CHAPTER ONE

THE EVOLUTION OF DEVELOPMENT PARADIGMS &

PLANNING

1.1. Evolution of development thinking and planning

The evolution of development thinking can be summarized in to three different periods:
The Early Post War Consensus

The Washington Consensus

The Oscillating Search for Silver Bullet

1.1.1 The Early Post War consensus

This period covers immediately after cease of World War II up to the end of 1960's and beginning of
1970's. This is the interesting period for the developing world because it gets attention by academicians
how growth and development could be achieved in these countries. That is why in the 1950's and 1960's,
the previously neglected sub-fields of Development Economics were rediscovered. Available economic
models seemed to offer only limited insights into the practical problems facing the so-called Third
World. The dominant one-sector macro models of the day, from Keynesian to Harrod-Domar to Solow
seemed to have relatively little relevance for societies not primarily concerned with business cycles or
steady state properties.

The period, for ease of understanding could be looked into five important sub- periods.

a) Dualism
It attracted due attention during the 1950s and 1960s. The components under dualism are:

 Sociological dualism: Boeke, 1953 is the major proponent. The central theme of
sociological dualism was differences between western and non-western objectives and
cultures are the major source for dualism.
 Technological dualism: Higgins, 1956 is the major proponent. Differences between
variable factor proportions in the traditional sector and fixed coefficients in modern
sector as major source for dualism.
 Physiocrats: viewing land as the source of all wealth, agricultural surplus supporting the
non-agricultural sector.

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  Classical dualism: Ricardo and Lewis 1951 are major proponents. Surplus labor as
potential for growth when transferred from agriculture to non-agriculture. Lewis also
asserts dualism in labor markets (competitive wage in non agriculture versus
institutional wage in agriculture as basis for dualism).
b) Need for Balanced Growth (structuralism)
Rosenstein - Rodan, 1943 and Nurkse, 1953 and others emphasized the need for balanced growth not
only between agriculture and non agriculture but also with in each sector, so that Say's law could come
in to play and both shoes and socks should be produced to fill both the demand and supply sides.

c) International Trade Scene

Prebisch, 1962 stated that the international trade scene painted in colors and was unfriendly for
development and demanded for equitable exchange.

d) Interventionist State
The current theoretical thinking indicates that there is strong inclination to turn to the intervention state
as a key instrument for development. The reasons that this was considered as key instrument for
development are first pre-colonial independent countries want to exercise their own development
agenda. At home the interventionist felt the need to create infrastructure, and the institutions required to
permit the functioning of a national entity. Second industrialization was synonymous with development
(2nd industrialization revolution). The motivation was to promote industry, with relatively less attention
paid to what was viewed as a stubbornly stagnant agriculture portrayed as a drag on the economy, and
with peasants seen as non-responsive to prices and profit opportunities.

A logical accompaniment of these views were PLANNING MODELS, focusing on the flow of
resources, domestically financed investment supplemented by foreign capital and paying relatively little
attention to changes in the behavior of the system or the relevance of technology.

The planning models used were:

 Planning for resources: such as Simple Harrod - Domar and Mahalonobis models.
These models are all silent on price, and foreign exchange rate flexibility. The
predominant view of policy makers at that time was that growth and efficiency should
take priority and the issues of equity, poverty alleviation, etc should be taken care of at
a latter date.

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  Multi - sector production function with multiple inputs and variable (Input-Output
models, Social Accounting Matrix). The real focus of planning shifted from resources
focus to devising strategies for policy change to accommodate the changing
requirements of transition.
e) Technology in generating growth
Solow, 1957 and Kuznets, 1955 contribute to emphasize the importance of technology in generating
growth. This provided a new point of departure for neo-classical growth theory, not only replacing
Harrod-Domar with a substitutable production function, but also enthroning exogenous technology
change. They introduced critical elements like Research & Development (R and D), patents and other
forms of scientific endeavors leading to new growth theory.

It was, however, Kuznets 1971, though mainly concerned with describing modern growth rather than
analyzing the transition process in getting there, which provided another essential ingredient focused
precisely on the developing world at the end of the post-war consensus era. Kuznets was interested in
why some developing countries were successful and others not and placed major emphasis on the
sources of structural change over time as between agriculture, industry and services. He viewed policy
as either basically accommodative or obstructive to the play of underlying economic forces and did not
view it as an exogenous variable.

