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Economic Planning

Planning is defined as conceiving, initiating, regulating and controlling
economic activity by the stat...
resources are less than required.

3. Discussion of likely development in private sector: It is said that both
public and ...
Importance / Objectives of Economic Planning w.r.t. Mixed Economy & UnderDeveloped Countries
In the following section we w...
(a) Limited life span of an individual
(b) Limited resources at the disposal of an individual

4. Because of these common ...
capitalist society. The government can redistribute labour and create more work
opportunities
for both private and public ...
to boost up the
savings and investment, esp. foreign investment. In UDCs on one hand there is a
vicious
circle of poverty,...
The following obstacles come in the way of economic planning:

1. Measurement of labour force: In economic planning, the i...
population
heavily rely on agricultural income. The present rate of population growth in
India and
Pakistan is not signifi...
This problem is common in Pakistan and hampers the economic development in rural
and
tribal areas.

7. Wage rates and unem...
countries,
there is a high consumption of energy, whereas in UDCs, the energy consumption
is
considerably low. The general...
13. Political instability: Most of UDCs, especially Asian and African countries,
are known of their
political instability,...
income. Developed countries managed to save 20% of their output in capital
formation.
Whereas only 5% of the national inco...
Many developing countries are caught up in vicious cycle of poverty. Low level
of income prevents
savings, retards capital...
at this stage.

3. Take-off: Take-off represents the point at which the resistances to steady
growth are finally
overcome ...
4. Drive to maturity: The fourth stage is the drive to maturity. It is the stage
of increasing
sophistication of the econo...
global context of economic development. Poor countries have important advantages
that the
pioneers of industrialisation ha...
http://www.maeconomics.webs.com/Economics_of_Planning/Economic_Planning_files/im
age002.jpg

http://www.maeconomics.webs.c...
encourages exports, and minimises unnecessary government regulation of
businesses esp.
small and medium sized firms.

3. S...
Harrod Domar Growth Model
As we know that one of the principal strategies of development is mobilisation
of
domestic and f...
Or
.K = k..Y ------------------------------- (iii)
· Finally, because net national savings, S, must equal net investment, ...
For example, the national capital-output ratio in an under-developed country is,
let say,
3 and the aggregate saving ratio...
Top
Home Page
Models of Economic Growth
Classical Model of Economic Growth
Every nation strives after development. Economic progress is ...
and his co-authors.
3. International-dependence revolution: The international-dependence revolution
was more radical
and p...
thought ’ the neo-colonial dependence model, the false-paradigm model, and the
dualisticdevelopment thesis.
4. Neoclassica...
the transition
from underdevelopment to development can be described in terms of a series of
steps or
stages through which...
Rostow also clarified that these stages are not merely a way of generalising
certain factual
observations about the sequen...
The primary focus of the model is on both the process of labour transfer and the
growth of
output and employment in the mo...
In addition to the accumulation of capital both physical and human, a set of
interrelated
changes in the economic structur...
end they suffocate
or condition the economies of the less developed countries.•
(b) False-Paradigm Model: The second and l...
models, in many cases merely serve the vested interests of existing power
groups, both
domestic and international.
(c) Dua...
reduction in individual freedoms. The conclusion, therefore, is that minimal
government is the
best government.
(c) Market...
Karl Marx•s Model
Czarist Russia grew rapidly from 1880 to 1914; it was considerably less
developed than industrialised
co...
3. Equal distribution of income,
4. Peaceful and democratic evolution,
5. Labour theory of value • value of a product repr...
work of labour force is not merely to produce value equal to its price but much
more. This surplus
value is the difference...
Planning Techniques
Methodology of Planning:
The planner is gone through the following steps in economic planning:
(a) Col...
existing per capita income while population is growing at the rate of 3% p.a.,
then the required GNP
growth rate should no...
(f) Sectoral allocation or determination of priorities: The resources at the
disposal of a
country are always short of the...
(v) readily availability and computerised maintenance of government records,
financial
statements and cost statements,
(vi...
(b) Tax Policy: The tax policy be stipulated in such a way that more revenues
could be raised
from taxes for the sake of p...
nationalisation policy in economic planning. The sector or the sectors that are
causing market
imperfections may be nation...
(a) Capital-Output Ratio (COR): The Capital-Output Ratio (COR) is used during
the planning
stage of determination of growt...
http://www.maeconomics.webs.com/Economics_of_Planning/planning_techniques_files/
planni3.gif
Where K = existing capital st...
Y = existing level of output.
For example, the existing capital stock of the economy is Rs. 6 billion, while
the output of...
Sectors
Growth in Zero Period
Growth during 5 years
Agriculture

