Planning is defined as
conceiving, initiating, regulating and controlling economic activity by the
state according to set priorities with a view to achieving well-defined
objectives within a given time.
According to Professor Dickinson, economic planning is the
making of major economic decisions by a determinate authority on the basis of a
comprehensive survey of the economy as a whole. Such decisions include
what and how much to produce; how, when and where it is to be produced; and to
whom it is to be allocated.
With reference to underdeveloped countries, Subrata
Ghatak defines economic planning as a
conscious effort on the part of any government to follow a definite pattern of
economic development in order to promote rapid and fundamental change in the
economy and society.
Essentials of Economic Planning
According to Arthur Lewis, a development plan may consist
of the following parts:
- Survey of
current economic conditions
- List of
proposed public expenditures
- Discussion of
likely development in private sector
economic projections of the economy
- Review of
of current economic conditions: The economic
survey shows the changes in respect of population, NI, taxation,
government expenditures and BOP, etc. It also tells us the changes
needed or expected to occur in these economic variables. The
economic survey is usually for one year.
of proposed public expenditures: The proposals and
suggestions for incurring public expenditures on development projects are
invited from various government departments and agencies. After a
thorough scrutiny of these recommendations, an order of priority is
determined deciding what is to be included, what is to be postponed or
rejected as the financial resources are less than required.
of likely development in private sector: It is said that both
public and private sectors are inter-related and rate of economic
development depends more on the working of the private sector than expenditures
in public sector. The government reviews the performance of major
industries in economic planning, and sets quantitative targets for the
plan period. All this involves a brief in-depth analysis of the
working and implications of market structure.
economic projections of the economy: It refers to the
preparation of aggregate models which are applied to the economy as a
whole. These models deal with production and consumption as single
aggregates. Aggregate models are used to determine the possible
growth rates in NI, the division of national product among consumption,
investment and exports, the required volume of domestic savings, imports
and foreign assistance needed to carry out a given development
programme. This involves massive calculations and paper works.
of government policies: The government through development policy
can influence the decisions indirectly in the private sector.
Importance / Objectives of Economic Planning w.r.t.
Mixed Economy & Under-Developed Countries
In the following section we will discuss the economic planning with
reference to mixed economies and under-developed countries:
utilization of resources: The most essential function of economic
planning is to ensure the best use of given resources within the
country. Maximum social benefits can only be ensured when the
available resources are allocated and utilized in the most efficient
manner. Unused or slack utilization of resources will adversely
affect the employment and productivity level of the economy. The
government has to do some arrangements in order to bring equality between
demand and supply. In the market economy, there are wasteful
expenditures in the form of selling costs. Sometimes, few producers
established their cartels in order to control the market. All this
can be undone by the government through effective planning.
imperfections and price distortions: In market economies,
there are certain market imperfections and price distortions both in
commodity market and factor market. These distortions rise because
of institutional arrangements. As the wage rate in some sectors of
the economy exceeds the opportunity cost of the labour. This may be
due to trade unions’ influence. Moreover, the goods whose demand is
less elastic their producers may pursue monopolistic behaviour.
There may be dualistic approach in the money market. In the
organized money market the rate of interest is kept artificially low or
inexpensive credit facilities are provided. While on the other hand,
in less organized money market or in agriculture market, the ROI is
extraordinary high. This situation also creates price
distortion. These market imperfections can only be corrected by
efficient economic planning.
opportunities: The most common benefit
that any democratic country enjoys is that the greater market
opportunities are and should be provided to the producer and
consumers. But this can be handicapped because of two reasons:
(a) Limited life span
of an individual
(b) Limited resources
at the disposal of an individual
- Because of
these common problems, the individuals undertake those projects which
require small amount of resources and the profit can be earned within a
short period of time. In this way, the individuals would hardly be
prepared to launch big projects like construction of highways,
power-stations, land-reclamation, anti water logging and salinity schemes,
rail-roads, sea ports, telecommunication, etc. It is the duty of the
modern government to provide greater resources at the disposal of
individuals. At the same time the government has to reduce
excessive-consumption or the disposal of resources in few
hands. This can only be ensured under efficient economic
of National Income and Raising Living Standard: It is the
responsibility of modern state to maximise the national income and raise
the standard of living. It can only be ensured when the government
correctly addresses the economic needs of the country and takes desired
actions in economic planning.
