Lecture Note, Development Planning and Project Analysis I, 2021 Abdi B.

Chapter I: Development Planning: An introduction

1.1 Historical Background of economic Planning
The idea of planning has a long history and goes back to the time of Pluto [the first person
who talked about organized planning]. It was later developed, shaped and molded by
eminent thinkers and writers both in the western and eastern camp. However, the idea of
economic planning in its modern form is comparatively new. It is the 20th century
phenomena.

Ideologically, the evolution is from three perspectives:

1. Planning in eastern Europe (socialist perspective)

2. Planning in western Europe (capitalist perspective)
3. Planning in underdeveloped countries (mixed economic perspective)
1.1.1 Planning in Eastern Europe
During the 19th century, intellectual theorists, thinkers and writers in the Eastern Europe
became fed up with the inquiry and contradictions of pure capitalism. Therefore, they
developed the idea of state intervention to set matters right and to prevent inequalities
resulting from capitalism (free economy) a solution to the fallacy of laisser-faire. But it was
only state intervention that was advocated. There was no mention of economic planning
and how to interrelate was ambiguous (although they realized that laisser-faire was not
working). In 1928 the Soviet Union gave the idea of economic planning a real shape when
it formulated its first five year plan.

The main objective of the socialist (Soviet) plan was to achieve the rapid transformation of a
backward agriculture sector (traditional sector) into a modern industrial sector.

1.1.2. Planning in Western Europe

There could be several factors that necessitate planning in Western Europe, among others,
great depression of 1930th, wars,the development of science and technology, expansion of
markets, and specialization, Post war periods rehabilitation programs,developments of
democracy and etc. In Western economics, a series of the above historical development led to
the coordination of economic policies, i.e., planning. These are:

1. Great Depression of 1930’s: In the 1930’s, the capitalist world was in the midst of the
biggest depression in the world history. Capitalism failed an utter collapse and its inherent
contradiction came up to the surface. Economic growth collapsed and acute misery poverty
well experienced by people. Therefore, economist and politician favored economic planning
as a remedy for these and other economic ills. People’s mind now turned to economic
planning as panacea for their economic ills while Keynes writings also in a way strengthen
the belief in the efficacy and economic planning in capitalist countries. Meanwhile there
was an attempt to plan economic life in Nazi German and Fascist Italy during the time
(thirties).

Note: - The objective of the economic planning in the West was basically different
from that of the Soviet Union. The purpose of planning in Nazi Germany was primarily
to build up the war potential rather than improving the living standard of the people.

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2. The outbreak of World War I and II: This necessitates the proper and efficient planning
of economic resources for successful prosecution of the war. [For coordinated management
of scarce resources]
3. The development of science and technology: This not only made material progress
possible, but also they made planning possible as well improve computation facility;
advances in management theory (organization coordination). The intervening depression
reminded the state of the tragedy incompleteness of economic theory and public policy.
4. The growth of markets and increased specialization: This led to increased
interdependence among economic activities and to greater economic externalities, which
lead to adoption of economic planning. There is a need to intervene public agencies to
rectify the negative externalities
5. Rehabilitation plan In the post war period: The war devastated countries of Europe
were compelled to resort to economic planning to rehabilitate themselves owing to:-
 As a condition for receiving assistance under the Marshal plan, the USA insisted upon
these countries to formulate their rehabilitation plan covering almost every sector of
the economy.
 The USA itself has recognized the significance of economic planning when it adopts
an economic program called the “new deal” to come out of the suffering from great
depression in thirties.
6. The development of democracy: This also lead to the adoption of planning in order to
rectify social inequalities people could vote for those who experience an interventionist
approach.

1.1.3. Planning in Underdeveloped Countries

Economic planning was considered as important panacea (remedy) for underdeveloped
countries in their desire for industrialization. They want to achieve rapid growth in short period
of time. Economic planning, therefore, was considered as a tool to achieve rapid economic
development.
However, the development (evolution) of planning took a different course (path) than the rich
countries in the following reasons:
a) In Less Developing Countries, planning was considered as an ideology rather than a means
because in these countries planning was considered as a desire (expression) of many
things, such as:-
Desire of self control
Desire (expression) of independence
Expression of self-determination.
Then planning as a political and cultural goal
b) New leaders (elites) emerged when they got independence with new vision (ideas).
This brings new decision making capacity, which is to mean colonial administrators were gone
and these new leaders have to plan because it was considered as a potential tool (instrument)
to survive and prosperity. However, the then planning was not as a result of popular

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participation (bottom up planning). it was up down planning to express the need of the
leaders who control the political structure - they dictate the plan. Planning here was not as a
consequent of industrialization, which is the inverse of the Western, developed countries.

Economic Planning has been adopted in different parts of the world for various reasons. In
socialistic countries, where there are state owned means of production, planning has become
an institutional need while is capitalistic countries where private ownership exists (Laissez
faire), It is necessitated for the use of resources. In less developed countries or in developing
countries, it is favored to overcome the bottlenecks and for bringing all-round
development. After ‘world depression’, economic planning has become the darling in
underdeveloped countries of the world.
Although both advanced capitalistic countries and the under-developed countries have adopted
planning but there is this difference between the two: in the former it is corrective planning to
ensure economic stability, in the latter it is developmental planning to secure rapid
growth.

