College Of Developmental Studies

Course Title
Development planning and project
analysis I

Prepared by : Mengistu D. (MSc)

June, 2023
Batu, Ethiopia

1
 1.1. Historical background of economic
planning, projection, plans and forecasting
 The concept of planning has a long history and dates back to Pluto, who was the
first to discuss systematic planning.
 Later, it was developed, shaped and influenced by well-known writers and
intellectuals from both the western and eastern camps.
 But, the concept of modern economic planning is quite recent (new).
 It is a phenomenon of late 19th and early 20’th century.
 Ideologically, there are three ways to look at the evolution:
 Eastern European planning from a socialist perspective
 Western European planning: a capitalist viewpoint
 Planning in developing nations (mixed economic viewpoint) 2
 1.1.1. Planning in Eastern Europe
 Eastern European intellectual theorists and writers grew tired of the
problems and inconsistencies of unadulterated capitalism during the 19th
century.

 In order to correct the above situation and stop inequality brought on by

capitalism (free economy), they devised the concept of state intervention as
a counterargument to the laissez-faire fallacy.

 But, the only course of action taken was state intervention. Economic
planning was not mentioned and it was unclear how things should relate to
one another (although they were aware that laissez-faire was failing).

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 …….Planning in Eastern Europe
 During the Cold War, when socialist governments allied with the Soviet Union
ruled Eastern Europe, planning played a crucial role in the region's economic
systems.
 Then, Soviet Union created its first five-year plan in 1928, it gave the concept of
economic planning tangible form.
 @ end, nations adopted the command economy model, in which the government
owned and controlled all means and end of economics system and central
planning organizations oversaw economic activities.
 The socialist (Soviet) plan's primary goal was to hasten the conversion of an
antiquated agricultural sector (traditional sector) into an advanced industrial
sector.
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 1.1.2 Planning in Western Europe
 There could be several factors that demand planning in Western Europe,
among others wars, great depression of 1930th, expansion of markets
and specialization.

 In Western economics, a series of the above historical development led

to the coordination of economic policies i.e., planning. These are:-

 The development of science and technology not only made material

progress possible, but also they made planning as well improve
computation facility; advances in management theory (organization
coordination).
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 ….. Planning in Western Europe

 In the 1930’s, the capitalist world was in the middle of the biggest depression
in the world history.
 Capitalism failed to complete 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.
 The objective of the economic planning in the West was basically different
from that of the Soviet Union.
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 1.1.3. Planning in Underdeveloped Countries
 Economic planning was considered as important remedy for
underdeveloped countries in their desire for industrialization & to
achieve rapid growth in short period of time.
 Therefore, economic planning 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 due the following reasons:
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:-
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 …Planning in Underdeveloped Countries
 Desire of self control

 Desire (expression) of independence

 Expression of self-determination.

 Then planning as a political and cultural goal

 When they gained independence, new leaders (elites) with fresh perspectives (ideas)
emerged.
 This results in a new capacity for decision-making, which implies that colonial administrators are no
longer in charge and that these new leaders must make plans because they were thought of as a
possible tool (instrument) for survival and prosperity.

 However, the planning was not as a result of popular 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.
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 1.2. The Meaning of Economic Plan
 Planning is the fundamental management function, which involves deciding
beforehand, what is to be done, when is it to be done, how it is to be done and
who is going to do it.

 Economic planning refers to the process of setting objectives/goals, decisions

making and allocating resources to achieve a desired/stable economic outcome.

 The approach of economic planning often involves a variety of stakeholders,

including government officials, business leaders, economists and other experts
(if needed).

 It may also involve public consultations and feedback from citizens or other
stakeholders.
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 Cont’d…
 Economic planning can take many different forms, ranging from centralized
(planning by a government authority) to decentralized approaches with
significant differences in terms of decision-making power, efficiency and
effectiveness.

 Centralized planning refers a system in which a central authority, such as the

government/state, makes all the decisions regarding the allocation of resources,
production and distribution of goods and services.

 The central authority has complete control over all aspects of the economy,
including pricing, investment and production targets.

10
 Cont’d…
 However, centralized planning can also have several drawbacks. The central
authority may not have sufficient information of local conditions and may not
be able to respond quickly to changes in the economy.
 It can also be vulnerable to corruption and abuse of power, leading to
inefficiencies and economic stagnation.
 On the other hand, decentralized planning involves allowing individuals,
organizations and local communities to make decisions about the allocation of
resources and production of goods and services.
 Decentralized planning empowers local communities and individuals to make
decisions that are in their best interest rather than relying on a centralized
authority.
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 Definitions given by academicians
 Ferdynand Zweig maintains that planning is planning of the economy, not within the
economy.
 It is not a mere planning of towns, public works or separate section of the national
economy, but of the economy as a whole.
 Thus, planning does not mean piecemeal (fractional) planning, but overall planning of
the economy.
 To Prof. L. Robbins economic planning is “collective control or suppression of private
activities of production and exchange.”
 To Hayek, planning means, “the direction of productive activity by a central authority.”
 To Dalton, “Economic planning in the widest sense is the deliberate direction by persons
in charge of large resources of economic activity towards chosen end.”

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 …Definitions given by academicians
 Lewis Lord win defined economic planning, "as a arrangement of economic organization
in which individual and separate plants, enterprises and 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 a given time.

 Zweig also defines as, "Economic planning consists in the extension of the functions of
public authorities to organization and utilization of economic resources.

 Dickinson also defines planning (most popular definitions) as the making of major
economic decisions on:

What and how much is to be produced,

 How, when and where it is to be produced and

To whom it is to be allocated

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 1.3. The Need for Economic Plan (Their importance)
 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 14
 1.4. Shortcomings of Planning
 Planning is mostly dependent on the accurate data (Planning heavily depend
on reliable data). The potential advantages of planning will be compromised
by incorrect data.

 The discontinuity issue. Random shocks (natural risks, social changes, and
human intervention) are not taken into account by planning models. Plan
model function well when social and economic growth is constant and ongoing.

 Uncertainty-related issues (natural, market, state, war-related, and

international challenge).

 Inflation: unstable price would result in less usage of planning models.

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 1.5. Problems of Planning
 The formulation and success of a plan require the fulfillment of the following
factors (pre- requisites for planning):

Planning commission, statistical data

Clear objectives, fixation of targets and priorities

Mobilization of resources, balancing in the plan

Incorrupt and efficient administration, proper development policy

Economy in administration, an education base

Theory of consumption and public cooperation

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 Problems (difficult) of Planning
 Uncertainty: Planning is based on assumptions about the future, which can be
uncertain and subject to change. This can make it difficult to predict outcomes
and plan for contingencies.

 Implementation challenges: The success of planning depends on effective

implementation, which can be challenging in practice due to factors such
as resource constraints, bureaucratic inefficiencies, and lack of coordination.

 Political interference: Planning can be subject to political interference, with

decisions influenced by political considerations rather than economic or social
objectives.

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 …Problems of Planning
 Lack of stakeholder engagement: Planning can be less effective, if key
stakeholders, such as businesses, civil society organizations and local
communities are not adequately engaged in the planning process.

 Resistance to change: Planning can sometimes involve significant changes to

existing practices and structures, which can be met with resistance from
stakeholders who are hesitant to embrace change.

 Lack of resources: Effective planning requires resources, including data,

expertise and financial resources, which may be limited or unavailable in some
contexts.

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1.6. Implications of economic controls in planned economy
 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 randomly. It provides for the rich and makes them
still richer.
 It ignores the real wants of the people and fails to promote general well-being.
 In a planned economy, economic controls are used to regulate the allocation of resources,
production, and distribution of goods and services.
 These controls can take many forms, including price controls, subsidies, regulations, and
quotas
 The implications of economic controls in a planned economy can be both positive and
negative. 19
 Arguments of economic planning in planned economy

 The judgment of the State is superior to that of the citizen (A. Lewis view)

 In planned economic system (socialist view),

 Planning becomes necessary for equitable distribution of economic power

 Planning helps to protect labor union and harmonize wage relations

 planning helps to eliminate economic instabilities

 Planning helps to make terms of trade (TOT) favorable to the country

 To realize major economic changes

 Planning eliminates wasteful competition

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 Cont’d….
 Planning eliminates wasteful competition

 Inefficient use of resources (economic controls can lead to inefficiencies in

production and distribution)

 Planning helps to minimize environmental costs of industrialization

 Planning also results in higher rate of capital formation

 Corruption and abuse of power: Economic controls can be vulnerable to

corruption and abuse of power. When a small group of people have complete
control over the economy, they may use their power for personal gain, rather
than for the good of the economy as a whole.

