CHAPTER- ONE

1. HISTORICAL BACKGROUND OF ECONOMIC PLANNING

In the initial decades after the Second World War and decolonization, the pursuit of
economic development was reflected in the almost universal acceptance of development
planning as the surest and most direct route to economic progress.

Until the 1980s, few people in the developing world would have questioned the
advisability or desirability of formulating and implementing a national development plan.

 Planning had become a way of life in government ministries, and every five years or so,
the latest development plan was paraded out with great fanfare.

 Economic planningmay be described asa deliberate governmental attemptto coordinate

economic decision making over the long run and to influence, direct, and in some cases
even control the level and growth of a nation’s principal economic variables (income,
consumption, employment, investment, saving, exports, imports, etc.) to achieve a
predetermined set of development objectives.

 An economic plan is simply a specific set of quantitative economic targets to be

reached in a given period of time, with a stated strategy for achieving those targets.

 Economic plans may be comprehensive or partial.

 Comprehensive plan is an economic plan that sets targets to cover all the major sectors
of the national economy.

 Partial plan is a plan that covers only a part of the national economy (e.g., agriculture,
industry, tourism, the public sector, the foreign sector, and so forth).

 Finally, the planning process itself can be described as an exercise in which a

government. First chooses social objectives, then sets various targets, and finally
organizes a framework for implementing, coordinating, and monitoring a development
plan. That means, planning process is the procedure for drawing up and carrying out a
formal economic plan.

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 1.2. Basic Concepts in Development Planning

 Planning:-is the making of major economic decisions, such as the national income,
income distribution, the saving rate and the investment rate etc.

 Planning: - is the coordination of economic activities via conscious effort. It is a

supplement to market forces. In most cases, price signals are misleading. As a result of
this there should be a certain particular apparatus that coordinates economic activities in
the economy.

 Planning:-is a process of cognition and compromise. The very aim of planning isto
compromise the different conflicting interests and to understand the desire of the
economy by singling out social needs.

 Planning is an institutionalized activity by or on behalf of a certain authority for:

a) The preparation of decisions and action to be taken by the central authority

b) The coordination of decisions and actions by lower echelons of the economy as between
themselves and the central authority for giving the development of the entire economy and its
constituent parts so as to achieve certain goals for the economy.

 Lewis Lorwin in his 1945 article entitled “time for planning” clearly stated thatPlanning,
in general, is a conscious effort to direct human energy for the purpose of security a
rationally desired end.”

 A development plan is a general statement of economic policy.

 National development plans are further disaggregated into a set of sectorial plans.

 A development plan or program is therefore, a wider concept than a project.

 It may include one or several projects at various times whose specific objectives are
linked to the achievement of higher level of common objective.

1.3. Measurement Issues of Economic Development

Indicators of broader concepts of economic development.

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  Social indicators reflecting access to basic human needs.

 Basic human indicators

 Infant mortality rates.

 Life expectancy.

 Child malnutrition.

 Adult literacy.

 Access to doctors or safe water

 Personal computers etc.

Human Development Index (HDI)

 The HDI is the best known effort to combine social indicators into an overall indicator of
development (UNDP).

 The HDI combines measures of life expectancy, educational attainment and GNP per
capital.

1.4. Meaning of Economic planning

 “Planning is neither the preparation of a list of schemes nor is it a political idealism; it is

rational, wise and scientific method for achieving certain socio-economic goals and
objectives.” Jawaharlal Nehru

 What is planning?

➾ Planning is a technique, a means to an end 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.

 Lewis has referred to six different senses is which the term planning is used in economic
literature.

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1. Planning refers to the geographical zoning of factors, residential buildings, cinemas and the
like. Some times this is called town and country planning and sometimes just planning.

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

3. 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.

4. Planning sometimes means any setting of production targets by the government, whether for
private or public enterprise.

5. 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.

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

 But Ferdinand 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.

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

One of the most popular definitions is by Dickinson who defines planning as the making
of major economic decisions what and how much is to be produced, how, when and
where is to be produced, to whom it is to be allocated, by the conscious decision of a
determinate authority, on the basis of comprehensive survey of the economic system as a
whole.

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  Economic planning is 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.

 1.5.Need for planning

 Planning has been introduced in different countries for different reasons.

 In socialist countries, where revolutions preceded and public ownership of resources

followed, planning became an institutional need of the system

 In non-socialist countries, with private ownership, several factors have necessitated the
use of the instrument of planning.

 In underdeveloped countries, development needs have been predominant in popularizing

planning.

 Even though, one can describe many different factors for the adoption of planning, the
major ones are:

a) Institutional

b) Technological and economic

c) Development (i.e. pre-requisite for development).

A) Institutional Requirement

 One aspect of this is the abolition of private ownership in the means of production and
its replacement by state ownership.

 Other aspect is the character of ideology that has inspired people in this structural change
of ownership.

I. Public Ownership: - once means of production are owned by the state, as is the case in all
socialist countries, the need for planning emerges automatically to decide on usage of these
resources.

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II. Use of resources by state. The change in the ownership pattern, from private to public is
associated with the demolition of the alternative market mechanism for the use of resources.

III. Replacing obstructive capitalism: - according to Marxian philosophy,”

 Capitalism bears the fruits of its own destruction.” Marx predicted that capitalism is
doomed to fail because of the inherent weaknesses in the system itself.