1.2. The meaning of economic development plan

There is no agreement among economists with regard to the meaning of the term planning.
Any type of state intervention in economic affairs has also been treated as planning. But the
state can intervene without making any planning. So what then is planning?
Before forwarding the operational definition of planning, let we see some of definition
suggested by different scholars;
According to Proffessor Artor Lewis planning is considered as: Planning within the economy.
 Town and country planning-Geographical zonation of factors, natural resources etc.
 Deciding what money the government will spend in the future.
 Planned economy is one in which each production unit (firm) uses only the resource of
men, material and equipment allocated to it quota and disposes of its product
exclusively to persons or firms indicated to it by central order.
 Any setting of production targets by the government, whether private or public
enterprise. Most governments practice this type of planning for industries or services to
which they attach special importance.
 Targets are set for the economy as a whole, purposing to allocate all the country’s labor,
foreign exchange, raw materials and other resources between the various branches of
the economy.
 The means which the government uses to enforce upon private enterprise the target
which have been previously determined.
Ferdynand Zweig: maintains that planning is planning of economy not within the economy. It
is note mere planning of separate section of the national economy, but of the economy as a
whole. Thus planning doesn’t mean piecemeal planning but overall planning of the economy.
Implies centralization of the national economy.
Robbins: Economic planning is collective control or supersession of private activities of
production and exchange.
Heyek: Planning is the direction of the productive by a central authority.

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Delton-economic planning is the deliberate direction by a person in charge of large resources
of economic activity towards chosen ends.
Lewis Lordwin-economic planning is a scheme of economic organization in which individual
and separate plants, enterprises, industries are treated as coordinate units of one single system
for the purpose of utilizing available resources to achieve the maximum satisfaction of the
people’s needs within time.

The most popular definition is by Dickinson – Planning is the making of major economic
decisions what and how much is to be produced, how, when and where it is to be produced, to
whom it is to be allocated, by a conscious decision of a determinate authority, on the basis of
comprehensives survey of the economic system as a whole.

Even though there is no unanimity of opinion on the subject, yet economic planning as
understood by a majority of economists implies deliberate control and direction of the economy
by a central authority for the purpose of achieving definite target and objectives with a specified
period of time. Economic planning, the process by which key economic decisions are made or
influenced by central governments.
“Generally speaking, planning is deciding in advance what is to be done”
Planning is preparing today for tomorrow; it is the activity that allows managers to determine
what they want and how to get it: They set goals and decide how to reach them. Planning
focuses on the future: what is to be accomplished and how.
Planning Answers six basic questions in regard to any intended activity:
What (the goal or goals).
When (the time frame in which it will be accomplished)
Where (the place or places where the plans or planning will reach its conclusion).
Who (which people will perform the tasks).
How (the specific steps or methods to reach the goals).
What resources (resources necessary to reach the goals).
As a working definition Planning is a technique or a means to achieve an end. End refers to
certain predetermined target (well defined objective). End might be achieving:
 Economic objectives,
 social objectives or military objectives or both
The main point is not to have plan or to have plan but what kind of plan do we need to achieve
the objectives. Intervention of state in all economic activities is inevitable, i.e.; government do
intervene in an economy in one way or another. But what matters is the degree, type and
nature of intervention.
1.3. The Need for economic planning,
The Economic Planning increases the rate of economic development through increasing the
rate of capital formation by raising the level of income, saving and investment. But in LDCs the
rate of Capital formation is beset (dominated) with many difficulties.
 People are poverty ridden
 Capacity to save is extremely low due to low level of income and high propensity to
consume

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 As a result rate of investment is very low which leads capital deficiency and low
productivity means low income and the vicious circle complete.
This vicious economic circle can only be broken by planned development. In this regard, two
methods are open to LDCs;
 Planned development by importing capital from abroad called supported
industrialization.
 Planned development by force saving called self-sufficient industrialization
What is Importance of Planning?
The followings are some of an importance of economic planning in general:
 It provides direction and sense of purpose
 It provides basis for controlling
 Improve and strengthen market mechanism
 It provides guideline for decision making
 Mobilize and utilize efficiently the available resources
 Determine the amount and composition of investment
 Enhances the efficiency of other managerial functions
 Facilitates the process of decision-making
 Minimizing the cost of operations
 Overcome structural rigidity
 Remove widespread unemployment and disguised unemployment
 Remove the poverty of nation
 Raise national and per capita income for reducing inequality in income and wealth.
 Reduce the inequality of wealth and money.
 Protection on environment
 Enables the management to implement future program in a systematic way so that the
management may get the maximum benefit out of the program framed
1.3.1. The Rationale for Planning in Developing Countries
Developing countries need economic planning in order to achieve the following objectives:

 To increase the rate of economic development

 To improve and strengthen the market mechanism
 To reduce unemployment and disguised unemployment
 To enhance the linkage between the agricultural and industrial sectors
 To create social overhead that enhance agricultural and industrial growth
 To expand domestic and foreign trade
 To eradicate poverty
 To be Self sufficient in food and raw materials
 To reduce inequality
a) Increase the rate of economic development
One of the principal objectives of planning in underdeveloped countries is to increase the rate
of economic development. In the words of D.R. Gadgil, "Planning for economic development
implies external direction or regulation of economic activity by the planning authority which is,
in most cases, identified with the government of the state. It means increasing the rate of
capital formation by raising the levels of income, saving and investment. But increasing the rate

