdifferentcontexts:-
a.
Planning as geographical zonation of areas,
b.
Planning as deciding on what money will the
governmentspend in the future,
c.
Planning
as
a
situation
where
resources
are
allocated
to
production
units
in
the
form
of
quotas
[the
central
c.
Planning
as
a
situation
where
resources
are
allocated
to
production
units
in
the
form
of
quotas
[the
central
directive decides what the production unit to produce
and howthey distribute among the users].
d.
Planning as the setting of targets to specific industries
and services.
e.
Planning as the setting of targets for the whole economy
with the hope of utilizing the available resources
efficiently (labor, capital, land, etc).
f.
Planning as the mechanismof ensuring the private
sector to achieve some predetermined targets.
15
Different definitions
1.
According to A. Lewis, Planning can be
understoodinsixdifferentcontexts:-
a.
Planning as geographical zonation of areas,
b.
Planning as deciding on what money will the
governmentspend in the future,
c.
Planning
as
a
situation
where
resources
are
allocated
to
production
units
in
the
form
of
quotas
[the
central
c.
Planning
as
a
situation
where
resources
are
allocated
to
production
units
in
the
form
of
quotas
[the
central
directive decides what the production unit to produce
and howthey distribute among the users].
d.
Planning as the setting of targets to specific industries
and services.
e.
Planning as the setting of targets for the whole economy
with the hope of utilizing the available resources
efficiently (labor, capital, land, etc).
f.
Planning as the mechanismof ensuring the private
sector to achieve some predetermined targets.
15
DEFINITIONOF PLANNINGCONT’D
2.
Other academicians (economists and others)
define planning as follows:
a.
Planning is a scheme of economic organization which
simply treats the different economic agents as
coordinatedunits of the systemfor achieving a goal.
b.
Planning as a king of collective control by the central
authority.
3.
As
major
popular
definition
of
economic
planning,
3.
As
major
popular
definition
of
economic
planning,
it is simply the making of major decisions on:
a.
What and howmuch to produce?
b.
Howwell and where to produce?
c.
Forwhomto be allocated?
All these definitions imply there is no single and
uniformdefinitionof planning.
However, most economists agree that economic planning
is a
deliberate action and direction
of the economy by a
central body.
16
2.
Other academicians (economists and others)
define planning as follows:
a.
Planning is a scheme of economic organization which
simply treats the different economic agents as
coordinatedunits of the systemfor achieving a goal.
b.
Planning as a king of collective control by the central
authority.
3.
As
major
popular
definition
of
economic
planning,
3.
As
major
popular
definition
of
economic
planning,
it is simply the making of major decisions on:
a.
What and howmuch to produce?
b.
Howwell and where to produce?
c.
Forwhomto be allocated?
All these definitions imply there is no single and
uniformdefinitionof planning.
However, most economists agree that economic planning
is a
deliberate action and direction
of the economy by a
central body.
16
DEFINITIONOF PLANNINGCONT’D 4.
Working definition: Planning is a technique or a means
to achieve an end. End refers to certain predetermined target
(welldefined objective).End might be achieving:
Economic objectives
Social objectives
Military objectives
The main point is not to have plan or have plan but what kind of
plan
do
we
need
to
achieve
the
objectives
.
of
plan
do
we
need
to
achieve
the
objectives
.
Intervention of state in all economic activities is inevita ble, i.e.;
government do intervene in an economy in one way or other.
But what matters is the degree, type and nature of
intervention.
Example:
There is
planning by direction
(Up down planning type) mostly
exercised by force (compulsory activity).
There is also planning by
inducement
(participatory type) and
mostly exercised by motivation and incentives.
17
Working definition: Planning is a technique or a means
to achieve an end. End refers to certain predetermined target
(welldefined objective).End might be achieving:
Economic objectives
Social objectives
Military objectives
The main point is not to have plan or have plan but what kind of
plan
do
we
need
to
achieve
the
objectives
.
of
plan
do
we
need
to
achieve
the
objectives
.
Intervention of state in all economic activities is inevita ble, i.e.;
government do intervene in an economy in one way or other.
