Chapter 2: Characteristics & Classification of different types Economic Planning:

2.1. Characteristics of Economic development Planning

Some of the most important features of economic planning are as follows:
i. Definite Objective: The most significant characteristic of economic planning is that it should
possess definite objectives. Planning means conscious and deliberate undertaking for a definite
objective. For instance, economic planning has the objective to accelerate the rate of growth,
elimination of trade cycles, bringing the stability and attain full employment in the economy.
ii. Central Planning Authority: The existence of a central planning authority is another feature
of economic planning. This central planning authority is responsible to prepare different schemes
of development and coordinating the various activities. The central planning authority takes all
decisions relating to production and consumption in an economy.
iii. Democratic Character: Another pioneer feature is its democratic nature. No doubt, various
plans are prepared by experts but at the same time, adequate opportunities are provided to the
people to actively participate at various levels. Being federal structure of Ethiopian Constitution
for example, the Union Government only uses its fiscal, monetary and physical controls to guide
and give direction in consequence with the plans.
iv. Only an Advisory Role of Planning Commission: In the decentralized set up of planning.
Planning Commission is the apex body. It provides the necessary perspective, guidance and
coordination. Furthermore, it serves as a close link between different agencies so that functioning
may be smooth. In this regard, Planning Commission is an advisory character.
v. Comprehensiveness: Another important characteristic of planning is its comprehensiveness
in scope. As central planning authority takes all decisions regarding production, consumption
and distribution, thus, it must cover the entire economy which must be comprehensive in scope.
In other words, planning must be effective so that the planning of one sector may not be nullified
by the absence of planning in other sectors.
vi. Planning for Consumption: In a centrally planned economy, it should not be confined to
production alone but at the same time, it must cover the distribution and consumption also. In
other words, the planning authority should not decide what and how to produce but it must keep
in mind and decide accordingly among whom it is to be distributed.
vii. Rational Allocation of Resources: Generally, in under-developed countries, available
resources are scarce and these resources are allocated in such a manner as to get maximum social

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welfare. It needs to fix up priorities relating to economic development, thus, allocation of
resources in accordance to these fixed priorities.
These scarce resources are also allocated to eliminate wastages for maximizing social welfare,
coordinating inter-sector and international plans into a single unified unit which, in turn,
promotes economic development in an economy.
viii. Feasible Policies and Targets: A good planning is based on the initial resources of the
country to achieve the feasible goals and policies. In this way, domestic resources are planned
for attaining economic stability.
2.2. Classification of Economic Planning
Planning is a technique/means to an end being the realization of certain predetermined 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. Therefore, the issue is not between
plan and no plan, it is between kinds of plans. There are different categories of planning based on
the type of the economic system, resources available, duration, and people involved, etc.
2.2.1. Planning by Direction and planning by Inducement
Planning by direction:
Is an integral part of socialist society. It entails complete absence of laissez-fair. There is one
central authority which plans, direct and orders the execution of the plan in accordance with pre-
determined targets and priorities. Comprehensive and encompasses the entire economy. The
national plan represents binding directives. The state holds the ‘commanding post’ in its hand by
taking over the entire private industrial and agriculture sectors and banking and transport. The
state owns the task of planning.
Limitations;
 Associated with bureaucratic and totalitarian regime. There is complete absence of
consumer sovereignty. People are not allowed to consume and spend according to their
choice. Even the right to choose ones occupation doesn’t exist. No economic freedom.
 Is unsatisfactory because the present economic system is exceedingly complex.
 Inflexibility- revision of the plan ones drawn is impossible in case circumstance necessitate.
 Due to resource limitation the fulfillment of target is difficult.