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of capital formation in underdeveloped economies is beset with a number of difficulties. People
are poverty-ridden. Their capacity to save is extremely low due to low levels of income and
high propensity to consume. As a result; the rate of investment is low which leads to capital
deficiency and low productivity. Low productivity means low income and the vicious circle is
complete. This vicious economic circle can only be broken by planned development. Two
methods are open to underdeveloped countries. One is planned development by importing
capital from abroad which Zweig calls 'supported industrialization, and the other is by forced
saving which he characterizes as self-sufficient industrialization.

b) Improve and strengthen the market mechanism

The rationale for planning arises in such countries to improve and strengthen the market
mechanism. The market mechanism works imperfectly in underdeveloped countries because
of the ignorance and unfamiliarity with it. A large part of the economy comprises the non-
monetized sector. The product, factor, money and capital markets are not organized
properly. Thus the price system exists in only a rudimentary form and fails to bring about
adjustments between aggregate demand and supply of goods and services. To remove
market imperfections, to mobilize and utilize efficiently the available resources, to determine
the amount and composition of investment, and to overcome structural rigidities, the market
mechanism is required to be perfected in underdeveloped countries through planning.

c) Reduce unemployment and disguised unemployment

The need for planning in underdeveloped countries is further stressed by the necessity of
removing widespread unemployment and disguised unemployment in such economies.
Capital being scarce and labour being abundant, the problem of providing gainful
employment opportunities to an ever-increasing labour force is a difficult one. It is only a
centralized planning authority which can solve this. In the absence of sufficient enterprise
and initiative, the planning authority is the only institution for planning the balanced
development of the economy. For rapid economic development, underdeveloped countries
require the development of the agricultural and the industrial sectors, the establishment of
social and economic overheads, the expansion of the domestic and foreign trade sectors in
a harmonious way. All this requires simultaneous investment in different sectors which is
only possible under development planning.

d) Enhance the linkage between the agricultural and industrial sectors

The need, for developing the agricultural sector along with the industrial sector arises from the
fact that agriculture and industry are interdependent. Reorganization of agriculture releases
surplus labour force which can be absorbed by the industrial sector. Development of agriculture
is also essential to supply the raw material needs of the industrial sector.

e) Create social overhead that enhance agricultural and industrial growth

The agricultural and industrial sectors cannot, however, develop in the absence of economic
and social overheads. The building of canals, roads, railways, power stations etc., is
indispensable for agricultural and industrial development. So are the training and educational
institutions, public health and housing for providing a regular flow of trained and skilled
personnel. But private enterprise in underdeveloped countries is not interested in developing

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the social and economic overheads due to their un-profitability. It is motivated by personal
gain rather than by social gain. It, therefore, devolves on the state to create social and
economic overheads in a planned way.

f) Expand domestic and foreign trade

Similarly, the expansion of the domestic and foreign trade requires not only the development
of the agricultural and industrial sectors along with social and economic overheads but also
the existence of financial institutions. Money and capital markets are undeveloped in underde-
veloped countries. This factor acts as an obstacle to the growth of industry and trade. There is
economic instability generated by international cyclical movements. Such maladjustments can
only be removed by the state. It can decide upon the setting up of a central bank and with its
help a bill market, commercial banks and other financial institutions throughout the country. It
is the planning authority which can control and regulate the domestic and foreign trade in the
best interests of the economy.

g) Eradicate poverty
The planning for development is indispensable for removing the poverty of nations. For raising
national and per capital income, for reducing inequalities in income and wealth, for increasing
employment opportunities, for all-round rapid development arid for maintaining their newly won
national independence, planning is the only path open to underdeveloped countries. There is no
greater truth than this that the idea of planning took a practical shape in an underdeveloped
country and that this is the only hope of the resurgent underdeveloped countries of the world.
The rapid development of the USSR, a poor country at the time of the October Revolution,
bears testimony to this fact. To sum up in the words of Professor Gadgil Planning for economic
development is undertaken presumably because the pace of direction of development taking
place in the absence of external intervention is not considered to be satisfactory and because it
is further held that appropriate external intervention will result in increasing considerably the
pace of development and directing it properly. Planners seek to bring about a rationalization,
and if possible and necessary, some reduction of consumption, to evolve and adopt a long-term
plan of appropriate investment of capital resources with progressively improved techniques, a
program of training and education through which the competence of labor to make use of
capital resources is increased, and a better distribution of the national product so as to attain
social security and peace. Planning, therefore; means no more than better organization,
consistent and far-seeing organization and comprehensive all-sided organization. Direction,
regulations, controls, on private activity, and increasing the sphere of public activity, are all
parts-of organizational effort.

h) Self-sufficiency in Food and Raw Materials

As a preparation for more systematic and intensive planning, it may be considered necessary
first to make the country self-sufficient in food and essential raw materials. That would provide
a solid and sound base for the economy and prepare it for further building up. Many developing
countries concentrate or give priority on agricultural development. Dependence on foreign food
is dangerous. The first duty of a nation is to feed its people. Political freedom may prove a
farce without freedom from foreign food, especially when war clouds may be hovering
overhead. It is understandable, therefore, that this objective may take precedence over other

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objectives when a Plan is being conceived.

i) Reduction of Inequalities
It is now realized that political equality is illusory unless it is accompanied by economic
equality. Glaring inequalities of wealth, income and opportunities are shocking to the
democratic conscience. Socialism is in the air; it has a very wide appeal in modern
times. In poor countries, it is a painful sight that the masses of people should be on the
border line of starvation, whereas a few rich people should be rolling in all conceivable
luxuries. It is natural, therefore, that the planners, who are custodians of general
welfare, should so shape their plans so as to make the poor people less poor and the
rich a little less rich, so that the gap between the two is narrowed down as much as is
humanly possible. The Indian planners have before them the establishment of socialistic
pattern of society as one of the objectives.