But what matters is the degree, type and nature of
intervention.
Example:
There is
planning by direction
(Up down planning type) mostly
exercised by force (compulsory activity).
There is also planning by
inducement
(participatory type) and
mostly exercised by motivation and incentives.
17
1.3. PROJECTION, PLANANDFORECAST
They are similar in that they all deal with future
economic events but differ in their meaning,
substance and purpose. The details are as
follows:
Projection: - indicate the path/trend that
economic variables will take place in the future
based
on
their
past
performances
(relationships)
based
on
their
past
performances
(relationships)
It uses several economic (econometric) models in
order to project about future development
(outcomes)
Ex: Calculation of future population projection
based on past information on fertility, mortality,
agedistribution,growthrateandthelike.
Demand projection depending on past
informationonprice,population,incomeetc…
18
They are similar in that they all deal with future
economic events but differ in their meaning,
substance and purpose. The details are as
follows:
Projection: - indicate the path/trend that
economic variables will take place in the future
based
on
their
past
performances
(relationships)
based
on
their
past
performances
(relationships)
It uses several economic (econometric) models in
order to project about future development
(outcomes)
Ex: Calculation of future population projection
based on past information on fertility, mortality,
agedistribution,growthrateandthelike.
Demand projection depending on past
informationonprice,population,incomeetc…
18
Plan: is a deliberate attempt to alter (change)
the shape of future development through
intervention mechanismgiven the potential and
constraints.
Differences
between
projection
and
Plan
:
Differences
between
projection
and
Plan
:
Projection heavily depend on the past while plan
dependtoalesserextent
Projection is mechanical exercise while planning
isanimaginaryexercise
Projection is neutral on future results, while
planning is not and intervenes to shape the
future.
19
Plan: is a deliberate attempt to alter (change)
the shape of future development through
intervention mechanismgiven the potential and
constraints.
Differences
between
projection
and
Plan
:
Differences
between
projection
and
Plan
:
Projection heavily depend on the past while plan
dependtoalesserextent
Projection is mechanical exercise while planning
isanimaginaryexercise
Projection is neutral on future results, while
planning is not and intervenes to shape the
future.
19
Forecast: is estimation of the most likely
outcome that will hold in the future based on
projections.
In forecasting, there is always a value judgment of
the
outcome,
i
.
e
.;
the
analyst
will
judge
the
of
the
outcome,
i
.
e
.;
the
analyst
will
judge
the
mostlikelyoutcome.
There are different methods of forecasting and
we will, end up with different results based on
subjectivityinjudgments.
20
Forecast: is estimation of the most likely
outcome that will hold in the future based on
projections.
In forecasting, there is always a value judgment of
the
outcome,
i
.
e
.;
the
analyst
will
judge
the
of
the
outcome,
i
.
e
.;
the
analyst
will
judge
the
mostlikelyoutcome.
There are different methods of forecasting and
we will, end up with different results based on
subjectivityinjudgments.
20
1.4.T
HENEEDFORPLANNING
Planning has been introduced in different
countriesfordifferentreasons.
Insocialist countries,where revolutions
preceded and public ownership of resources is
followed,
planning
became
an
institutional
need
followed,
planning
became
an
institutional
need
ofthesystem.
Innon-socialist countries,with private
ownership, several factors have necessitated the
useoftheinstrumentofplanning.
Again, in underdeveloped economics,
development needs have been a predominant
factorinpopularizingplanning.
21
HENEEDFORPLANNING
Planning has been introduced in different
countriesfordifferentreasons.
Insocialist countries,where revolutions
preceded and public ownership of resources is
followed,
planning
became
an
institutional
need
followed,
planning
became
an
institutional
need
ofthesystem.
Innon-socialist countries,with private
ownership, several factors have necessitated the
useoftheinstrumentofplanning.
Again, in underdeveloped economics,
development needs have been a predominant
factorinpopularizingplanning.
21
What are the different factors responsible for the
adoption of planning?.
Institutional,
Technological & economic, and Development
.
Development
.
22
What are the different factors responsible for the
adoption of planning?.