1.1.2 The Washington Consensus

It is undoubtedly unfair to attribute the realization that policy change is the key ingredient of successful
development to the international financial institutions. It rather would give more credit for the
realization that prices matter more and that macroeconomic stability matters less. The major contributors
of the idea are: Little, Scitovsky, and Scott 1970, Bhagwati 1978, Krueger 1978, Cohen and Ranis,
1971, among others, who insisted that a re-structuring of the rails of development was needed.

The main ingredients of the consensus are:

 Privatization and unified and competitive exchange rates

 Simultaneous liberalization of financial markets (domestic and international)
 Relative openness to Foreign Direct Investment (FDI) and gradual deregulation of control
systems
 Emphasize on R and D
 Changes at micro level: labor market productivity, legal, financial and other institutional reforms

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  Program lending changes in to structural adjustment lending. Both program and structural
adjustment lending were subject to debates ranging from cost effectiveness of the resources spent
to all the way the conditionality lists imposed on internal affairs of the recipient country.
1.1.3 The Oscillating Search for a Silver Bullet
Viewing per capita income growth as the key objective has been questioned for sometimes. Serious
mainstream attention has been given to the distribution of income, to the extent to which private
income poverty is reduced and to the extent to which public income poverty (the distribution of public
goods) is being addressed. The public income poverty can be seen through various human development
dimensions like infant mortality, life expectancy, literacy as fundamental objectives of development.

The basic efficiency - equity trade offs led to redistribution with growth approach of development. The
controversial relationship between growth and income poverty alleviation is that growth is a necessary
but not sufficient condition for poverty reduction.

Theoretical Revisionism

Recently with the advancement in theoretical thinking and problems faced in global relations, there
arises a need to revise some theories. These are:

 New Trade Theory: the challenge to openness (globalization) and favoring import substitution
(infants) leads to the two-way relationship between growth and human development.
 Recent emphasize of development economists are on: micro foundations of development issues
(women household decision making; poor performance of land, labor and credit markets) and
micro-credit organizations and NGO's in developing countries.
Best Guesses as to the Way Forward

 Avoid dealing with large number and going towards a set of small number comparative historical
studies encompassing typologically ''neighboring'' countries.
 Need to pursue on the two-way relationship between growth and human development.
 Closer look on the pros and cons of decentralization and its relation to democratization and
decision making by the broader body politics.

1.2. The meaning of development planning

There is no agreement among economists with regard to the meaning of the term economic planning.

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The term has been used very loosely in economic literature. It is often confused with communism,
socialism or economic development. Any type of state intervention in economic affairs has also been
treated as planning. But the state can intervene even without making any plan. What then is planning?

Planning is a technique, a means to an end being the realization of certain pre-determined and well-
defined aims and objectives laid down by a central planning authority. The end may be to achieve
economic, social, political or military objectives. The idea underlying planning is a conscious and
deliberate use of the resources of the community with a view to achieving certain targets of production.
The State, through a planning authority, takes the responsibility of planning. It represents a complete
break from the policy of laissez-faire.

The two main constituents of the concept of planning are:

 A system of ends to be pursued, and

 Knowledge as to the available resources and their optimum allocations.

Thus, planning is a technique for achieving certain self-defined and pre-determined goals laid down by a
central planning authority.

There is an enormous literature in which it refers only to the geographical zoning of factors, residential
buildings, cinemas and the like. Sometimes this is called town and country planning and sometimes just
planning.

Planning means only deciding what money the government will spend in the future, if it has the money
to spend.

A planned economy is one in which each production unit (or firm) uses only the resources of men,
materials and equipment allocated to it by quota and disposes of its product exclusively to persons or
firms indicated to it by central order.

'Planning' sometimes means any setting of production targets by the government, whether for private or
public enterprise. Most governments practice this type of planning if only sporadically, and if only for
one or two industries or services to which they attach special importance.

Here targets are set for the economy as a whole, purporting to allocate all the country's labor, foreign
exchange raw materials and other resources between the various branches of the economy.

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The word 'planning' is sometimes used to describe the means which the government uses to try to end
force upon private enterprise the targets which have been previously determined.

But Ferdyn and 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 planning but overall planning of the
economy.