Industry

Services

GDP

2. Resources and their Uses
Reso...
Govt. expenditure

Private consumption

Total

Total

3. Capital Account

In
zero period
In 5 years

In
zero period
In 5 y...
Stocks

Corporate saving

Private saving

Govt. saving

Foreign saving

Total

Total
4. Government Current Account
Revenues
In
zero period
In 5 years
Expenditures
In
zero period
In 5 years
Taxes

Govt. expen...
(c) Input-Output Analysis: The purpose of Input Output (IO) Analysis is to
provide a balance
between input, output and fin...
Selling
Sectors
Agriculture
500
1500
1000
3000
Industry
1000
2500
1500
5000
Value added
(Payment to factors)
1500
1000
0
2...
problems concerning with maximisation or minimisation subject to constraints.
Through linear
programming the profit functi...
x2 = motor cycles (profit of $55 per motor cycle)
Following are the given constraints:
http://www.maeconomics.webs.com/Eco...
http://www.maeconomics.webs.com/Economics_of_Planning/planning_techniques_files/
planni8.gif
Where C = annuity amount
i = ...
18,000
2009
19,000
20,500
PV Factor
10%
10%

The NPV of both projects is calculated as below:
Net Present Value
Years
Proj...
0.826
12,390
14,000
0.826
11,564
2007
16,000
0.751
12,016
17,000
0.751
12,767
2008
18,000
0.683
12,294
18,000
0.683
12,294...
59,000
Net Present Value
1225

355

In the above case, the planners will opt for project A, because the NPV of the
project...
‘ Foreign exchange used as a ‘measuring rod‘. Rather domestic prices, foreign
exchange measures the true costs and benefit...
represented as:
http://www.maeconomics.webs.com/Economics_of_Planning/planning_techniques_files/
planni10.gif
Where V = an...
K = total investment
VB = variations in income because of changes in 1 unit of BOP.
(iii) Maximisation of the Rate of Crea...
Schumpeter‘s Model of Economic Growth
Joseph Schumpeter was a famous Austro-Hungarian economist, but never followed
Austri...
Schumpeter‘s theory of economic development is considered as a radical theory.
It is considered
radical in the context tha...
‘ nowhere in the system are there commodities without complements.
Under these conditions, all goods find a market, and th...
The basic structure from Schumpeter‘s model of economic development has two
distinctive spheres.
On the one hand is the se...
(b) Kitchin cycles ‘ covering a period of 3 years
(c) Juglar cycles ‘ covering a period of 10 years
(d) Kuznets cycles ‘ c...
Intelligence
Types of Economic Planning

Planning by Inducements
Planning by inducement is often referred to as ‘indicativ...
automated
market system. The demand and supply is automatically adjusted and remain in
balance
under market economy.

Deme...
Planning by Directions
This type of planning is practised in socialist countries like China, Former
USSR, Cuba, North Kore...
(h) It also involves huge administrative costs, as the planning by direction
involves in elaborate
census, numerous forms ...
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Transcript of " Economics-planning-ma-in-economics"