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 Arguments against planning
1. Inherently markets are imperfect.
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 plan, it needs competent administration
(skilled manpower) which is in short supply in less developing countries.
4. Planning requires information in quantity and quality, which is limited in less
developing countries
5. The cost of planning in less developing countries is enormous in the form of
administration, licensing, etc.

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The end of Ch-#1

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 CHAPTER TWO

Classification of planning: characteristics of different types

of planning and their relative merits and demerits.

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 Chapter objectives
 After reading this chapter you must be able to:
 Explain planning by direction and planning by inducement

 Financial planning and physical planning

 Perspective planning and annual planning

 Short term, medium term and long term planning

 Indicative planning and Imperative planning

 Democratic planning and totalitarian planning

 Rolling and fixed plans

 Centralized and decentralized planning

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 Introduction
 Planning takes different forms/types Therefore, the types of planning are:
based on different basis: i. Authoritarian and democratic planning
 Differences in time periods (Variations ii. General and partial planning
in temporal periods ) iii. Functional and structural planning
 Institutions affected/demanded iv. Planning by inducement and direction
 Extent of activities covered (scope of v. Centralized and decentralized planning

the activities covered) vi. Physical and financial planning

 Modes of executing the plan (how the vii. Rolling and fixed planning
plan will be carried out), etc

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 Planning by Direction and planning by Inducement
 Planning by direction is an integral part of a socialist society/nation.
 Because, it entails complete absence of laissez-faire characteristics.
 Thus, one/small central authority group plan, directs and orders implementation of
the plan in accordance with pre-determined targets and priorities.
 Planning by Direction" is top-down approach, where central authority sets goals and
directives, then implemented by lower-level actors.
 Central authority emphasis on control and coordination, with the assumption that
he/she has necessary information and knowledge to make decisions and set goals.
 This approach can be effective, where there is a high degree of certainty and
predictability.
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Characteristics of planning by direction

1 2 3

Clear structure Efficiency focus Top-down decision making

Roles, responsibilities, and Plans are optimized for efficient A central authority makes most
objectives are clearly use of resources and quick decisions and sets the tone for
defined. execution/implemetation. implementation.
 Benefits of planning by direction

Efficiency Clarity Control

Allows for streamlined (rationalized) decision- Clear roles and objectives ensure A central authority can maintain tight
making and efficient use of resources. everyone is on the same page. control over the implementation of the plan.
 Shortcomings of planning by direction
 It is undemocratic, since the people are ignored all along.
 It is bureaucratic and totalitarian and involves the treatment of human beings as
simple pegs in a big bureaucratic machine.
 There' is no economic freedom.
 There is rationing and control, that result in black marketing and corruption.
 Owing to the complexity and many-sidedness of modern economic system,
planning by direction does not yield satisfactory results every times.
 There is bound to be shortage of some and surplus of other commodities.
 The fulfillment of the plan cannot be anticipated, because conditions keep
changing.
 Leads to excessive standardization which imposes on consumer's sovereignty. 30
…. Shortcomings of planning by direction
 Lack of flexibility: planning by direction can be inflexible, as the plan is
created by top-level management without much input from lower-level
employees.
 Poor communication: communication can break down between the top-
level management and lower-level employees.
 Lack of ownership: lower-level employees may not feel a sense of
ownership in the plan since they were not involved in the planning process.
 Limited creativity: planning by direction can strangle creativity and
innovation since employees are not given the opportunity to contribute their
ideas and suggestions.
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 Merits of planning by direction
 Clarity of objectives: planning by direction provides clarity of objectives to
lower-level employees.
 Efficient use of resources: planning by direction can result in efficient use of
resources, since the central authority has a broad overview of all the resources
available and can allocate them effectively.
 Consistency: planning by direction can ensure that the organization's activities
are consistent with its overall objectives and goals.
 Quick decision making: planning by direction can result in quick decision-
making, since the central authority has the authority to make decisions quickly
without needing to consult of lower-level employees.
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 Planning by Inducement (indicative planning)
 Planning by inducement is a bottom-up approach where individuals or teams within an
organization come up with their own plans and goals.
 Planning by inducement is self-governing planning, where actors at the local level
are empowered to make decisions and take action based on their own knowledge
and experience.
 The emphasis is on experimentation and adaptation, with the assumption that local
actors are best placed to identify problems and opportunities and develop solutions.
 This approach is often associated with participatory planning and community
development.
 The planning can be effective in situations, where there is a high degree of
uncertainty and complexity.
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 Cont’d….
 Planning by inducement is democratic planning.
 There is no force, but encouragement may involved.
 There is freedom of enterprise, freedom of consumption and freedom of
production.
 But, these freedoms are subject to state control and regulation (little
intervention).
 People are induced (encouraged) to act in a certain way, through various
monetary and fiscal measures.
 Encourages creativity and innovation, allows for individual ownership and buy-in
and can be more adaptable to changing conditions.
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 Characteristics of planning by inducement

1 2 3

Collaboration Innovation Flexibility

Multiple stakeholders work together Encourages experimentation, new Plans are adaptable and can
to co-create the plan and goals. ideas, and out-of-the-box thinking. change based on feedback and new
information.
 Benefits of Planning by Inducement

Creativity Engagement Diversity

Empowers individuals and teams to Encourages participation and Allows for a variety of perspectives
come up with their own innovative ownership from all stakeholders. and ideas to come together and
ideas. create a dynamic plan.
 Merits of indicative planning
 Consumer's sovereignty remains complete
 There is freedom of enterprise
 It is flexible
 It is democratic.
 Demerits of indicative planning
 Lack of Specificity: Indicative planning can be vague and lacking in detail,
which can lead to confusion and uncertainty among lower-level employees about
what is expected of them.
 The private entrepreneurs care more for profit than for the growth of the
economy (individual interest based)
 Thus, it may fails to achieve the objectives of planning or targets of production 37
 …. Demerits of indicative planning
 Time-Consuming: since it involves gathering input from multiple levels of the
organization.
 Potential for Misalignment: Indicative planning can lead
to misalignment between different levels of the organization if lower-level
employees do not fully understand the plan's objectives or if they interpret it
differently from top-level management.

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 2.2. Short term, Medium term and Long term Planning
Perspective planning and annual planning:

 Perspective planning and annual planning are two different types of planning that
organizations can use to help and guide their activities.
 Here are some differences between the two:

Time horizon:

 Perspective planning is long-term planning approach, that typically covers a period of 5

to 10 years or even longer
 Are future proofing and strategic focus : Mitigates risks by do in advance for future
challenges and building contingencies and resilience.
 While, annual planning is a short-term planning approach that covers a period of 1 year.

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 Cont’d….
On Scope:
 Perspective planning is broader in scope than annual planning and focuses on the
organization's overall vision, mission and strategic objectives.
 On other hand, annual planning is more focused on specific goals and objectives
that need to be achieved in the upcoming year.
Level of Detail:
 Perspective planning is more detailed than annual planning, as it is focused on
high-level strategic objectives and does not go into significant detail about how
those objectives will be achieved.
 On the other hand, annual planning is less detailed and includes specific actions,
timelines and responsibilities. 40
 Cont’d….
 Generally, we can differentiate planning based on the time frames of the inputs and expected
outcomes as short-term, medium-term and long-term framework.
a) Short term planning
 Typically covers a period of up to one year.
 It involves setting goals and developing plans that can be achieved in the near future, often
within a few months.
 Short term planning is important for day-to-day operations and ensuring that immediate
needs are met.
b) Medium term planning
 Typically covers a period of 1-3 years. It involves setting goals and developing plans that
can be achieved within a relatively short time frame, but still require significant effort and
resources.
 Medium term planning is important for achieving strategic objectives and responding to
changing circumstances in a timely manner.
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 Cont’d….
c) Long term planning
 Typically covers a period of three to ten years or even longer time.
 It involves setting goals and developing plans that require a long-term perspective
and significant resources to achieve.
 Long term planning is important for achieving ambitious/motivating goals, such
as expanding into new markets, developing new products or services, or making
major investments in infrastructure.
 When short-term and medium-term planning is successful, long-term planning
builds on those achievements to preserve accomplishments and ensure continued
progress.

