Chapter 1

Introduction
1.1 Evolution of development thinking
• The evolution of development thinking can be
summarized in to three different periods:
The Early Post War Consensus
The Washington Consensus

The Oscillating Search for Silver Bullet

 1.1.1 The Early Post War consensus

 This period covers immediately after a cease of World

War II up to the end of 1960's & beginning of 1970's.
 This is an interesting period for the developing world
b/c it gets attention by academicians how growth and
development could be achieved in these countries.
 Available economic models seemed to offer only
limited insights into the practical problems facing the
so-called Third World.
• The period, for ease of understanding could be looked
into Four important sub- periods.
1.Dualism
2.Need for Balanced Growth (structuralism)
3.Interventionist state
4.Technology in generating growth
1.Dualism: is the co-existence of two contradicting
social-economic situations i.e.
 one modern and other primitive or
 one desirable and the other undesirable or
 one superior and other inferior.
i. Sociological dualism: the coexistence of western and
non-western cultures.
ii. Technological dualism: the co-existence of traditional
sector using traditional technology & modern sector
using modern technology in less developed countries.
iii. Physiocrats: viewing land as the source of all wealth,
agricultural surplus supporting the non-agricultural
sector.
iv. Classical dualism: Surplus labor as potential for growth
when transferred from agriculture to non-agriculture.
2.The need for balanced growth: not only
balanced growth b/n agriculture & non-agriculture
but also with in each sector, so that Say's law could
come in to play and not only shoes but also socks
would be produced feeding each other on both the
demand and supply sides.
3.Interventionist state: on the policy side, strong
inclination to turn to the intervention state as a key
instrument for development. This is b/c:
 – Desire to cut pre-independence colonial ties & want to
exercise their own development agenda.
– to promote industry, with relatively less attention paid to
stagnant agriculture.
• Interventionist state create pre-conditions of dev’t through
 Infrastructure
 Institutions
 Subsidization of newly created non agricultural
entrepreneurs &
 protection from foreign competition
4. Technology in generating growth: Solow, 1957
and Kuznets, 1955 emphasized the importance
of technology in generating growth.
• They introduced critical elements like
 Research & Development (R&D),
 patents and
 other forms of scientific endeavours leading to
new growth theory.
 1.1.2 The Washington Consensus
• Scitovsky, and Scott 1970, Bhagwati 1978, Krueger
1978, Cohen and Ranis, 1971, among others insisted
that a re-structuring of the rails of development was
needed.
• Main theme: Prices matters more & macroeconomic
stability matters lessThis includes:
– Privatization
– Trade liberalization
– Export promotion through enhancing competitiveness
– Simultaneous liberalization of financial markets (domestic
and international)
– Openness to Foreign Direct Investment (FDI)
– Emphasize on R&D (public + private)
1.1.3 Oscillating Search for a Silver bullet
• Oscillating search = looking for different ways for solving
different problems.
• Silver bullet/magical solution/quick fix = a quick/
immediate/effective solution to a difficult problem.
• Viewing per capita income growth as the key objective has
been questioned for sometimes.
• Attention has been given to the distribution of income, to the
extent to w/h private income poverty is reduced & to the
extent to which public income poverty (the distribution of
public goods) is being addressed.
• The public income poverty can be seen through various human
development dimensions like infant mortality, life expectancy,
literacy as fundamental objectives of development.
 1.2 Historical background of economic planning