Institutional,
Technological & economic, and Development
.
Development
.
22
A. Institutional Requirement
The use of planning in socialist countries is
inherent in their situation. One aspect of this is
theabolitionofprivateownershipinthemeansof
production
and
its
replacement
by
state
production
and
its
replacement
by
state
ownership.
i.Publicownership
Once means of production are owned by the
state, as in the case in all socialist countries, the
needforplanningemergesautomatically.
23
The use of planning in socialist countries is
inherent in their situation. One aspect of this is
theabolitionofprivateownershipinthemeansof
production
and
its
replacement
by
state
production
and
its
replacement
by
state
ownership.
i.Publicownership
Once means of production are owned by the
state, as in the case in all socialist countries, the
needforplanningemergesautomatically.
23
ii) Ideological considerations:
A part frompublic ownership of the means of
production, the ideology that motivates socialist
countries also requires the instrument of
planningforitspractice.
We
may
single
out
two
aspects
of
this
ideology
to
We
may
single
out
two
aspects
of
this
ideology
to
highlight the argument for planning in socialist
countries.
a.Social character:One aspect to which
reference should be made is to the social
character of production. Production is social in
nature. Production activity should be a direct
responsibility of society as a whole and should
notbelefttoindividuals.
24
A part frompublic ownership of the means of
production, the ideology that motivates socialist
countries also requires the instrument of
planningforitspractice.
We
may
single
out
two
aspects
of
this
ideology
to
We
may
single
out
two
aspects
of
this
ideology
to
highlight the argument for planning in socialist
countries.
a.Social character:One aspect to which
reference should be made is to the social
character of production. Production is social in
nature. Production activity should be a direct
responsibility of society as a whole and should
notbelefttoindividuals.
24
b.Capital:An important aspect of the socialist
ideology to which reference can be made is in
respectofmoneycapital.
While the substance of capital lies in the magnitude
and
composition
of
such
items
as
magnitude
and
composition
of
such
items
as
buildings,machines,tools,etc.
The formation of capital in such an institutional
arrangement is governed by appropriate
planning and implementing theeconomic law
ofprofitsforthemassnotforindividuals.
25
ideology to which reference can be made is in
respectofmoneycapital.
While the substance of capital lies in the magnitude
and
composition
of
such
items
as
magnitude
and
composition
of
such
items
as
buildings,machines,tools,etc.
The formation of capital in such an institutional
arrangement is governed by appropriate
planning and implementing theeconomic law
ofprofitsforthemassnotforindividuals.
25
c.Dictating the economy:Fromthe above discussion
about socialist economics it is clear that the one basic
need that propels themideologically to plan is the
needto dictate to the economy.
Instead of taking exchange of goods via money, or producing
capital
goods
for
individual
profits,
and
producing
capital
goods
for
individual
profits,
and
thus accepting the dictates of the economic laws of the
capitalist systemas a necessity, socialist countries,
with knowledge of the character of production and the
realnature of capital, want to dictate the economy.
Such liberty to dictate as to what to produce instead
of being subjected to the slavery of economic laws of a
capitalist systemis possible only with comprehensive
planning.
26
about socialist economics it is clear that the one basic
need that propels themideologically to plan is the
needto dictate to the economy.
Instead of taking exchange of goods via money, or producing
capital
goods
for
individual
profits,
and
producing
capital
goods
for
individual
profits,
and
thus accepting the dictates of the economic laws of the
capitalist systemas a necessity, socialist countries,
with knowledge of the character of production and the
realnature of capital, want to dictate the economy.
Such liberty to dictate as to what to produce instead
of being subjected to the slavery of economic laws of a
capitalist systemis possible only with comprehensive
planning.
26
iii) National Resurgence:
Planningasaninstitutionalmeanshasalsocome
handy to those who sought the fulfillment of the
nationalaspirationsofcountries.
The
need
for
planning
for
national
resurgence
by
The
need
for
planning
for
national
resurgence
by
thefollowingtwopoints:
a. Symbol of sovereignty:Planning is a symbol of
asserting their liberation and sovereign status.
