Chapter-Three

Quantitative Development
Planning Techniques
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 1. Choice of Planning Techniques – Pro and cons of
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Labour and Capital Intensive Techniques
 One of the problems facing under developed countries is how best to utilize
the available resources in order to accelerate the growth rate of the economy.
 The majority of such countries have abundant labor but scarce capital.
 The number of alternative open to an underdeveloped country is between
labor-intensive and capital intensive techniques; between light and heavy
industries and between agriculture and industry.
 An efficient technique is one that maximizes the output from a given
level of inputs or minimizes the costs of a given output.

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 Choice of Planning Techniques-------------------------------------
A. Labour Intensive Technique
3  The problem of choice of techniques boils down to one of adopting output increasing
techniques that raises labor productivity per unit of capital and are capital light and labor
intensive.
 Underdeveloped countries fail to use output increasing labor intensive techniques
because of the limits set by shortage of capital and skill.
B. Capital Intensive Technique, Modern Technique
 Successful economic development particularly in the face of gross backwardness, hinges
largely upon the introduction of modern technology upon as large scale as possible.
 For continuing and compounding effect on the growth rate of income, advanced
techniques are considered to be indispensable. Further their use will help change
customary working habits, conditions, social institutions and the very outlook of the people.

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 Choice of Planning Techniques-------------------------------------

 But the adoption of modern technology in underdeveloped countries is a very

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ticklish (difficult)question.(Why??)
The reasons are:
 Modern technology is, however, highly capital intensive and labour saving. It
involves high costs and excessively large amount of capital thereby making it unsuitable
for underdeveloped countries.
 Modern technology also requires complementary supplies of highly skilled, technical
and managerial person not available in less developed economies.
 Modern technology was evolved under different socio-economic and geographical set
up. It is meant to accommodate labor shortages and other requirements of advanced
country.

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 C. Appropriate Technique for Developing Countries
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i. Arguments for labor intensive technique
Employment argument:-
 It is only by using labor intensive techniques that increasing
employment opportunities can be provided to the idle or unemployed
labor force.
 Labor intensive techniques spread the total income generated more
widely over the population.

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 Arguments for labor intensive technique-----------------------------------------

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Resource argument: -
 In underdeveloped countries there is an acute shortage of capital and
entrepreneurial resources.
 The use of labor intensive techniques would be more appropriate for
releasing these scarce resources to be used in more important uses.
 These techniques are import light, that is, they require simple tools and
implements which need not be imported from abroad & thus there is
considerable saving in foreign exchange.

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ii. Arguments for Capital Intensive Techniques
 Enterprises using capital intensive techniques lead to a large
share of the resulting income going to entrepreneurs and a
smaller share going to wage earners.
 Since the propensity to save is higher on the part of
entrepreneurs, savings increase and a large proportion of them
are utilized for investment. Thus the rate of economic growth is
accelerated.

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 Arguments for Capital Intensive Techniques-----------------------------------------------
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 Since the growth rate is much faster under capital intensive
techniques than under labor intensive techniques, more
employment will be offered in the long run.
 Underdeveloped countries should, therefore, choose highly
capital intensive production techniques that do not become
obsolete soon.
 Thus a small production of capital goods is required to be
replaced in the future & more capital is available for further
capital formation.
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 Which technique should be adopted in an underdeveloped country?
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 In making a choice b/n labor & capital intensive techniques in the
context of underdeveloped country, it is necessary to consider a variety
of factors such as:
 their comparative cost of production;
 effects on employment,
 income, saving & investment over different periods;
 use of domestic resources ;
 effects on domestic and foreign demand;
 their ability to ease inflationary pressures & BOPs position etc.

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 2. An Overview of the Characteristics of Development
10 Planning Models
 Models have some common characteristics. Using these characteristics
we can distinguish between different types of models.
The most common characteristics include:
1. Coverage: - this refers to scope. On the basis of coverage, we can
classify models in to:
i. Overall (national) models
ii. Sectoral (regional) models
iii.Projects

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 The most common characteristics of planning model----------------------

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2. Degree of Aggregation
a) Aggregated models: -the whole economy is treated as one
producing /consuming sector.
b) Main sector models: - dividing the economy in to major
sectors: eg- Lewis model
c) Multi sector models:- the economy is divided into large
number of sectors which are interrelated. Example: Input-
Output model, Social Accounting Matrix.

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 The most common characteristics of planning model----------------------

12 3. Time dimension
a. Based on the capacity to predict the future development: - for example,
long-term models, medium-term models and short-term models.

b. based on time treatment within the models: such categories include:

 Static models: - if models try to compare future development

with present development but don’t necessarily consider the path of
development

 Dynamic models: - if models try to provide the path

(movement) of future development of the economy.

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 The most common characteristics of planning model----------------------

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4. Behavioral Relationships
a) Stochastic models:- if the behavioral relationship between variables
include a stochastic (error) term.

b) Deterministic models:- if the behavioral relationship between

variables doesn’t include a stochastic term.