  1. 1. Economic Planning Planning is defined as conceiving, initiating, regulating and controlling economic activity by the state according to set priorities with a view to achieving well-defined objectives within a given time. According to Professor Dickinson, economic planning is the making of major economic decisions by a determinate authority on the basis of a comprehensive survey of the economy as a whole. Such decisions include what and how much to produce; how, when and where it is to be produced; and to whom it is to be allocated. With reference to underdeveloped countries, Subrata Ghatak defines economic planning as a conscious effort on the part of any government to follow a definite pattern of economic development in order to promote rapid and fundamental change in the economy and society. Essentials of Economic Planning According to Arthur Lewis, a development plan may consist of the following parts: 1. 2. 3. 4. 5. Survey of current economic conditions List of proposed public expenditures Discussion of likely development in private sector Macro economic projections of the economy Review of government policies 1. Survey of current economic conditions: The economic survey shows the changes in respect of population, NI, taxation, government expenditures and BOP, etc. It also tells us the changes needed or expected to occur in these economic variables. The economic survey is usually for one year. 2. List of proposed public expenditures: The proposals and suggestions for incurring public expenditures on development projects are invited from various government departments and agencies. After a thorough scrutiny of these recommendations, an order of priority is determined deciding what is to be included, what is to be postponed or rejected as the financial
  2. 2. resources are less than required. 3. Discussion of likely development in private sector: It is said that both public and private sectors are inter-related and rate of economic development depends more on the working of the private sector than expenditures in public sector. The government reviews the performance of major industries in economic planning, and sets quantitative targets for the plan period. All this involves a brief in-depth analysis of the working and implications of market structure. 4. Macro economic projections of the economy: It refers to the preparation of aggregate models which are applied to the economy as a whole. These models deal with production and consumption as single aggregates. Aggregate models are used to determine the possible growth rates in NI, the division of national product among consumption, investment and exports, the required volume of domestic savings, imports and foreign assistance needed to carry out a given development programme. This involves massive calculations and paper works. 5. Review of government policies: The government through development policy can influence the decisions indirectly in the private sector.
  3. 3. Importance / Objectives of Economic Planning w.r.t. Mixed Economy & UnderDeveloped Countries In the following section we will discuss the economic planning with reference to mixed economies and under-developed countries: 1. Efficient utilization of resources: The most essential function of economic planning is to ensure the best use of given resources within the country. Maximum social benefits can only be ensured when the available resources are allocated and utilized in the most efficient manner. Unused or slack utilization of resources will adversely affect the employment and productivity level of the economy. The government has to do some arrangements in order to bring equality between demand and supply. In the market economy, there are wasteful expenditures in the form of selling costs. Sometimes, few producers established their cartels in order to control the market. All this can be undone by the government through effective planning. 2. Market imperfections and price distortions: In market economies, there are certain market imperfections and price distortions both in commodity market and factor market. These distortions rise because of institutional arrangements. As the wage rate in some sectors of the economy exceeds the opportunity cost of the labour. This may be due to trade unions’ influence. Moreover, the goods whose demand is less elastic their producers may pursue monopolistic behaviour. There may be dualistic approach in the money market. In the organized money market the rate of interest is kept artificially low or inexpensive credit facilities are provided. While on the other hand, in less organized money market or in agriculture market, the ROI is extraordinary high. This situation also creates price distortion. These market imperfections can only be corrected by efficient economic planning. 3. Greater opportunities: The most common benefit that any democratic country enjoys is that the greater market opportunities are and should be provided to the producer and consumers. But this can be handicapped because of two reasons:
  4. 4. (a) Limited life span of an individual (b) Limited resources at the disposal of an individual 4. Because of these common problems, the individuals undertake those projects which require small amount of resources and the profit can be earned within a short period of time. In this way, the individuals would hardly be prepared to launch big projects like construction of highways, power-stations, land-reclamation, anti water logging and salinity schemes, railroads, sea ports, telecommunication, etc. It is the duty of the modern government to provide greater resources at the disposal of individuals. At the same time the government has to reduce excessive-consumption or the disposal of resources in few hands. This can only be ensured under efficient economic planning. 5. Maximisation of National Income and Raising Living Standard: It is the responsibility of modern state to maximise the national income and raise the standard of living. It can only be ensured when the government correctly addresses the economic needs of the country and takes desired actions in economic planning. 6. Full Employment: In economically advanced countries, the government’s aim is to provide full employment. All modern governments have, in fact, underwritten employment. If they cannot provide work, they have to give doles. Unemployment is the biggest by product of any