Some of the definitions of economic planning given by other academicians are:

Professor Robbins defines economic planning as "collective control or super session of private
activities of production and exchange."

To Hayek, planning means, "the direction of productive activity by a central authority."

According to Dr. Dalton, "Economic planning in the widest sense is the deliberate direction by persons
in charge of large resources of economic activity towards chosen ends."

Lewis Lord win defined economic planning, "as a scheme. 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.

In the words of Zweig, "Economic planning consists in the extension of the functions of public
authorities to organization and utilization, of economic resources. Planning implies and leads to"
centralization of the national economy.

One of the most popular definitions is by Dickinson who defines planning 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,
Even though there is no unanimity of opinion on the subject, yet economic planning as understood by
the majority of economists implies deliberate control and direction of the economy by a central authority
for the purpose of achieving definite targets and objectives within a specified period of time.

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As a working definition Planning is a technique or a means to achieve an end. End refers to certain
predetermined target (well defined objective). End might be achieving:
 Economic objectives,
 social objectives or military objectives or both
The main point is not to have plan or not to have plan but what kind of plan do we need to achieve the
objectives. Intervention of state in all economic activities is inevitable, i.e.; government do intervene in
an economy in one way or another. But what matters is the degree, type and nature of intervention.

1.3. The rationale of development planning in developing countries

Developing countries need economic planning in order to achieve the following objectives:

 To increase the rate of economic development

 To improve and strengthen the market mechanism
 To reduce unemployment and disguised unemployment
 To enhance the linkage between the agricultural and industrial sectors
 To create social overhead that enhance agricultural and industrial growth
 To expand domestic and foreign trade
 To eradicate poverty
 To be Self sufficient in food and raw materials
 To reduce inequality

a) Increase the rate of economic development

One of the principal objectives of planning in underdeveloped countries is to increase the rate of
economic development. In the words of D.R. Gadgil, "Planning for economic development implies
external direction or regulation of economic activity by the planning authority which is, in most cases,
identified with the government of the state. It means increasing the rate of capital formation by raising
the levels of income, saving and investment. But increasing the rate of capital formation in
underdeveloped economies is beset with a number of difficulties. People are poverty-ridden. Their
capacity to save is extremely low due to low levels of income and high propensity to consume. As a
result; the rate of investment is low which leads to capital deficiency and low productivity. Low
productivity means low income and the vicious circle is complete. This vicious economic circle can

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only be broken by planned development. Two methods are open to underdeveloped countries. One is
planned development by importing capital from abroad which Zweig calls 'supported industrialization,
and the other is by forced saving which he characterizes as self-sufficient industrialization.

b) Improve and strengthen the market mechanism

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

c) Reduce unemployment and disguised unemployment

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

d) Enhance the linkage between the agricultural and industrial sectors

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

e) Create social overhead that enhance agricultural and industrial growth

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The agricultural and industrial sectors cannot, however, develop in the absence of economic and social
overheads. The building of canals, roads, railways, power stations etc., is indispensable for
agricultural and industrial development. So are the training and educational institutions, public health
and housing for providing a regular flow of trained and skilled personnel. But private enterprise in
underdeveloped countries is not interested in developing the social and economic overheads due to
their un-profitability. It is motivated by personal gain rather than by social gain. It, therefore, devolves
on the state to create social and economic overheads in a planned way.

f) Expand domestic and foreign trade

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

g) Eradicate poverty
The planning for development is indispensable for removing the poverty of nations. For raising national
and per capital income, for reducing inequalities in income and wealth, for increasing employment
opportunities, for all-round rapid development arid for maintaining their newly won national
independence, planning is the only path open to underdeveloped countries. There is no greater truth than
this that the idea of planning took a practical shape in an underdeveloped country and that this is the
only hope of the resurgent underdeveloped countries of the world. The rapid development of the USSR,
a poor country at the time of the October Revolution, bears testimony to this fact. To sum up in the
words of Professor Gadgil Planning for economic development is undertaken presumably because the
pace of direction of development taking place in the absence of external intervention is not considered to
be satisfactory and because it is further held that appropriate external intervention will result in
increasing considerably the pace of development and directing it properly. Planners seek to bring about a
rationalization, and if possible and necessary, some reduction of consumption, to evolve and adopt a
long-term plan of appropriate investment of capital resources with progressively improved techniques, a