 National Resurgence

 Planning, as an institutional means also came handy to those who sought the fulfillment
of the national aspirations of countries recently liberated from centuries of colonial rule.

 Almost all such countries adopted planning right from the inception of their
independence.

I. Symbol of sovereignty: - a part from the dire and urgent need for telescoping development
into a few years, newly independent countries found in planning a symbol of asserting their
liberation and sovereign status.

 Development planning enabled these countries to set their common goals and gave them
a sense of being sovereign in respect of what to do and how to do it.

II Break from the past: - These countries with backwardness hanging round their necks like a
mill-stone, wanted to stage a dramatic break from the past.

B) Technological and economic factors

 Technologies of modern times are of such nature, and involve so much expense that their
fuller utilization requires that they be used in a planned way.

 Equally important are the economic factors, associated mostly with the inadequacy and
malfunction of market economies, which necessitate the use of planning techniques to
overcome these deficiencies.

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I. Technological Reasons

 Modern technologies, because of certain characteristics, can be put to proper use if there
is planning on a national scale.

 Characteristics of modern technologies

- Indivisibility

- Adjustability

- Product changes

- Mass production

II. Economic Reasoning

 The need to overcome the deficient functioning of the market system

 Recent knowledge of economics and the perfection of planning techniques.

 Separation of management

 Integration of economies

 Market deficiencies

 Market inadequacy

 Economic knowledge

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 CHAPTER- TWO

2. CLASSIFICATION OF PLANNING:

Meaning, characteristics of different types of planning and their relative merits and demerits

Meaning of Planning:

Planning is very important for successfulness and the effective performance of an organization
not only for organization’s but also for individuals. It is the most basic of all the managerial
functions. It involves selecting missions and objectives and the actions to achieve them.
Therefore every organization gives a greater emphasis on planning. Planning as a process
involves the determination of future course of action, that is why an action, what action, how to
take action, and when to take action. These are related with different aspects of planning process.
Thus, Terry has defined planning in terms of future course of action i.e., “planning is the
selection and relating of facts and making and using of assumptions regarding the future in the
visualization and formalization of proposed activities believed necessary to achieve desired
result.”

McFarland has defined Planning as “a concept of executive action that embodies the skills of
anticipating, influencing and controlling the nature and direction of change.”Peter Drucker
defined as “planning is the continuous process of making present entrepreneurial decisions
systematically and with best possible knowledge their futurity, organizing systematically the
efforts needed to carry out these decisions and measuring the results of these decisions against
the expectation through organized systematic feedback.”

In the words of Koontz and O’Donnell, “planning is deciding in advance what to do, how to do
it, when to do it, and who is to do it. Planning bridges the gap from where we are to here we
want to go.” According to Theo Haimann, “planning is the function that determines in advance
what should be done. It consists of selecting the enterprise objectives polices, programmes,
procedures and other means of achieving these objectives.”

 Types of Planning:

The process of planning may be classified into different categories on the following basis:

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(i) Nature of Planning:

a. Formal planning.

b. Informal planning.

(ii) Duration of planning:

a. Short term planning.

b. Long term planning.

(iii) Levels of Management:

a. Strategic planning.

b. Intermediate planning.

c. Operational planning.

(i) Nature of Planning:

a. Formal Planning:

Planning is formal when it is reduced to writing. When the numbers of actions are large it is
good to have a formal plan since it will help adequate control.The term formal means official and
recognized. Any planning can be done officially to be followed or implemented. Formal
planning is aims to determine and objectives of planning. It is the action that determines in
advance what should be done.

 Advantages:

1. Proper Cooperation among employees,

2. Unity of Action,

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3. Economy,

4. Proper coordination and control,

5. Choosing the right objectives, and

6. Future plan.

b. Informal Planning:

An informal plan is one, which is not in writing, but it is conceived in the mind of the manager.
Informal planning will be effective when the number of actions is less and actions have to be
taken in short period.

(ii) Duration of Planning:

a. Short term Planning:

Short term planning is the planning which covers less than two years. It must be formulated in a
manner consistent with long-term plans. It is considered as tactical planning. Short-term plans
are concerned with immediate future; it takes into account the available resources only and is
concerned with the current operations of the business. These may include plans concerning
inventory planning and control employee training, work methods etc.

 Advantages:

1. It can be easily adjustable.

2. Changes can be made and incorporated.

3. Easy to Gauge.

4. Only little resources required.

 Disadvantages:

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1. Very short period-left over things will be more.

2. Difficult to mobiles the resources.

3. Communication cycle will not be completed.

b. Long-Term Planning:

Long-term planning usually converse a period of more than five years, mostly between five and
fifteen years. It deals with broader technological and competitive aspects of the organization as
well as allocation of resources over a relatively long time period. Long-term planning is
considered as strategic planning.

Short-term planning covers the period of one year while long term planning covers 5-15 years. In
between there may be medium-term plans. Usually, medium term plans are focusing on between
two and five years. These may include plan for purchase of materials, production, labour,
overhead expenses and so on.