 The idea of planning has a long history and goes

back to the time of Plato [the first person who
talked about organized planning].
 It was later developed and shaped by eminent
thinkers and writers both in the western and
eastern camp.
 However, the idea of economic planning in its
modern form is comparatively new. It is the 20th
century phenomena.
 Ideologically, the evolution is from three
perspectives:
Planning in eastern Europe (socialist perspective)
Planning in western Europe (capitalist perspective)
Planning in underdeveloped countries (mixed
economic perspective)
Planning in Eastern Europe (socialist perspective)
 During the 19th century, intellectual theorists,
thinkers and writers in the Eastern Europe became
fed up with the inquiry & contradictions of pure
capitalism
 They developed the idea of state intervention to set
matters right and to prevent inequalities resulting
from capitalism (free economy), a solution to the
fallacy of laisser-faire.
 In 1928 the Soviet Union gave the idea of economic
planning a real shape when it formulated its first five
year plan.
The main objective of the socialist (Soviet) plan
was to achieve the rapid transformation of a
backward agriculture sector (traditional sector) into
a modern industrial sector
The First Five-Year Plan of the Union of Soviet
Socialist Republics (USSR) was a list of economic
goals, created by General Secretary Joseph Stalin.
It was implemented between 1928 and 1932.
 Planning in Western Europe

In Western economies, a series of the historical

development that led to the coordination of
economic planning are:
a) The development of science and technology
not only made material progress possible, but
also they made planning possible.
b) In the 1930’s, the capitalist world was in the
midst of the biggest depression in the world
history.
 Capitalism failed an utter collapse and its
inherent contradiction came up to the surface.
Economic growth collapsed and acute misery
poverty well experienced by people.
Therefore, economist and politician favored
economic planning as a remedy for these and other
economic ills.
Note: - The objective of the economic planning in the
West was basically different from that of the Soviet
Union. The purpose of planning in Nazi Germany
was primarily to build up the war potential rather
than improving the living standard of the people.
c) The outbreak of World War I and II necessitates
the proper and efficient planning of economic
resources for successful prosecution of the war.
[For coordinated management of scarce
resources]
d) In the post war period, the war devastated
countries of Europe were compelled to resort to
economic planning to rehabilitate themselves. B/c:
As a condition for receiving assistance under
the Marshal plan, the USA insisted upon these
countries to formulate their rehabilitation plan
covering almost every sector of the economy.
The Marshall Plan (officially the European Recovery
Program, ERP) was the American initiative to aid
Europe, in which the United States gave economic
support to help rebuild European economies after
the end of World War II in order to prevent the
spread of Soviet Communism.
The plan was in operation for four years beginning
in April 1948.
The goals of the United States were to
 rebuild war-devastated regions
 remove trade barriers
 modernize industry
 make Europe prosperous again.
The USA itself has recognized the significance of
economic planning when it adopts an economic
program called the “new deal” to come out of the
suffering from great depression in thirties.
The New Deal was a series of domestic programs
enacted in the United States between 1933 & 1938.
 They involved laws passed by Congress as well as
presidential executive orders during the first
term of President Franklin D. Roosevelt.
 The programs were in response to the Great
Depression.
e) The growth of markets and increased
specialization led to increased interdependence
among economic activities and to greater
economic externalities, which lead to adoption
of economic planning. There is a need to
intervene public agencies to rectify the negative
externalities.

f) The development of democracy also lead to the

adoption of planning in order to rectify social
inequalities.
 Planning in Underdeveloped Countries
 Economic planning was considered as important
panacea (remedy) for underdeveloped countries
in their desire for industrialization.
 Developing countries want to achieve rapid
growth in short period of time.
 Economic planning, therefore, was considered as
a tool to achieve rapid economic development.
However, the development of planning took a
different course (path) than the rich countries due
to the following reasons:
a. In Less Developing Countries, planning was
considered as an ideology rather than a means b/c
in these countries planning was considered as a
desire (expression) of many things, such as:-
Desire (expression) of independence
Expression of self-determination.
Then planning as a political & cultural goal
b. New leaders (elites) emerged when they got
independence with new vision (ideas).
• This brings new decision making capacity, which is to
mean colonial administrators were gone and these
new leaders have to plan because it was considered as
a potential tool (instrument) to survive and prosperity.
• However, the then planning was not as a result
of popular participation (bottom up planning), it
was up down.
• It was up down planning to express the need of
the leaders who control the political structure.
• Planning here was not as a consequent of
industrialization, which is the inverse of the
Western, developed countries.
 summary
Planning in Eastern Europe mainly evolved due
to the continuous failures observed in western
market economies.
 Planning in Western Europe evolved to seek
solutions for market failures and especially the
need for Marshal Plan of the post war
rehabilitation schemes designed.
 Planning in under developed economies evolved
as a means of declaring independence and the
ambitious need for fast growth.
 1.3 Meaning of Economic Planning