Employment: In economically advanced countries, the
government’s aim is to provide full employment. All modern
governments have, in fact, underwritten employment. If they cannot
provide work, they have to give doles. Unemployment is the biggest
by product of any capitalist society. The government can
redistribute labour and create more work opportunities for both private
and public sector.
distribution of income: Economic planning is the most powerful
tool of equitable distribution of income. The price-mechanism
rewards people according to the resources they possess but contains in
itself no mechanism for equalization of the distribution of those
resources. Therefore, there is a wide gap between haves and
have-nots. Shocking economic inequalities are a marked feature of an
unplanned economy. Reduction of economic inequalities is now the
avowed aim of a modern welfare state and is impossible without the
instrument of economic planning.
oriented goals: In market economy, only those goods are produced
whose demands are backed by money offers. As a result the production
of public goods / services, including health, research and education,
old-age benefits, poor houses, orphan houses, clean water, sewerage and
drainage, free entertainment, art and culture, historical assets,
wildlife, forests, security, and defence, are altogether ignored or very
less attention is paid. It is planning which distributes the
resources between present consumption and future consumption, social
development and economic development, etc. As a result the goals of
planned economies are more welfare and public oriented.
Stability: The purpose of economic
planning is to reduce the price instability created by business
fluctuations. During the period of increasing demand, the price
hikes are inevitable due to supply shortages. In under-developed
countries, because of low productive capacity, low savings and investment,
and traditional set up, the price starts rising very sharply, and its
impact on the developing society is very deep. In order to eliminate
the adverse effects of price instability and business fluctuations, the
government comes forward and play a vital role in creating a favourable
economic condition. This can only be done through wise economic
savings and investment: The ultimate task of any finance ministry
is to boost up the savings and investment, esp. foreign investment.
In UDCs on one hand there is a vicious circle of poverty, while on the
other, there is an operation of international demonstration effect.
In UDCs, there is a general tendency of demonstration effect within the
people, and the whole economy’s growth is hampered by dualism. Savings
remain at the lowest level. The boost in investment, domestic or
foreign, depends on the level and duration of economic stability.
More stable and viable economic growth planning may motivate the investors
in investing and thus increasing the level of employment in the economy.
of Social Services: In UDCs, the provision of social services
forms an important objective of planning. In the fifth five year
plan, two important objectives were:
(a) Development of rural
areas through various programmes and policies alongwith widespread
extension of social services such as schooling, health and clean water
(b) Easing of urban
problems like water supply, sewerage and drainage, electricity, gas supply,
housing and transportation facilities, etc.
to victims of catastrophe: The granting of
assistance and the organisation of relief to victims of natural
catastrophes, such as flood, earthquakes, tsunamis, tropical storms,
drought, etc. are the main the responsibilities of any government.
The following obstacles come in the way of economic planning:
of labour force: In economic planning, the identification and
enumeration of gainfully employed population is a difficult task, esp. in
agriculture, where the employment is of part-time or seasonal
nature. The important contributions to economic activities by women
and children raise further complications. In backward economies, it
is very difficult to distinguish between voluntary and involuntary
data: The biggest problem with economic planning is that the planner has
to work with a limited statistical data provided. Moreover, the
planner has to work with these data, collected through different surveys,
consensus, polls, etc., without much questioning about their reliability
natural resources: The UDCs are identified of their unused natural
resources like land, mines, rivers, forests, livestock, sea, etc. A
resource such as land, a mineral deposit, a forest or a rive may not be
used in production because it is economically inaccessible. A
natural resource is valueless when its cost of extraction is greater than
the price the product can command in the market. Therefore, the
fullest possible use of natural resources is not a sensible aim of an
economic planning, and the extent of the use of land or other natural
resources is not a measure of economic efficiency. There are four
types of resource idleness:
reflecting the inability of the resource to contribute to profitable
(b) Withholding of the
resources in the interests of monopolistic exploitation of the market,
(c) Employment of
resources for commercial or private use, and
(d) Withholding of a
natural resource from current production because the owner believes that it
will make a more valuable contribution to production at a later date.
and real income: The biggest problem regarding human resources is
that in UDCs, the population is growing at a very high rate.
Moreover, most of the UDCs population heavily rely on agricultural
income. The present rate of population growth in India and Pakistan
is not significantly greater than in the United States. But the
significant point of contrast is that in the South Asia and Central Asia,
there is a heavy reliance on comparatively backward agriculture.