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 Summary

Medium Term Planning

bridges the gap between the short and long-term plans,
translating long-term goals into the actionable near future.

1 2 3

Short Term Planning Long Term Planning

Lays the foundation for the medium term plan, Establishes the vision and goals for the distant future
supporting the implementation of the long-term with a clear roadmap of how to realize them.
plan.
 2.3. Fixed and Rolling Planning
 Professor Myrdal was the first economist to advocate a rolling plan for developing
countries in his book Indian Economic Planning in its Broader Setting
 It was introduced for purposes of defense after the Chinese aggression in 1962
and has been a great success in making the country almost self-sufficient in the
manufacture of sophisticated arms and ammunitions, frigates and aircrafts and
helped to prepare it face Pakistan twice.
 It was introduced in Indian planning by the Junta Government since April 1,
1978 and was given up on April 1, 1980 with the coming to power of the India
government.

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 Fixed planning
 Fixed planning is a traditional approach to project planning, where the project
plan is created at the beginning of the project and not expected to change throughout
the project's lifecycle.
 During this planning cycle, the organization sets goals, develops strategies and
creates budgets and plans for the upcoming period.
 The plans created during the fixed planning cycle are then implemented over the
course of the period, with periodic reviews and adjustments made as needed.
 This approach is useful when the project scope, timeline and resources are well-
defined and unlikely to change.
 The advantages of fixed planning include clear expectations, well-defined
deliverables and a sense of control over the project.
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 Cont’d…..
 More stable

 Provides a clear framework for decision-making

 Can be easier to track progress

 Can be less complex to manage

Cons:

However, it may not account for unexpected changes or delays that may arise during the
project.

 Less flexible

 Can be less responsive to new opportunities

 Can be more difficult to adapt to changes in the environment or the organization's goals
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 Rolling planning
 On the other hand, rolling planning is a more flexible approach to planning where the
planning cycle is continuous and ongoing.
 Rather than setting a fixed schedule for planning, the organization continually reviews
and updates its plans based on changing circumstances and new information.
 This approach is useful when project details are uncertain or when changes are likely
to occur during the project.
 This approach allows for greater quickness and responsiveness to changing conditions,
as plans can be adjusted quickly as needed.
 Advantages of rolling planning include greater flexibility, the ability to adapt to
changing circumstances, and a more accurate representation of the project's progress.
 However, it can also be more difficult to manage (if there is diverse need) and may
require more frequent communication and collaboration with stakeholders. 48
 Summary

Definition of Rolling and Fixed Planning

• Rolling planning involves revising the plan as the project progresses based on feedback and new
information.
• Fixed planning involves preparing a detailed plan upfront and executing it without alterations.

Rolling Planning Fixed Planning

Structured approach, well-planned and predictable

Flexible approach, adaptable to change and feedback
Advantages and Disadvantages of Each Approach
Fixed Planning
 Clear goals and timelines (a sequence of related events
arranged in chronological )
 Better for big projects
 Less flexible and unable to adjust for changes
 Can create unnecessary constraints

1 2

Rolling Planning

 Adaptable to change and unexpected situations

 Can be inefficient if not managed well
 Requires frequent assessment and monitoring
 2.4. Democratic and Totalitarian (Authoritarian) planning
 Democratic planning and totalitarian (authoritarian) planning are two different
approaches to decision-making in the context of planning. Here's a brief
explanation of each:
 Democratic Planning: Democratic planning is an approach to decision-making
where all stakeholders have an equal say in the planning process.
 This approach emphasizes collaboration, negotiation and consensus-building
among stakeholders such as community members, elected officials and experts.
 The advantages of democratic planning include greater inclusivity, diversity of
perspectives and a higher level of stakeholder engagement.
 However, it can also be time-consuming and may require significant effort to
reach consensus among stakeholders. 51
 Totalitarian (Authoritarian) Planning
 Totalitarian (authoritarian) planning is an approach to decision-making where
a single individual or small group of individuals hold complete power and
make all decisions regarding planning.

 This approach emphasizes top-down management and strict duty

to predetermined plans.

 The advantages of totalitarian planning include strong leadership, clear

direction and efficient decision-making.

 However, it can also be less inclusive, less responsive to stakeholder input

and may not account for the needs and perspectives of all members of the
community.
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Difference between Autocratic & Democratic planning

53
Summary Democratic &Autocratic planning

Advantages of Democratic
planning
1 Increased participation 2 Better quality decisions

Democratic planning takes into The collective nature of

account the views of all democratic planning results in
individuals involved, providing better-quality decisions, as all
a sense of ownership to the voices are heard and
final decision. considered.
3 Improved communication

The democratic process encourages open and honest communication,

leading to increased trust and stronger relationships between team
members.
Disadvantages of Democratic planning
Time-consuming Lack of direction Creativity can be stifled
The democratic process can take Everyone's opinion may result in The focus on reaching consensus
more time than a top-down a lack of direction or prioritization may limit the amount of creative
approach. of goals. thinking.

Not suitable for emergencies

The democratic process may not be timely enough for emergencies or situations requiring quick decisions.
Totalitarian (Authoritarian) planning

Highly structured Efficient decision-making Lowered employee satisfaction

In a totalitarian regime, the decision- In totalitarian planning, decision- In a totalitarian regime, there is no
making process is centralized and making is usually quick and decisive, room for feedback or dissent, leading
structured, and orders are issued from and orders must be followed without to decreased employee satisfaction
top to bottom. question. and engagement.
Advantages of Totalitarian
(Authoritarian) planning
1 Efficiency 2 Clarity

The highly structured The strict hierarchy and

decision-making process centralized control in
in totalitarian planning totalitarian planning
provides quick decisions provide clarity to
and efficient employees on their roles
implementation. and responsibilities.
3 Strong leadership

In a totalitarian regime, strong leadership can drive results and

improve team performance.
Disadvantages of Totalitarian (Authoritarian)
planning
Low morale Poor decision-making Resistance to change

Without employee participation The centralized decision-making The rigidity of totalitarian planning
and engagement, morale is likely process can result in poor quality can make it difficult to adapt to
to be low in a totalitarian regime. decisions, as input from those changing circumstances or new
lower down in the hierarchy may ideas.
be overlooked or ignored.
Comparison of Democratic and Totalitarian
(Authoritarian) planning

Democratic planning Totalitarian planning

• Owner of the final decision: the group • Owner of final decision: Leader

• Attribute: Participation • Attribute: Control

• Decision-making speed: Gradual, medium • Decision-making speed: Quick, high

 2.5. Anti-Cyclical and Development planning
 Anti-cyclical planning: anti-cyclical planning is an approach to economic
planning that aims to stabilize the economy by counteracting the business cycle.

 This approach involves using government policies, such as fiscal and monetary
policies, to smooth out fluctuations in economic activity.

 The advantages of anti-cyclical planning include increased economic stability,

reduced unemployment and balanced economic growth.

 Anti-cyclical planning is best suited for addressing short-term economic

fluctuations

 However, it can also be challenging to predict economic fluctuations accurately

and to implement policies that are effective in addressing them.
60
 Development Planning:
 Development Planning: Development planning is an approach to economic
planning that focuses on promoting long-term economic growth and development.
 This approach involves setting development goals and implementing policies to
achieve them, such as investing in infrastructure, education and technology.
 The advantages of development planning include increased economic
growth, improved quality of life and reduced poverty.
 However, it can also be challenging to implement policies that are effective in
achieving long-term development goals and it may take time to see the benefits of
these
 The key difference between anti-cyclical planning and development planning is their
focus and scope.
 Anti-cyclical planning is focused on short-term economic stabilization, while
development planning is focused on long-term economic and social progress. 61
 2.6. Physical planning Vs financial planning

 Physical planning and financial planning are two different types of planning
that organizations can use to manage their resources and achieve their goals.
 Physical planning involves the management of physical resources, such as
land, buildings, and infrastructure.
 This type of planning focuses on ensuring physical resources that are used
effectively and efficiently to meet the needs of the organization.
 Physical planning often involves land use planning, urban design,
transportation planning and environmental planning.

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 Cont’d….
 Financial planning, on the other hand involves the management of financial
resources, such as funds, investments, and budgets.
 This type of planning focuses on ensuring that financial resources are used
effectively and efficiently to achieve the goals of the organization.
 Financial planning often involves budgeting, forecasting, financial analysis,
and investment planning.
 The key difference between physical planning and financial planning is the
type of resources they manage.
 Physical planning focuses on managing physical resources, while financial
planning focuses on managing financial resources.