 Advantages:

1. Sufficient time to plan and implement.

2. Effective control.

3. Adjustment and changes may be made gradually.

4. Periodic evaluation is possible.

5. Thrust areas can be identified easily.

6. Weakness can be spotted and rectified then and there.

 Disadvantages:

1. Prediction is difficult.

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2. Full of uncertainties.

3. Objectives and Targets may not be achieved in full.

4. More resources required.

(iii) Levels of Management:

a. Strategic Planning:

The strategic planning is the process of determining overall objectives of the organization and
the policies and strategies adopted to achieve those objectives. It is conducted by the top
management, which include chief executive officer, president, vice-presidents, General Manger
etc. It is a long range planning and may cover a time period of up to 10 years.

It basically deals with the total assessment of the organization’s capabilities, its strengths and its
weaknesses and an objective evaluation of the dynamic environment. The planning also
determines the direction the company will be taking in achieving these goals.

b. Intermediate Planning:

Intermediate planning cover time frames of about 6 months to 2 years and is contemplated by
middle management, which includes functional managers, department heads and product line
mangers. They also have the task of polishing the top management’s strategic plans.

The middle management will have a critical look at the resources available and they will
determine the most effective and efficient mix of human, financial and material factors. They
refine the broad strategic plans into more workable and realistic plans.

c. Operational Planning:

Operational planning deals with only current activities. It keeps the business running. These
plans are the responsibility of the lower management and are conducted by unit supervisors,
foremen etc. These are short-range plans covering a time span from one week to one year. These
are more specific and they determine how a specific job is to be completed in the best possible

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way. Most operational plans .ire divided into functional areas such as production, finance,
marketing, personnel etc.

Thus even though planning at all levels is important, since all levels are integrated into one, the
strategic planning requires closer observation since it establishes the direction of the
organization. Planning consists of several individual plans or components of planning, which are
usually bound together.

(i) Forecasting.

(ii) Objectives.

(iii) Policies.

(iv) Programmes.

(v) Strategies.

(vi) Schedules.

(vii) Procedures.

(viii) Rules, and

(ix) Budgets.

i. Forecasting:

Forecasting becomes an integral part of the planning process. It is a prediction of future events
and conditions. It, therefore, includes both the assessment of the future and the provision for it. It
helps to reduce the uncertainties that surround management, decision making.

ii. Objectives:

Objectives are the ends toward which activity is aimed— they are the results to be achieved.
They represent not only the end point of planning but also the end toward which organizing,

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staffing, leading and controlling are aimed.Organization can grow without any difficulty if it has
well-defined objectives. These objectives should be clearly defined and communicated
throughout the organization. Such objectives must be realistic.

iii. Policies:

Koonte and O’Donnell defines “policies are general statements or undertakings which guide or
channel thinking in decision-making of subordinates.” So, policies act as guides to thinking and
action of subordinates in the organizations. It should be clearly prescribed and understandable by
all.

iv. Programmes:

It refers to the course of action of work to be carried out in proper sequence for the purpose of
achieving specific objectives.

v. Strategies:

Konnoz and Heinz Weihrich defined strategies as “a general programme of action and
deployment of resources to attain comprehensive objectives”or” the determination of the basic
long-term objectives of an enterprise “and the adoption of courses of action and allocation of
resources necessary to achieve these goals. It is specific type of plan for achieving organizational
goals.

vi. Schedules:

Fixing a time sequence for every operation is known as schedules. Normally it forms part of
programming a part of action plan.

vii. Procedures:

Procedures are plans that establish a required method of handling future activities. They are
guides to action, rather than to thinking and they detail the exact manner in which certain
activities must be accomplished. They are chronological sequences of required actions.

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viii. Rules:

Rules spell out specific required actions or non-actions, following no direction. They are usually
the simplest type of plan.

ix. Budgets:

A budget is a statement of expected results expressed in numerical term. It may be referred to as

a numbered programme. A budget may be expressed either in financial terms or in terms of
labour-hours, units of product, machine hours, or any other numerically measurable term. It
helps the organization to control the action by comparing budgetary and actual results.

 Advantages of Planning:

1. Primacy of Planning:

Even though there are other managerial functions such as organizing, staffing, directing and
controlling which helps to achieve the organizational goals, planning precedes all other
managerial functions. It establishes objectives necessary for all group effort.

2. Helping to Management:

Since the planning is a future course of action, mangers are able to define their objectives and get
direction. Also it creates a unity of purpose.

3. Effective Utilization of Resources:

Proper planning helps to proper and effective utilization of resources. Resources are identified
for optimum utility through planning. So waste or minimum waste of resources will not result
and thereby idle time for workers and downtime for machines will be reduced. This will lead to
result in minimum cost of operations.

4. Minimum Cost:

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Planning helps to minimize cost by providing greater utilization of the available resources. All
kinds of wastage of men, materials, money and machines are prevented with the help of
planning.

5. To help in Motivation:

All employees of the organization can feel that we have taken this plan, if the plans are
communicated to them. In this case the sense of belonging of employees increases and therefore
they will be highly motivated.

6. To Offset Uncertainty and Change:

There may be continuous change in the environment and organization has to work in accelerating
change. This change is reflected in both tangible and intangible forms. Tangible changes are in
the form of changes in technology, market forces, and government regulations.

