Development Planning

•The nature of development planning

•Basic concepts
•Economic planning – is defined as deliberate governmental attempt to
coordinate economic decision making over the long run and to influence,
direct and in some case control the level and growth of a national’s principal
economic variables (income, consumption, employment, investment,
saving, exports, imports, etc.) to achieve set of development objectives.
•Economic plan is a set of quantitative economic targets to be reached in a
given period of time. Economic plans may be either comprehensive or partial.
•Comprehensive plan sets its targets to cover all major aspect of national
economy.
•A partial plan covers only part of the national economy – industry, agriculture,
the public sector, the foreign sector etc.
•The planning process can be described as an exercise in which government
first choose social objectives, then sets various targets and finally organizes a
framework for implementing, coordinating and monitoring a development plan.
 Plaining: Three Basic Models
• Aggregate Growth Models: Projecting Macro
Variables.
 It deals with the entire economy in terms of
macroeconomic variables such savings,
investment, capital stocks, exports, imports,
foreign assistance and so on.
 Aggregate growth models provide method for
forecasting output and employment growth
over a three- to five year period.
 Input- Output models and Sectoral
Projections
• Input-output model- All industries are viewed both as
producers of output and user of inputs from other industries.
For example the agricultural sector is both producer of output
(wheat) and user of input from manufacturing sector
( machinery, fertilizer). Thus direct and indirect repercussions
of planned changes in the demand for the products of one
industry on output, employment and imports of all other
industries can be traced throughout the entire economy. Given
the planned output targets for each sector of the economy, the
interindustry model can be used to determine intermediate
material, import, labor and capital requirements with
consistent production levels and resources requirements
 Project Appraisal and Social Cost-Benefit
Analysis
• setting objective – the social worth of a project must be evaluated in
terms of national economic and social objectives. Economic planes
measure the social worth of a project in terms of the degree to which
it contributes to the net flow of future goods and services in the
economy, i.e. its impact on future levels of consumption. Its impact
on income distribution. How the project will benefit different income
groups
• Computing shadow price and social discount rates - there are five
reasons why social planners need to calculate shadow price and
social discount rates
•
(i)Inflation and currency overvaluation
(ii)Wage rates, capital cost and unemployment
(iii)
Tariffs, quotas and import substitution
(iv)
Savings deficiency
(v)Social rate of discount
•
•Choosing projects: some decision criteria- net present value (NPV) in choosing investment project
the project should be accepted or rejected according to whether their net present value is positive
or negative. However NPV calculations are very sensitive to the choice of a social discount rate.
An alternative is to calculate internal rate of return that gives the project a NPV of zero, compare
this with either a predetermined social discount rate or the market rate of interest, and choose
projects whose internal rates exceed the predetermined or market interest rate.
•Most developing countries face capital constraints, the choice of investment project will also
involve a ranking of all projects that meet the NPV rule. Projects are ranked by descending NPV
by their benefit-cost ratios, NPV/K. The projects with the highest NPV/K ratio is chosen, then the
next highest, and so on until all available capital investment funds have been exhausted.
 Arguments for and against planning

•Arguments for planning

the product and factor markets in most developing countries
are imperfect; market forces fail to attain efficient allocation of
resources.
•Hence the state intervention in the form of planning is
necessary to obtain an efficient allocation of resources since
price are wrong signal to the decision markers.
Private investors do not pay much attention to the externalities which could
be generated in the process of development and which could account for
the differences between marginal net social benefit and marginal net private
benefit. therefore, planning is necessary to remove the difference between
marginal net social benefit and marginal net private benefit.
•
Private investors are interested in maximizing short-term and not long-term
profits and this again may lead to a resource allocation, which is less than
socially optimal in the long run.
The economic progress via reliance upon market forces is consider very
long and given the present differences between rich and poor countries, the
task of achieving high rate of growth is important. It is believed that
planning would accelerate the growth rate in developing countries.
•
Rapid economic growth would be retard if necessary institutional and
structural reforms were not carried simultaneously. Planning is supposed to
achieve the necessary institutional reforms to allow for more rapid growth.
Also planning exert (make use of) some such psychological impact upon
Developing countries have limited resources, it is
necessary to utilize such resources (e.g. capital, skilled
manpower, foreign exchange etc.) in the most
productive way and this can only be achieved if the
whole economy is brought under an overall planning
mechanism.
•
• The argument against planning

If planning is necessary to avoid imperfections of the market

mechanism, then what is necessary is to make the market more
perfect, not planning.
If there is externalities, the best way to solve the problem would
be tax or to provide subsidies and information to the producers so
that the differences could be removed.
Imperfect operation of the market in underdeveloped country can
be attributed to ignorance in the sense of lack of familiarity with
LDCs lack skilled manpower necessary to tackle the problem of preparing
the executing an efficient planning mechanism. Given government
intervention in the decision making process, an inefficient and corrupt
bureaucracy may easily increase the waste of resources that would
otherwise have resulted in the operation of the imperfect market.
Planning requires a large amount of information about many braches of
the economy. The availability and reliability of such information is doubt.
•
 The costs of planning are large for LDCs.
Apart from the costs of running the planning administration, government
intervention and planning for promoting industrialization via protection,
industrial licensing and quotas have increase the real costs for LDCs.