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 It leads to excessive standardization because it makes production process easy. Production
of only one type of standard good in each line of production unfavorable to growth of
initiative and enterprise.
 Requires huge resource thus costly to conduct survey and census.
Planning by inducement:
Is democratic planning. Planning by manipulating the market. There is freedom of consumption,
freedom of enterprise and freedom of production. But these freedoms are subject to state control
and regulations. People are induced to act in a certain way through various monetary and fiscal
measures. Planning by inducement is able to achieve the same result as are likely to be achieved
in planning by direction but with less sacrifice of individual liberty.
Difficulties;
 The incentives offered may not be adequate for producers and consumers to act the way
the state desires them to behave. May upset the government plans.
 Since the actual working of the plans is left to market forces, surplus or shortages are
bound to arise. Shortages are frequent and they necessitate price control and rationing
which are the forms of planning by direction. In such a situation planning by inducement
merges with planning by direction.
 Monetary and fiscal measures alone are inadequate to induce planned development of
the economy by raising the rate of capital formation. Because of low level of income and
saving, capital formation in LDCs is difficult. People have tendency to use their saving in
unproductive channels (consumption).
Conclusion:
Whether a country adopts planning by direction or planning by inducement depends on the
system of government. Socialist countries adopt planning by direction, while capitalist
economies adhere to the technique of planning by inducement. But both planning technique are
complementary. In mixed economy both planning technique are used. Eg. India
2.2.2. Perspective planning and annual planning
Perspective planning- Refers to long term planning in which long rage targets are set in
advance for a period of 15, 20 or 25 years. Indicates development to be undertaken over a longer
period. It however doesn’t mean one plan for the entire period of 15 or 20 years. In reality the
broader objectives and targets are to be achieved with in the specified period of time by dividing

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the perspective plan into several short period plans of 4,5,6 years. Shorter period plan makes for
greater precision. There for a perspective plan is always split up into short term plans. Not only
is this five year plan further broken into annual plans (operational plans) so that each annual plan
fits into a broader framework of the five year plan (strategic plan). Plans of either kind are
further divided into regional and sectional plans.
 Regional plans pertain to regions, districts, and localities being further split up into
sectional and branches for various sectors.
 Sectional (sectoral) plans further sub divided into sub plans for each branch. All these
plans and sub plans are related to perspective plans.
Current plan and sub plans are the necessary support to perspective plan to achieve those targets.
Planning is a continuous process and can’t be isolated for a short period. Thus, a five year plan is
a projection and continuation of the previous plans and it will lend to the subsequent plans.
The main purpose of a perspective plan is thus to provide a background to the shorter term plans,
so that the problems that have to be solved over a long term can be taken into account in
planning over a shorter term.
Limitation;
 Rigidity- adjustment of targets set in the perspective plan to unforeseen change may not
be made.
 Revision of the plan when provision is not made can have psychological demoralizing
effect.
2.2.3. Fixed and rolling planning
Roll plan- every year three new plans are made and acted up on. These are;
1. Plan for the current year which includes annual budget & foreign exchange budget.
2. Plan for a number of years 3, 4, 5 years changed every year to keep with the requirement of
the economy.
3. A perspective plan for 10, 15, 20, 25 even more years is presented every year, in which the
broader goal are stated and the outlines of future development are forecast.
Since planning is a continuous process, every year the plan is revised in the light of new
information, improved data and improved analysis.

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 Merit- devised to overcome the rigidity encountered in the fixed plans. It provides clear
perspective and better view of priorities. Combines the advantage of perspective and fixed
planning.
Demerits-
 Since the target is revised every year, it is not possible to achieve the targets laid down in the
plan within a fixed time period.
 Continuous revision creates uncertainty in the private and public sector of the economy.
 Continuous revision develops an attitude of non-commitment among the planners and the
public.
 Requires trained manpower and strong base for information exchange and data updating.
Strong and reliable data base is required.
 Needs up to date knowledge of progress as well as shortcoming in the implementation of
projects.
Fixed plan- lay down definite aim and objectives which are required to be achieved during the
plan period. Physical targets are fixed along with the total outlay. Physical and financial targets
are seldom changed except under emergencies.
Merit:
 Fixes targets and priorities rigidly for achieving the objectives laid down in the plan.
 Helps to maintain proper balance in the economy.
 Ensures public cooperation and political will to make the plan success.
Demerit:
 Failure to consider unforeseen changes. But operational plan can help to overcome.
 Lacks flexibility
The demerits of fixed plans are not so serious as to discard it in favor of rolling plan.
2.2.4. Democratic and totalitarian (authoritarian) planning
Democratic planning Totalitarian planning
 Planning within democracy  Central control and direction of all
 People are associated at every step in the formulation economic activities in accordance
& implementation of the plan with a single plan
 Consultation of government & private enterprises at the  Planning by direction. Economic
stage of plan preparation activity controlled by the state
 The plan is fully debated parliament, private forum  Planning authority is the supreme