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 3. Aggregate Development Planning Models
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 Development planning models can be aggregative.

 Here the entire economy is taken into account and the behavior of
some of the major variables such as output, income; saving and
capital are taken into consideration.
 These are also regarded as macro models and as an example the
use of the Harrod-Domar model can be cited.

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 Aggregate Development Planning Models----------------------------------------

15  In many Less Developing Countries, relevant data for the entire

economy may not be available although enough information could be
obtained for a single project. In such cases sectoral models are developed
and different sectoral plans are combined together to form an overall
sectoral project plan.
 As aggregative models do not provide a detailed description of
the inter industry relationships between supply and demand, to
achieve greater balance or consistency between various sectors,
inter-industry models are now being used to determine the
demand for intermediate goods plus imports.
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 Aggregate Development Planning Models----------------------------------------
 Relationships among different sectors are described by linear
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equations between output produced by a sector and its input
requirement. These models are useful:
a. To achieve consistency between demand and supply in different sectors;

b. To know whether investment demand will be enough to produce a target

output;

c. To determine intermediate demand for inputs including capital and labor;

d. To provide the basis for the use of programming models in which, apart from
achieving consistency, the planner can test the feasibility and optimality of
different projects within a plan.

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 A. Aggregate growth Models: the Harrod-Domar Models
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 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.

 In a simple form, the model could be set out as follows:

Where S is savings, I is investment, K is capital stock, Y is income, v is the capital-output ratio or

capital coefficient and s is the propensity to save.
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 Importance of HD model
18  The model helps the planner to predict the required savings rate once the target growth
rate and the capital-output ratio v are given.
 The model is also helpful to find out the extent of foreign resources that would be
necessary to realize the target growth rate should domestic savings be inadequate.
 For example, if the use of fiscal and monetary policies yields only 12 per cent
rather than 15 percent savings, then the difference between planned savings and
actual savings would be 3 percent (i.e. 15 per cent - 12 per cent) and this amount of
resources could represent the amount of foreign resources necessary to realize the
target.

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B. The invention of development (A. Lewis)

 The Depression and large number of unemployed rural people in

poor countries motivated A. Lewis to suggest a surplus labor model
in which only capital was a constraint.
 A. Lewis suggested that building factories would soak up this labor
without causing a decline in rural production.
 How many new machines? Lewis and other development economists
assumed a fixed ratio in production between people and machines,
i.e., Leontief production function.

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 C. The stages of growth (Rostow)
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 The next step in the evolution of the financing gap was to persuade rich
nations to fill the gaps with aid is Rostow’s stages of growth (1960).
 Anticipating the self-help boom, Rostow figured out five stages of
growth (traditional society, pre-take off, take off, self sustained maturity,
and high consumption) and the stage that stuck(unable to move) in
people’s mind was the take off into self-sustained growth.
 But how was take off accomplished?

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 5. The Planning Models
21 I. The Two- Gap Models
 The two-gap model illustrates that despite having surplus labor, developing
countries constrained by lack of domestic savings and the foreign exchange
availability to invest.
 The first gap is between the investment and savings and the second gap is
between imports and foreign exchange earnings.
 The developing countries cannot overcome the shortage of savings and foreign
exchange earnings from their own resources without, foreign aid,
 The main criticism on supporters of aid is that if two-gap models exists in LDCs
economy and foreign aid is necessary to fill these gaps then why the majority of
aid recipient countries could not achieved sustainable economic growth.

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 II. Input –Output Model
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 It is used to analyze inter industry relationship in order to understand
the interdependencies and complexities of the economy and thus the
conditions for maintaining equilibrium between supply and demand. Thus
it is also known as “inter industry analysis.”
 The basic notion of input-output analysis rests on the belief that the
economy of any country can be divided into a distinct number of
sectors called industries each consisting of one or more firms
producing a similar but not necessarily homogeneous product.

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 Input –Output Model------------
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 Each industry requires certain inputs from other sectors in order to
produce its own output. Similarly, each industry sells some of its gross
output to other industries so that they too can satisfy their intermediate
material needs.

 In other words, the input of one industry is the outputs of another

industry and vice versa, so that ultimately their mutual relationships lead
to equilibrium between supply and demand in the economy as a whole.

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 The assumptions of input – output Analysis.
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Before we are going to deal with the details of the input- output analysis, it is
important to note the basic assumptions:
 An economy is decomposed into n sector (industries) and each of these produces
only one kind of product i.e. no two products are produced jointly.
 The total output of any industry is capable of being used as inputs by other
inter- industry sectors, itself and consumed by final demand sector.
 There are constant returns to scale.
 Prices, consumer demands and factor supplies are given
 There are no external economies and diseconomies of production.
 All transactions may be considered in terms of money value since money.

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