 LDCs have a tendency to adopt planning as an important policy to achieve a

higher rate of growth. However, in many developing countries all means of
production are owned by the state. Few LDCs have resorted to totalitarian
forms of planning and the private sector is allowed to operate alongside the
growing public sector.
 Problems of implementation

•
• Factor prices, choice of technique and employment creation -
there is conflict between two major objectives –rapid industrial growth
and expand employment opportunities, which result in the employment
creation in the industrial sector at the expense of rural sector.
• There is a need government policy toward adjusting factor price signal
to real resources of developing societies.
• These private price signal have increase diverged from their social
valuations as a result of public policies that have raised the level of
wages above labour’s shadow price or scarcity value by various
devices such minimum wages legislation, tying wages to educational
attainment, and structuring rates of remuneration at higher levels on
the basis of international salary scales.
• Also investment depreciation and tax allowances, overvalued
exchange rates, low effective rates of protection, quotas and credit
rationing at low interest rates all serve to lower the private cost of
capital below social cost.
The net effect of these factor-price distortions has been to encourage
private and public enterprises to adopt more capital-intensive
production methods than would exist if public policy attempted to
correct the prices. This divergence between private and social
valuation is one of the major reasons for the slow growth of
employment opportunities.
Rural-urban imbalances and migration - Government
policies that are biased in favour of urban development
have stimulate and outflow of rural migrants in search of
limited but high paid urban jobs.
Demand for education and employment problem-
developing countries governments tend to subsidies the
private costs of education at higher levels which led to a
situation in which the social returns to investments in
education expansion seem hardly justified in comparison
with alternative investment opportunities.
• Structure of the economy – Planning and government policies
also contributed to maintenance or aggregation of social incorrect
signal and incentives through the emphasis on import substitution.
External and internal policies such as special tax concession to
foreign investors, higher effective tariff designed to lower the costs of
capital and intermediate goods imports, quotas, subsidized interest
rate etc. have to serve to provide stimulus to import substituting
industrial expansion. Heavy emphasis on urban industrial growth has
contributed to the stagnation of agricultural sector.
 Reasons for plan failures
•
1)Deficiencies in plans and their implementation – Governments try
accomplish too many objectives at once without consider that some of the
objectives are competing. Many plans are never implemented.
•
2) Insufficient and unreliable date – The economic value of a
development plan depends to the quality and reliability of statistical data.
When these data are weak, unreliable or non-existent, the accuracy and
internal consistency of economic plans are diminished.
Also there is inadequate supply of qualified economists, statisticians
and other planning personnel that will formulate and carry out a
comprehensive and detailed development plans.
Unanticipated economic disturbances, external and
internal- developing countries depend on international
trade, aid and private foreign investment it becomes difficult
for them to engage in even short-term forecasting.
Governments have little control to determine the success or
failure of their development policies.
Institutional weakness – lack of separation of the planning agency from
day-to-day decisions making machinery of government, the failure of
planners, administrators, and political leaders to engage in a continuous
dialogue and internal communication about gaols and strategies and
international transfer of institutional planning practices and organisation
arrangements that may inappropriate to local conditions.
Lack of commitment to national goals as opposed to regional, departmental,
lack of national interest as opposed to personal interest, the political and
bureaucratic corruption.
Lack of political will- Poor performance and gap between plan
formulation and plan implementation are also attributed to lack of
commitment and political will on the part of many developing
country leaders and high level of decision makers.
Political will require an unusual ability and political courage to
challenge powerful elites and vested interest groups and persuade
them that such development is in the long run interest of all citizens.
•
 Industrialization development

•Export promotion versus Import Substitution

•trade policies for development -
• Outward-looking development policies- which
encourage free trade, free movement of capital, workers,
enterprises and students, multinational enterprises and
an open system of communications.
• Inward-looking development policies –stress the
need for developing countries to evolve their own style of
development and to control their own destiny.
•It encourages policies that encourage indigenous learning by
doing in manufacturing and the development of indigenous
technologies appropriate to a country’s resource endowments.
•According to proponents of inward-looking trade policies, self-
reliance can be accomplished only if you restrict free trade, the
movement of people and communication
• Export promotion (expansion strategy)- an out-ward-
oriented strategy that emphasises the development of
industries capable of exporting to world markets. Integral to
expansion strategy is an emphasis on export
diversification.
 Export Processing Zone

• A special geographic region usually found in developing

countries where foreign investment is encouraged to stimulate
export expansion and diversification.
• The creation of export processing zones reflects an outward-
oriented and exports driven strategy of economic development.
• Such zones may lead to a growth in regional economic
disparities.
 Import substitution

• A strategy that stress the development of local

industries to manufacture products that were previously
purchased from abroad. Initial such industries normally
need protection with tariffs and government subsidies,
given their infant industry status.