  5. 5. capitalist society. The government can redistribute labour and create more work opportunities for both private and public sector. 7. Equitable distribution of income: Economic planning is the most powerful tool of equitable distribution of income. The price-mechanism rewards people according to the resources they possess but contains in itself no mechanism for equalization of the distribution of those resources. Therefore, there is a wide gap between haves and have-nots. Shocking economic inequalities are a marked feature of an unplanned economy. Reduction of economic inequalities is now the avowed aim of a modern welfare state and is impossible without the instrument of economic planning. 8. Public oriented goals: In market economy, only those goods are produced whose demands are backed by money offers. As a result the production of public goods / services, including health, research and education, old-age benefits, poor houses, orphan houses, clean water, sewerage and drainage, free entertainment, art and culture, historical assets, wildlife, forests, security, and defence, are altogether ignored or very less attention is paid. It is planning which distributes the resources between present consumption and future consumption, social development and economic development, etc. As a result the goals of planned economies are more welfare and public oriented. 9. Price Stability: The purpose of economic planning is to reduce the price instability created by business fluctuations. During the period of increasing demand, the price hikes are inevitable due to supply shortages. In under-developed countries, because of low productive capacity, low savings and investment, and traditional set up, the price starts rising very sharply, and its impact on the developing society is very deep. In order to eliminate the adverse effects of price instability and business fluctuations, the government comes forward and play a vital role in creating a favourable economic condition. This can only be done through wise economic planning. 10. Larger savings and investment: The ultimate task of any finance ministry is
  6. 6. to boost up the savings and investment, esp. foreign investment. In UDCs on one hand there is a vicious circle of poverty, while on the other, there is an operation of international demonstration effect. In UDCs, there is a general tendency of demonstration effect within the people, and the whole economy’s growth is hampered by dualism. Savings remain at the lowest level. The boost in investment, domestic or foreign, depends on the level and duration of economic stability. More stable and viable economic growth planning may motivate the investors in investing and thus increasing the level of employment in the economy. 11. Provision of Social Services: In UDCs, the provision of social services forms an important objective of planning. In the fifth five year plan, two important objectives were: (a) Development of rural areas through various programmes and policies alongwith widespread extension of social services such as schooling, health and clean water facilities. (b) Easing of urban problems like water supply, sewerage and drainage, electricity, gas supply, housing and transportation facilities, etc. 12. Aid to victims of catastrophe: The granting of assistance and the organisation of relief to victims of natural catastrophes, such as flood, earthquakes, tsunamis, tropical storms, drought, etc. are the main the responsibilities of any government. Limitations of Economic Planning
  7. 7. The following obstacles come in the way of economic planning: 1. Measurement of labour force: In economic planning, the identification and enumeration of gainfully employed population is a difficult task, esp. in agriculture, where the employment is of part-time or seasonal nature. The important contributions to economic activities by women and children raise further complications. In backward economies, it is very difficult to distinguish between voluntary and involuntary unemployment. 2. Statistical data: The biggest problem with economic planning is that the planner has to work with a limited statistical data provided. Moreover, the planner has to work with these data, collected through different surveys, consensus, polls, etc., without much questioning about their reliability and accuracy. 3. Unused natural resources: The UDCs are identified of their unused natural resources like land, mines, rivers, forests, livestock, sea, etc. A resource such as land, a mineral deposit, a forest or a rive may not be used in production because it is economically inaccessible. A natural resource is valueless when its cost of extraction is greater than the price the product can command in the market. Therefore, the fullest possible use of natural resources is not a sensible aim of an economic planning, and the extent of the use of land or other natural resources is not a measure of economic efficiency. There are four types of resource idleness: (a) Idleness reflecting the inability of the resource to contribute to profitable production, (b) Withholding of the resources in the interests of monopolistic exploitation of the market, (c) Employment of resources for commercial or private use, and (d) Withholding of a natural resource from current production because the owner believes that it will make a more valuable contribution to production at a later date. 4. Population and real income: The biggest problem regarding human resources is that in UDCs, the population is growing at a very high rate. Moreover, most of the UDCs