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 The plan prepared by planning institution can be body
accepted, modified, or rejected by the parliament of the  Absolutely no option to the plan.
country. People accept & rigidly implement
 The plan is not forced up on the people from above, it the plan.
is planning from below
 Respects the institution of private property
 Fiscal & monetary measures are used by the state to
influence economic and investment decision of private
sector.
 Private sectors operate side by side with public sector.
2.2.5. Corrective (ant-cyclical planning and development planning
Corrective planning:
A number of maladjustment arises in a capitalist economy. When the government plans and
adopts various fiscal, monetary and direct control measures to rectify them, this is called
corrective planning. If the economy suffers from inflationary pressures, the government adopts
such corrective measures as a contractionary monetary policy, raising tax rates, reducing
consumption, investment and public expenditure. In the event of a depression; corrective
planning includes an expansionary monetary policy, reduction in tax rate, stimulation of
consumption, increase in private and public investment, and a deficit budgetary policy. Planning
on excessive inequality of income distribution and monopoly power. Eg. Planning in USA and
other capitalist countries is of the corrective type.
Development planning:
Meant to develop the economy as a whole. The government formulates development plan for the
whole economy. The government doesn’t use force on the private sector to get the plan
implemented, rather it provides incentives through monetary, fiscal and direct control measures.
Primarily related to the development of under developed countries. Since such countries are:
Lewis; Good policy help, but don’t ensure success. Development planning in this respect is like
medicine; the good practitioner knows some use full tricks, but it is still the case that many
patients die who are expected to live, and many live who are expected to die.
2.2.6. Financial planning v/s Physical planning
Financial planning
Refers to the technique of planning in which resources are allocated in terms of money. Finance
is the main key to economic planning. If sufficient finance is available it is not difficult to

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achieve physical targets. Important to remove maladjustment between supply and demand to
calculate cost- benefit of various projects. The essence of financial planning is to ensure that
demands and supplies are matched in a manner which exploits physical potential as fully as
possible without major and un planned changes in the price structure. In the case of financial
planning outlays are fixed in terms of money. Hence the plan is to cover those outlays by
taxation, savings, donation/ aid etc.
Limitation;
 Measures to mobilize financial resources through taxation, may adversely affect the
propensity to save.
 In LDCs there is a vast non-monetized subsistence sectors and small organized money sector
(lack of stock market).
 Supplies can be increased through import, but leads to balance of payment difficulties (X-M).
 Effect of inflation rise in price.
Physical planning
Is the allocation of resource in terms of men, materials, and machinery? An attempt to work out
the implication of the development effort in terms of factor allocation and product yields so as to
maximize incomes and employment. Requires the fixation of physical targets.
Limitations:
 Lack of statistical data and information on available resources.
 Due to inherent structural difficulties of LDCs to attain internal consistency is impossible
(input-output matrix).
 Shortage in physical target may lead to inflationary pressure through an increase in prices.
 Physical planning without financial planning is always a negation of planning in LDCs.
 If plans are drawn on the basis of physical resources without any regards to the availability of
financial resources, plan target can never be fulfilled.

Conclusion;
The use of financial planning or physical planning technique depends on the political structure of
the country. In Socialist state there is physical planning since there is absence of private property
and all the resources belong to the state. In capitalist country financial planning is as much
important as physical planning. Both are complementary. Both are mutually consistent. For
effective planning both are needed together. Both techniques are required to integrate in
development planning. Physical targets should be balanced in terms of the available financial

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 resources, while larger financial resources should be mobilized in order to fulfill physical targets
for accelerating the pace of development.
2.2.7. Centralized and decentralized planning
Centralized planning:
The entire planning process in a country is under a central planning authority. This authority
formulates a central plan, fix objectives, targets and priorities for every sector of the economy. It
takes all investment decision in accordance with the goals and targets of the plan.
Decentralized planning:
Execution of the plan from the grassroots. A plan is formulated by a central planning authority
in consultation with the different administrative units of the country.
2.2.8. Indicative planning and imperative planning
Indicative planning Imperative planning
 Based on the principle of  Comprehensive planning in which the
decentralization in the operation & planning authority decides about the amount
execution of national plan. to be invested in each sector, fixation of
 Flexible planning. Eg. French prices, & type of product to be produced.
 Peculiar to mixed economy, the  Has rigidity. Distortion in one sector
public & private sectors work adversely affects the entire economy.
together.  There is complete control over the factors of
 The state provides all types of production by the state.
facilities to the private sector but  No consumers’ sovereignty. Consumers get
doesn’t direct it, rather indicates commodity in fixed quantity at fixed price.
the areas in which it can help in Often the commodities are rationed.
implementing the plan. Eg. China & Russia
(9)Short-term, Medium and Long-term Planning
Short-term plans
Short-term plans are also known as ‘controlling plans’. They encompasses the period of one
year, therefore, they are also known as ‘annual plans’.
In annual plans or budgets the financial aspects of the plan, i.e., financial sources and
applications are shown. In the annual developmental plans the items pertaining to capital
budgets, i.e., the capital revenue and expenditure are listed. The main objectives of short-term
planning are to raise the revenue, attain the short-term economic targets, bring price stability, and
remove deficit in BOP. The medium-term plans last for the period of 3 to 7 years. But normally,
the medium term plan is made for the period of five years.
The medium-term planning