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program of training and education through which the competence of labor to make use of capital
resources is increased, and a better distribution of the national product so as to attain social security and
peace. Planning, therefore; means no more than better organization, consistent and far-seeing
organization and comprehensive all-sided organization. Direction, regulations, controls, on private
activity, and increasing the sphere of public activity, are all parts-of organizational effort.

h) Self-sufficiency in Food and Raw Materials

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

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

1.4. Requisites for Successful development planning

The formulation and success of a plan require the fulfillment of the following factors:

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  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
 A Theory of Consumption
 Public Cooperation
1. Planning Commission
The first prerequisite for a plan is the setting up of a planning commission which should be
organized in a proper way. It should be divided and sub-divided into a number of divisions and
sub-divisions under such experts as economists, statisticians, engineers, etc, dealing with the
various aspects of the economy.

2. Statistical Data
A prerequisite for sound planning is a thorough survey of the existing potential resources of a
country together with its deficiencies. As Baykov puts it: "Every act of planning in so far as it is
not mere fantastic castle building presupposes a preliminary investigation of existing resources."
Such a survey is essential for the collection of statistical data and information with regard to the
total available material, capital and human resources of the country. Data pertaining to the
available and potential natural resources along with the degree of exploitation, agricultural and
industrial output, transport, technical and non-technical personnel etc., are essential for fixing
targets and priorities in planning. It, therefore, requires the setting up of a central statistical
organization with a network of statistical bureaus for collecting statistical data and information
for the formulation of the plan.

3. Objectives
The plan may lay down the following objectives: to increase national income and per capita

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income; to expand employment opportunities; to reduce inequalities of income and wealth and
concentration of economic power; to raise agricultural production; to industrialize the
economy; to achieve balanced regional development; to achieve self-reliance, etc. The various
goals and objectives should be realistic, mutually compatible and flexible enough in keeping
with the requirements of the economy.

4. Fixation of Targets and Priorities

The next problem is to fix targets and priorities for achieving the objectives laid down in the
plan. They should be both global and sectoral. Global targets must be bold and cover every
aspect of the economy. They include quantitative production targets, so many more million tons
of foodstuffs, coals, steel, fertilizers, etc., so many kilowatts of power capacity, so many
kilometers of railways and roads so many additional training institutions, so much increase in
national income, saving, investment, etc. There are also sectoral targets pertaining to individual
industries and products in physical and value terms both for the private and public sectors.
Global and sectoral targets should be mutually consistent in order to attain the required growth
rate for the economy. This necessitates determining priorities. Priorities should be laid down on
the basis of the short-term and long-term needs of the economy keeping in view the available
material, capital and human resources.

Such schemes or projects which are required to be executed first should be given top priority
while the less important should have a low priority. The scheme of priorities should not be rigid
but may be changed according to the requirements of the country. Thus sound governmental
planning consists of establishing intelligent priorities for the public investment program and
formulating a sensible and consistent set of public policies to encourage growth in the private
sector.

5. Mobilization of Resources
A plan fixes the public sector outlay for which resources are required to be mobilized. There are
various internal and external resources for financing a plan. Savings, profits of public enterprises,
net marketing borrowings, taxation and deficit financing are the principal internal sources of
finance for the public sector. Net budgetary receipts corresponding to external assistance relate to
the external sources of financing the plan. The plan should lay down such policies and
instruments for mobilizing resources which fulfill the financial outlay of the plan without

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inflationary and balance of payments pressures. At the same time, they should encourage
corporate and household savings of the private sector.

6. Balancing in the Plan

A plan should ensure proper balance in the economy, otherwise shortages or surpluses will arise
as the plan progresses. There should be balance between saving and investment, between the
available supply of goods and the demand for them, between manpower requirements and their
availabilities, and between the demand for imports and the available foreign exchange.

Aggregate savings come from various sources such as voluntary savings, taxation, profits of
public enterprises, foreign remittances by nationals, etc. These must equal planned aggregate
investment in fixed capital assets and enterprise in the economy. The balance between the
supply and demand for goods requires balancing of the available supply, of consumption
goods with their demand, of the supply of capital goods, materials and inventories with their
requirements, of the supply of intermediate goods with their demand, and the proposed
requirements of exports of goods with their supplies. Balances are also required between
planned demand and supply of manpower, and between import requirements and the available
foreign exchange during the plan period.