  8. 8. population heavily rely on agricultural income. The present rate of population growth in India and Pakistan is not significantly greater than in the United States. But the significant point of contrast is that in the South Asia and Central Asia, there is a heavy reliance on comparatively backward agriculture. Real income is vitally affected by the quality of the population. 5. Economic repercussions of social institutions: Certain social institutions, such as extended family system or joint family system, which are appropriate to a subsistence economy may impede economic growth directly by reducing the rewards of individuals who take advantage of the opportunities presented by wider markets. Subsistence economy is the economy in which people strive for the minimum necessities to support life. The extended family system acts as a serious obstacle to economic progress. A man is much less likely to be willing and able to save and invest, when he knows that he would have to maintain a large number of distance relatives. It minimises the inducement for people to improve their own position. It obstructs the spreading of banking habit since people are unwilling to have banking accounts as there is no willingness to save. However, the economic planner can overcome this situation by introducing private or public insurance or other arrangements to replace the traditional methods for the relief of personal distress or disability. 6. Implications of restrictive tendencies: Social, political and administrative restrictive measures are directed against foreigners on the basis of racial, national or tribal differences. Such restrictive measures are often directed also against the members of local population. It may put restrictions on the movement of people or on the acquisition and exercise of goods or services. It may also be connected with ’xenophobia’, esp. in the tribal areas and villages.
  9. 9. This problem is common in Pakistan and hampers the economic development in rural and tribal areas. 7. Wage rates and unemployment: In UDCs, the wage rate is relatively low and there is a high unemployment rate in the economy. Limited employment opportunities may create a pool of urban unemployed. These urban members do not enjoy the security of the extended family system, nor are they related to agricultural sector. They therefore are apt to constitute a more serious social and political problem then the rural unemployed. 8. Monopsony in the labour market: It is a common situation in UDCs in which there are very few employers and they exercise their monopsony powers in the labour market. Labour is more exploited when the wage rate is below the equilibrium point indicating the unsatisfied demands of labour. Whereas in advanced countries, the supply of labour is elastic and there is little scope for monopsonistic exploitation. The planner must address the labour issues like wage rates, overtime, bonus, allowances, perquisites, working hours, safety measures, health and medical facilities, life insurance, transportation, children education, pension and benevolent funds, old age benefits, income tax on salaries, etc. 9. Uneven distribution of entrepreneurial faculties: The material progress of a society is likely to be assisted greatly when there are dynamic entrepreneurial abilities. In economically backward countries, there are difficulties in the way of developing and utilising the entrepreneurial qualities. The government can support small and medium enterprises to come forward and develop new economic opportunities. The government must encourage, both on private and public level, new agricultural or industrial techniques, adoption or adaptation of new improved methods, innovative activities, internship, on-the-job training, etc. in order to raise the level of economy. 10. Low level of capital in UDCs: The biggest problem of less developed countries is that there is a dearth of capital, whether it is physical or financial. The low level of capital is also indicated by statistics of consumption of energy for purposes of production. In developed
  10. 10. countries, there is a high consumption of energy, whereas in UDCs, the energy consumption is considerably low. The general implication of low level of capital is a low level of output and a low level of consumption per head. In such economies, there is no assurance of a continuity in supply of goods. Transport costs are very high and limited availability of perishable or bulky goods. Because of low level of working capital and storage facilities, there is a danger of acute shortage of food crops. 11. Methods of production: The methods of production, farming, marketing and domestic operation are not usually the same in all the countries. What is an economic use of resources in one country may be uneconomic in another in which relative factor prices are comparatively different. It follows that the economic efficiency of methods of production and economic organisation in UDCs cannot be judged simply by comparing them with those familiar in advanced countries. The planner has to jot out all the possible opportunities and focus on major weaknesses, and must plan within the available resources. 12. International demonstration effect: In UDCs, there is a strong desire to enjoy as much of attractive way of living in the advanced countries as incomes permit. There is an international demonstration effect. Moreover, the under developed economy is divided into two extreme sections ’ traditional section and modern section. There are old and new production methods, educated and illiterate population, rich and poor, modern and backward, capitalistic and socialistic, donkey carts and motor cars existing side by side. This situation creates great atmosphere of conflict and contradiction, as a result the economic development is hampered.
