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Economic Planning

Planning is defined as conceiving, initiating, regulating and controlling economic


activity by the state according to set priorities with a view to achieving welldefined objectives within a given time.
According to Professor Dickinson, economic planning is the making of major
economic decisions by a determinate authority on the basis of a comprehensive
survey of the economy as a whole. Such decisions include what and how much
to produce; how, when and where it is to be produced; and to whom it is to be
allocated.
With reference to underdeveloped countries, Subrata Ghatak defines economic
planning as a conscious effort on the part of any government to follow a definite
pattern of economic development in order to promote rapid and fundamental
change in the economy and society.

Essentials of Economic Planning


According to Arthur Lewis, a development plan may consist of the following
parts:
1.
2.
3.
4.
5.

Survey of current economic conditions


List of proposed public expenditures
Discussion of likely development in private sector
Macro economic projections of the economy
Review of government policies

1. Survey of current economic conditions: The economic survey shows


the changes in respect of population, NI, taxation, government
expenditures and BOP, etc. It also tells us the changes needed or
expected to occur in these economic variables. The economic survey is
usually for one year.
2. List of proposed public expenditures: The proposals and suggestions
for incurring public expenditures on development projects are invited from
various government departments and agencies. After a thorough scrutiny
of these recommendations, an order of priority is determined deciding
what is to be included, what is to be postponed or rejected as the financial
resources are less than required.
3. Discussion of likely development in private sector: It is said that both
public and private sectors are inter-related and rate of economic
development depends more on the working of the private sector than
expenditures in public sector. The government reviews the performance
of major industries in economic planning, and sets quantitative targets for

the plan period. All this involves a brief in-depth analysis of the working
and implications of market structure.
4. Macro economic projections of the economy: It refers to the
preparation of aggregate models which are applied to the economy as a
whole. These models deal with production and consumption as single
aggregates. Aggregate models are used to determine the possible growth
rates in NI, the division of national product among consumption,
investment and exports, the required volume of domestic savings, imports
and foreign assistance needed to carry out a given development
programme. This involves massive calculations and paper works.
5. Review of government policies: The government through development
policy can influence the decisions indirectly in the private sector.

Importance / Objectives of Economic Planning w.r.t. Mixed


Economy & Under-Developed Countries
In the following section we will discuss the economic planning with reference to
mixed economies and under-developed countries:
1. Efficient utilization of resources: The most essential function of
economic planning is to ensure the best use of given resources within the
country. Maximum social benefits can only be ensured when the available
resources are allocated and utilized in the most efficient manner. Unused
or slack utilization of resources will adversely affect the employment and
productivity level of the economy. The government has to do some
arrangements in order to bring equality between demand and supply. In
the market economy, there are wasteful expenditures in the form of selling
costs. Sometimes, few producers established their cartels in order to
control the market. All this can be undone by the government through
effective planning.
2. Market imperfections and price distortions: In market economies, there
are certain market imperfections and price distortions both in commodity
market and factor market. These distortions rise because of institutional
arrangements. As the wage rate in some sectors of the economy exceeds
the opportunity cost of the labour. This may be due to trade unions
influence. Moreover, the goods whose demand is less elastic their
producers may pursue monopolistic behaviour. There may be dualistic
approach in the money market. In the organized money market the rate of
interest is kept artificially low or inexpensive credit facilities are provided.
While on the other hand, in less organized money market or in agriculture
market, the ROI is extraordinary high. This situation also creates price
distortion. These market imperfections can only be corrected by efficient
economic planning.

3. Greater opportunities: The most common benefit that any democratic


country enjoys is that the greater market opportunities are and should be
provided to the producer and consumers. But this can be handicapped
because of two reasons:
(a) Limited life span of an individual
(b) Limited resources at the disposal of an individual
4. Because of these common problems, the individuals undertake those
projects which require small amount of resources and the profit can be
earned within a short period of time. In this way, the individuals would
hardly be prepared to launch big projects like construction of highways,
power-stations, land-reclamation, anti water logging and salinity schemes,
rail-roads, sea ports, telecommunication, etc. It is the duty of the modern
government to provide greater resources at the disposal of individuals. At
the same time the government has to reduce excessive-consumption or
the disposal of resources in few hands. This can only be ensured under
efficient economic planning.
5. Maximisation of National Income and Raising Living Standard: It is
the responsibility of modern state to maximise the national income and
raise the standard of living. It can only be ensured when the government
correctly addresses the economic needs of the country and takes desired
actions in economic planning.
6. Full Employment: In economically advanced countries, the governments
aim is to provide full employment. All modern governments have, in fact,
underwritten employment. If they cannot provide work, they have to give
doles. Unemployment is the biggest by product of any capitalist society.
The government can redistribute labour and create more work
opportunities for both private and public sector.
7. Equitable distribution of income: Economic planning is the most
powerful tool of equitable distribution of income. 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.
Therefore, there is a wide gap between haves and have-nots. Shocking
economic inequalities are a marked feature of an unplanned economy.
Reduction of economic inequalities is now the avowed aim of a modern
welfare state and is impossible without the instrument of economic
planning.
8. Public oriented goals: In market economy, only those goods are
produced whose demands are backed by money offers. As a result the
production of public goods / services, including health, research and
education, old-age benefits, poor houses, orphan houses, clean water,