Development planning enabled these countries to
identify themselves with the common goals they
wanted to achieve as also with the means, for
whichtheywerepreparedtogivetheirbest.
27
Planningasaninstitutionalmeanshasalsocome
handy to those who sought the fulfillment of the
nationalaspirationsofcountries.
The
need
for
planning
for
national
resurgence
by
The
need
for
planning
for
national
resurgence
by
thefollowingtwopoints:
a. Symbol of sovereignty:Planning is a symbol of
asserting their liberation and sovereign status.
Development planning enabled these countries to
identify themselves with the common goals they
wanted to achieve as also with the means, for
whichtheywerepreparedtogivetheirbest.
27
b. Break fromthe past:Additionally, these countries,
with backwardness hanging round their necks like a
millstone (as burden), wanted to stage a dramatic break
fromthe past via appropriate planning
2.Technological and economic Factors:
Technologies
of
modern
times
are
of
such
nature,
and
Technologies
of
modern
times
are
of
such
nature,
and
involve so much expense that their fuller utilization
requiresthat they be used in a planned way.
Equally important are the economic factors,
associated mostly with theinadequacy and
malfunctioning of market economies,which
necessitate the use of planning techniques to
overcome these deficiencies.
28
with backwardness hanging round their necks like a
millstone (as burden), wanted to stage a dramatic break
fromthe past via appropriate planning
2.Technological and economic Factors:
Technologies
of
modern
times
are
of
such
nature,
and
Technologies
of
modern
times
are
of
such
nature,
and
involve so much expense that their fuller utilization
requiresthat they be used in a planned way.
Equally important are the economic factors,
associated mostly with theinadequacy and
malfunctioning of market economies,which
necessitate the use of planning techniques to
overcome these deficiencies.
28
TechnologicalReasons:
Modern technologies because of certain
characteristics can be put proper use if there is
planningonanationalscale.
There
are
four
principal
features
of
modern
There
are
four
principal
features
of
modern
technology such as indivisibility; adjustability,
productchanges,andmassproduction.
EconomicReasons:
To overcome the deficient functioning of the
market systemhas necessitated the use of
planning.
29
TechnologicalReasons:
Modern technologies because of certain
characteristics can be put proper use if there is
planningonanationalscale.
There
are
four
principal
features
of
modern
There
are
four
principal
features
of
modern
technology such as indivisibility; adjustability,
productchanges,andmassproduction.
EconomicReasons:
To overcome the deficient functioning of the
market systemhas necessitated the use of
planning.
29
Market deficiencies include many evils such as:-
Cyclicaldepression
Unprofitableproduction
Unsatisfieddemand
Instability
in
the
economy
Instability
in
the
economy
Unfair distribution of income, wealth &
opportunityinlife.
Money note needs to give primacy i.e. exchange
valuebutnotusevaluegivenprimacy.
Exploitationoflabour
Dehumanization of the whole process of
productionanddistribution.
30
Market deficiencies include many evils such as:-
Cyclicaldepression
Unprofitableproduction
Unsatisfieddemand
Instability
in
the
economy
Instability
in
the
economy
Unfair distribution of income, wealth &
opportunityinlife.
Money note needs to give primacy i.e. exchange
valuebutnotusevaluegivenprimacy.
Exploitationoflabour
Dehumanization of the whole process of
productionanddistribution.
30
3.Development
For many countries development has been the
major reason for the adoption of planning .If
development is to be compressed in to a given
period
planning
is
needed
.
period
planning
is
needed
.
Mechanicsofdevelopmentincludethefollowing:
A.
Resourcemobilization(organization)
The first requisite for development is to organize
resourcesforinvestment.
ensure sufficiency of resources for production
investmentandsecondlycollectingtheseresources.
31
For many countries development has been the
major reason for the adoption of planning .If
development is to be compressed in to a given
period
planning
is
needed
.
period
planning
is
needed
.
Mechanicsofdevelopmentincludethefollowing:
A.
Resourcemobilization(organization)
The first requisite for development is to organize
resourcesforinvestment.
ensure sufficiency of resources for production
investmentandsecondlycollectingtheseresources.