63
 2.7. Centralized and Decentralized planning
 Centralized planning involves a hierarchical approach to decision-making, where
decisions are made by a central authority or group.
 In this approach, decision-making power is concentrated in the hands of a few
individuals or a central planning agency.
 Centralized planning can result in more efficient decision-making, as decisions can be
made quickly and with a clear chain of command.
 However, it can also lead to outcomes that are not representative of the needs and
interests of all stakeholders.
 Decentralized planning, on the other hand, involves a collaborative and
participatory approach to decision-making.
 In this approach, decision-making power is distributed among a group of
stakeholders, such as local communities or organizations.
64
 Cont’d…
 Decentralized planning often involves a bottom-up approach to decision-
making, where stakeholders are encouraged to share their opinions, ideas, and
concerns.
 Decentralized planning can result in more inclusive and representative
outcomes, but it can also be slower and more complex than centralized
planning.
 The key difference between centralized planning and decentralized planning is
the distribution of decision-making power.
 Centralized planning concentrates decision-making power in the hands of a
few individuals or a central planning agency, while decentralized planning
distributes decision-making power among a group of stakeholders. 65
 Summary of centralized vs decentralized planning

Definition of Centralized Planning

Central Control Top-Down Approach Efficient Decision-Making

Involves a centralized authority
Decisions are made by upper- Streamlines decision-making
figure who makes critical
level management and and creates a clear chain of
decisions for the entire
executives with little input from command or hierarchy of
organization, business, or
lower-level staff or employees. control.
country.
 Characteristics of Centralized Planning

Controlled Environment Clear Responsibilities Efficient Processes Hierarchical

Management maintains control Tasks and responsibilities are clearly Processes are highly structured and Centralized planning has a clear hierarchy
over decision-making, which can defined, which can reduce ambiguity streamlined, which can result in of command and control, which can result
create a stable and predictable and confusion among staff members. increased efficiency and output. in a more orderly and structured
environment. organization.
Advantages of Centralized Planning
1 Clear Direction

Establishes a clear sense of purpose and direction

for the organization, with a unified vision and
Efficient Use of Resources 2
mission.
Reduces waste, duplication, and redundancy,
which can lead to more efficient use of resources
of time, money, and personnel. 3 Cost Savings

When decisions are made at the top level, they

tend to be more cost-effective, as no time is
wasted with unnecessary back-and-forth and
approval processes.
 Definition of Decentralized Planning

1 Delegated Authority

Authority and decision-making are

Empowers Employees 2 delegated to lower-level management or
Gives employees more autonomy and decision- staff members within an organization.
making power over their own work, which can
increase job satisfaction and productivity. 3 Flexible

Allows for more flexibility and adaptability

in changing market conditions or uncertain
circumstances.
Characteristics of Decentralized Planning

1 Increased Creativity 2 Adaptive Decision-Making

Allows for more creativity and Participants or employees can be

innovation among employees, more flexible and adaptable in
who have more input and response to new situations or
decision-making power. changing market conditions.

3 Greater Accountability 4 Customer-Focused

A culture of accountability develops Elevates the customer experience

when staff members are responsible and ensures that the customer
for their own tasks, projects, and remains at the forefront of decision-
decisions. making and planning.
 Advantages of Decentralized Planning

Quick Response Times Innovative Solutions to Problems Job Satisfaction and Ownership

Encourages new ideas, innovation, Gives employees a sense of

Staff members can respond more
and problem-solving from staff ownership and responsibility for their
quickly to customer needs, market
members who have a direct projects and tasks, leading to
changes, or new trends.
understanding of the tasks at hand. increased job satisfaction.
The end of Ch #-2

72
 CHAPTER-3

Quantitative Development planning Techniques

73
 Chapter Objectives
After completing this chapter, the students’ understand the below concepts

Choice of planning techniques – pro and cones of labor and capital

intensive techniques

Appropriate technique for developing countries.

Growth models - review of models in development economics

An overview of development planning models.

Planning models – two-gap model, social accounting matrix {SAM} and

linear planning model (LPM)

74
 Introduction
 Quantitative development planning techniques refer to the use of numerical and
statistical methods for analyzing and planning development projects and policies.
 Organisations need to make decisions on whether capital or labour intensive and this
depends upon:
 The amount to be produced
 The product – is it a standardised product or unique
 Who you are selling to – is it a luxury item or not
 Whether the product / service requires the “personal touch”
 Generally, there are two common planning techniques are labor-intensive and
capital-intensive techniques.
 Each method have their own pros and cons

75
 Overview of planning techniques
• Planning techniques can help businesses to develop effective strategies for
success of targeted goal.
• In this presentation, we'll explore labor and capital intensive techniques and
their pros and cons to help you make an informed decision.

1 Labor-Intensive 2 Capital-Intensive 3 Cost Leadership

Invests more in Focuses on reducing production
Invests more in human costs to offer lower prices than
resources and less in
machinery and less in
human resources. competitors.
machinery.

4 Differentiation 5 Innovation

Focuses on creating unique products Focuses on developing new technologies

to differentiate from competitors. and processes to improve production
efficiency.
 Factors to consider when choosing planning techniques
• When choosing a planning technique, businesses should consider several factors
like their goals, competitors, customers, pricing and product quality.
• Companies must assess their strengths and weaknesses to ensure they select
techniques that meet their unique needs.

Factors Considerations

What business goals do you want to achieve? What

Goals
plans do you need to make to achieve these goals?

Who are your main competitors? What planning techniques

Competitors
are they using? How can you differentiate from them?

Customers Who are your target audience? What do they need?

How can you meet their needs and expectations?
Advantage of Quantitative Development planning Techniques
 Quantitative development planning techniques are those that use mathematical and statistical methods to
analyze data and make decisions.

 They have several advantages over qualitative methods:

 Accuracy: Quantitative methods are more accurate than qualitative methods because they are based on hard
data

 Objectivity: Quantitative methods are more objective than qualitative methods because they are less influenced
by personal opinions or biases.

 Efficiency: Quantitative methods can be used to analyze large amounts of data quickly and easily. This makes
them more efficient than qualitative methods, which can be time-consuming and labor-intensive.

 Reproducibility: Quantitative methods are reproducible, meaning that the same results can be obtained by
different people using the same data. This makes them more reliable for making decisions that need to be
based on solid evidence.

78
 Cont’d…
 They can be used to assess the impact of different development interventions.

 They can be used to identify the most efficient use of resources.

 They can identify and quantify the problem

 They can be used to set realistic goals and targets (better decision).

 They can be used to monitor progress and evaluate the success of development
programs.

79
 Labor-Intensive Techniques
What is labor-intensive production?

 A production method that relies heavily on human labor

 Involves the use of simple tools and machinery

 Often used in developing countries where labor is cheap

When to use labor-intensive production??

 When capital is scarce

 When labor is cheap

 When flexibility is important

Examples of labor-intensive industries

 Agriculture and service 80

 Advantage (Pros) of Labor-Intensive Techniques
 Low capital investment - Labor-intensive techniques require a lower initial
investment in capital equipment than capital-intensive techniques, making it easier for
small businesses to enter the market.
 Workers can be flexibility - Labor-intensive techniques can be more flexible, as
workers can be easily moved from one task to another.
 Employment - Labor-intensive techniques can provide more employment
opportunities, especially for unskilled workers.
 People can think for themselves
 Labour can be used to do many different tasks
 Personal touch – people can interact better with customers – a lot of services cannot
be provided by machinery.
81
 Disadvantages of Labour Intensive Production:
Low productivity - Labor-intensive techniques can be less efficient and less
productive than capital-intensive techniques, as they rely on human labor rather
than machines.

High labor costs - Labor-intensive techniques can have high labor costs, as
workers may require higher wages, benefits and training.

Wage costs are high

Employees can only work limited hours

Workers can become ill, need holidays, take industrial action etc

82
 Labor-Intensive Techniques (Summary)
 Labor-intensive techniques require more human resources and less capital investment.
 These techniques help promote employment opportunities, reduce costs and encourage
innovation.
 However, they can be time-consuming and less efficient than capital-intensive techniques.