Intangible changes reflect in changes in attitudes, values, cultures etc. In order to cope up with
the requirements of such changes, organization must role ahead for its future course of action,
which is basically provided by planning process. Planning does not stop changes in the
environment, but gears the organization to take suitable actions so that it is successful in
achieving its objectives.

7. Help in Coordination:

Proper planning is made by unifying all areas on departments of the organization. It wills leads
to coordinate and harmony among the departments is achieved.

8. Facilities Control:

Planning provides performance standards and standards for measuring the progress of the
organizations. Therefore management can compare the actual performance with the standards.
Manager can control action by looking at different if any deviation.

9. Facilitates Decision-making:

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Planning provides a framework for decision-making. Since the planning provides for feedback,
periodic evaluation, and indication for any deviation, corrective action can be taken which leads
to better decision-making.

10. Encourage Innovation and Creativity:

It brings about rationality in managerial approach and improvement in executive thinking. D. F.

Hussey said that, “A good planning process will provide avenues for individual participation will
throw up more ideas about the company and its environment will encourage an atmosphere of
frankness and corporate self-criticism and will stimulate managers to achieve more.”

11. Improves Competitive Strength:

Since the operations are planned in advance, company can take its action concretely. It improves
the competitive strength of the organization.

 Limitations of Planning:

1. Corporate Planning is not integrated into the Total Management System:

The top management fails to identify and associate properly the formal planning with the central
concept of the organization’s mission.

2. There is a Lack of Understanding of the Different Steps of the Planning Process:

The management may not be knowledgeable or skilled in understanding all steps of the planning
requirements.

3. Non-Availability of Correct Information and Data:

Planning is made by having information and data available. Generally correct information and
data not available.

4. Management at Different Levels in the Organization has not Properly Contributed to Planning
Activities:

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Generally all strategic planning are made and conducted at top management. So sometimes
middle level and lower level of management, which are closer to the operation, may not
understand all aspects of planning. This will affect their fullest contribution.

5. Costly or Uneconomical:

Planning is expensive. The cost of planning should not be in excess of its contribution and
managerial judgment is necessary to balance the expenses of preparing the plans against the
benefits derived from them.

6. The management is not always willing to cancel or modify your plans.

7. In starting formal planning, too much is attempted at once.

8. Resistance to change by organizational members.

9. Lack of contingency plans.

 What are the Important Types of Economic Planning?

(1). Direction and Inducement Planning:

(i) Planning by Direction:

Planning by direction is an integral part of a socialist society. It assumes complete absence of

laissez faire.Therefore, it implies complete centralized planning with no features of a private
economy. Under planning by direction, planning authority takes charge of the productive
resources and uses them in accordance with social priorities.

In other words, there is one central authority which plans, directs and orders the execution of the
plan. Market forces are not allowed to operate freely. Both saving and investment are strictly
controlled by the planning authority. The state holds the commanding posts in its hands by taking
over entire private industrial and agricultural sectors and banking and transport. “Without such
concentration, the state would lack the means to carry out the tasks of the plan. Provisions in the
plan would be mere pious wishes without any guarantee of realization attached to them.”

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Planning by direction is comprehensive and embraces the entire economic life of the country.
Russia provides the best example of planning by direction. Under such planning, the targets for
optimum planning can be realized. Full employment can be ensured. Oligopolistic and
monopolistic tendencies can easily be eliminated.

(ii) Planning by Inducement:

Planning by inducement is consistent with democratic planning. It referred to the planning by

manipulating the market. There is no compulsion and direction but only persuasion. Therefore, in
planning by inducement, the state manipulates the market economy not by command but by
providing inducement to secure its objectives.

The planning authority induces the people through monetary and fiscal measures and through
appropriate price policies to act in certain desired ways. In case, planning authority wishes to
raise the level of production, it can do so by granting subsidies. Similarly, price control and
rationing, can be adopted in case of scarcity.Furthermore, in order to increase the rate of capital
formation, planning authority can undertake public investments or encourage private investment.
In a real sense, quantitative methods of credit control can help in a long way in maintaining the
price level while qualitative method of credit control can help in diverting investment into
desired channels.

(2). Democratic and Totalitarian Planning:

(i) Democratic Planning:

Democratic Planning implies a system of economic order in which the authority that vests in the
state is based on the support of common masses. The economists like Hayek and Lipmann have
pointed out that planning is incompatible with democracy. Hayek says that “What was promised
to us as the road to freedom was in fact the high road to serfdom.” Therefore, in democratic
planning, the state does not control all the means of production and does not regulate economic
operations of the private economy directly.

(ii) Totalitarian (authoritarian) planning:

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When planning is adopted under a planning, it is called totalitarian dictator. Under this planning,
state fully controls the economic affairs, productive resources and economic decisions. The state
is the final authority in allocating the productive resources and it determines in accordance with
the directions of the central authority.The profits or production instead of being pocketed by the
private capitalists go to the state for ameliorating the problems of the poor lots in the country.
Totalitarian planning shows the complete socialization of entire national economy. Under such
planning, plans are formulated, controlled, financed and executed by the state and people have to
do nothing in it. This type of authoritarian planning has found in the writing of Maurice Dobb.