 There is no agreement among economists with

regard to the meaning of the term economic
planning. The term has been used very loosely
in economic literature.
 It is often confused with communism, socialism
or economic development.
 Any type of state intervention in economic affairs
has also been treated as planning. But the state
can intervene even without making any plan.
What then is planning?
Planning is a technique, a means to an end, an end being
the realization of certain pre-determined and well-defined
objectives laid down by a central planning authority. The
end may be to achieve economic, social, political or
military objectives.
The idea underlying planning is a deliberate use of the
resources of the communi­ty with a view to achieving
certain goals.
The State, through a planning authority, takes the
responsibility of planning.
It represents a complete break from the policy of laissez-faire.
Thus, planning is a technique for achieving certain pre-
determined goals laid down by a central planning
authority.
Some of the definitions of economic
planning given by academicians are:
 Professor Robbins defines economic planning as
"collective control or super session of private
activities of production and exchange.“
 To Hayek, planning means, "the direction of
productive activity by a central authority.“
 According to Dr. Dalton, "Economic planning in the
widest sense is the deliberate direction by persons
in charge of large resources of economic activity
towards chosen ends."
Lewis Lordwin defined economic planning, "as a
system of economic organization in which
individual/separate plants, enterprises, and industries
are treated as coordinate units of one single system
for the purpose of utilizing available resources to
achieve the maximum satisfaction of the people's
needs within a given time.
In the words of Zweig, "Economic planning consists
the extension of the functions of public authorities to
organization and utilization of economic resources…
Planning implies and leads to" centralization of the
national economy.
One of the most popular definitions is by Dickinson
who defines planning as the making of major
economic decisions on:
what and how much is to be produced,
How, when and where it is to be produced, and
to whom it is to be allocated by authority on the basis of
comprehensive survey of the economic system.
• Even though there is no agreement of opinion on
the subject, yet economic planning as understood
by the majority of economists implies deliberate
control and direction of the economy by a central
authority for the purpose of achieving definite
objectives within a specified period of time.
 As a working definition Planning is a technique or a
means to achieve an end. End refers to certain
predetermined target (well defined objective). End
might be achieving: Economic objectives, social
objectives or military objectives or both.
 A plan is a forecast for accomplishment. It is
predetermined course of action. It is today’s
projection for tomorrow’s activity. In other words,
to plan is to bring about specified results at a
specified cost, in a specified period of time.
To sum up, economic planning comprises the
following essential features:
1. Predetermined and well defined objectives
2. Deliberate control of the economy by central
authority i.e. state
3. Optimum utilization of resources
4. The objectives are to be achieved within a
given interval of time.
1.4 The need for economic planning in
underdeveloped countries
1. To Increase the Rate of Economic Development.
 It means increasing the rate of capital formation by raising
investment.
 But increasing the rate of capital formation in these economies is
beset/affected with a number of difficulties.
o People are poverty-ridden.
o Their capacity to save is extremely low due to low levels of income and
high propensity to consume.
 Thus, the rate of investment is low w/c leads to capital deficiency
& low productivity.
o Low productivity means low income & the vicious circle is complete.
o This vicious economic circle can only be broken by dev’t planning.
o Two methods are open to underdeveloped countries.
o One is planned development by importing capital from abroad which
(supported industrialization) and
o The other is by forced saving (self-sufficient industrialization).
2. To Improve and Strengthen Market Mechanism.
 The market mechanism works imperfectly in
underdeveloped countries because of the ignorance
and unfamiliarity with it.
 The product, factor, money markets are not organised
properly.
 Thus the price system exists in only a undeveloped
form and fails to bring about adjustments between
aggregate demand and supply of goods and services.
 To remove market imperfections, to mobilise and
utilise efficiently the available resources, to determine
the amount and composition of investment, the
market mechanism is required through planning.
3. To Remove Unemployment.
 Capital being scarce and labour being abundant, the
problem of providing gainful employment opportunities
to an ever-increasing labour force is a difficult one.
 It is only a centralized planning authority which can solve
this.
4. Balanced Development of the Economy.
 For rapid economic development, underdeveloped
countries require the development of the agricultural
and industrial sectors, the establishment of social and
economic overheads, the expansion of the domestic and
foreign trade sectors in a harmonious way.
 All this requires simultaneous investment in different
sectors which is only possible via development planning.
a) Development of Agricultural and Industrial Sectors.
 The need for developing the agricultural sector along
with the industrial sector arises from the fact that
agriculture and industry are interdependent.
 Reorganisation of agriculture releases surplus labour
force which can be absorbed by the industrial sector.
 Development of agriculture is also essential to supply
the raw material needs of the industrial sector.
b) Development of Infrastructure.
 The agricultural and industrial sectors cannot develop in
the absence of economic and social overheads.
 The building of canals, roads, railways, power stations,
etc., is indispensable for agricultural and industrial
development.
 The training & educational institutions, health centres,
legal system/police, emergency (fire, floods) etc.
 But private enterprise in underdeveloped countries is
not interested in developing the social and economic
overheads due to their unprofitability.
 It, therefore, devolves on the state to create social and
economic overheads in a planned way.
5. Removing Poverty and Inequalities.
• For raising national & per capita income, for reducing
inequalities in income and wealth, for increasing
employment opportunities, for all-round rapid
development, planning is the only path open to
underdeveloped countries.
 1.5 Requisites for Successful Planning