1.4. Shortcomings/problems of economic planning

Planning aims at forecasting and providing a means for examining the future and drawing up a
plan of action. The very purpose of planning is to develop creative and innovative policies to
guide company’s activities in the market place. This is not an easy task. There are many
obstacles in the path leading to successful planning. As a tool, planning could not be a remedy
for all economic, social and others ills. Broadly the limitations could be on: concepts,
coordination, action, follow up. The specific limitations observed on planning are:
1. Accuracy of facts and information about the future is one of the limitations of
planning.
According to Terry,“no manager can predict completely and accurately the events of the
future”.
Managerial planning can be made accurately only if the events in future are
predicted accurately. Often adequate facts may not be available. Planning heavily
depend on reliable data. If there are unreliable data, the potential benefits of
planning will be undermined.

2. Time, money and effort are required in the collection and analysis of data and in
the formulation and revision of plans.
It is a time consuming process. It is an expensive process. Planning is useful only when the
expected gains from it exceed its costs. Often it is remarked that the cost of planning is in
excess of its actual contribution.
3. Planning may create a false opinion that all problems will be solved if the plans
are implemented. In practice, management has to revise the plans continuously and
check on their execution.
4. The effectiveness of planning may be greatly influenced by external forces, the
controllability of which is not in the hands of planners.
Government control, natural calamities, etc., may create hurdles in the implementation of
managerial plans. The problem of uncertainty (natural, market, state and war,

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international). The problem with uncertainty could be minimized by adopting probabilistic
models but planning models are not using such methods.
5. It makes the entire organizational set up extremely rigid/tendency towards
inflexibility
6. The problem of discontinuity. Planning models don’t deal with random shocks (natural
hazards, social changes and human intervention). Plans work effectively when social and
economic development unchanged (unfolds) continuously.
7. Inflation: rice instability would reduce the use of planning models.
In spite of the serious limitations, planning is still recognized as the foremost function of the
management. It is no doubt that unplanned operations shall produce chaos and disorder
everywhere without exception. Therefore, the use (favoring) of planning should be in line with
the above limitations

How to avoid the failure of planning?

In order to avoid the failure of planning, the following suggestions should be kept in mind:
1. Avoid sequential planning if possible,
2. Do not wait to start the second stage of planning until the first stage is finished,
3. Try to have parallel planning with lots of cross-checking, and
4. See that all plans move in the forward direction at the same time
5. Share the Knowledge and experiences of other

1.5 Plan formulation and requisites for successful planning.

The formulation and success of a plan require the fulfillment of the following factors:
1. Planning commission 7. Incorrupt and Efficient
2. Statistical data Administration
3. Clear Objectives 8. Proper Development Policy
4. Fixation of Targets and 9. Economy in Administration
Priorities 10. An Education Base
5. Mobilization of Resources 11. A theory of Consumption
6. Balancing in the Plan 12. Public cooperation
1. Planning commission/team- The first prerequisite for a plan is the setting up of a
planning commission which should be organized in a proper way. It should be divided
and sub-divided.
2. Statistical data- thorough survey of the existing potential resources of a country
together with deficiencies.
3. Objectives- the various goals and objectives should be realistic, mutually compatible
and flexible enough in keeping with the requirements of the economy.
4. Fixation of targets and priorities- this could be global and sect oral.
5. Mobilization for resources- a plan fixes the public sector outlay for which resources
are required to be mobilized. Internal and external resources to finance the plan. Eg.
Saving profit of public enterprises, etc.
6. Balancing in the plan- Proper balance of the economy should be ensured in the plan.
Otherwise shortage or surpluses will arise as the progress. Eg. Balance between saving

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and investment, supply & demand of goods and services, manpower requirement and
their availability, demand for import and available foreign exchange.
7. Incorrupt and efficient administration- it influence the success of the plan
competent staffing. It should gain experience in planning and starting a project, keeping
it on schedule, amending it in case of some unexpected snags, and evaluating it from
time to time. Highly trained and disciplined staff.
8. Proper development policy- investigation of development potential: provision of
adequate infrastructure; provision of specialized training facilities, general education,
skill; improving the legal framework of economic activities, laws related to land tenure,
commercial transaction; helping to create more and foreign, promoting better utilization
of resources; promoting and increasing in saving both private and public;
Good Policy helps, but may not ensure successes.

9. Economy in administration- people must be confident that every payment to the

government through taxation and borrowing is properly spent for their walfare and
development, and not dissipate away.
10. An education base- without creating honest and efficient human being in the
economy, it wouldn’t be feasible to undertake economic planning on a bit scale. Ethical
and moral standard of the people should get attention.
11. A theory of consumption-under developed countries shouldn’t follow the
consumption pattern of more developed countries. The theory should be democrat and
prime attention should be accorded to goods that are within the range of the model
income that can be purchased by the typical family.
12. Public cooperation- Public cooperation is considered to be one of the important levers
for the success of the plan in a democratic country.