(3). Centralized and Decentralized Planning:

(i) Centralized planning:

The framing, adopting, executing supervising and controlling the plan is done by central
planning authority. Planning authority determines targets and priorities. It is the duty of the
planning authority to bring harmony in the planning process. This type of planning comes from
the top to the bottom. This plan determines the equality and cohesion. The central planning
authority which determines the basic policies in view of the regional and local needs.All
investment decisions are taken in accordance with goods and targets fixed by the central
planning authority. All economic decisions like what to produce, how to produce, where to
produce and to whom it is to be allocated are exclusively decided by the central authority. All
aspects of the economy are controlled by the central authority. Again the prices and wages are
also fixed by the planning authority.Oscar Lange criticized centralized planning as it is not
democratic in nature and character. The complete process of planning is regulated and controlled
by authority. This planning is inflexible due to which it has less adaptability. There is no
economic freedom at all. Further, the disequilibrium arising on account of centralized planning
cannot be easily corrected.

(ii) Decentralized Planning:

Under this planning, responsibility lies with local and regional officials who take economic
decisions about the plan. In other words, this planning starts from the grass roots. In other words,
this type of planning is from bottom to top. Under this, plan is framed by the central planning

20
authority by consulting different administrative units of the country.The plan incorporates plans
under central, state and local schemes. Also plans are prepared for different industries too. But
individual firms are free to take their own decisions about investment and output. Prices are
determined by market mechanism even though there are government controls.There is complete
economic freedom in consumption, production and exchange. The main defect of decentralized
planning is that there is no uniformity and coordination among different sectors of the economy.
This plan has been adopted in England and France.

(4). Functional and Structural Planning:

(i) Functional planning:

Under functional planning, there is no need to build up new structure, rather the existing
structure is corrected and modified. According to Zweig in his “The Planning of Free Societies’
has stated “Functional planning will only repair, not build a new, it will improve the wave of the
existing order, but not supersede it. It is a conservative, or rather evolutionary type of planning
which will not over turn the existing structure and moves only within its narrow border”. Thus
functional planning brings no change in the economic and social set up.

(ii) Structural Planning:

In this type of planning the present social and economic structure is changed and a new structure
emerges. In the developing countries, there is a structure planning. Big economic and social
changes are brought about to usher into a new system.For instance, shift from capitalist to
socialist economy can be called a structural change. Structural planning can help in accelerating
the pace of economic development. The Communist countries like Russia and China followed
structural planning.

(5). Physical and Financial Planning:

(i) Physical Planning:

Physical planning is that where targets or objectives are fixed in terms of real physical resources.
Plans are also formulated on the basis of real resources of the economy, i.e., the availability of

21
natural, human, raw materials and capital resources. On the basis of these resources, the output
targets are fixed. To quote second Five Year Plan, Physical planning, is an attempt to work out
the implication of the development effort in terms of factor allocations and product yield so as to
maximize incomes and employment. Financial planning is followed as a mean to achieve
physical targets only. But the target under it, should be properly balanced. Further physical
planning has to be viewed as an overall long-term planning rather than a short-term planning.

(6)Rolling and Fixed Planning:

(i) Rolling Planning:

Rolling plan was advocated by Prof. Myrdal for the development of developing countries. India
experienced it for the first time in April 1978 under Janata Party rule and continued up to April
1980.

(ii) Fixed Planning:

Fixed planning is for some fixed period, say four or five or six or seven years. A fixed plan fixes
definite objectives which have to be achieved during the plan period. Physical targets and
financial outlays do not change except under emergencies. Under this plan, targets are achieved
which are laid down in the plan.This plan helps in maintaining proper balance in the economy.
Further, there is no uncertainty in this type of planning. Fixed plan, with given objectives,
ensures public cooperation. This type of planning needs political will for its successful
implementation.

(7). General Planning and Partial Planning:

(i) General Planning:

It refers to planning of all activities in an economy. All sectors of the economy, namely,
agriculture, industry, transport, irrigation, power, social services etc. are brought under its scope.
The entire resources of the country are sought to be allocated among the different sectors.

(ii) Partial Planning:

22
It refers to the planning of a particular sector of the economy. If planning in a country is confined
only to agricultural sector, it is called partial planning. Under it, only a part of the total
investment is studied. It is a short- term method which is adopted to achieve a particular
objective.

(8). Physical and Financial Planning:

(i) Physical Planning:

Physical planning is that where targets or objectives are fixed in terms of real physical resources.
Plans are also formulated on the basis of real resources of the economy, i.e., the availability of
natural, human, raw materials and capital resources. On the basis of these resources, the output
targets are fixed. To quote second Five Year Plan, Physical planning, is an attempt to work out
the implication of the development effort in terms of factor allocations and product yield so as to
maximize incomes and employment. Financial planning is followed as a mean to achieve
physical targets only. But the target under it should be properly balanced. Further physical
planning has to be viewed as an overall long-term planning rather than a short-term planning.

(ii) Financial Planning:

Financial planning helps in removing disequilibrium between demand and supply to avoid
inflation and to bring about economic stability. Finance is the basic key to economic planning.
Without financial resources, physical targets cannot be achieved. All objectives are fixed in
terms of finance i.e., how much national income, savings and investments are to be increased.

(9). Regional, National and International Planning:

Regional planning refers to the decentralized control exercised over the region of a particular
country. When economic planning is applied for the nation as a whole, it is known as national
planning. International planning is meant for a state of affairs in which the resources of more
than one country are the property of the countries as a whole.