  11. 11. 13. Political instability: Most of UDCs, especially Asian and African countries, are known of their political instability, bureaucratic malfunctioning, corruption on administrative level, and nepotism, like India, Pakistan, Sri Lanka, Bangladesh, Afghanistan, Vietnam, Cambodia, Myanmar, Nigeria, Zimbabwe, Uganda, Somalia, Kenya, etc. Perhaps the biggest challenge for any economic planner is the political and administrative malfunctioning in his way of economic planning. Elements of Economic Development The economic development in advanced or under-developed countries depends on four elements: 1. Human resources: In poor countries GDP rises but at the same time the population also grows. Several developing countries are facing high birth rates with stagnant national income per head. It is hard for poor countries to overcome poverty with birth rates so high. In underdeveloped countries, the economic planners emphasise the following specific programmes: (a) Control disease and improve health and nutrition, (b) Improve education, reduce illiteracy and train workers, and (c) Ensure that the labour force is well-equipped with necessary and competing skills. 2. Natural resources: Many poor countries have enormous amount of natural resources, but they are failed to explore them. The reason is that the government has not provided necessary incentives to the farmers and landowners to invest in capital and technologies that will increase their land’s yield. 3. Capital formation: Capital formation or inducement to invest depends on the propensity to save. In less-developed countries, there is a very low saving tendency because of low
  12. 12. income. Developed countries managed to save 20% of their output in capital formation. Whereas only 5% of the national income is saved in UDCs. Much of the savings goes to housing and basic needs and, therefore, a very small amount is left over for development. Capital formation is the basic tool for economic development. It may take decades to invest in building up a country’s infrastructure, information technologies, powergenerating plants, and other capital goods industries. Developing countries must have to build up their infrastructure, or social overhead capital in order to set path for economic glory. If there are so many obstacles in finding domestic savings for capital formation, then the country depends on foreign sources of funds. Less-developed countries have to welcomed the flow of foreign capital or foreign borrowings. As long as the exports of these countries grew at the same rate as borrowings, it is a favourable condition. But several poor countries needed all their earnings simply to pay interest on their foreign debts. This is an adverse situation. Such countries need to boost up their production in order to cope with their current indebtedness. 4. Technological change and innovations: The developing countries have a potential advantage in the economic development ’ i.e., they can be benefited from up-todate technologies developed by advanced countries. They can climbed up to industrialisation more rapidly than those advanced countries who struggled for more than 500 years. Vicious Cycle of Poverty
  13. 13. Many developing countries are caught up in vicious cycle of poverty. Low level of income prevents savings, retards capital growth, hinders productivity growth, and keeps income low. Successful development may require taking steps to break up the chain at many points. Other points in poverty are also self-reinforcing. Poverty is accompanied by low levels of education, literacy and skill; these in turn prevent the adaptation to new and improved technologies and lead to rapid population growth. The vicious cycle of poverty is depicted as below: http://www.maeconomics.webs.com/Economics_of_Planning/Economic_Planning_files/im age001.jpg Overcoming the barriers of poverty often requires a concentrated effort on many fronts and a ’bigpush’ is required to break the ’vicious cycle’ into ’virtuous circle’. If the country has stepped to invest more, improve health and education, develop labour skills, and curb population growth, she can break vicious cycle of poverty and stimulate a virtuous circle of rapid economic growth. Stages of Economic Development W.W. Rustow has defined and analysed in his book ’The Stages of Economic Growth’ the five stages of economic development: 1. 2. 3. 4. 5. Traditional society, Pre-conditions for take-off, Take-off stage, Drive to maturity, and Stage of mass production and mass consumption. 1. Traditional society: In the traditional long-lived social and economic system, the output per head is low and tends not to rise. Economic activities are static and national income is very low. The examples are Somalia, Bangladesh, Afghanistan, etc. 2. Pre-conditions for take-off: The second stage is ’Pre-take-off’. It is a period of transition in which the traditional systems are overcome, and the economy is capable of exploiting the fruits of modern science and technology. Pakistan, India, Sri Lanka, etc. are operating
  14. 14. at this stage. 3. Take-off: Take-off represents the point at which the resistances to steady growth are finally overcome and the growth is normally inevitable. The economy generates its own investment and technological improvement at sufficiently high rates so as to make growth virtually selfsustaining. South Africa, UAE, etc. are the examples.