Real income is vitally affected by the quality of the population.
repercussions of social institutions: Certain social
institutions, such as extended family system or joint family system, which
are appropriate to a subsistence economy may impede economic growth
directly by reducing the rewards of individuals who take advantage of the
opportunities presented by wider markets. Subsistence economy is the
economy in which people strive for the minimum necessities to support
life. The extended family system acts as a serious obstacle to
economic progress. A man is much less likely to be willing and able
to save and invest, when he knows that he would have to maintain a large
number of distance relatives. It minimises the inducement for people
to improve their own position. It obstructs the spreading of banking
habit since people are unwilling to have banking accounts as there is no
willingness to save. However, the economic planner can overcome this
situation by introducing private or public insurance or other arrangements
to replace the traditional methods for the relief of personal distress or
of restrictive tendencies: Social, political and
administrative restrictive measures are directed against foreigners on the
basis of racial, national or tribal differences. Such restrictive
measures are often directed also against the members of local
population. It may put restrictions on the movement of people or on
the acquisition and exercise of goods or services. It may also be
connected with ‘xenophobia’, esp. in the tribal areas and
villages. This problem is common in Pakistan and hampers the
economic development in rural and tribal areas.
rates and unemployment: In UDCs, the wage rate is relatively low
and there is a high unemployment rate in the economy. Limited
employment opportunities may create a pool of urban unemployed.
These urban members do not enjoy the security of the extended family
system, nor are they related to agricultural sector. They therefore
are apt to constitute a more serious social and political problem then the
in the labour market: It is a common situation in UDCs in which
there are very few employers and they exercise their monopsony powers in
the labour market. Labour is more exploited when the wage rate is
below the equilibrium point indicating the unsatisfied demands of labour.
Whereas in advanced countries, the supply of labour is elastic and there
is little scope for monopsonistic exploitation. The planner must
address the labour issues like wage rates, overtime, bonus, allowances,
perquisites, working hours, safety measures, health and medical
facilities, life insurance, transportation, children education, pension
and benevolent funds, old age benefits, income tax on salaries, etc.
distribution of entrepreneurial faculties: The material progress
of a society is likely to be assisted greatly when there are dynamic
entrepreneurial abilities. In economically backward countries, there
are difficulties in the way of developing and utilising the
entrepreneurial qualities. The government can support small and
medium enterprises to come forward and develop new economic
opportunities. The government must encourage, both on private and
public level, new agricultural or industrial techniques, adoption or
adaptation of new improved methods, innovative activities, internship,
on-the-job training, etc. in order to raise the level of economy.
level of capital in UDCs: The biggest problem of less developed
countries is that there is a dearth of capital, whether it is physical or
financial. The low level of capital is also indicated by statistics
of consumption of energy for purposes of production. In developed
countries, there is a high consumption of energy, whereas in UDCs, the
energy consumption is considerably low. The general implication of
low level of capital is a low level of output and a low level of
consumption per head. In such economies, there is no assurance of a
continuity in supply of goods. Transport costs are very high and
limited availability of perishable or bulky goods. Because of low
level of working capital and storage facilities, there is a danger of
acute shortage of food crops.
of production: The methods of production, farming, marketing
and domestic operation are not usually the same in all the
countries. What is an economic use of resources in one country may
be uneconomic in another in which relative factor prices are comparatively
different. It follows that the economic efficiency of methods of
production and economic organisation in UDCs cannot be judged simply by
comparing them with those familiar in advanced countries. The
planner has to jot out all the possible opportunities and focus on major
weaknesses, and must plan within the available resources.
demonstration effect: In UDCs, there is a strong desire to enjoy
as much of attractive way of living in the advanced countries as incomes
permit. There is an international demonstration effect.