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Review Question
Part-1 (Assignment)

1/ what is meaning of planning?

2/ Write MeasurementIssues of Economic Development?

3/describe many different factors for the adoption of planning?

4/write the characteristics of modern technologies

5/list several components of planning.

6/what are the Important Types of Economic Planning?

Part-2 (Test by itself)

1/ which of the following is must be realistic?

A/ Policies B/ Government C/ Objective D/all E/None

2/______is deciding in advance what to do, how to do it, when to do it, and who is to do it.

A/ Rule B/ Planning C/Economics D/ all E/None

3/ life expectancy, educational attainment and GNP per capital arecombines to measures
of________

A/ HDI B/UNDP C/GDP D/all E/None

4/ which of the following is not Economic Reasoning?

A/Separation of management B/ Integration of economies C/Market deficiencies D/all E/None

5/_______ is a statement of expected results expressed in numerical term.

A/ Budget B/Planning C/ policy D/ Government E/all

Part-3 true/false

1/_____Planning bridges the gap from where we are to here we want to go.

2/_____planning is a future course of action, mangers are able to define their objectives and get
direction.

3/_____Short term planning is the planning which covers less than two years.

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4/_____Long-term planning usually converse a period of more than five years.

5/______Thestrategic planning is the process of determining overall objectives of the

organization and the policies and strategies adopted to achieve those objectives.

NB:-MORE READER IS BEFORE LEADER.

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 CHAPTER -THREE

METHODOLOGY AND STAGES OF PLANNING

3.1. Basic Data in Planning

 The content of information (data) to be gathered for planning can vary based on:

The purpose of planning, and

The scope of the planning dimension.

 Based on the overall need of the planning, the central planning authority (MOFED, CSA,
respective ministry or sectors), private sector components and the like would organize the
data required and determine the depth of the information and the magnitude of the data
and system of analysis. the data to be required in the planning process are;

i. Population profile and its negative consequence

 Economic growth-rapid population growth lowers per capita income growth in

most LDCs, especially those that are already poor, dependent on agriculture
and experiencing pressures on land and natural resources.

 Poverty and inequality- rapid population growth fall most heavily on the poor
because they are the ones who made landless, suffer first from the cuts in
government health and education programs, are main victims of jobs cut due to
slower growth of the economy.

 Education- large family size and low incomes restrict the opportunities of parents
to educate all their children.

 Health- high fertility harms the health of mothers and children.

 Food-feeding the world’s population is made more difficult by rapid population

growth. Over 90% of additional LDC food requirements are caused by population
increase.

 Environment-rapid population growth cause environmental degradation in the

form of forest encroachment, deforestation, fuel wood depletion, soil erosion, in
adequate and unsafe water.

 International migration-the rapid increase in international migration both legal

and illegal, to be one of the major consequences of LDCs population growth.
Excess of job seekers over job opportunities.

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ii. Agricultural profile

iii. Industry and trade performance

iv. Social factors like education, health, employment (unemployment),

v. Infrastructure profile

vi. Financial sector performance

vii. Foreign exchange

viii. Inflation

ix. Trend analysis

x. Market assessment, unit cost determination

xi. Level of poverty and inequality of income

 Personal or size distribution of income that deals with individual persons or

households and the total incomes they receive (per capita income).

 Absolute poverty defined as the number of people who are unable to command
sufficient resources to satisfy basic needs. Counted as the total number living
below a specified minimum level of real income-an international poverty line ($1
per day). etc.

 In general the content of an information to be collected and depth of analysis in planning

depends on: the purpose of the plan and

The country’s development pattern.

3.2. Determination of Growth Rate and Plan Target

 The likely development goals, objectives hence growth rate and plan target to be drawn
for a certain country relate to:

=>Particular issue and priority concerns within the country.

 Hence, we must unavoidably deal with value judgments and priorities.

 For example, if greater equality is an overall objective of government policy, factors

such as the distribution of income, the spread of educational opportunities, and the
role of labor-intensive rural development projects became significant.

 If, however, the objective is maximum growth of GNP irrespective of its distribution,
these factors may be less important.
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  The point is that any attempt to deal with real world development problems must be
based on explicit economic and social value premises about what is desirable and what
the priorities are among different desirable goals.

 The basic issue of development requires a higher GNP and a faster growth rate is
obvious.

 However, it is not only how to make GNP grow but also who would make it grow, the
few or the many.

 In strictly economic terms, development has traditionally meant the capacity of a national
economy, whose initial economic condition has been more or less staticfor a long time, to
generate and sustain an annual increase in its Gross National Product (GNP) and /or
Gross Domestic Product(GDP) at rates of perhaps 5% to 7% or more.

 Rate of growth of income per capita or per capita GNP takes into account the ability of a
nation to expand its output at a rate faster than the growth rate of its population.

At a national level for the country as a whole, the consolidated target growth rate or plan target is
usually set by the national government.

 While, the respective public enterprises and private sectors are expected to set their
institutional (micro) plan in line with their area of engagement.

 Accordingly, these sectorial or ministry development targets will contribute to the overall
country’s development objectives.