1.6. Planning Process/ Steps of economic planning

Planning has its own processes or series of steps. These steps are interrelated and there is no rigid
boundary between or among these steps, and one is the base for the other.
1. Analyze Opportunities: Generally, this is not a step of planning. It is known as pre-step of
planning. It is essential to make a successful plan. The management has to analyze strengths; weakness,
opportunities and threats (SWOT) of changing environment of the business. Here, strengths and
weaknesses are internal environment of the enterprise like availability of materials, machines, manpower,
organizational structural technology etc. In the similar manner, opportunities and threats are external
environment and affected by many factors like government rules, economic condition, competitors’
strategy customers’ taste, social and cultural believes etc. It is essential to make detail study about the
above factors and should be pointed clearly.
2. Formulation of objectives: The formulation of the general objectives of the plan and their
definition in specific quantitative terms. The task of the formulation of the general objectives of the plan
is generally performed by the Planning Commission alone. The Planning Commission is a body of experts
and specialists in different fields of activity. As objectives provide the direction for all other managerial
functions, especially planning, objective setting is an important first step in the planning process.
Objectives specify the expected results and indicate the end points of what is to be done, where the
primary emphasis is t be placed, and what is to be accomplished by the network of strategies, policies,

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procedures, rules, budgets, and programs. They provide the direction necessary for achievement and
without them there is little to keep a manager from simply wandering in all directions. Objectives are
then, the ‘guiding light’ for the entire management process. Objective setting is a three steps process,
which involves
i. assessing the present situation,
ii. anticipating future conditions, and
iii. Then setting the objectives
2. Developing Premises: Planning premises are assumptions about the environment within which the
plan is to be carried out. Once objectives are established the planning commissions have to investigate
the environment to know factors that facilitate or block the attainment of these objectives. This involves
examining the external and internal factors which affect the economic plan: the external environment
(for Treats and Opportunities) analysis and internal environment (for Strengths and Weaknesses)
through Self-Audit.

 Strengths are internal competencies possessed by the organizations in comparison with the
competitors. These include structure and policies of the organizations, locations, financial soundness,
knowledge of personnel, qualities of facilities, and so on.
 Weaknesses are attributes of the organizations which tend to decrease its competence in comparison
to its competitors.
 Threat is reasonably probable events which if it were to occur, would produce significant damage to
the organization.
 Opportunity is a combination of circumstances, time, and place which if accompanied by a certain
course of action on the part of the organization, is likely to produce significant benefits.
The key element of planning at this stage is forecasting. It is based on the forecasts made in different
areas that premises are made. Because the future is so complex, it would not be profitable or realistic to
make assumptions about every detail of the future environment of a plan. Therefore, premises are, as a
practical matter, limited to assumptions that are critical, or strategic, to a plan, that is, those that most
influence its operation.

3. Determining alternative courses of actions: Alternatives are courses of actions that are available
to a planning commission to reach a goal. In developing alternatives, commission should try to create as
many roads to the objective as possible. Usually the most common problem is not finding alternatives
but reducing number of alternatives so that the most promising may be analyzed.

4. Evaluating alternative courses of action: Having sought out alternative courses, planning
commission evaluates the benefits, costs and effects of alternative courses in light of their weight to
goals and premises. Because there are so many alternative courses in most situations and there are
numerous variables and limitations to be considered, evaluation can be exceedingly difficult. This is a
step in planning process that operations research and mathematical as well as computing techniques
have their primary application to the field of management.

5. Selecting a course of action: This is the point at which the plan to be adopted is chosen or
selected. It is the real point of decision-making. The analysis of each alternative’s disadvantages,
benefits, costs and effects should result in determining one course of action that appears better than the

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others. If no one alternative emerges as clearly the best, consideration should be given to combining
parts or the entire content of two or more alternatives. Whatever the course chosen, it should be one
that gives you the most advantages and the fewest serious disadvantages.

6. Formulating derivative/action plans: At step 5 planning are ended. Formulating derivative plans
means formulating other plans based on one major plan.

7. Numberzing plans by budgeting: Numberzing plans are converting them into budgets. Plans will
have meaning when they are changed into numbers. Budgeting is the means of adding various plans
together and set important standards against which planning process can be measured.
8. Adoption: The adoption of the plan is the function of either the Parliament or the Government. The
Parliament can make any changes in the plan it likes but generally it does not make any drastic
changes in the draft of the plan. Any far reaching changes effected in the plan will upset the entire
plan and necessitate its reformulation by the Planning Commission. There are little possibilities for
making changes in the Plan by the Parliament or the Government because the Planning Commission
consults it fully at the formulation stage.
9. Implementing the plan: After the optimum alternative has been selected, the planning commission
needs to develop an action plan to implement it. The execution or implementation of the Plan is the
responsibility of the central and state governments in their respective spheres. The various Government
departments and agencies are entrusted with the task of executing the Plan and maintain continuous
liaison with the Planning Commission, because every plan, however well drawn up, has to be changed
during its execution to adapt it to the new situations. Implementing a plan is more difficult than making
it. Making a plan is an exercise of imagination, while implementation is a struggle with reality.
Implementation involves determining who will be involved, what resources will be assigned, how the
plan will be evaluated, and the reporting procedure.
10. Controlling and evaluating the results:
Once the plan is implemented, the planning commission must monitor the progress that is being made,
evaluate the reported results, and make any modifications necessary. The environment that a plan is
constructed in is constantly changing, so the plans may have to be modified. Or modification may be
needed because a plan was not quite “perfect” when it was implemented. Hence the Planning
Commission is to appraise from time to time the progress achieved in the execution of each stage of a
plan and recommend the adjustment of policy and measures that such appraisal might be necessary.
The supervision of the plan needs an independent body of experts unconnected with plan formulation or
plan execution. This body of experts should evaluate plan fulfillment in a strictly impartial manner. It
should bring to the notice of the government the failures and shortcomings which it notices in the course
of its evaluation.