sewerage and drainage, free entertainment, art and culture, historical


assets, wildlife, forests, security, and defence, are altogether ignored or
very less attention is paid. It is planning which distributes the resources
between present consumption and future consumption, social
development and economic development, etc. As a result the goals of
planned economies are more welfare and public oriented.
9. Price Stability: The purpose of economic planning is to reduce the price
instability created by business fluctuations. During the period of
increasing demand, the price hikes are inevitable due to supply
shortages. In under-developed countries, because of low productive
capacity, low savings and investment, and traditional set up, the price
starts rising very sharply, and its impact on the developing society is very
deep. In order to eliminate the adverse effects of price instability and
business fluctuations, the government comes forward and play a vital role
in creating a favourable economic condition. This can only be done
through wise economic planning.
10. Larger savings and investment: The ultimate task of any finance
ministry is to boost up the savings and investment, esp. foreign
investment. In UDCs on one hand there is a vicious circle of poverty,
while on the other, there is an operation of international demonstration
effect. In UDCs, there is a general tendency of demonstration effect within
the people, and the whole economys growth is hampered by dualism.
Savings remain at the lowest level. The boost in investment, domestic or
foreign, depends on the level and duration of economic stability. More
stable and viable economic growth planning may motivate the investors in
investing and thus increasing the level of employment in the economy.
11. Provision of Social Services: In UDCs, the provision of social services
forms an important objective of planning. In the fifth five year plan, two
important objectives were:
(a) Development of rural areas through various programmes and
policies alongwith widespread extension of social services such as
schooling, health and clean water facilities.
(b) Easing of urban problems like water supply, sewerage and
drainage, electricity, gas supply, housing and transportation
facilities, etc.
12. Aid to victims of catastrophe: The granting of assistance and the
organisation of relief to victims of natural catastrophes, such as flood,
earthquakes, tsunamis, tropical storms, drought, etc. are the main the
responsibilities of any government.

Limitations of Economic Planning

The following obstacles come in the way of economic planning:


1. Measurement of labour force: In economic planning, the identification
and enumeration of gainfully employed population is a difficult task, esp. in
agriculture, where the employment is of part-time or seasonal nature. The
important contributions to economic activities by women and children raise
further complications. In backward economies, it is very difficult to
distinguish between voluntary and involuntary unemployment.
2. Statistical data: The biggest problem with economic planning is that the
planner has to work with a limited statistical data provided. Moreover, the
planner has to work with these data, collected through different surveys,
consensus, polls, etc., without much questioning about their reliability and
accuracy.
3. Unused natural resources: The UDCs are identified of their unused
natural resources like land, mines, rivers, forests, livestock, sea, etc. A
resource such as land, a mineral deposit, a forest or a rive may not be
used in production because it is economically inaccessible. A natural
resource is valueless when its cost of extraction is greater than the price
the product can command in the market. Therefore, the fullest possible
use of natural resources is not a sensible aim of an economic planning,
and the extent of the use of land or other natural resources is not a
measure of economic efficiency. There are four types of resource
idleness:
(a) Idleness reflecting the inability of the resource to contribute to
profitable production,
(b) Withholding of the resources in the interests of monopolistic
exploitation of the market,
(c) Employment of resources for commercial or private use, and
(d) Withholding of a natural resource from current production because
the owner believes that it will make a more valuable contribution to
production at a later date.
4. Population and real income: The biggest problem regarding human
resources is that in UDCs, the population is growing at a very high rate.
Moreover, most of the UDCs population heavily rely on agricultural
income. The present rate of population growth in India and Pakistan is not
significantly greater than in the United States. But the significant point of
contrast is that in the South Asia and Central Asia, there is a heavy
reliance on comparatively backward agriculture. Real income is vitally
affected by the quality of the population.
5. Economic repercussions of social institutions: Certain social
institutions, such as extended family system or joint family system, which