In fact, two kinds of balances must be secured in a plan. The first is the physical balance which
consists of balancing the planned increase in output of various goods with the amounts and
types of investment. It also requires the balancing of the outputs of the various sectors of the
economy. This is, achieved through the input-output technique because the output of one sector
or industry is the input of the other for producing its output. Physical balancing is essential for
the internal consistency of the plan, otherwise such physical obstacles as lack of raw materials,
manpower, etc., will develop in the economy. The second is the monetary or financial balance
which consists of balancing the incomes of the people with the amount of goods available to
them for consumption, the funds used for private investment and the amount of investment
goods available to private investors, the funds used for public investment and the amount of
investment goods produced by the public sector, and the balancing of foreign payments and
receipts. The lack of these financial balances will lead to disequilibrium in the supply and
demand for physical goods thereby leading to inflationary and balance of payments pressures
during planning.

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 7. Incorrupt and Efficient Administration
A strong, efficient and incorrupt administration is the sine qua non of successful planning. But
this is what an underdeveloped country lacks the most. Lewis regards a strong, competent and
incorrupt administration as the first condition for the success of a plan. The Central Cabinet in
an underdeveloped country should not take important economic decisions hurriedly without
getting them- properly examined from technical advisers. Competent administrative staff should
be appointed in various ministries which should first prepare good feasibility reports of
proposed projects before starting them. It should gain experience in planning and starting a
project, keeping it on schedule, amending it in case of some unexpected snags, and evaluating it
from time to time. Without such administrative machinery, development planning has no major
input in an under developed country. Lewis is very emphatic when he writes, In the absence of
such an administration it is often much better that governments should be laissez-faire than they
should pretend to plan. The phenomenal success of development planning in Russia can be
attributed to "a highly trained and disciplined priestly order of the Communist Party." "In
making a plan," writes Lewis at another place, "technique is subsidiary to policy". Hence
although the basic techniques are displayed, the emphasis is throughout on policy. The
economics of development is not very complicated; the secret of successful planning lies more
in sensible politics and good public administration.

8. Proper Development Policy

The state should lay down a proper development policy for the success of a development plan
and to avoid any pitfalls that may arise in the development process. Professor Lewis lists the
following main elements of such a development policy:

a) investigation of development potential survey of national resources, scientific research,

market research;
b) provision of adequate infrastructure (water, power, transport, and communications)
whether by public or private agencies;
c) provision of specialized training facilities, as well as adequate general education, thereby
ensuring necessary skills;
d) Improving the legal framework of economic activity, especially laws relating to land
tenure, corporations and commercial transactions.

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e) helping to create more and better markets, including commodity markets, security
exchanges, banking, insurance and credit facilities;
f) seeking out and assisting potential entrepreneurs, both domestic and foreign;
g) promoting better utilization of resources, both by offering inducements and by operating
controls against misuse; and
h) Promoting an increase in saving, both private and public. The success of a development
plan can be tested mainly by examining various proposals under each of these heads. Good
policies help, but they may not ensure success. Lewis, therefore likens development
planning to medicine which in the hands of a good practitioner may perform useful tricks,
but it is still the case that many patients die who are expected to live, and many live who are
expected to die.
9. Economy in Administration
Every effort should be made to effect economies in administration, particularly in the expansion
of ministries and state departments. The people must feel confident that every pie that they pay
to the government through taxation and borrowings is properly spent for their welfare and
development, and not dissipated away.

10. An Education Base

For a clean and efficient administration, a firm educational base is essential. Planning to be
successful must take care of the ethical and moral standards of the people. One cannot expect
economy and efficiency in administration unless the people possess high ethical and moral
values. This is not possible unless a strong educational base is built up whereby instructions are
imparted both in the academic and technical fields. Without creating honest and efficient human
beings in the country, it would not be feasible to undertake economic planning on a big scale.

11. A Theory of Consumption

According to Professor Galbraith an important requirement of modern development planning is
that it has a theory of consumption. Underdeveloped countries should not follow the
consumption patterns of the more developed countries. The theory of consumption should be
democratic and prime attention must be accorded to goods that are within the range of the
model income that can be purchased by the typical family. Cheap bicycles in a low-income
country are thus more important than cheap automobiles. An inexpensive electric lighting

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system for the villages is better than a high capacity system which runs equipment, the people
cannot afford. Inexpensive radio sets are important, television belongs to another day. Above
all, nothing is so important, as abundant and efficiently produced food, clothing and shelter for
these are the most universal requirements.