1.7 Arguments for and against Planning

1.7.1. Cases for Planning
An unplanned economy is like a ship moving rudderless on uncharted seas with no fixed
destination and unlikely to reach it if there be any. Such an economy works blindly and
haphazardly. It caters for the rich and makes them still richer. It ignores the real wants of the
people and fails to promote general well-being. It is the profit motive rather than service of

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the masses which is the mainspring of economic activity in such an economy. How it operates
is no guarantee of economic progress for the less developed economies. The-economically
advanced countries may not feel enamored of the idea of planning but for the under-
developed economies it is a stark necessity as economic development is now regarded as
imperative. Majority of the under-developed countries realize very clearly that they must
develop economically and that too very soon.

As Galbraith says, "There is much that market can usefully encourage and accomplish. But the
market cannot reach forward and take great strides when these are called for. As it cannot
put a man in space so it cannot bring quickly into existence a steel industry when there was
little or no steel making capacity before. To trust the market is to take an unacceptable risk
that nothing or too little will happen." It is planning alone which can guarantee quick
economic growth in the under-developed countries. This explains why there is a clear and
pronounced swing of opinion in favor of planning.

We shall now put forward a few arguments for economic planning. Some of these arguments
are in favor of planning in general for all countries and some of them apply with a special
focus to underdeveloped economies.

a) The judgment of the State is superior to that of the citizen

As Arthur Lewis remarks, "The state now claims to know better than its citizens for how many
years they should send their children to school, between what hours they should drink, what
proportion of income should be saved, whether cheap houses are better than cigarettes, and
so on." Economic development is a more serious matter and should not be left to the
individual entrepreneurs. The State represents the accumulated wisdom of centuries and
provides talent and experience beyond the capacity of individual and isolated businessmen.
Planning by collective action is indispensable if a country is to develop economically on the
right lines and develop at the desired speed.

b) Planning becomes necessary for equitable distribution of economic power

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. There is no wonder,
therefore, that there are wide gaps between the 'haves' and 'have nots' which seriously offend
against sense of social justice. Shocking economic inequalities are a marked feature of an
unplanned economy. Inequalities result in heart burning and social tensions.

They also paralyze some of the ablest members of the society. Reduction of inequalities in
income, wealth and economic opportunities is, therefore, now the avowed aim of modern
welfare States and it is impossible of achievement without the instrument of planning. In the
absence of planning, inequalities will not only be perpetuated but accentuated from generation
to generation.

c) Planning helps to protect labor and harmonize wage relations

It has been seen that labor legislation alone cannot protect labor and harmonize wage
relations when market mechanism is permitted to operate freely. A planning authority must

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step to regulate the economic growth of the country as to ensure to the actual workers the
fruits of their labor. If there was perfect competition and full-employment, the price
mechanism, shorn of its imperfections, would have afforded due protection of labor rights. But
this is a big 'IF'. The State is a more effective guardian of labor rights than self adjusting and
automatic economic forces. By proper planning, it will be possible to provide perfect social
security to all workers.

d) Planning helps to eliminate economic instabilities

Planning has also proved to be a powerful instrument for eliminating instability which is
necessary concomitant of free market economy. Private enterprise left to it would produce
trade cycles, unemployment and misery. As Barbara Wootton remarks, "the progress of an
unplanned capitalist economy has always been liable to interruptions from the tendency of the
system to fall over its own toes, from a certain continued instability in its gait." It is not
generally agreed that planning of economic activity goes a long way in smoothening the
violent oscillations and swings in business, thus preventing undeserved gains and undue
hardships. It is on this ground that planning is advocated even for developed and advanced
economies. These countries may not need any further economic development; but they
certainly need a mechanism which would prevent violent ups and downs in the movements of
business activity and smoothen the course of business. In the last thirties, every country
suffered from Depression except Russia, which was a planned economy.

e) Planning helps to make terms of trade favorable to the country

Again, it is planning alone which can ensure that the terms of trade remain favorable to a
country. The volume and direction of foreign trade of a country admittedly plays a very
important part not only in economic development but also in determining the level of general
well-being in a community. But handling of foreign trade by the market has proved utterly
inadequate. Foreign trade must be thoroughly planned, if fruits of economic development are
not to be thrown away. This aspect of economic development has been paid special attention
by planners everywhere.