31
B. The direction of investment among the
different lines of production.
Investmentallocation
The
amount
of
resources
to
be
invested
gives
the
The
amount
of
resources
to
be
invested
gives
the
maximumpossible result, that is, the most rapid
growth of production, if they are properly
allocatedamongdifferentlinesofproduction.
32
different lines of production.
Investmentallocation
The
amount
of
resources
to
be
invested
gives
the
The
amount
of
resources
to
be
invested
gives
the
maximumpossible result, that is, the most rapid
growth of production, if they are properly
allocatedamongdifferentlinesofproduction.
32
Balancing the economy
For the smooth functioning of the economy, in
particular when larger resources than the market can
permit are going in to investment, there is need for
making
planned
efforts
to
secure
balances
within
the
making
planned
efforts
to
secure
balances
within
the
physical realm, as also within the monitory or
financial realmof an economy.
C.Efficientuseofresources
Broadly, this is a question of evaluating costs of
production,valueofoutputandcomparisonofthe
two.
33
Balancing the economy
For the smooth functioning of the economy, in
particular when larger resources than the market can
permit are going in to investment, there is need for
making
planned
efforts
to
secure
balances
within
the
making
planned
efforts
to
secure
balances
within
the
physical realm, as also within the monitory or
financial realmof an economy.
C.Efficientuseofresources
Broadly, this is a question of evaluating costs of
production,valueofoutputandcomparisonofthe
two.
33
1.4.1.THE NEEDFORPLANNINGINLDCS
Development planning is indispensable for LDCs in their
attempt for growth and poverty reduction efforts.
There are a number of justifications for the need of planningin
LDCs:
1. To increase the rate of economic development
One means to achieve economic development through significant
increase in the rate of capital accumulation. This is ac hieved by:-
Raising the level of income
Raising the level of savings and investment. Raising the level of savings and investment.
But in LDCs, increasing capital formation is difficult because
people are poor (high level of propensity to consume) low lev el of
income and saving: - low level of investment.
These people find themselvesin Vicious circle of poverty.
This circle can only be broken by planned development.
This can be external support for industrialization, which c ame in
two forms and initiation of domestic planning.
Supporting industrialization (foreign direct investment (FDI)
Self-reliant industrialization (forced saving)
34
Development planning is indispensable for LDCs in their
attempt for growth and poverty reduction efforts.
There are a number of justifications for the need of planningin
LDCs:
1. To increase the rate of economic development
One means to achieve economic development through significant
increase in the rate of capital accumulation. This is ac hieved by:-
Raising the level of income
Raising the level of savings and investment. Raising the level of savings and investment.
But in LDCs, increasing capital formation is difficult because
people are poor (high level of propensity to consume) low lev el of
income and saving: - low level of investment.
These people find themselvesin Vicious circle of poverty.
This circle can only be broken by planned development.
This can be external support for industrialization, which c ame in
two forms and initiation of domestic planning.
Supporting industrialization (foreign direct investment (FDI)
Self-reliant industrialization (forced saving)
34
NEEDFOR PLANNINGCONT’D
2.
The need for removing widespread open unemployment
and disguised unemployment.
In LDCs capital is highly scarce and labor is to a greater
extent abundant. As a consequence, the challenge is howto
provide the gainful employment for the ever-increasing
labor force. Undoubtedly, this problemcan be addressed by
public intervention through planned developed.
3.
To
bring
about
balanced
development
3.
To
bring
about
balanced
development
To reduce the skewed formof development, planning is
indispensable factor.
Inter-sectoral developmentrequires balanced growth.
For instance the development of agricultural sector needs
the development of industrial sector because they are
interrelated activities.
35
2.
The need for removing widespread open unemployment
and disguised unemployment.
In LDCs capital is highly scarce and labor is to a greater
extent abundant. As a consequence, the challenge is howto
provide the gainful employment for the ever-increasing
labor force. Undoubtedly, this problemcan be addressed by
public intervention through planned developed.
3.
To
bring
about
balanced
development
3.
To
bring
about
balanced
development
To reduce the skewed formof development, planning is
indispensable factor.
