Development Planning

Development Planning

•Development planning
•Development plan: is a mid-term government plan that maps out
what government wants to achieve in 5 years.
•It involves predetermining a nation’s visions, missions, policies and
programmes in all facets of life such as social, human, political, environment,
technological and the means of achieving them. It requires central planning
and monitoring on national level and implementation on micro, local level.
• Economic plan: is defined as deliberate
governmental attempt to coordinate economic
decision making over the long run and to influence,
direct and in some case control the level and
growth of a national’s principal economic variables
(income, consumption, employment, investment,
saving, exports, imports, etc.) to achieve set of
development objectives
•Economic plan is a set of quantitative economic targets to be reached in a given
period of time. Economic plans may be either comprehensive or partial.
•Comprehensive plan sets its targets to cover all major aspect of national
economy.
•A partial plan covers only part of the national economy – industry, agriculture,
the public sector, the foreign sector etc.
•The planning process is an exercise in which government first choose social
objectives, then sets various targets and finally organizes a framework for
implementing, coordinating and monitoring a development plan.
Plaining: Three Basic Models
• Aggregate Growth Models: Projecting Macro
Variables.
 It deals with the entire economy in terms of
macroeconomic variables such savings,
investment, capital stocks, exports, imports,
foreign assistance and so on.
 Aggregate growth models provide method for
forecasting output and employment growth
over a three- to five year period.
Input- Output models and Sectoral
Projections
• Input-output model- All industries are viewed both as producers of
output and user of inputs from other industries.
• For example the agricultural sector is both producer of output
(wheat) and user of input from manufacturing sector ( machinery,
fertilizer).
• Thus direct and indirect repercussions of planned changes in the
demand for the products of one industry on output, employment and
imports of all other industries can be traced throughout the entire
economy.
• Given the planned output targets for each sector of the economy, the
interindustry model can be used to determine intermediate material,
import, labor and capital requirements with consistent production
levels and resources requirements
Project Appraisal and Social Cost-Benefit
Analysis
• setting objective – the social worth of a project must be evaluated in terms
of national economic and social objectives.
• Economic planners measure the social worth of a project in terms of the
degree to which it contributes to the net flow of future goods and services
in the economy, i.e. its impact on future levels of consumption.
• Its impact on income distribution. How the project will benefit different
income groups
• Computing shadow price and social discount rates - there are five
reasons why social planners need to calculate shadow price and social
discount rates
•
(i)Inflation and currency overvaluation
(ii)Wage rates, capital cost and unemployment
(iii)Tariffs, quotas and import substitution
(iv)Savings deficiency
(v)Social rate of discount
•
•Choosing projects:
• Net present value (NPV)
•in choosing investment project the project should be accepted or rejected
according to whether their net present value is positive or negative.
• However NPV calculations are very sensitive to the choice of a social discount
rate.
Internal rate of return(IRR) : compare IRR with either a
predetermined social discount rate or the market rate of interest,
and choose projects whose internal rates exceed the
predetermined or market interest rate.
•Benefit cost ratio: Most developing countries face capital
constraints, the choice of investment project will also involve a
ranking of all projects that meet the NPV rule. Projects are ranked
by descending NPV by their benefit-cost ratios, NPV/K. The
projects with the highest NPV/K ratio is chosen, then the next
highest, and so on until all available capital investment funds have
been exhausted.
Arguments for and against planning
•Arguments for planning

Imperfect market: market forces fail to attain efficient
allocation of resources.
•Hence the state intervention in the form of planning is
necessary to obtain an efficient allocation of resources
since price are wrong signal to the decision markers.
Externalities: Private investors do not pay much attention to the externalities
which could be generated in the process of development and which could
account for the differences between marginal net social benefit and marginal
net private benefit. therefore, planning is necessary to remove the difference
between marginal net social benefit and marginal net private benefit.
•
Private investors are interested in maximizing short-term and not long-term
profits and this again may lead to a resource allocation, which is less than
socially optimal in the long run.
The economic progress via reliance upon market forces is
consider very long and given the present differences between rich
and poor countries, the task of achieving high rate of growth is
important. It is believed that planning would accelerate the growth
rate in developing countries.
•
institutional and structural: Planning is supposed to achieve the
necessary institutional reforms to allow for more rapid growth.
Lack of resources: Developing countries have limited
resources, it is necessary to utilize such resources (e.g.
capital, skilled manpower, foreign exchange etc.) in the
most productive way and this can only be achieved if the
whole economy is brought under an overall planning
mechanism.
•
The argument against planning
•
Perfect market: If planning is necessary to avoid imperfections of
the market mechanism, then what is necessary is to make the
market more perfect, not planning.
Tax and subsidy: If there is externalities, the best way to solve the
problem would be tax or to provide subsidies and information to the
producers so that the differences could be removed.
Imperfect operation of the market in underdeveloped country can
be attributed to ignorance in the sense of lack of familiarity with
LDCs lack skilled manpower necessary to tackle the problem of preparing
the executing an efficient planning mechanism. Given government
intervention in the decision making process, an inefficient and corrupt
bureaucracy may easily increase the waste of resources that would
otherwise have resulted in the operation of the imperfect market.
Planning requires a large amount of information about many braches of
the economy. The availability and reliability of such information is doubt.
•
 The costs of planning are large for LDCs.
Apart from the costs of running the planning administration, government
intervention and planning for promoting industrialization via protection,
industrial licensing and quotas have increase the real costs for LDCs.
 LDCs have a tendency to adopt planning as an important policy to achieve a