Pros Cons
Reduces costs, promotes employment, Time-consuming and less efficient than
encourages innovation, and profits local
capital-intensive techniques.
communities.
 Capital Intensive Production
What is capital-intensive production?
 A production method that relies heavily on machinery and equipment
 Involves the use of complex tools and technology
 Often used in developed countries, where capital is abundant
When to use capital-intensive production ??
 When capital is abundant
 When labor is expensive
 When efficiency is important
 When quality control is a priority
 Examples of capital-intensive industries
 Automobile manufacturing
 Chemical manufacturing
84
 Advantages of Capital Intensive Production
 High productivity - Capital-intensive techniques can be highly efficient and productive, as they
rely on advanced machinery and technology.
 Lower labor costs - Capital-intensive techniques can have lower labor costs, as fewer workers
are required to operate the machinery.
 Quality - Capital-intensive techniques can produce goods and services of a higher quality, as
they can be more precise and consistent.
 Can work 24/7
 Machines don’t need breaks or holidays etc
 Quality of work is consistent
 Work is accurate and precise
 Can do work which is too dangerous and unpleasant for people
 More productive than labour – a machine can produce more output per hour than labour
85
 Disadvantages of Capital Intensive Production
 Initial cost is high – have to spend a lot of money to buy machinery at first

High capital investment - Capital-intensive techniques require a higher initial

investment in capital equipment than labor-intensive techniques, making it more
difficult for small businesses to enter the market.

Machinery needs to be maintained

Machinery can break down – if it does it can halt production

Can only be used for the tasks they were designed to do

Can cause unemployment: as fewer workers are required to operate the

machinery.
86
 Cont’d…..
 In conclusion, the choice of planning technique depends on the specific needs and goals of
the business.

 Labor-intensive techniques can be more suitable for small businesses with limited capital,
while capital-intensive techniques can be more suitable for larger businesses that require high
productivity and quality.

 Mechanisation is being labour substituted by machinery, but labour still operates the
machines

 Automation means labour is replaced by machines and machines work automatically and
are computer controlled. Workers supervise.

Reasons for Automation and Mechanisation are – to reduce costs and increase productivity.

But, business will use a combination of people and machines !!!

87
 Capital-Intensive Techniques (Summary)
 Capital-intensive techniques require more investment in machinery and less human resources.
 These techniques are fast, efficient, and have a high level of output.
 However, they can lead to unemployment and can be harmful to the environment.

Pros Cons
Fast, efficient, high level of output, and cost-effective. Can lead to unemployment and harm the environment.
 3.2. Appropriate techniques for developing countries
 The type of technology to be used will rely on the resources that are available and the
economic issues that the country is experiencing.

 There is widespread labor unemployment in developing nations. So, labor-intensive

technology should be used if the goal is to increase employment prospects for the rising
work force.

 Other benefits of labor-intensive technology might include the fact that light and medium-
sized industries would benefit from it more than heavy and large-scale ones.

 If the objective of development planning is to maximize the rate of growth of output and
the volume of employment in future, they argued in favor of capital – intensive technology.

 Capital – intensive techniques are more suited to development of the basic and heavy
industries. 89
 Cont’d…
 However, labor-intensive techniques are inappropriate when taken into account in terms
of output growth and capital accumulation rates.

 Labor-intensive techniques will not be able to utilize the most recent technology
advancement, which will prevent them from maximizing labor productivity.

 Therefore, investment initiatives that increase employment do not increase labor

productivity.

 The demand for consumer products in the economy would grow in larger proportion than
that of the output, according to another argument made against the labor-intensive
method.

 If enough attention is not paid to this, it means that the creation of jobs increases
consumer demand, which leads to inflation. 90
Challenges Faced by Developing Countries

1 Resource constraints 2 Lack of infrastructure

Inadequate infrastructure makes
Scarcity of resources to invest in
adoption of complex and costly
costly technologies
technology difficult

3 Unemployment and poverty

High levels of poverty limit access to 4 Climate change

technology and lead to high
unemployment rates Climate change puts additional
pressure on already struggling
economies in developing
countries
 Importance of Appropriate Technology Techniq

Cost-effective Sustainable Accessible

Appropriate technology is affordable and Appropriate technology is often Appropriate technology is suited to local
easily replicable, reducing the need for environmentally friendly and energy- conditions and can be easily operated and
expensive imported technology. efficient, helping to reduce carbon maintained by local people, without the
footprints and promote sustainable living. need for external expertise or resources.
 Criteria for Appropriate Technology

Small scale Simple design Sustainability

Appropriate technology should be Appropriate technology should Appropriate technology should

small and adaptable to local use simple design principles promote sustainable practices,
contexts such as homes, farms or using locally available materials, including renewable energy,
workshops. reducing production costs and waste reduction, and
increasing accessibility. environmentally-friendly
manufacturing processes.

Safety
Appropriate technology should be safe to use, maintain and operate even when operated by locals with limited training
and education.
 Benefits of Appropriate Technology for Developing Countries

Improved quality of life Reduced carbon footprint Empowerment of local people

Appropriate technology helps to create jobs, Appropriate technology ensures efficient Appropriate technology builds local capacity
access to clean water sources, and improve energy use, reducing the negative impact on and skills, empowering communities to take
health care, education, and standard of living. the environment and promoting sustainable control of their own economic, social and
living practices. environmental destiny.
Potential Drawbacks of Appropriate Technology

Low scalability Limited potential for Cultural barriers

innovation
Appropriate technology is typically Appropriate technology may conflict
small-scale and designed for local Appropriate technology often uses with certain cultural practices or
contexts, which can limit the scope simple designs that are less norms, these making adoption
of its impact. susceptible to innovation, which can difficult or impossible in some cases.
limit the potential for technological
progress.
 3.3. Overview of development planning models characteristics
 Planning is essential for any organization to achieve their settled goals.

 A number of social and economic factors are involved in planning procedure and may be there
interaction among these variables.

 Although, some of the variables may not be related to one another, models are used to study the
intricate interactions between the various variables.

 Therefore, we need analytical techniques or models in order to understand the interaction between
these variables.

 Models are useful tools for understanding complex interactions between variables, these is one of
its benefits.

 Models are required to make clear/ rigorous relationships.

 For instance, using models ambiguous (vague) relationships might be made clearer.

96
 Advantages of analytical models
 Deductive values (or thought value). Since Models are simplification of the
complex reality or simplified version of a reality.

 It can have also communicative value because different organizations or an

individual wants to communicate each other the complex nature of the economy

 Models attempt to establish a relationship between the goals of the society and the
instruments to achieve these goals.

 Models enable to give alternatives in terms of resource constraints or capacity to

achieve the goals.

 Models provide a framework with different agents to carry out meaning full
dialogue regarding the possibilities and tradeoffs.
97
 Limitations of analytical tools
 Models may not necessarily provide the intended solutions. i.e. models do not
provide the solution for everything. experience or common sense on detail
knowledge of the economy.

 Models can’t replace the value judgment (intuitive) that is required through
experience. That is why we say models don’t provide the solutions. But, they
show way to approach for solutions.

 Furthermore, no single model is the best model as remedy. Depending on the

situation, different models can be used for different problems.

98
 Characteristics of analytical models
 Analytical models are quantitative models that are used to represent a system or process in terms
of mathematical equations.

 They are typically used to predict the behavior of the system or process under different conditions.

 Here are some of the characteristics of analytical models:

• They are based on mathematical equations. This means that they can be used to make precise
predictions about the behavior of the system or process.

• They are typically deterministic. This means that they assume that the behavior of the system or
process is completely determined by the initial conditions and the parameters of the model.

• They are typically linear. This means that the equations that describe the system or process are
linear in the parameters.

• They are typically simple. This means that they are relatively easy to understand and use.

99
 Classification of analytical model
Using these characteristics we can distinguish between different types of models.
A) Coverage: - this refers to scope. On the basis of coverage, we can classify models into
◦ Overall (national) models
◦ Sectoral (regional) models
◦ Project model
A)Degree of aggregation
A. Aggregated models :- A high degree of aggregation means that the data is aggregated
to a coarse level, while a low degree of aggregation means that the data is aggregated to a
fine level.
◦ treats the economy in its entity ( the whole economy is treated as one producing
/consuming sector)
b. Main sector models: - dividing the economy in to major sectors.

100
 Example
◦ Lewis model dichotomizing the economy into agriculture and non agriculture
sectors.

◦ Mahalonobis model by divides the economy in to consumption and capital

goods producing sector.

◦ Multi sector models:- the economy is divided into large number of sectors
which are interrelated. Example: Input-Output model(Leiontef model), Social
Accounting Matrix.