Inter-sectoral developmentrequires balanced growth.
For instance the development of agricultural sector needs
the development of industrial sector because they are
interrelated activities.
35
CONT’D
Development of agricultural sector leads to:
Increase in supply of raw materials for industries
Release surplus labor that is necessary for the growth of
industrial sector
Provides market for industrial goods
Provides food for industrial laborers
On top of inter-sectoral balanced development, it also helps to lies
emphasis
to
social
development
such
as
:
education,
health
lies
emphasis
to
social
development
such
as
:
education,
health
and economic infrastructures, energy, and etc.
Equally important is the development of domestic and foreign
trade.
All these development spheres need a harmonic approach which
demands broad understanding of all the sectors.
Hence, we can’t leave all these to market forces or private sector
as we are all aware of market failures.
Therefore, for the balanced development of an economy,
planning is indispensable tool.
36
Development of agricultural sector leads to:
Increase in supply of raw materials for industries
Release surplus labor that is necessary for the growth of
industrial sector
Provides market for industrial goods
Provides food for industrial laborers
On top of inter-sectoral balanced development, it also helps to lies
emphasis
to
social
development
such
as
:
education,
health
lies
emphasis
to
social
development
such
as
:
education,
health
and economic infrastructures, energy, and etc.
Equally important is the development of domestic and foreign
trade.
All these development spheres need a harmonic approach which
demands broad understanding of all the sectors.
Hence, we can’t leave all these to market forces or private sector
as we are all aware of market failures.
Therefore, for the balanced development of an economy,
planning is indispensable tool.
36
NEED FOR PLANNING CONT’D
In general developing countries need economic
planninginordertoachievethefollowingobjectives:
To increase the rate of economic development
To improve and strength the market mechanism
To reduce open unemployment and disguised
unemployment
To
enhance
the
linkage
between
agricultural
and
To
enhance
the
linkage
between
agricultural
and
industrial sector
To create social overheads that enhance agricultural and
industrial growth
To expand domestic and foreign trade
To eradicate poverty
To be self-sufficient in food and rawmaterials
To reduce inequality
37
In general developing countries need economic
planninginordertoachievethefollowingobjectives:
To increase the rate of economic development
To improve and strength the market mechanism
To reduce open unemployment and disguised
unemployment
To
enhance
the
linkage
between
agricultural
and
To
enhance
the
linkage
between
agricultural
and
industrial sector
To create social overheads that enhance agricultural and
industrial growth
To expand domestic and foreign trade
To eradicate poverty
To be self-sufficient in food and rawmaterials
To reduce inequality
37
1.5. P
LAN FORMULATION AND REQUISITES FOR
S
UCCESSFUL
P
LANNING
1.
A planning agency: we need to set up an organization
thatis responsiblefor the formulationof a plan.
Example: MoFEC/National Planning commission:- needs various
types of experts like economists, statisticians, engineers, etc.
2.
Statistical data: - information on opportunities and
constraintsis crucial.
What kinds of resources and how much do we have.
There is a need for an organization to collect, compile and make accessible
statistical
information
.
accessible
statistical
information
.
Example: Central Statistical Agency of Ethiopia (CSA)
3.
Fixing of targets and setting of priorities
Quantitative (on production, consumption, investment,
employment, etc) targets should be set. Example:
ADLI = agriculture is a priority sector because abundant labor can
make comparative advantage to agriculture.
PRSD = agriculture, road, education, and health are set as a priority
sectors.
FFYP = priority was given to development of infrastructure
SFYP and TFYP = agriculture was given top priority.
38
LAN FORMULATION AND REQUISITES FOR
S
UCCESSFUL
P
LANNING
1.
A planning agency: we need to set up an organization
thatis responsiblefor the formulationof a plan.
Example: MoFEC/National Planning commission:- needs various
types of experts like economists, statisticians, engineers, etc.
2.
Statistical data: - information on opportunities and
constraintsis crucial.
What kinds of resources and how much do we have.
There is a need for an organization to collect, compile and make accessible
statistical
information
.
accessible
statistical
information
.