higher rate of growth. However, in many developing countries all means of
production are owned by the state. Few LDCs have resorted to totalitarian
forms of planning and the private sector is allowed to operate alongside the
growing public sector.
Problems of implementation
 Lack of action
 Discrepancies between planning and implementation due to constraints
such as financial and human resources
 Conflict of interest among agents at planning and implementation stages
 Lack of political commitment for implementation
 Lack of effectiveness of visions in terms of enforceable actions
 Ineffective implementation syndrome.
 Factor prices, choice of technique and employment creation- there is
conflict between two major objectives –rapid industrial growth and expand
employment opportunities, which result in the employment creation in the
industrial sector at the expense of rural sector.
• Structure of the economy – Planning and government policies also
contributed to maintenance or aggregation of social incorrect signal
and incentives through the emphasis on import substitution.
External and internal policies such as special tax concession to
foreign investors, higher effective tariff designed to lower the costs of
capital and intermediate goods imports, quotas, subsidized interest
rate etc. have to serve to provide stimulus to import substituting
industrial expansion. Heavy emphasis on urban industrial growth has
contributed to the stagnation of agricultural sector.
Reasons for plan failures
 Deficiencies in plans and their implementation – Governments try

accomplish too many objectives at once without consider that some of
the objectives are competing. Many plans are never implemented.
•
 Insufficient and unreliable date – The economic value of a development
plan depends to the quality and reliability of statistical data.
When these data are weak, unreliable or non-existent, the accuracy and
internal consistency of economic plans are diminished.
 Lack of human capital such as qualified economists, statisticians
and other planning personnel that will formulate and carry out a
comprehensive and detailed development plans.
 Economic shock: external and internal- developing
countries depend on international trade, aid and private
foreign investment it becomes difficult for them to engage
in even short-term forecasting. Governments have little
control to determine the success or failure of their
development policies.
 Institutional weakness – lack of separation of the planning agency from day-
to-day decisions making machinery of government, the failure of planners,
administrators, and political leaders to engage in a continuous dialogue and
internal communication about gaols and strategies and international transfer
of institutional planning practices and organisation arrangements that may
inappropriate to local conditions.
 Lack of commitment to national goals as opposed to regional, departmental,
lack of national interest as opposed to personal interest, the political and
bureaucratic corruption.
 Lack of political will- gap between plan formulation and plan
implementation due to lack of commitment and political
Political will require ability and political courage to challenge
powerful elites and vested interest groups and persuade them
that such development is in the long run interest of all citizens.
•
Industrialization development
•Export promotion versus Import Substitution

•trade policies for development -
• Outward-looking development policies- which encourage
free trade, free movement of capital, workers,
enterprises and students, multinational enterprises and
an open system of communications.
• Inward-looking development policies –stress the need for
developing countries to evolve their own style of
development and to control their own destiny.
•It encourages policies that encourage indigenous learning by
doing in manufacturing and the development of indigenous
technologies appropriate to a country’s resource endowments.
•According to proponents of inward-looking trade policies, self-
reliance can be accomplished only if you restrict free trade, the
movement of people and communication
• Export promotion (expansion strategy)- an out-ward-
oriented strategy that emphasises the development of
industries capable of exporting to world markets. Integral to
expansion strategy is an emphasis on export
diversification.
Export Processing Zone
• A special geographic region usually found in developing countries

where foreign investment is encouraged to stimulate export
expansion and diversification.
• The creation of export processing zones reflects an outward-
oriented and exports driven strategy of economic development.
• Such zones may lead to a growth in regional economic
disparities.
Import substitution
• A strategy that stress the development of local

industries to manufacture products that were previously
purchased from abroad. Initial such industries normally
need protection with tariffs and government subsidies,
given their infant industry status.

Development Planning - Development Plan: Is A Mid-Term Government Plan That Maps Out What Government Wants To Achieve in 5 Years

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•Arguments for planning

 LDCs have a tendency to adopt planning as an important policy to achieve a

 Deficiencies in plans and their implementation – Governments try

•Export promotion versus Import Substitution

• A special geographic region usually found in developing countries

• A strategy that stress the development of local

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