are appropriate to a subsistence economy may impede economic growth


directly by reducing the rewards of individuals who take advantage of the
opportunities presented by wider markets. Subsistence economy is the
economy in which people strive for the minimum necessities to support
life. The extended family system acts as a serious obstacle to economic
progress. A man is much less likely to be willing and able to save and
invest, when he knows that he would have to maintain a large number of
distance relatives. It minimises the inducement for people to improve their
own position. It obstructs the spreading of banking habit since people are
unwilling to have banking accounts as there is no willingness to save.
However, the economic planner can overcome this situation by introducing
private or public insurance or other arrangements to replace the traditional
methods for the relief of personal distress or disability.
6. Implications of restrictive tendencies: Social, political and
administrative restrictive measures are directed against foreigners on the
basis of racial, national or tribal differences. Such restrictive measures
are often directed also against the members of local population. It may
put restrictions on the movement of people or on the acquisition and
exercise of goods or services. It may also be connected with
xenophobia, esp. in the tribal areas and villages. This problem is
common in Pakistan and hampers the economic development in rural and
tribal areas.
7. Wage rates and unemployment: In UDCs, the wage rate is relatively low
and there is a high unemployment rate in the economy. Limited
employment opportunities may create a pool of urban unemployed. These
urban members do not enjoy the security of the extended family system,
nor are they related to agricultural sector. They therefore are apt to
constitute a more serious social and political problem then the rural
unemployed.
8. Monopsony in the labour market: It is a common situation in UDCs in
which there are very few employers and they exercise their monopsony
powers in the labour market. Labour is more exploited when the wage
rate is below the equilibrium point indicating the unsatisfied demands of
labour. Whereas in advanced countries, the supply of labour is elastic and
there is little scope for monopsonistic exploitation. The planner must
address the labour issues like wage rates, overtime, bonus, allowances,
perquisites, working hours, safety measures, health and medical facilities,
life insurance, transportation, children education, pension and benevolent
funds, old age benefits, income tax on salaries, etc.
9. Uneven distribution of entrepreneurial faculties: The material progress
of a society is likely to be assisted greatly when there are dynamic
entrepreneurial abilities. In economically backward countries, there are

difficulties in the way of developing and utilising the entrepreneurial


qualities. The government can support small and medium enterprises to
come forward and develop new economic opportunities. The government
must encourage, both on private and public level, new agricultural or
industrial techniques, adoption or adaptation of new improved methods,
innovative activities, internship, on-the-job training, etc. in order to raise
the level of economy.
10. Low level of capital in UDCs: The biggest problem of less developed
countries is that there is a dearth of capital, whether it is physical or
financial. The low level of capital is also indicated by statistics of
consumption of energy for purposes of production. In developed
countries, there is a high consumption of energy, whereas in UDCs, the
energy consumption is considerably low. The general implication of low
level of capital is a low level of output and a low level of consumption per
head. In such economies, there is no assurance of a continuity in supply
of goods. Transport costs are very high and limited availability of
perishable or bulky goods. Because of low level of working capital and
storage facilities, there is a danger of acute shortage of food crops.
11. Methods of production: The methods of production, farming, marketing
and domestic operation are not usually the same in all the countries.
What is an economic use of resources in one country may be uneconomic
in another in which relative factor prices are comparatively different. It
follows that the economic efficiency of methods of production and
economic organisation in UDCs cannot be judged simply by comparing
them with those familiar in advanced countries. The planner has to jot out
all the possible opportunities and focus on major weaknesses, and must
plan within the available resources.
12. International demonstration effect: In UDCs, there is a strong desire to
enjoy as much of attractive way of living in the advanced countries as
incomes permit. There is an international demonstration effect.
Moreover, the under developed economy is divided into two extreme
sections traditional section and modern section. There are old and new
production methods, educated and illiterate population, rich and poor,
modern and backward, capitalistic and socialistic, donkey carts and motor
cars existing side by side. This situation creates great atmosphere of
conflict and contradiction, as a result the economic development is
hampered.
13. Political instability: Most of UDCs, especially Asian and African
countries, are known of their political instability, bureaucratic
malfunctioning, corruption on administrative level, and nepotism, like India,
Pakistan, Sri Lanka, Bangladesh, Afghanistan, Vietnam, Cambodia,
Myanmar, Nigeria, Zimbabwe, Uganda, Somalia, Kenya, etc. Perhaps the

biggest challenge for any economic planner is the political and


administrative malfunctioning in his way of economic planning.