101
 Time dimension
◦ based on the capacity to predict the future development
 Long-term models
 Medium-term models
 Short-term models
◦ based on time treatment with in the models
 Static models: - if models try to compare future development with present
development, Which don’t necessarily consider the path of development
 Dynamic models:- if models try to provide the path (movement) of future
development of the economy.
102
 Behavioral relationships
Stochastic model
 Econometric models are stochastic models because there is a certain disturbance term included in
the model.
 Example: Y=XB + U;
 Where Y is the dependent variable; X independent variable; B the coefficient or parameter and U
is the error or stochastic term
 All short run macroeconomic models are stochastic models.
Deterministic models:-
 if the behavioral relation ship between variables doesn’t include a stochastic term.

 The relationship is administratively (exogenously) determined.

 Ex Y=X B that is an exact relationship between dependent & independent variables.

 All mathematical models are deterministic models.

103
 Degree of closure
 If there is a system of equations, the number of equations should be equal to the number of
unknown variables in order to solve the equation.

◦ Open models:-if the variables (unknown) are not explained with in the system. As an
example open input out put models (when the final demand is assumed to be given, and
not some thing that is solved with in the model).

◦ One popular open economy model is the Mundell-Fleming model, which explains how
changes in monetary and fiscal policy can affect an economy's exchange rate, interest
rates, and output.

◦ Example: The national income identity: Y = C(Y-T) + I(r) + G + NX(e), where Y is

output, C is consumption, T is taxes, I is investment, r is the domestic interest rate, G is
government spending, NX is net exports, and e is the exchange rate.
104
 Cont’d….
◦ Fully closed models:- if the variables can be calculated within the system
itself.

◦ Closed economy models are useful for understanding the workings of a

domestic economy in isolation from the rest of the world. However, they have
limitations in that they do not account for the effects of international
trade, capital flows, or exchange rates on the domestic economy.
1. Keynesian cross model, which is a simple closed economy model, includes the
following equations:
 Aggregate demand: Y = C(Y-T) + I(r) + G, where Y is output, C is consumption,
T is taxes, I is investment, r is the interest rate, and G is government spending.

105
 Cont’d….
 Aggregate supply: Y = F(K,L), where F is the production function, K is capital, and L is labor.

 Market equilibrium: Y = AD, where AD is aggregate demand.

2. The IS-LM model, which is a more complex closed economy model, includes the following
equations:

 The investment-saving (IS) curve: Y = C(Y-T) + I(r) + G, where Y is output, C is consumption, T is

taxes, I is investment, r is the interest rate, and G is government spending.

 The liquidity preference-money supply (LM) curve: M/P = L(r,Y), where M is the money supply, P is
the price level, L is the demand for money, r is the interest rate, and Y is output.

 Market equilibrium: Y = C(Y-T) + I(r) + G = M/P * L(r,Y).

◦ Partially closed models:- if more than one value of the variables is possible to calculate with in the
system.

◦ In optimization (maximization of benefits or minimizing of costs) given certain constraints in linear

programming. 106
Advantages and disadvantages of analytical modeling techniques

107
 Overview of growth models
Definition
 Growth models are theoretical frameworks that outline the factors that
contribute to economic growth and development.

 These models attempt to explain the factors that contribute to economic

growth, such as technological progress, investment, human capital, natural
resources and institutions.

 There are several different types of growth models.

 Generally economic model can be classified into two categories:

endogenous growth models and exogenous growth models.
108
 Cont’d….
 Endogenous growth models emphasize the role of internal factors in driving economic
growth, such as investment in research and development, education, training and
entrepreneurial activity.

 In these models, growth is not simply the result of the accumulation of capital and labor, but
there is also driven by innovation and technological progress.

 Examples of endogenous growth models : Harrod-Domar model.

 On the other hand exogenous growth models, emphasize the role of external factors in driving
economic growth, such as changes in the availability of natural resources, improvements in
international trade or changes in government policies.

 In these models, growth is largely driven by factors outside of the economy.

 Examples of exogenous growth models are AK model, Solow-Swan model and the Lucas
model.
109
 Form of growth model

Classical growth model

1 2 3

Introduction Assumptions Implications

The classical model was • The model assumes that technology is The classical model suggests that growth
developed in the 18th and 19th fixed, output is determined by the in the long run is limited by resources and
centuries by economists such factors of production. that policies to promote growth should
as Adam Smith and David • other savings and investment focus on increasing productivity and
Ricardo. determine the rate of capital savings.
accumulation.
 Neoclassical growth model
The model is based on the following
assumptions:
• The economy is in steady state, meaning that
the growth rate of output is constant.
• The economy is perfectly competitive
• There is no government intervention.
• Technological progress is exogenous, meaning
that it is an outside force that cannot be
influenced by economic decisions.

Implications
Introduction Assumptions
• The neoclassical model suggests that
• The neoclassical growth model  The model assumes that policies to promote growth should
was developed by Robert Solow and technology can be improved focus on improving technology and
Trevor Swan independently in 1956. through innovation, individuals increasing savings and investment.
• The neoclassical model was have access to capital markets and • The model shows that the long-run
developed to address the limitations savings and investment decisions growth rate of output is determined by
of the classical model. are intertemporal. rate of technological progress.
 Solow-Swan growth model
 It was developed in 1950s by Prof. Robert Solow

 It is the neoclassical economic growth model .

 According to Solow growth model, “economic growth is initially

growth rapid, then increase in slows from second phase and then per
capita output reaches its steady state/maximum and finally economy
stops growing”.

 The Solow model work under the assumption of Constant Returns to

Scale (CRS) argue that accumulation of capital alone cannot account
for sustained economic growth (saving level, population growth and
technological progress can affect the growth of output over time)
112
 Schumpeterian growth model
 Joseph Schumpeter (1883-1950) was an Austrian economist who is considered as founders of

modern economic growth theory.

 Schumpeter's theory of economic growth is based on the idea that innovation is the driving force of

economic development.

 Innovation can take many forms, such as the introduction of new products, new production

processes, or new business models.

 The Schumpeterian growth model is a dynamic model of economic growth that takes into account the

role of innovation.

 Innovation disrupts the equilibrium, leading to new firms entering the market and old firms exiting

the market.

 Schumpeter argued that entrepreneurs are the key drivers of economic growth.
113
Beyond the Solow Model: New (Endogenous) Growth Theory

 One goal of this growth theory is to explain the persistent/ stubborn

rise in living standards that we observe in most parts of the world.

 The Solow growth model shows that such persistent growth must
come from technological progress.

 But where does technological progress come from?

 In the Solow model, it is simply assumed exogenously determined!

114
 Continued . . .
 To understand fully, the process of economic growth, we need to
go beyond the Solow growth model and develop models that
explain technological progress.

 In endogenous growth theory, we reject the Solow model’s

assumption of exogenous technological change.

 Endogenous growth theory considers two main driving forces of

growth:

◦ Accumulation of knowledge (effectiveness of labor and its

evolution over time)

◦ Capital is central to growth by including human capital.

115
 Aggregate Models:The Harrod-Domar Models

• In the aggregate models only a few crucial variables are taken into consideration.
• The model which is most used is the one developed by Harrod and Domar (H-D)
in the context of growth theory.

• The Harrod-Domar model is an economic growth model that focuses on the

relationship between investments, savings and economic growth.
• The Harrod-Domar model is a simple model of economic growth that was
developed by Roy Harrod and Evsey Domar in the 1930s and 1940s.
• The model is based on the idea that economic growth is driven by accumulation
of capital.
• The model assumes that the rate of capital accumulation is proportional to the
rate of savings.
 Concept of Harrod-Domar Model

1 Focused on Investment 2 Marginal Capital-Output 3 Development Assistance

and Savings Ratio (MCOR)
• Harrod-Domar Model asserts that
The Harrod-Domar Model asserts that The Harrod-Domar Model proposes developing countries need higher
investments and savings are key that the MCOR (the ratio of the levels of aid and investment if they
determinants of economic growth, and change in capital to the change in want to increase their economic
that an increase in the rate of savings or output) is a key determinant of growth.
investments can lead to an increase in economic growth. This ratio • Investment from foreign sources has
economic growth. determines how much investment is the potential to create multiplier
required for a certain level of growth. effects and help close the savings
gap in underdeveloped countries.
 Assumptions of Harrod-Domar Model
Uniform Marginal Product of Capital (MPC)
Stable Savings Ratio
The MPC of an economy is the same for all
The Harrod-Domar model requires a
types of investment. The Harrod-Domar model
consistent fraction of national income
assumes that the marginal product of capital is
saved each year.
constant and independent of the sector of
investment.