Example: Central Statistical Agency of Ethiopia (CSA)
3.
Fixing of targets and setting of priorities
Quantitative (on production, consumption, investment,
employment, etc) targets should be set. Example:
ADLI = agriculture is a priority sector because abundant labor can
make comparative advantage to agriculture.
PRSD = agriculture, road, education, and health are set as a priority
sectors.
FFYP = priority was given to development of infrastructure
SFYP and TFYP = agriculture was given top priority.
38
CONT’D
4.
Ability to maintain properly balanced economic
development: there must be proper balance between:-
D
Consumptionand production
D
Private and public sector
D
Capitaland laborintensive
5.
Existence of efficient administration:- competent,
responsible, incorrupt and dedicated administration is
needed
to
effectively
conduct
economic
planning
.
needed
to
effectively
conduct
economic
planning
.
6.
Formation of appropriate development policy and
implementation capacity: appropriate development
policiesare required for proper economicplanning.
7.
Participation of public in all the process of
planning and implementation and feedback
mechanisms:all stakeholders should be involved in
initiating economic planning so as to nurture sense of
ownershipand facilitateits implementation.
39
4.
Ability to maintain properly balanced economic
development: there must be proper balance between:-
D
Consumptionand production
D
Private and public sector
D
Capitaland laborintensive
5.
Existence of efficient administration:- competent,
responsible, incorrupt and dedicated administration is
needed
to
effectively
conduct
economic
planning
.
needed
to
effectively
conduct
economic
planning
.
6.
Formation of appropriate development policy and
implementation capacity: appropriate development
policiesare required for proper economicplanning.
7.
Participation of public in all the process of
planning and implementation and feedback
mechanisms:all stakeholders should be involved in
initiating economic planning so as to nurture sense of
ownershipand facilitateits implementation.
39
1.6 ARGUMENT FOR ANDAGAINST PLANNING
Argumentsforplanning
1.
In most LDCs markets are imperfect and the only efficient
allocationof resources is made through state intervention in the form of
planning.
2.
The existence of externalities: private sector is less interested to ad dress the
problem of externalities (negative or positive).
The private sector need to maximize private benefits (not so cial benefits).
Hence, state intervention is justifiable to remove the difference between the
marginal net benefit of social and private.
3.
The inadequacy of market mechanism: planning is important to accelerate
development
.
accelerate
development
.
If everything is entirely left to market, development is slo w.
Hence to bring development at relatively shorter period, weneed state intervention
(planning).
4.
Limited objective of private sector: private sector is interested in short-
term gains rather than long term profits particularly in LDCs.
This leads to resource misallocations and could only be revive when there is state
intervention.
5.
Institutional and structural reformscould be only achieved when there
is state intervention: hence economic planning is justified.
6.
LDCs have limited resources(capital, foreign currency, skilled
manpower, etc) and in order to reduce wastage and bring balanced
development in the whole economy an overall planning is necessary.
40
Argumentsforplanning
1.
In most LDCs markets are imperfect and the only efficient
allocationof resources is made through state intervention in the form of
planning.
2.
The existence of externalities: private sector is less interested to ad dress the
problem of externalities (negative or positive).
The private sector need to maximize private benefits (not so cial benefits).
Hence, state intervention is justifiable to remove the difference between the
marginal net benefit of social and private.
3.
The inadequacy of market mechanism: planning is important to accelerate
development
.
accelerate
development
.
If everything is entirely left to market, development is slo w.
Hence to bring development at relatively shorter period, weneed state intervention
(planning).
4.
Limited objective of private sector: private sector is interested in short-
term gains rather than long term profits particularly in LDCs.
This leads to resource misallocations and could only be revive when there is state
intervention.
5.
Institutional and structural reformscould be only achieved when there
is state intervention: hence economic planning is justified.
6.
LDCs have limited resources(capital, foreign currency, skilled
manpower, etc) and in order to reduce wastage and bring balanced
development in the whole economy an overall planning is necessary.
40
CONT’D
Argumentagainstplanning
1.
Inherently markets are not perfect.
Markets could be perfect by man mechanisms (increase
competition, information) and therefore there is no need for state
intervention (planning).