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The medium-term planning is not only related to allocation of financial resources but also
physical resources. The main objectives of medium-term economic planning are to raise per
capita income, raise the level of employment, create self-sufficiency in the economy, reduce
dependence over foreign aid and raise revenues through domestic sources, and to remove
regional and intra-regional disparities.
Long-term plans
Long-term plans last for the period of 10 to 30 years. They are also known as ‘perspective
plans’. The origin of long-term planning goes back to USSR where Goelro Plan 1920-35 was
first formulated and implemented in 1920. The basic purpose of that plan was to electrify the
rural areas. The basic philosophy behind long-term planning is to bring structural changes in the
economy. Under long term planning, there is greater freedom of choice and there is a wide scope
of planning.

(10). 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.

(11). Capitalist, Socialist & Mixed Planning

Planning Under Capitalist

Capitalistic economy is also known as ‘free-enterprise economy’. There was no authority

governing the planning activity. All the economic activities were controlled by the private
sector. The state function was limited to tax collection and defense. There was no public
welfare measures, no developmental planning and no labor rights. But with the capacity of time
esp. after the great depression of
1930s and development of economic, social and political economic thoughts, the capitalist
economies adopt the modern functions like:

(a) formulating and implementing monetary, fiscal and trade policies,

(b) promulgating( declare) anti-monopoly and anti-cartel laws,
(c) working for the sake of community’s benefits,
(d) formulating and implementing development plans
(e) providing basic facilities of health, education, transportation, communication, and recreation,
etc.

Planning under Socialist

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In socialism, the central planning board formulates the plan which covers the whole economy.
The central planning board has unlimited powers regarding allocation of resources and
production of goods and services. Government determines the goals and priorities regarding
distribution of national income, employment, economic needs, capital accumulation and
economic growth. All factories, resources, financial institutions, shops, stores, ware houses,
foreign and domestic trades, means of communication and transportation are under government
control.

Planning under Mixed Economy

Most economists suggest the operation of mixed economy because both extreme capitalistic and
socialistic system are not suitable.

Capitalistic characterised by lot of problems [ misallocationof resources, market imperfections,

monopolies, oligopolies, labour exploitation, widening gap between haves and have-nots, and
consumer’s exploitation].

Socialistic form of economy may create the problems [like State’s monopoly and supremacy,
bureaucratic hold, corruption, red tapism (bureaucry) , VIP system, loss of consumer’s
sovereignty, standardization of products, poor quality of products, less foreign trade, etc.]

While in case of mixed economy, Consumer’s sovereignty, private property ownership and
operation of price mechanism are ensured. The public sector also works parallel to private sector.
The public sector in a mixed economy consists of those projects which require heavy funds like
railways, air transportation, roads, bridges, flyovers, underpasses, power generation, irrigation,
telecommunication, research, etc.

Govn’t addresses people’s basic needs like employment, health, and education. In LDCs gvn’t
provides housing facilities to poor family. To avoid labour & consumer’s exploitation, govn’t
promulgates antimonopoly and anti-cartel laws. Govn’t adopts safety measures against pollution
and unhealthy working conditions in factories, offices, etc.

In agricultural sector, govn’t provides short term loans to farmers, and imports farm machines.

(12). General Planning and Partial Planning:

(i) General Planning: It refers to planning of all activities(all sectors) of the economy, namely,
agriculture, industry, transport, irrigation, power, social services etc. are brought under its scope.

(ii) Partial Planning: 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. It is a short- term
method which is adopted to achieve a particular objective

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