• The success of a plan require the following:

1. Planning Commission.
 The setting up of a planning commission which should be
organised in a proper way.
 It should be divided and sub-divided into a number of
divisions and sub-divisions under such experts as
economists, statisticians, engineers, etc. dealing with the
various aspects of the economy.
2. Statistical Data.
 The successful planning requires the setting up of a central
statistical organization for collecting statistical data and
information with regard to the total available material,
capital and human resources of the country.
3. Objectives
• objectives should be realistic, mutually compatible & flexible
enough in keeping with the requirements of the economy.
4. Fixation of Targets and Priorities.
 They should be both global/national and sectorial:
 Global targets must be bold and cover every aspect of the
economy.
 They include quantitative production targets, so many
million tons of foodstuffs, coals, steel, fertilizers, etc., so
many kilowatts of power capacity, so many metres of
railways & roads, so many additional training institutions, so
much increase in national income, saving, investment, etc.
 There are also sectoral targets pertaining to individual
industries and products in physical and value terms.
5. Mobilization of Resources.
 Both internal (such as savings, taxation, etc.) and external
sources (such as net budgetary receipt) of financing a plan
are important for the success of a plan
 The plan should lay down such policies and instruments for
mobilising resources w/c fulfil the financial outlay of the plan
without inflationary and balance of payments pressures.
6. Balancing in the Plan.
 A plan should ensure proper balance in the economy,
otherwise shortages or surpluses will arise.
 There should be balance b/n saving & investment, b/n the
available supply of goods & the demand for them, b/n
manpower requirements & their availabilities, & b/n the
demand for imports & the available foreign exchange.
7. Incorrupt and Efficient Administration.
 A strong, efficient and incorrupt administration is the sine
qua non of successful planning.
 But this is what an underdeveloped country lacks the most.
 Lewis regards a strong, competent & incorrupt
administration as the first condition for the success of a
plan.
• The Central Cabinet in an underdeveloped country should
not take important economic decisions hurriedly without
getting them properly examined from technical advisers.
8. Public Cooperation.
• As Lewis states: Popular enthusiasm is both the
lubricating oil of planning & the petrol of economic
development.