f) To realize major economic changes

Without the aid of planning no country can cope with major economic changes. Such changes
like industrial revolution or rationalization movement, are bound to turn the economy topsy-
turvy. The economic system may be thrown out of gear altogether. Private enterprise will feel,
helpless and stand simply aghast. The planning authority with its resources of men and money
can meet all such situations and control the disturbing factors. Major changes can even be
anticipated and provided against in good time. The market mechanism cannot move the
resources in the desired directions in quantity and with speed which a major change may
necessitate. Only a planning authority can eliminate bottle-necks. Under a free market
economy, a few persons receive abnormally large incomes at public expense and the scarce
commodities are unjustly distributed. Overproduction is a common phenomenon bringing
suffering to the poor. A planned action to speed up the movement of resources at times of
major changes is absolutely essential.

g) Planning eliminates wasteful competition

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The merit of the free market lies in competition being perfect; but in actual life perfect compe-
tition is a rare phenomenon. At any rate, there is nothing in the market mechanism that
establishes or maintains competition. Only State action can ensure fair competition. Hence,
market economy can also be helped to function adequately with the positive support of the
planning authority. Huge man-power need not be dissipated in distributional trades or huge
fund frittered away in advertisement and salesmanship. Planning can be combined with a
market economy in various degrees. Only by means of planning by direction rather than by
means of persuasion or inducement can an economy achieve a desired objective. That is the
only way to direct economic life economically, wisely and safely.

h) Efficient use of resources

Only a planned economy provides for proper co-ordination and avoids unnecessary duplication
of staff and equipment. In an unplanned economy, millions of producers work in an inde-
pendent and isolated fashion without bothering as to what the other businessmen are doing.
The cumulative consequence may be confusion and chaos. We might well question with
Professor Dobb: "How could order emerge from the conflict of a myriad of independent and
autonomous wills?" An unplanned economy, according to Lerner is like "an automobile without
a driver but in which many passengers keep reaching over to the steering wheel to give it a
twist." It will be a miracle indeed if the automobile reaches its destination safely.

On the whole, therefore, economic decisions in an unplanned economy are likely to be

irrational, shortsighted, self-frustrating and socially disastrous. A planning authority, on the
other hand, can take farsighted decisions and produce a balanced economy. It can take an
overall view, whereas in an unplanned economy each entrepreneur looks to his own interest
and nobody bothers about the economy as a whole as a central planning authority can do. As
Prof. Durbin remarks, "the general officers on the hill must be able to see more than the ensign
in the line of battle."

Planning makes for optimum utilization of a country's resources. A planning authority is able to
lay down what is essential and what is non-essential activity, encouraging the former and
sharply cutting down the latter. On the other hand, private enterprise is guided solely by the
profit motive regardless of social benefits or evils. Only a planning authority can ban lipstick
and face powder, otherwise valuable national resources will be directed towards the production
of useless luxuries for the rich and starve the masses of the necessaries of life. It is to the
obvious advantage of a country to concentrate on the production of essentials and avoid
wasting its resources on the non-essentials. As Professor Harris says, "Surely no well
functioning planned society would allow expenditure of 3 billion on education, and 2 billion on
social security, as in the U.S.A. and seven billion on alcoholic beverages."

i) Planning prevents artificial shortages that can be created by monopoly actions

A planned economy will prevent artificial shortages being created by profit-greedy businessmen.
By means of trusts, cartels, price agreements and market sharing they increase their profits at
the expense of the society. The planning authority can smash such designs by positive action in
favor of the community. It possesses enough power to ensure the working of the economy in a
healthy manner in the best interest of all rather than for the benefit of the few.

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j) Planning helps to minimize environmental costs of industrialization
By planning it is possible to keep down or eliminate social costs which usually take the form of
industrial diseases, industrial accidents, overcrowding and unsanitary conditions and cyclical
unemployment. These social costs are the by-products of capitalism. Since planning extends the
sphere of public ownership and control, the evils of capitalism are mitigated. Full co-operation
of labor can be secured and anti-social 'go slow' tactics rendered unnecessary resulting in
increase in national output.

k) Planning also results in higher rate of capital formation

Private enterprise is more intent on immediate gain rather than future good. It takes a short-
sighted view of things. On the contrary, the planning authority, as the custodian of the
national interests, takes a farsighted view. It can look more to the distant future than to the
immediate present. It is in a position to sacrifice petty present gains for the future substantial
benefits. The surpluses of the public undertakings add to the capital assets of the nation
instead of going into the pockets of private persons and spent on consumption goods. That is
why under planning capital formation receives great attention.

l) Special Case of Under-developed Countries

The arguments given above apply to all countries at all stages of economic development.
They largely take their stand on the failure of laissez-faire policy and its general
abandonment. It is now realized that lack of co-ordination, recurrence of business cycles,
economic inequalities, social parasitism, economic insecurity, wastes of competition, absence
of industrial peace and huge social costs which characterize an unplanned economy, can be
done away with by resorting to planning. An unplanned economy must act in an erratic and
irrational manner. But planning has a specially strong case for the under-developed
economies. In their case, it is not merely necessary to maintain the country's economy in
sound health and to ensure a rational and optimum use of the community's resources but
also to speed up economic development. They are lagging behind in the race and they are
keen to catch up with the advanced economies or at any rate reduce dependence on them as
fast as possible; This impatience for accelerating economic development leads inevitably to
economic planning. The achievements of the Russian and Chinese economies under planning
serve as an example.