Some objectives of economic plan:

 Growth of GNP/GDP, Increasing national income

 Increase in employment rate , expanding empl opportunities

 Improved education coverage, improved health coverage,

 Reduced mortality rate,

 Financial sector development.

 Increased import substitution

 Increased earnings from export

 Stable factor and goods market,

 Reducing inequalities of income and wealth

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  Increasing agricultural production and productivity

 Industrializing the economy

 Achieving balanced regional development and self-reliance & so on

3.3. The process of plan formulation and adoption

Stages of planning

 There are four well defined stages through which an economic plan has to pass for its
successful working.

i. Plan formulation

 The first stage in planning is the formulation of the general objectives of the plan and
their definition in quantitative terms. It is possible that the task of formulation of general
objectives may be attempted by the government itself, though it may sometimes leave the
task to the planning commission.

 The definition of the general objectives in quantitative terms i.e. the drafting of the plan
is a task which is left to be performed by the planning commission.

 The planning commission is a body of experts and specialists in different fields of

activities.

 The planning commission has the necessary data at its disposal. After due deliberation
and thought, the planning commission works out the economic plan for the country and
presents it to the government for final acceptance.

ii. Plan adoption

 The adoption of the plan is the function of either the parliament or the government.

 In principle, the parliament or the government can make any changes they like in the
plan.

 But these bodies usually do not introduce any drastic or far-reaching changes in the draft
of the plan. The reason is that the plan is a comprehensive, coherent and well-knit
document. Any substantial or far-reaching changes effected anywhere in this document
will upset the entire plan and necessitate its reformulation by the planning commission.

 In light of this, the parliament or the government makes only minor changes at the time
of plan adoption.

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  As soon as the plan is adopted by the parliament or the government, it becomes a law. It
then becomes the statutory obligation of the government to execute the plan.

 The position regarding the formal status of plans differs from country to country.

 Generally, speaking, the national development plans of all socialist countries are
approved by their legislatures other authorities and have the force of a law. The plan
targets are mandatory on all executing agencies. Sanctions are provided in

 The laws for non – execution of plan targets. Several countries with mixed economies
also provide for the enactment of their plans as laws even throughthey are generally
binding only on the enterprises under the direct control of the central government.

There are two clear advantages in giving the plans a legal status.

 Firstly,the enactment of a plan into law raises its status in the eyes of political leaders,
government officials and the general public thereby increasing the chances for its
fulfillment.

 Secondly, it ensures continuity in the plan. This is advantageous in a country where

governments change frequently. Succeeding governments are more likely to implement
the plan if it has been enacted into a law than if it has only been approved by an earlier
government as an expression of its economic policy.

 As against this, there are two disadvantagesin putting a development plan on the statute
(law, order) book.

 Firstly, if the plan in enacted into a law, it will lack the desired flexibility which is an
essential feature of a good plan.

 Secondly, if the plan is submitted to the legislature for approval, amendments

(improvement, correction) may be introduced to it which disrupts the internal balance and
consistency of the plan.

iii. Plan implementation

 As pointed out above, the planning commission is only an advisory body. It has no power
to implement or execute the plan.

 The execution of the plan is the responsibility of the government. The various
government departments and agencies take the necessary measures to execute (perform)
the plan.

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  These departments and agencies maintain continuous liaison (connection) with the
planning commission which is the final authority as far as the interpretation of the
provisions of the plan is concerned.

 Every plan, however, well – drawn it may be, has to be constantly changed during its
execution to adapt it to new requirements and new situations. In the words of

 A. Lewis “Implementation of a plan is more difficult than making it. “ Making a plan is
an exercise of imagination, while implementation is a struggle with reality.

 Before crossing the Atlantic, the pilot of an aircraft plots his course in relation to
expected weather and winds. Once aloft, reality is found to differ from expectation. The
plan must be modified continually to cope with changing facts.”

iv. Plan evaluation

 The supervision of the fulfillment of the plans is one of the fundamental prerequisites of
planning. Planning cannot be considered as good unless it takes in to account the course
of the fulfillment of the plan. If the plan is not bound up with plan fulfillment, it becomes
a mere scrap of papers.

 The supervision of the plan, however, calls for an independent body of experts and
technical accountants unconnected either with plan formulation or plan execution. This
body should evaluate plan fulfillment in a strictly impartial manner. It should boldly
bring to the notice of the government the failures and drawbacks which it detects in the
course of its evaluation.

3.4. Plan Implementation

 The consolidated national plan is commonly developed from the various sectorial/
ministry programs.

 In this regard, the various public development enterprises, regular ministry and private
sectors have developed their respective plans that have defined goal, target to be achieved
in the specified period.

 These plans despite, the physical activities and the budget outlay indicated in the
document are usually comprises of the implementation schedule and work plan to be
performed over the specified period.

 Under normal circumstances, the perspective plans drawn for longer period are further
disaggregated into short term and medium term plans so as to lend themselves for
implementation in the subsequent phases. These plans in turn organized into
annual/operational plans that can be implemented on yearly basis.

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  In such away, the plan implementation procedure will automatically proceedinline with
the detail work schedule formulated while planning. In the strive to meet their plan
requirement, the various program performance of development sectors will contribute to
the overall national objective of a given country.

3.5. Plan Evaluation

 Project evaluation is the most specialized planning process which involves systematic,
objective and comprehensive appraisal of development programs for individual
commodities and projects.