Elements of Economic Development


The economic development in advanced or under-developed countries depends
on four elements:
1. Human resources: In poor countries GDP rises but at the same time the
population also grows. Several developing countries are facing high birth
rates with stagnant national income per head. It is hard for poor countries
to overcome poverty with birth rates so high. In under-developed
countries, the economic planners emphasise the following specific
programmes:
(a) Control disease and improve health and nutrition,
(b) Improve education, reduce illiteracy and train workers, and
(c) Ensure that the labour force is well-equipped with necessary and
competing skills.
2. Natural resources: Many poor countries have enormous amount of
natural resources, but they are failed to explore them. The reason is that
the government has not provided necessary incentives to the farmers and
landowners to invest in capital and technologies that will increase their
lands yield.
3. Capital formation: Capital formation or inducement to invest depends on
the propensity to save. In less-developed countries, there is a very low
saving tendency because of low income. Developed countries managed
to save 20% of their output in capital formation. Whereas only 5% of the
national income is saved in UDCs. Much of the savings goes to housing
and basic needs and, therefore, a very small amount is left over for
development.
Capital formation is the basic tool for economic development. It may take
decades to invest in building up a countrys infrastructure, information
technologies, power-generating plants, and other capital goods industries.
Developing countries must have to build up their infrastructure, or social
overhead capital in order to set path for economic glory.
If there are so many obstacles in finding domestic savings for capital
formation, then the country depends on foreign sources of funds. Lessdeveloped countries have to welcomed the flow of foreign capital or
foreign borrowings. As long as the exports of these countries grew at the
same rate as borrowings, it is a favourable condition. But several poor
countries needed all their earnings simply to pay interest on their foreign

debts. This is an adverse situation. Such countries need to boost up their


production in order to cope with their current indebtedness.
4. Technological change and innovations: The developing countries have
a potential advantage in the economic development i.e., they can be
benefited from up-to-date technologies developed by advanced countries.
They can climbed up to industrialisation more rapidly than those advanced
countries who struggled for more than 500 years.

Vicious Cycle of Poverty


Many developing countries are caught up in vicious cycle of poverty. Low level
of income prevents savings, retards capital growth, hinders productivity growth,
and keeps income low. Successful development may require taking steps to
break up the chain at many points. Other points in poverty are also selfreinforcing. Poverty is accompanied by low levels of education, literacy and skill;
these in turn prevent the adaptation to new and improved technologies and lead
to rapid population growth. The vicious cycle of poverty is depicted as below:
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Overcoming the barriers of poverty often requires a concentrated effort on many


fronts and a big-push is required to break the vicious cycle into virtuous circle.
If the country has stepped to invest more, improve health and education, develop
labour skills, and curb population growth, she can break vicious cycle of poverty
and stimulate a virtuous circle of rapid economic growth.

Stages of Economic Development


W.W. Rustow has defined and analysed in his book The Stages of Economic
Growth the five stages of economic development:
1. Traditional society,
2. Pre-conditions for take-off,
3. Take-off stage,

4. Drive to maturity, and


5. Stage of mass production and mass consumption.
1. Traditional society: In the traditional long-lived social and economic
system, the output per head is low and tends not to rise. Economic
activities are static and national income is very low. The examples are
Somalia, Bangladesh, Afghanistan, etc.
2. Pre-conditions for take-off: The second stage is Pre-take-off. It is a
period of transition in which the traditional systems are overcome, and the
economy is capable of exploiting the fruits of modern science and
technology. Pakistan, India, Sri Lanka, etc. are operating at this stage.
3. Take-off: Take-off represents the point at which the resistances to steady
growth are finally overcome and the growth is normally inevitable. The
economy generates its own investment and technological improvement at
sufficiently high rates so as to make growth virtually self-sustaining. South
Africa, UAE, etc. are the examples.
4. Drive to maturity: The fourth stage is the drive to maturity. It is the stage
of increasing sophistication of the economy. Against the background of
steady growth new industries are developed, there is less reliance on
imports and more exporting activity. The economy demonstrate its
capacity to move beyond the original industries which powered its take off,
and to absorb and to apply efficiently the most advanced fruits of modern
technology. China, South Korea, Malaysia, etc. are the examples.
5. Stage of mass production and mass consumption: The fourth stage
ends in the attainment of fifth stage, which is the age of mass production.
It is the stage in which there is an affluent population, and durable and
sophisticated consumer goods. There are huge capital and technological
intensive industries in such an economy. People are more quality
conscious and comfort lovers. Wage rates are high. Health and safety
issues are addressed by the government. The whole economy is
dynamic. USA, UK, France, Germany, Japan, Canada, Italy, Netherlands,
Denmark, etc. are the examples.