1 2 3 4

Full Employment Constant Technological Progress

The model assumes full employment of The model assumes constant technological
a country's labour force. Any increase in progress. With constant technology, investment
investment will require an increase in can lead to an increase in capital stock.
the labour force, which must be fully Without increasing technology, one unit of
employed. capital stock yields the same output year after
year.
•The Harrod-Domar model was used to calculate the financing gap, the gap
between actual investment in a developing country and the investment needed to
attain some desired growth rate.
•The Harrod-Domar model can be expressed in the following equation:
g=s/k
• where:
• g = the rate of growth of output
• s = the savings rate
• k = the capital-output ratio (which is constant)
•The equation states that the rate of growth of output is equal to the savings rate
divided by the capital-output ratio.
 Application of H-D model
 Suppose that the saving rate is 20% of income and every 100 birr of output
requires capital valued at 500 birr.

 Then, growth in output will be:

gy= s/k= 0.2/5= 0.04= 4%

 If the saving rate is equal to 30%, then gy= 0.3/5=0.06=6%

120
Limitations of Harrod-Domar Model
 The model assumes that the economy is always at full employment.

 The model assumes that the capital-output ratio is constant.

 The model does not take into account technological progress.

121
Application & Difference of Harrod-Domar, Lewis and Rostow models

Harrod-Domar
1 (more focused on short run business cycle)

The model focuses on the relationship between

Lewis 2 savings, investment, and economic growth, and
requires full employment, constant technology,
The model states that industrialization in and uniform Multiparty Computation (MPCs).
developing countries is characterized by a shift of
labour from low to high productivity sectors, 3 Rostow
leading to an increase in wages and productivity.
The model assumes that a five-stage of
economic growth will take place, with
developed nations reaching an advanced
stage of high mass consumption driven
market demand.
Rostow five-stage of economic growth

123
 Planning Models

A) The Two- Gap Models

 In the previous discussion we have seen how various economists and
academicians applied the Harrod- Domar model to show that foreign capital can
raise the growth rate by raising the availability of capital for reproduction,
when the COR is held constant.

 The two-gap model introduces the assumptions that an imported commodity not
produced domestically is essential for the production of investment goods.

 The growth may be Exogenous or Endogenous

The two-gap planning model is a tool used to analyze the economic

development of less developed countries (LDCs). 124
 Savings Gap
The savings gap is the difference between the amount of savings that is generated domestically
and the amount of investment that is needed to achieve a targeted rate of economic growth.

◦ If the savings gap is positive, then LDCs will need to depend on on foreign aid or foreign
borrowing to finance their investment needs.

 A positive saving gap is when a country's savings exceed its investment.

 This can have a number of positive economic implications including:

• Increased economic growth: When there are more savings available, businesses have more
money to invest in new projects and expansion. This can lead to increased economic growth.

• Improved financial stability: A positive saving gap can help to improve a country's financial
stability. This is because it means that there is more money available to meet unexpected
financial challenges, such as a recession or a natural disaster.
125
 Cont’d….
• Reduced reliance on foreign investment: When a country has a positive saving
gap, it means that it is less reliant on foreign investment. This can give the
country more control over its own economic destiny.
 However, there are also some potential risks associated with a positive saving
gap. These include:
• Increased inflation: If there is too much money in the economy, it can lead to
inflation. This is because businesses can raise prices without losing customers, as
there is more money available to pay for goods and services.
• Reduced consumption: If people are saving more money, they may be
consuming less. This can lead to a slowdown in economic growth, as businesses
have fewer customers.
• Increased inequality: If the savings are not evenly distributed, it can lead to
increased inequality. This is because the people who are saving the most money
are likely to be the wealthiest people in society.
126
The Foreign Exchange Gap
◦ The foreign exchange gap is the difference between the amount of foreign
exchange that is earned through exports and the amount of foreign
exchange that is needed to import essential goods and services.

◦ If the foreign exchange gap is negative, then LDCs will need to rely on
foreign aid or foreign borrowing to finance their import needs.

127
 Positive implications exchange rate
 Increased exports: A positive exchange rate gap can make a country's exports
more competitive in international markets. This can lead to increased exports
and economic growth.

 Reduced imports: A positive exchange rate gap can make imports more
expensive for domestic consumers. This can lead to reduced imports and a
decrease in the trade deficit.

 Increased foreign investment: A positive exchange rate gap can make a

country more attractive to foreign investors. This can lead to increased
investment and economic growth.
128
 Negative implications
 Reduced exports: A negative exchange rate gap can make a country's
exports less competitive in international markets. This can lead to reduced
exports and economic growth.
 Increased imports: A negative exchange rate gap can make imports
cheaper for domestic consumers. This can lead to increased imports and a
trade deficit.
 Reduced foreign investment: A negative exchange rate gap can make a
country less attractive to foreign investors. This can lead to reduced
investment and economic growth.

129
 Advantage of Two-Gap Model
 Using the The two-gap model can be used to determine the following:
 The amount of foreign aid or foreign borrowing that is needed to achieve a
targeted rate of economic growth.
 The composition of foreign aid or foreign borrowing (i.e., how much should
be used to finance savings and how much should be used to finance
imports).
 The impact of foreign aid or foreign borrowing on the balance of payments.
 The model can help LDCs to identify the constraints on their economic growth
and to determine the amount of foreign aid or foreign borrowing that is needed
to achieve their development goals.
130
 Social Accounting Matrices (SAM)
 Social Accounting Matrix (SAM) represents flows of all economic transactions
that take place within an economy (regional or national).
SAM is a matrix representation of the National Accounts for a given country,
but can be extended to include non-national accounting flows and created for
whole regions or area.
SAMs refer to a single year providing a static picture of the economy.
The main features of a SAM are threefold.
First, the accounts are represented as a square matrix; where the incomings and
outgoings for each account are shown as a corresponding row and column of the
matrix.
131
 Cont’d….
 Second, it is comprehensive, in the sense that it portrays all the economic
activities of the system (consumption, production, accumulation and
distribution), although not necessarily in equivalent detail.

 Thirdly, the SAM is flexible, that usually set up in a standard, basic

framework there is a large measure of flexibility both in the degree of
disaggregation and in the emphasis placed on different parts of the economic
system.

132
A hypothetical example of the Input-Output table

Sectors Purchasing sector

Input to Input to Input to Total Final Gross
agriculture manufacturing service immediate demand output
input xj

Agriculture 50 150 0 200 100 300

Selling sector Manufacturing
100 100 50 250 250 500

Service 0 150 50 200 100 300

Total intermediate
purchase 150 400 100 650 450 1100

Household
(primary inputs) 150 100 200 450 50 500

Gross in put (xi)

300 500 300 1100 500 1600

133
 Cont’d….
.
Because of the assumption of fixed proportions, to produce a birr worth of agricultural output
requires:-

50 300  0.17 worth of agricultural goods

150
100 300
500  0.33 worth of manufacturingl goods
0 300  0.00 worth of service goods
The same analysis applies to the other sectors i. e manufacturing and services
The intersectoral technical matrix A= aij for our hypothetical example is
0.17 0.30 0.00
A= 0.33 0.20 0.17
 
0.00 0.30 0.17

134
 Linear Planning Models
 Linear planning models are a useful tool for economic planning.

 Linear planning models are mathematical models, that are used to plan the
economic development of a country.

 The models are based on the assumption that the relationships between
economic variables are linear.

 The models can be used to determine the optimal allocation of resources and to
achieve specific economic goals.

 However, the models are based on a number of assumptions and they may not
be able to capture the full complexity of economic systems.

135
 Components of a Linear Planning Model
◦ A linear planning model typically consists of the following components:
 A set of variables that represent the economic activities of the country.
 A set of equations that describe the relationships between the variables.
 A set of constraints that represent the limited availability of resources.
 An objective function that represents the goal of the planning model.