2.
The best approach to minimize the difference between
marginal net benefits of social and privateis
through use of fiscal measures(taxation and subsidy).
3.
In order toprepare and execute planneeds competent
administration
(skilled
manpower)
which
competent
administration
(skilled
manpower)
which
isin shortsupply in LDCs.
Therefore, planning is only to exacerbate skilled manpower
shortages.
4.
Planning requires information in quantity and quality
which islimitedin LDCs.
The information even available is not reliable; hence markets
rather than planning should be favored.
5.
Thecost of planning in LDCs is enormousin the
formof administration,licensing,etc.
41
Argumentagainstplanning
1.
Inherently markets are not perfect.
Markets could be perfect by man mechanisms (increase
competition, information) and therefore there is no need for state
intervention (planning).
2.
The best approach to minimize the difference between
marginal net benefits of social and privateis
through use of fiscal measures(taxation and subsidy).
3.
In order toprepare and execute planneeds competent
administration
(skilled
manpower)
which
competent
administration
(skilled
manpower)
which
isin shortsupply in LDCs.
Therefore, planning is only to exacerbate skilled manpower
shortages.
4.
Planning requires information in quantity and quality
which islimitedin LDCs.
The information even available is not reliable; hence markets
rather than planning should be favored.
5.
Thecost of planning in LDCs is enormousin the
formof administration,licensing,etc.
41
1.7 PROBLEMS/LIMITATIONS OFPLANNING
As a tool, planning could not be a remedy for all economic, soc ial
and others ills.
Broadly the limitations could be on:- concept, coordination,
action,and followsup.
The specific limitationsobserved on planning are:-
1.
Planning heavily depend on reliable data: if there are
unreliable data, the potential benefits of planning will be
undermined. 2.
The problemof discontinuity: planning models don’t deal with random
shocks
(natural
hazards,
social
changes
and
human
intervention)
.
random
shocks
(natural
hazards,
social
changes
and
human
intervention)
.
Plans work effectively when social and economic development
unfolds continuously.
3.
The problemof uncertainty (natural, market, state and war):
the problemwith uncertainty could be minimized by adopting
probabilistic models but planning models are not using such
methods.
4.
Inflation: price instability would reduce the use of planning
models.
Therefore, the use of planning should be in line with the above
limitations.
42
As a tool, planning could not be a remedy for all economic, soc ial
and others ills.
Broadly the limitations could be on:- concept, coordination,
action,and followsup.
The specific limitationsobserved on planning are:-
1.
Planning heavily depend on reliable data: if there are
unreliable data, the potential benefits of planning will be
undermined. 2.
The problemof discontinuity: planning models don’t deal with random
shocks
(natural
hazards,
social
changes
and
human
intervention)
.
random
shocks
(natural
hazards,
social
changes
and
human
intervention)
.
Plans work effectively when social and economic development
unfolds continuously.
3.
The problemof uncertainty (natural, market, state and war):
the problemwith uncertainty could be minimized by adopting
probabilistic models but planning models are not using such
methods.
4.
Inflation: price instability would reduce the use of planning
models.
Therefore, the use of planning should be in line with the above
limitations.
42
1.8 IMPLICATIONS OF VARIOUS ECONOMIC CONTROLS IN PLANNED
ECONOMY
A planned economy is a type of economic system
where investment and the allocation of capital goods
takeplaceaccordingtowideeconomicandproduction
plans.
In a planned economy there are various controls.
e.g
……. price controls
e.g
……. price controls
Selection of priority sectors
Investment planning and capital budget allocation.
These activities limits the sovereignty of economic agents
and hence could limit efficient utilization of the scarce
resources.
43
ECONOMY
A planned economy is a type of economic system
where investment and the allocation of capital goods
takeplaceaccordingtowideeconomicandproduction
plans.
In a planned economy there are various controls.
e.g
……. price controls
e.g
……. price controls
Selection of priority sectors
Investment planning and capital budget allocation.
These activities limits the sovereignty of economic agents
and hence could limit efficient utilization of the scarce
resources.
43
44
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