Moreover, the under developed economy is divided into two extreme sections
– traditional section and modern section. There are old and new
production methods, educated and illiterate population, rich and poor,
modern and backward, capitalistic and socialistic, donkey carts and motor
cars existing side by side. This situation creates great atmosphere
of conflict and contradiction, as a result the economic development is
instability: Most of UDCs, especially
Asian and African countries, are known of their political instability,
bureaucratic malfunctioning, corruption on administrative level, and
nepotism, like India, Pakistan, Sri Lanka, Bangladesh, Afghanistan,
Vietnam, Cambodia, Myanmar, Nigeria, Zimbabwe, Uganda, Somalia, Kenya,
etc. Perhaps the biggest challenge for any economic planner is the
political and administrative malfunctioning in his way of economic
Elements of Economic
The economic development in advanced or under-developed countries
depends on four elements:
Human resources: In poor countries
GDP rises but at the same time the population also grows. Several
developing countries are facing high birth rates with stagnant national income
per head. It is hard for poor countries to overcome poverty with birth
rates so high. In under-developed countries, the economic planners
emphasise the following specific programmes:
(a) Control disease
and improve health and nutrition,
(b) Improve education,
reduce illiteracy and train workers, and
(c) Ensure that the
labour force is well-equipped with necessary and competing skills.
Natural resources: Many poor
countries have enormous amount of natural resources, but they are failed to
explore them. The reason is that the government has not provided
necessary incentives to the farmers and landowners to invest in capital and
technologies that will increase their land’s yield.
Capital formation: Capital formation
or inducement to invest depends on the propensity to save. In
less-developed countries, there is a very low saving tendency because of low
income. Developed countries managed to save 20% of their output in
capital formation. Whereas only 5% of the national income is saved in
UDCs. Much of the savings goes to housing and basic needs and, therefore,
a very small amount is left over for development.
Capital formation is the basic tool for economic
development. It may take decades to invest in building up a country’s
infrastructure, information technologies, power-generating plants, and other
capital goods industries. Developing countries must have to build up
their infrastructure, or social overhead capital in order to set path for
If there are so many obstacles in finding
domestic savings for capital formation, then the country depends on foreign
sources of funds. Less-developed countries have to welcomed the flow of
foreign capital or foreign borrowings. As long as the exports of these
countries grew at the same rate as borrowings, it is a favourable
condition. But several poor countries needed all their earnings simply to
pay interest on their foreign debts. This is an adverse situation.
Such countries need to boost up their production in order to cope with their
Technological change and
innovations: The developing countries have a potential advantage in
the economic development – i.e., they can be benefited from up-to-date
technologies developed by advanced countries. They can climbed up to
industrialisation more rapidly than those advanced countries who struggled for
more than 500 years.
Vicious Cycle of
Many developing countries are caught up in vicious cycle of
poverty. Low level of income prevents savings, retards capital growth,
hinders productivity growth, and keeps income low. Successful development
may require taking steps to break up the chain at many points. Other
points in poverty are also self-reinforcing. Poverty is accompanied by
low levels of education, literacy and skill; these in turn prevent the
adaptation to new and improved technologies and lead to rapid population
growth. The vicious cycle of poverty is depicted as below:
Overcoming the barriers of poverty often requires a concentrated effort
on many fronts and a ‘big-push’ is required to break the ‘vicious cycle’ into
‘virtuous circle’. If the country has stepped to invest more, improve
health and education, develop labour skills, and curb population growth, she
can break vicious cycle of poverty and stimulate a virtuous circle of rapid
Stages of Economic
W.W. Rustow has defined and analysed in his book ‘The Stages
of Economic Growth’ the five stages of economic development:
- Drive to
- Stage of mass
production and mass consumption.
society: In the traditional long-lived social and
economic system, the output per head is low and tends not to rise.
Economic activities are static and national income is very low. The
examples are Somalia, Bangladesh, Afghanistan, etc.
for take-off: The second stage is ‘Pre-take-off’. It is
a period of transition in which the traditional systems are overcome, and
the economy is capable of exploiting the fruits of modern science and
technology. Pakistan, India, Sri Lanka, etc. are operating at this
- Take-off: Take-off
represents the point at which the resistances to steady growth are finally
overcome and the growth is normally inevitable. The economy
generates its own investment and technological improvement at sufficiently
high rates so as to make growth virtually self-sustaining. South
Africa, UAE, etc. are the examples.
to maturity: The fourth stage is the drive to maturity.
It is the stage of increasing sophistication of the economy. Against
the background of steady growth new industries are developed, there is
less reliance on imports and more exporting activity. The economy
demonstrate its capacity to move beyond the original industries which
powered its take off, and to absorb and to apply efficiently the most
advanced fruits of modern technology. China, South Korea, Malaysia,
etc. are the examples.
of mass production and mass consumption: The fourth stage ends
in the attainment of fifth stage, which is the age of mass
production. It is the stage in which there is an affluent
population, and durable and sophisticated consumer goods. There are
huge capital and technological intensive industries in such an
economy. People are more quality conscious and comfort lovers.