12. Public Cooperation

Above all, public cooperation is considered to be one of the important levers for the success of
the plan in a democrat country. Planning requires the unstinted cooperation of the people.
Economic planning should be above party politics, but at the same time, it should have the
approval of all the parties. In other words, a plan should be regarded as a National Plan when it
is approved by the representative of the people. For, without public support no plan can be
success. As Lewis states: "Popular enthusiasm is both the lubricating oil of planning and the
petrol of economic development, a dynamic force that makes all things possible".

1.5 Arguments for and against Planning

1.5.1. Cases for Planning

An unplanned economy is like a ship moving rudderless on uncharted seas with no fixed
destination and unlikely to reach it if there be any. Such an economy works blindly and
haphazardly. It caters for the rich and makes them still richer. It ignores the real wants of the
people and fails to promote general well-being. It is the profit motive rather than service of the
masses which is the mainspring of economic activity in such an economy. How it operates is
no guarantee of economic progress for the less developed economies. The-economically
advanced countries may not feel enamored of the idea of planning but for the under-developed
economies it is a stark necessity as economic development is now regarded as imperative.
Majority of the under-developed countries realize very clearly that they must develop
economically and that too very soon.

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

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opinion in favor of planning.

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

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

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

b) Planning becomes necessary for equitable distribution of economic power

The price mechanism rewards people according to the resources they possess but contains in
itself no mechanism for equalization of the distribution of those resources. There is no wonder,
therefore, that there are wide gaps between the 'haves' and 'have nots' which seriously offend
against sense of social justice. Shocking economic inequalities are a marked feature of an
unplanned economy. Inequalities result in heart burning and social tensions.

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

c) Planning helps to protect labor and harmonize wage relations

It has been seen that labor legislation alone cannot protect labor and harmonize wage relations
when market mechanism is permitted to operate freely. A planning authority must step to
regulate the economic growth of the country as to ensure to the actual workers the fruits of their
labor. If there was perfect competition and full-employment, the price mechanism, shorn of its
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imperfections, would have afforded due protection of labor rights. But this is a big 'IF'. The
State is a more effective guardian of labor rights than self adjusting and automatic economic
forces. By proper planning, it will be possible to provide perfect social security to all workers.

d) planning helps to eliminate economic instabilities

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

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

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

f) To realize major economic changes

Without the aid of planning no country can cope with major economic changes. Such changes
like industrial revolution or rationalization movement, are bound to turn the economy topsy-
turvy. The economic system may be thrown out of gear altogether. Private enterprise will feel,
helpless and stand simply aghast. The planning authority with its resources of men and money
can meet all such situations and control the disturbing factors. Major changes can even be

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anticipated and provided against in good time. The market mechanism cannot move the
resources in the desired directions in quantity and with speed which a major change may
necessitate. Only a planning authority can eliminate bottle-necks. Under a free market economy,
a few persons receive abnormally large incomes at public expense and the scarce commodities
are unjustly distributed. Overproduction is a common phenomenon bringing suffering to the
poor. A planned action to speed up the movement of resources at times of major changes is
absolutely essential.

g) Planning eliminates wasteful competition

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

h) Efficient use of resources

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

On the whole, therefore, economic decisions in an unplanned economy are likely to be irrational,
shortsighted, self-frustrating and socially disastrous. A planning authority, on the other hand, can
take farsighted decisions and produce a balanced economy. It can take an overall view, whereas
in an unplanned economy each entrepreneur looks to his own interest and nobody bothers about

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the economy as a whole as a central planning authority can do. As Prof. Durbin remarks, "the
general officers on the hill must be able to see more than the ensign in the line of battle."