The private enterprise in India has not taken India any far on the road of economic progress.
It has left untouched and undeveloped some of the off vital sectors of the Indian economy.
The entrepreneurial ability is lacking in India or exists only in an insignificant measure. The
Indian entrepreneurs take up worn-out lines and give no evidence of innovation. They are
more intent on rich quick methods and pursue speculative profits, rather than long-term
industrial development. They have been attracted more by commerce than by industry. In
such countries, it becomes necessary for the State to intervene and provide the right type of
entrepreneurship to bring about economic development.

Even in advanced countries, the edge of price mechanism has been blunted. It has failed to
function efficiently on account of economic rigidities and structural disequilibria; but in the
underdeveloped countries, intent upon accelerated economic development, little reliance can

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be placed on price-mechanism for the optimum utilization of resources and for giving a right
direction to the productive machine of the community. It will only function erratically, fitfully
and irrationally. There will be no guarantee that the quality and quantity of production is
what the nation needs. Much more positive action is needed to give right direction to
productive activity. In order to speed up the rate of economic development, price-
mechanism, as governing economy development, must go or its functioning confined to
unimportant sectors of the economic like the purchase and sale of consumer goods. Only
then, the under-developed countries will come out of the morass of poverty and economic
stagnation. Only by planning can specific objectives be attained and targets of production
achieved. At every five-year period, progressively higher tar gets can be fixed and effective
means to achieve them adopted.

Capital formation and skill formation are of crucial importance for any stage of economic deve-
lopment. These two determinants of economic growth have a very tardy and unsatisfactory
development in backward and under-developed economies. Planning is essential to build up
these necessary elements of productive power. Planning authority can launch a vigorous
savings drive and control and guide investment of the mobilized resources in the desired
channels. Normally in backward countries, rich people prefer investment in land, housing,
property and jeweler. This sort of investment is no good for speedy economic development of
the country. That is why Indian government has come hard upon the gold hoardings; drastic
measures have to be taken to take over hoarded wealth lying unproductively in lockers and
private hoards in order to help capital formation. This can only be done under planning.

Voluntary savings can be supplemented by revenue surplus 'Disguised unemployment, which

is a special feature of an under-developed economy, is another source that can be tapped.
We have surplus labor in agriculture which represents disguised unemployment. Such labor
can be withdrawn from agriculture and put to more productive employment. The State, in an
under-developed country, can also resort to deficit financing and thus increase the financial
resources available for economic development. Even then foreign aid may become necessary.
For planned economic development, foreign aid is readily made available. A country which has
no plan and which may rightly be considered as going nowhere, cannot hope to secure
foreign financial assistance, but planned economies can.

Plan and foreign aid given to Pakistan and India are the examples which can be cited. These
are a few measures by means of which financial resources of a country can be built up under
planning.

Glaring inequalities of wealth and income and of economic opportunities is another painful
feature of under-developed countries. These inequalities can also be reduced through planning.
Slogan of equality whips up the enthusiasm of the people and induces them to put in their best
effort.

The demographic factor is another hindrance in backward countries which can also be
overcome by planning. A country with increasing population must run fast in order to keep up
its present position, Increase in national wealth is swallowed up by still many more mouths.

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There is no escape from planning in such countries.

The socio-religious attitudes of the people also call for an effective State action to make them
act in a more rational manner. It is well known that social and religious institutions of India
have hindered economic growth in the past. A planned program is essential to neutralize the
adverse effect of such obsolete notions and institutions. The paucity of trained, competent and
honest administrators in backward countries has also to be made up and calls for a planned
endeavor.

Conclusion: These are some of the special problems which an under-developed country has to
tackle. It is now already realized and universally admitted that these problems can be
effectively tackled by planning and by planning alone. Planning in such countries is needed,
above all, for accelerating economic development. There is need in such countries, as Galbraith
says, not only for development "but an urgent demand that it should occur promptly."

Prof. D.R. Gadgil indicates the need for, and justification of, planning in these words, "Planning
for economic development is undertaken presumably because the pace or direction of
development taking place in the absence of external intervention is not considered to be
satisfactory and because it is further held that appropriate external intervention will result in
increasing considerably the pace of development and directing it properly. Planning seeks to
bring about a rationalization and, if possible and necessary, some reduction of consumption to
evolve and adopt a long-term plan of appropriate investment of capital resources with
progressively improved techniques, a program of training and education through which the
competence of labor to make use of capital resources is increased, and a better distribution of
the national product so as to attain social security and peace. Planning therefore means in a
sense, no more than better organization, consistent and far-seeing organization and compre-
hensive all-sided organization. Direction regulation controls on private activity and increasing
the sphere of public activity, are all parts of organizational effort.

1.7.2. Arguments against Planning

1. Inherently markets are not imperfect. 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
private is through use of fiscal measures (taxation and subsidy).
3. In order to prepare and execute a plan needs competent administration (skilled manpower)
which is in short supply in Less Developing Countries. Therefore, planning is only to
exacerbate skilled manpower shortages.
4. Planning requires information in quantity and quality which is limited in Less Developing
Countries. The information even available is not reliable; hence markets rather than
planning should be favored.
5. The cost of planning in Less Developing Countries is enormous in the form of
administration, licensing, etc.

Therefore, the use (favoring) of planning should be in line with the above limitations.

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