 Types of Linear Planning Models

◦ There are two main types of linear planning models:
 Input-output models: These models are used to analyze the interdependencies
between different sectors of the economy.
 Linear programming models: These models are used to optimize the allocation
of resources.
136
Mathematical equation of LPM

n
max Z  
j 1
cij xi

Subject to:
n


j 1
aij x j  ri I = 1,2,…, m

xj  0 j = 1, 2, …, n

137
 Cont’d….
 Advantages of Linear Planning Models
◦ Linear planning models are relatively easy to understand and to solve.
◦ The models can be used to analyze complex economic systems.
◦ The models can be used to optimize the allocation of resources.
 Disadvantages of Linear Planning Models
◦ The models are based on the assumption that the relationships between
economic variables are linear.
◦ The models are not always able to capture the full complexity of economic
systems.
◦ The models can be computationally expensive to solve.
138
 Chapter-4

Planning in Practice: Experiences from Ethiopian and other countries

139
 4.1. An Overview Of Ethiopia's Planning Experience

 Ethiopia has a long history of planning, dating back to the 1950s.

It is over three decades, since Ethiopia adopted a planned approach to

development.

In the immediate post-World War II period, separate programs and plans were
not integrated into a general framework of a national plan covering the entire
economy, were drawn up by various government agencies and served as the
bases for government policy.

Afterwards, sectoral programs of varying durations were prepared for

agriculture, industry, forestry transport, telecommunications, education and
water resources development.
140
 Cont’d….
 In 1954/55, government created the National Economic Council to coordinate the
state's development plans.
 The National Economic Council (NEC) is a White House office, that is responsible for
coordinating economic policy across the federal government.
 This agency, which was a policy-making body, chaired by the emperor, devoted its
attention to improving agricultural and industrial productivity, eradicating illiteracy and
diseases and improving living standards for all Ethiopian nation.
 The National Economic Council helped to prepare Ethiopia's first and second five-
year plans.

141
 The First Five Year Plan
 The First Five-Year Plan (1957-61) sought to develop a strong infrastructure, particularly in transportation,
construction and communications to link isolated regions.

 Another goal was the establishment of an indigenous of skilled and semiskilled personnel to work in processing
industries to help reduce Ethiopia's dependence on imports.

 Lastly, the plan aimed to accelerate agricultural development by promoting commercial agricultural ventures.

The Second Five Year Plan

 The Second Five-Year Plan (1962-67) indicated the start of a twenty-year program to change Ethiopia's
predominantly agricultural economy to an agro-industrial.

 The plan's objectives included diversification of production, introduction of modern processing methods and
expansion of the economy's productive capacity to increase the country's growth rate.

The Third Five Year Plan

 The Third Five-Year Plan (1968-73) also sought to facilitate Ethiopia's economic well-being by raising
manufacturing and agro-industrial performance.
142
Ethiopia's planning experience:
• 1958: First five-year plan is launched.
• 1974: Derg regime comes to power and introduces a new planning system
(The Agricultural Development Led Industrialization (ADLI) Strategy).
• 1991: Derg regime is overthrown and a new government is formed.
• 1995: The Federal Democratic Republic of Ethiopia is established.
• 2005: The Growth and Transformation Plan (GTP) is launched.
• 2010: The GTP is revised.
• 2021: The Ten-Year Perspective Development Plan (PDEP) is launched.

143
 Cont’d….
 The PDEP is Ethiopia's most ambitious planning initiative to date.

 The plan has six strategic pillars: ensuring quality growth, improving productivity

and competitiveness, undertaking institutional transformation, ensuring private

sector leadership in the economy, ensuring equitable participation of women and

children and building a climate-resilient green economy.

 Here are some of the key lessons that can be learned from Ethiopia's planning

experiences:

 The importance of long-term planning: Ethiopia's PDEP is a good example of the

importance of long-term planning. The plan provides a clear vision for the

country's future, and it helps to ensure that resources are used effectively. 144
 Cont’d….
 The importance of stakeholder participation: Ethiopia has made a
concerted effort to involve stakeholders in its planning process. This has
helped to ensure that the plans are relevant to the needs of the people, and
it has also helped to build support for the plans.

 The importance of flexibility: Ethiopia's planning experiences have

shown that it is important to be flexible in the face of change. The country
has had to adapt its plans to changing circumstances on a number of
occasions.

145
 The plan for accelerated and sustained development to end
poverty (PASDEP)
 The Plan for Accelerated and Sustained Development to End Poverty (PASDEP) was launched in
Ethiopia in 2005/06.
 The plan was designed to accelerate economic growth and reduce poverty in Ethiopia.
 The PASDEP was a five-year plan and it was implemented in two phases.
 The first phase of the PASDEP was implemented from 2005/06 to 2009/10 and the second phase was
implemented from 2010/11 to 2014/15.
 The Plan for Accelerated and Sustained Development to End Poverty (PASDEP) is the First Five
Year Phase to attain the goals and targets set in the Millennium Development Goals (MDGs) at a
minimum.
 The main objective of the PASDEP is to lay out the directions for accelerated, sustained and people-
centered economic development as well as to pave the groundwork for the attainment of the
MDGs by 2015.
146
Objective of Millennium Development Goals (MDGs)
 The Millennium Development Goals (MDGs) were a set of eight international
development goals that were established in 2000 by the United Nations.
 The goals were:
1. Eradicate extreme poverty and hunger.
2. Achieve universal primary education.
3. Promote gender equality and empower women.
4. Reduce child mortality.
5. Improve maternal health.
6. Combat HIV/AIDS, malaria, and other diseases.
7. Ensure environmental sustainability.
8. Develop a global partnership for development.
147
 Major Challenges Encountered PASDEP

 High inflationary

 Inadequate capacity for domestic revenue collection

 Low level of domestic savings to support the huge demand of the country’s
investment for accelerating growth and development in the process of
eradicating poverty

 In some areas of the country, delayed entrance of rainy seasons, early

withdrawal and mal-distribution of rain to practice irrigation scheme.

148
 The planning process
 The planning process is a systematic approach to setting goals and objectives, developing
strategies and allocating resources in order to achieve those goals.

 The planning process can be used for a variety of purposes, including:

 Business planning: The planning process can be used to develop a business plan, which is a
document that outlines the goals and objectives of a business, as well as the strategies that will
be used to achieve those goals.

 Project planning: The planning process can also be used to develop a project plan, which is a
document that outlines the goals and objectives of a project, as well as the tasks that need to be
completed in order to achieve those goals.

 Personal planning: The planning process can also be used for personal planning, such as
setting financial goals or developing a fitness plan.
149
 Cont’d….
 The planning process typically involves the following steps:

A) Define the problem or opportunity(preliminary stage)

 The first step in the planning process is to define the problem or opportunity that you are trying
to address. What are you trying to achieve? What are the challenges that you face?

B) Set goals and objectives (analytical stage ):

 Once you have defined the problem or opportunity, you need to set goals and objectives. What
do you want to achieve? Which are the specific, measurable, achievable, relevant and time-
bound goals that you will need to achieve in order to reach your overall objective?

C) Develop strategies (Adjustments and directive stage):

Once you have set your goals and objectives, you need to develop strategies. What are the steps that
you need to take in order to achieve your goals?

150
 Cont’d….
D) Allocate resources (Plan elaboration stage): Once you have developed your
strategies, you need to allocate resources. What resources do you need in order to
implement your strategies?

E) Implement and adoption the plan: Once you have allocated resources, you need to
implement and adopt your plan. This involves taking the steps that you have outlined
in your strategies.

F) Monitor and evaluate the plan: Once you have implemented your plan, you need to
monitor and evaluate it. Are you on track to achieve your goals? Do you need to make
any changes to your plan?

151
Planning and the transition period
 The transition period is often a time of great uncertainty and
change.

 It can be difficult to know what to expect or how to prepare.

However, by careful planning and preparation, we can make
the transition period smoother and more successful.

 Ethiopia as moving towards a market-oriented mixed

economy, where all forms of ownership and enterprises will
operate on the principle of profitability and competitiveness.
Planning in practice beyond Ethiopian countries
 In the United States, the federal government uses a variety of planning
frameworks to set national priorities and allocate resources. For example, the
President's Management Agenda is a strategic planning framework that
outlines the government's goals for improving efficiency and effectiveness.
 In the United Kingdom, the National Planning Framework is a strategic
planning framework that sets out the government's vision for the
development of the country. The framework is used to guide local planning
authorities in their decision-making.
 In China, the Five-Year Plan is a strategic planning framework that sets out
the government's goals for economic and social development. The plan is
used to guide the allocation of resources and the implementation of policies.
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END OF THE COURSE!!!
Thanks!

154