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

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

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

j) Planning helps to minimize environmental costs of industrialization

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

k) Planning also results in higher rate of capital formation

Private enterprise is more intent on immediate gain rather than future good. It takes a short-
sighted view of things. On the contrary, the planning authority, as the custodian of the national

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interests, takes a farsighted view. It can look more to the distant future than to the immediate
present. It is in a position to sacrifice petty present gains for the future substantial benefits.
The surpluses of the public undertakings add to the capital assets of the nation instead of going
into the pockets of private persons and spent on consumption goods. That is why under
planning capital formation receives great attention.

l) Special Case of Under-developed Countries

The arguments given above apply to all countries at all stages of economic development. They
largely take their stand on the failure of laissez-faire policy and its general abandonment. It is
now realized that lack of co-ordination, recurrence of business cycles, economic inequalities,
social parasitism, economic insecurity, wastes of competition, absence of industrial peace and
huge social costs which characterize an unplanned economy, can be done away with by
resorting to planning.

An unplanned economy must act in an erratic and irrational manner. But planning has a
specially strong case for the under-developed economies. In their case, it is not merely
necessary to maintain the country's economy in sound health and to ensure a rational and
optimum use of the community's resources but also to speed up economic development. They
are lagging behind in the race and they are keen to catch up with the advanced economies or at
any rate reduce dependence on them as fast as possible; This impatience for accelerating
economic development leads inevitably to economic planning. The achievements of the
Russian and Chinese economies under planning serve as an example.

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

Even in advanced countries, the edge of price mechanism has been blunted. It has failed to

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

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

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

a special feature of an under-developed economy, is another source that can be tapped. We have
surplus labor in agriculture which represents disguised unemployment. Such labor can be
withdrawn from agriculture and put to more productive employment. The State, in an under-
developed country, can also resort to deficit financing and thus increase the financial resources
available for economic development. Even then foreign aid may become necessary. For planned
economic development, foreign aid is readily made available. A country which has no plan and

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which may rightly be considered as going nowhere, cannot hope to secure foreign financial
assistance, but planned economies can.

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

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

The demographic factor is another hindrance in backward countries which can also be overcome
by planning. A country with increasing population must run fast in order to keep up its present
position, Increase in national wealth is swallowed up by still many more mouths. There is no
escape from planning in such countries.

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

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

Prof. D.R. Gadgil indicates the need for, and justification of, planning in these words, "Planning
for economic development is undertaken presumably because the pace or direction of
development taking place in the absence of external intervention is not considered to be
satisfactory and because it is further held that appropriate external intervention will result in
increasing considerably the pace of development and directing it properly. Planning seeks to
bring about a rationalization and, if possible and necessary, some reduction of consumption to

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evolve and adopt a long-term plan of appropriate investment of capital resources with
progressively improved techniques, a program of training and education through which the
competence of labor to make use of capital resources is increased, and a better distribution of the
national product so as to attain social security and peace. Planning therefore means in a sense, no
more than better organization, consistent and far-seeing organization and comprehensive all-
sided organization. Direction regulation controls on private activity and increasing the sphere of
public activity, are all parts of organizational effort.

1.5.2. Arguments against Planning

1. Inherently markets are not imperfect. Markets could be perfect by man mechanisms
(increase competition, information) and therefore there is no need for state intervention-
planning.
2. The best approach to minimize the difference between marginal net benefits of social and
private is through use of fiscal measures (taxation and subsidy).
3. In order to prepare and execute a plan needs competent administration (skilled manpower)
which is in short supply in Less Developing Countries. Therefore, planning is only to
exacerbate skilled manpower shortages.
4. Planning requires information in quantity and quality which is limited in Less Developing
Countries. The information even available is not reliable; hence markets rather than
planning should be favored.
5. The cost of planning in Less Developing Countries is enormous in the form of
administration, licensing, etc.

1.6 Limitation of Planning

As a tool, planning could not be a remedy for all economic, social and others ills. Broadly the
limitations could be on: concepts, coordination, action, follow up. The specific limitations
observed on planning are:
 Planning heavily depend on reliable data. If there are unreliable data, the potential
benefits of planning will be undermined.

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  The problem of discontinuity. Planning models don’t deal with random shocks
(natural hazards, social changes and human intervention). Plans work effectively
when social and economic development unchanged (unfolds) continuously.
 The problem of uncertainty (natural, market, state and war, international). The
problem with uncertainty could be minimized by adopting probabilistic models but
planning models are not using such methods.
 Inflation: rice instability would reduce the use of planning models.
Therefore, the use (favoring) of planning should be in line with the above limitations.

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