 It implies an appraisal or assessment of a project;

 As to its operational efficiency technically, economically, financially and managerially.

 Whether it meets its objective

 Benefit to the community

 On impacts brought on the people and environment

 Negative effects if any etc.

 It involve detail examination by a group of outside experts (external evaluators) into the
working of the project, to find out its achievement and weaknesses to improve its
operation.

 Project evaluation thus refers to the procedure of fact finding about the result of planed
social actions which in turn move the spiral of planning over upward.

 It is an integral part of any development program in order to assess its success or failure
and to point out further lines of improvement.

 It is a process to evaluate the rate of return on a project, its social profitability, and its
side effects on the growth rate of population, on employment, labor and management
training and on rate of reinvestment.

 Hence, Evaluation is an essential aid to the policy.

 Stages of evaluation:

 Review the situation before the project is actually started (baseline data on
existing situation to identify potentials and gaps for development)

 To make appraisal when the project is in operation in order to find out how much
has been accomplished and what remains to be accomplished (interim or midterm

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 or ongoing evaluation) to suggest ways and means to improve its operation further
and to plug loopholes

 To evaluate the ends achieved by the project when it is complete and is in full
operation (end user evaluation, terminal evaluation).

 Methods of evaluation:

 In the method of evaluation the usual stages are:

 The description of the technical and economic characteristics of each project (terminal
report or progress report is required in line with the original document).

 Estimation of the influence of the project on the economy both during the construction
period as well as during the operational period, when the investment is completed and
then newly productive capacity is in operation (financial, economic evaluation)

 The evaluation of the consequences of the projectwhich may be direct or indirect. The
direct effects consists of the immediate contributions to production within the sector of
the project while the indirect effects are those in sectors vertically connected with the
sector, either preceding or following, because for their direct technological links (effect,
impact)

The formulation of the criterion for the selection of the projects.

i. Benefit-Cost Analysis

 Appropriate and popular method to appraise project.

 Helps the planning authority in making correct investment decisions to achieve optimum
resource allocation by maximizing the difference between the present value of benefits
and costs of a project.

 Involve the enumeration, comparison and evaluation of benefits and costs.

 Implies weighing of the returns against the costs involved in a project.

 Objective function is to establish Net Social Benefit

(NSB)= Benefits-Costs,

 Where benefits and costs are measured in terms of ‘shadow’ or ‘accounting’

prices[efficiency prices] of inputs and outputs instead of in actual market prices. Because
these prices reflectbetter the true social or economic values.

 Criteria for Cost-Benefit Analysis:

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  There are four benefit-cost criteria;

A. B-C= this always favor a large project, and make small and medium size projects less
beneficial. Thus this criterion can only help in determining the scale of the project on the basis of
the maximization of the difference between Benefit and Cost.

B. ‘B-C/I’= determines the total annual return on a particular investment to the economy as a
whole irrespective of to whom this accrue.

C. Change B/ change C= help to determine the size of a project that has already been selected
and is not for selecting a project.

D. B/C = the best and the most reliable criteria for project evaluation is B/C.

 If B/C=1, the project is marginal, just it covers the cost.

 If B/C>1, benefits are more than cost and it’s beneficial to undertake the project.

 If B/C<1, the project cannot be undertake.

 The higher B/C, the higher priorities are attached to the project. Since capital and other
investible resources are scarce, in under developed countries, it can maximize output by
using them on a project than the second alternative project for which B/C ratio is less.

 Where; B and C refer to benefit & costs , I relates to direct investment Change is
incremental or marginal

 The appraisal rules for project evaluation require discounting of future benefits and costs
because society prefers the present to the future.

ii. The Net present value (NPV) criteria:

 NPV is equal to the present value of benefits minus the present value of operating and
maintenance costs minus initial outlay.

 A project is socially profitable if the NPVB>0. This is possible if there are a number of
mutually exclusive projects, the project with the highest NPVB will be chosen.

 To discount future benefit and costs of the project so as to get present value the discount
factor is expressed as;

 D= 1/ (1+i) t Where, i is the social discount rate and t is the time period.

 In making a choice among projects either of the two rules may be followed:

 Only those project should be selected in which the present value of benefits exceed the
present value of costs.
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 (NPV of Benefit >NPV of Cost)

 All projects where the ratio of the present value of benefits to the present value of costs is
greater than one.

(NPV>1)

NB: The NPV is considered as the most appropriate rule for project evaluation.

iii. The internal rate of return (IRR) criteria:

 IRR is the discount rate at which the present value of return minus costs is zero.

 In the case of mutually exclusive projects, that project should be selected which has the
highest rate of return.

Limitation of IRR approach

 Once IRR is assumed for a calculation of the profitability of a project, it is difficult to

change it.

 Calculation of IRR is difficult on long-gestation period project which doesn’t yield

benefit for a number of years.

 If projects are mutually exclusive, the criteria favors that project which has a lower
capital cost than others. Thus it can’t be applied to capital intensive projects.

 The use of IRR for public investment doesn’t lead to correct decisions.

Prepared by: Alex .T

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 CHAPTER-FOUR

4. Planning in practice: Experiences from Ethiopian and other countries.(Reading

Assignment)

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