  15. 15. 4. Drive to maturity: The fourth stage is the drive to maturity. It is the stage of increasing sophistication of the economy. Against the background of steady growth new industries are developed, there is less reliance on imports and more exporting activity. The economy demonstrate its capacity to move beyond the original industries which powered its take off, and to absorb and to apply efficiently the most advanced fruits of modern technology. China, South Korea, Malaysia, etc. are the examples. 5. Stage of mass production and mass consumption: The fourth stage ends in the attainment of fifth stage, which is the age of mass production. It is the stage in which there is an affluent population, and durable and sophisticated consumer goods. There are huge capital and technological intensive industries in such an economy. People are more quality conscious and comfort lovers. Wage rates are high. Health and safety issues are addressed by the government. The whole economy is dynamic. USA, UK, France, Germany, Japan, Canada, Italy, Netherlands, Denmark, etc. are the examples. Approaches to Economic Development The following approaches are developed in recent years to explain the economic development and answer the question how countries break out of the vicious cycle of poverty to virtuous circle of economic development: 1. The Take-off Approach: Take-off is one of the stages of economic growth. Different economies have been benefited from ’take-off’ approach in different periods, including England at the beginning of eighteenth century, the United States at the mid of nineteenth century, and Japan in early twentieth century. The take-off is impelled by leading sectors such as a rapid growing export market or an industry displaying large economies of scale. Once these leading sectors begin to flourish, a process of self-sustained growth (i.e. take-off) occurs. Growth leads to profits, profit are reinvested, capital, productivity and per capita income spur ahead. The virtuous cycle of economic development is under way. 2. The Backwardness Hypothesis and Convergence: The second approach emphasises the
  16. 16. global context of economic development. Poor countries have important advantages that the pioneers of industrialisation had not. Developing nations can draw upon the capital, skills and technologies of advanced countries. Developing countries can buy modern textile machinery, efficient pumps, miracle seeds, chemical fertilisers and medical supplies. Because they can lean on the technologies of advanced countries. Today’s developing nations can grow more rapidly than Great Britain, Western European Countries and United States in past. By drawing upon more productive technologies of the leaders, the developing countries would expect to see convergence towards the technological frontier. 3. Balanced Growth: Some writers suggest that growth is a balanced process with countries progressing steadily ahead. In their view, economic development resembles the tortoise making continual progress, rather than the hare, who runs in spurts and then rats when exhausted. Simon Kuznets examined the history of thirteen advanced countries and conceived that the balanced growth model is most consistent with the countries he studied. He noticed no significant rise or fall in economic growth as development progressed. Note one further important difference between these approaches. The ’take-off’ theory suggests that there will be increasing divergence among countries (some flying rapidly, while others are unable to leave the ground). The ’backward’ hypothesis suggests ’convergence’, while the ’balanced-growth’ model suggests roughly ’constant’ differentials. In the following diagrams, advanced countries are represented by curve A, middle income countries by curve B and low-income countries by curve C. The curves show per capita income:
  17. 17. http://www.maeconomics.webs.com/Economics_of_Planning/Economic_Planning_files/im age002.jpg http://www.maeconomics.webs.com/Economics_of_Planning/Economic_Planning_files/im age003.jpg Issues in Economic Development Following are the important issues in under developed countries: 1. Industrialisation vs. Agriculture: In most countries, incomes in urban areas are almost more than double in rural areas. Many nations jump to the conclusion that industrialisation is the cause rather than effect of affluence. To accelerate industrialisation at the expense of agriculture has led many analysis to rethink the role of farming. Industrialisation tends to be capital intensive, attract workers into crowded cities, and often produces high level of unemployment. Rising productivity on farms may require less capital, while providing productive for surplus labour. 2. Inward vs. Outward Orientation: This is a fundamental issue of economic development towards international trade. Should the developing countries be self-sufficient? If yes, the country has to replace imported goods and services with domestic production. This strategy is known as ’import substitution’ or ’inward orientation’. If the country decides to pay for imports it needs by improving efficiency and competitiveness, developing foreign markets, and giving incentives for exporters. This is called ’outward orientation’ strategy. It is generally observed that by subsidising import substitution, competition is limited, innovation is dampened, productivity growth is slow down and country’s real income falls to a lower level. Whereas, the outward orientation sets up a system of incentives that stimulates exports. This approach maintains a competitive FOREX rate,
  18. 18. encourages exports, and minimises unnecessary government regulation of businesses esp. small and medium sized firms. 3. State vs. Market: The cultures of many developing countries are hostile to the operation of markets. Often competition among firms or profit seeking behaviour is contrary to traditional practices, religious beliefs, or vested interest. Yet decades of experience suggest that extensive reliance on markets provides the most effective way of managing an economy and promoting rapid economic growth. The government has a vital role in establishing and maintaining a healthy economic environment. It must ensure law and order, enforce contracts, and orient its regulations towards competition and innovation. The government plays a leading role in investment in human capital through education, health and transportation, but the government should minimise its intervention or control in sectors where it has no comparative advantage. Government, should focus its efforts on areas where there are clear signs of market failure Top