Approaches to Economic Development


The following approaches are developed in recent years to explain the economic
development and answer the question how countries break out of the vicious
cycle of poverty to virtuous circle of economic development:
1. The Take-off Approach: Take-off is one of the stages of economic
growth. Different economies have been benefited from take-off approach
in different periods, including England at the beginning of eighteenth
century, the United States at the mid of nineteenth century, and Japan in

early twentieth century. The take-off is impelled by leading sectors such


as a rapid growing export market or an industry displaying large
economies of scale. Once these leading sectors begin to flourish, a
process of self-sustained growth (i.e. take-off) occurs. Growth leads to
profits, profit are reinvested, capital, productivity and per capita income
spur ahead. The virtuous cycle of economic development is under way.
2. The Backwardness Hypothesis and Convergence: The second
approach emphasises the global context of economic development. Poor
countries have important advantages that the pioneers of industrialisation
had not. Developing nations can draw upon the capital, skills and
technologies of advanced countries. Developing countries can buy
modern textile machinery, efficient pumps, miracle seeds, chemical
fertilisers and medical supplies. Because they can lean on the
technologies of advanced countries. Todays developing nations can grow
more rapidly than Great Britain, Western European Countries and United
States in past. By drawing upon more productive technologies of the
leaders, the developing countries would expect to see convergence
towards the technological frontier.
3. Balanced Growth: Some writers suggest that growth is a balanced
process with countries progressing steadily ahead. In their view,
economic development resembles the tortoise making continual progress,
rather than the hare, who runs in spurts and then rats when exhausted.
Simon Kuznets examined the history of thirteen advanced countries and
conceived that the balanced growth model is most consistent with the
countries he studied. He noticed no significant rise or fall in economic
growth as development progressed.
Note one further important difference between these approaches. The take-off
theory suggests that there will be increasing divergence among countries (some
flying rapidly, while others are unable to leave the ground). The backward
hypothesis suggests convergence, while the balanced-growth model suggests
roughly constant differentials. In the following diagrams, advanced countries
are represented by curve A, middle income countries by curve B and low-income
countries by curve C. The curves show per capita income:

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Issues in Economic Development


Following are the important issues in under developed countries:
1. Industrialisation vs. Agriculture: In most countries, incomes in urban
areas are almost more than double in rural areas. Many nations jump to
the conclusion that industrialisation is the cause rather than effect of
affluence. To accelerate industrialisation at the expense of agriculture has
led many analysis to rethink the role of farming. Industrialisation tends to
be capital intensive, attract workers into crowded cities, and often
produces high level of unemployment. Rising productivity on farms may
require less capital, while providing productive for surplus labour.
2. Inward vs. Outward Orientation: This is a fundamental issue of
economic development towards international trade. Should the
developing countries be self-sufficient? If yes, the country has to replace
imported goods and services with domestic production. This strategy is
known as import substitution or inward orientation.

If the country decides to pay for imports it needs by improving efficiency


and competitiveness, developing foreign markets, and giving incentives for
exporters. This is called outward orientation strategy. It is generally
observed that by subsidising import substitution, competition is limited,
innovation is dampened, productivity growth is slow down and countrys
real income falls to a lower level. Whereas, the outward orientation sets
up a system of incentives that stimulates exports. This approach
maintains a competitive FOREX rate, encourages exports, and minimises
unnecessary government regulation of businesses esp. small and medium
sized firms.
3. State vs. Market: The cultures of many developing countries are hostile
to the operation of markets. Often competition among firms or profit
seeking behaviour is contrary to traditional practices, religious beliefs, or
vested interest. Yet decades of experience suggest that extensive
reliance on markets provides the most effective way of managing an
economy and promoting rapid economic growth.
The government has a vital role in establishing and maintaining a healthy
economic environment. It must ensure law and order, enforce contracts,
and orient its regulations towards competition and innovation. The
government plays a leading role in investment in human capital through
education, health and transportation, but the government should minimise
its intervention or control in sectors where it has no comparative
advantage. Government, should focus its efforts on areas where there are
clear signs of market failure
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