Wage rates are high. Health and safety issues are addressed by the
government. The whole economy is dynamic. USA, UK, France,
Germany, Japan, Canada, Italy, Netherlands, Denmark, etc. are the
Approaches to Economic
The following approaches are developed in recent years to explain the
economic development and answer the question how countries break out of the
vicious cycle of poverty to virtuous circle of economic development:
Take-off Approach: Take-off is one of the stages of economic
growth. Different economies have been benefited from ‘take-off’
approach in different periods, including England at the beginning of
eighteenth century, the United States at the mid of nineteenth century, and
Japan in early twentieth century. The take-off is impelled by
leading sectors such as a rapid growing export market or an industry
displaying large economies of scale. Once these leading sectors
begin to flourish, a process of self-sustained growth (i.e. take-off)
occurs. Growth leads to profits, profit are reinvested, capital,
productivity and per capita income spur ahead. The virtuous cycle of
economic development is under way.
Backwardness Hypothesis and Convergence: The second approach
emphasises the global context of economic development. Poor
countries have important advantages that the pioneers of industrialisation
had not. Developing nations can draw upon the capital, skills and
technologies of advanced countries. Developing countries can buy
modern textile machinery, efficient pumps, miracle seeds, chemical
fertilisers and medical supplies. Because they can lean on the
technologies of advanced countries. Today’s developing nations can
grow more rapidly than Great Britain, Western European Countries and
United States in past. By drawing upon more productive technologies
of the leaders, the developing countries would expect to see convergence
towards the technological frontier.
Growth: Some writers suggest
that growth is a balanced process with countries progressing steadily
ahead. In their view, economic development resembles the tortoise
making continual progress, rather than the hare, who runs in spurts and
then rats when exhausted. Simon Kuznets examined the
history of thirteen advanced countries and conceived that the balanced
growth model is most consistent with the countries he studied. He
noticed no significant rise or fall in economic growth as development
Note one further important difference between these approaches.
The ‘take-off’ theory suggests that there will be increasing divergence among
countries (some flying rapidly, while others are unable to leave the
ground). The ‘backward’ hypothesis suggests ‘convergence’, while the
‘balanced-growth’ model suggests roughly ‘constant’ differentials. In the
following diagrams, advanced countries are represented by curve A, middle
income countries by curve B and low-income countries by curve C. The
curves show per capita income:
Issues in Economic
Following are the important issues in under developed countries:
vs. Agriculture: In most countries, incomes in urban areas are
almost more than double in rural areas. Many nations jump to the
conclusion that industrialisation is the cause rather than effect of
affluence. To accelerate industrialisation at the expense of
agriculture has led many analysis to rethink the role of farming.
Industrialisation tends to be capital intensive, attract workers into
crowded cities, and often produces high level of unemployment.
Rising productivity on farms may require less capital, while providing
productive for surplus labour.
vs. Outward Orientation: This is a fundamental issue of economic
development towards international trade. Should the developing
countries be self-sufficient? If yes, the country has to replace
imported goods and services with domestic production. This strategy
is known as ‘import substitution’ or ‘inward orientation’.
If the country decides to pay for imports it
needs by improving efficiency and competitiveness, developing foreign markets,
and giving incentives for exporters. This is called ‘outward orientation’
strategy. It is generally observed that by subsidising import
substitution, competition is limited, innovation is dampened, productivity
growth is slow down and country’s real income falls to a lower level.
Whereas, the outward orientation sets up a system of incentives that stimulates
exports. This approach maintains a competitive FOREX rate, encourages
exports, and minimises unnecessary government regulation of businesses esp.
small and medium sized firms.
vs. Market: The cultures of many developing countries are
hostile to the operation of markets. Often competition among firms
or profit seeking behaviour is contrary to traditional practices,
religious beliefs, or vested interest. Yet decades of experience
suggest that extensive reliance on markets provides the most effective way
of managing an economy and promoting rapid economic growth.
The government has a vital role in establishing
and maintaining a healthy economic environment. It must ensure law and
order, enforce contracts, and orient its regulations towards competition and
innovation. The government plays a leading role in investment in human
capital through education, health and transportation, but the government should
minimise its intervention or control in sectors where it has no comparative
advantage. Government, should focus its efforts on areas where there are
clear signs of market failure