  19. 19. Harrod Domar Growth Model As we know that one of the principal strategies of development is mobilisation of domestic and foreign saving in order to generate sufficient investment to accelerate economic growth. The economic mechanism by which more investment leads to more growth can be described in terms of Harrod-Domar growth model, often referred to as the AK model. Every economy must save a certain proportion of the national income, if only to replace worn-out or impaired capital goods (buildings, equipment, and materials). However, in order to grow, new investments representing net additions to the capital stock are necessary. If we assume that there is some direct economic relationship between the size of the total capital stock, K, and total GNP, Y ’ for example, if $3 of capital is always necessary to produce a $1 stream of GNP ’ it follows that any net additions to the capital stock in the forms of new investment will bring about corresponding increases in the follow of national output, GNP. This relationship is known as ’capitaloutput ratio’ and is represented as ’k’. in the above case ’k’ is roughly 3:1. If we further assume that the national savings ratio ’S’ is a fixed proportion of national output (e.g. 6%) and that total new investment is determined by the level of total savings. We can construct the following simple model of economic growth: · Saving (S) is some proportion, s, of national income (Y) such that we have the simple equation: S = s .Y ---------------------------- (i) · Net investment (I) is defined as the change in the capital stock, K, and can be represented by .K such that: I = .K ----------------------------- (ii) But because the total capital stock, K, bears a direct relationship to total national income or output, Y, as expressed by the capital-output ratio, k, it follows that: K = k Y Or .K = k .Y
  20. 20. Or .K = k..Y ------------------------------- (iii) · Finally, because net national savings, S, must equal net investment, I, we can write this equality as: S = I ------------------------------- (iv) But from equations (i), (ii) and (iii), we finally get the following equation: I = .K = k. .Y Therefore, we can rewrite the equation (iv) as follows: S = s.Y = k..Y = .K = I --------------- (v) Or simply s.Y = k..Y -----------------------------------(vi) Dividing both the sides of equation (vi) first Y and then by k, we obtain the following expression: .Y = s -------------------------------------- (vii) Y k Note that the left-hand side of the equation i.e., .Y / Y represents the rate of change or rate of growth in GNP (i.e., the percentage change in GNP). The Harrod Domar Model, more specifically says that in the absence of government, the growth rate of national income will directly or positively related to the savings ratio (i.e., the more an economy is able to save and invest out of a given GNP, the greater the growth of that GNP will be. Harrod Domar Model further states that the growth rate of national income will be inversely or negatively related to the economic capitaloutput ratio (i.e., the higher k is, the lower the rate of GNP growth will be). The additional output can be obtained from an additional unit of investment and it can be measured by the inverse of the capital-output ratio, k, because this inverse, 1 / k, is simply the output-capital or output-investment ratio. It follows that multiplying the rate of new investment, s = I / Y, by its productivity, 1 / k, will give the rate by which national income or GNP will increase.
  21. 21. For example, the national capital-output ratio in an under-developed country is, let say, 3 and the aggregate saving ratio (s) is 6% of GNP, it follows that this country can grow at a rate of 2% (i.e., 6% / 3 or s / k or .Y / Y). Now suppose that the national saving rate increased from 6% to 15% through increased taxes, foreign aids, and / or general consumption sacrifices ’ GNP growth can be transferred from 2% to 5% (15% / 3). According to Rostow and other theorists, the countries that were able to save 15% to 20% of GNP could grow at a much faster rate than those that saved less. Moreover, this growth would then be self-sustained. The mechanisms of economic growth and development, therefore, are simply a matter of increasing national savings and investment. The main obstacle or constraint on development, according to this theory, was the relatively low level of new capital formation in most poor countries. But if a country wanted to grow at, let say, a rate of 7% per annum and if it could not generate savings and investment at a rate of 21% (i.e., 7% × 3) of national income but could not only manage to save 15%, it could seek to fill this saving gap of 6% through either foreign aid or private foreign investment. Limitations of the model: 1. Economic growth and economic development are not the same. Economic growth is a necessary but not sufficient condition for development 2. Harrod Domar model was formulated primarily to protect the developed countries from chronic unemployment, and was not meant for developing countries. 3. Practically it is difficult to stimulate the level of domestic savings particularly in the case of LDCs where incomes are low. 4. It fails to address the nature of unemployment exists in different countries. In developed countries, the unemployment is ’cyclical unemployment’, which is due to insufficient effective demand; whereas in developing countries, there is ’disguised unemployment’. 5. Borrowing from overseas to fill the gap caused by insufficient savings causes debt repayment problems later. 6. The law of diminishing returns would suggest that as investment increases the productivity of the capital will diminish and the capital to output ratio rise. The Harrod-Domar model of economic growth cannot be rejected on the ground of above limitations. With slight modifications and reinterpretations, it can be made to furnish suitable guidelines even for the developing economies.
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  24. 24. Models of Economic Growth Classical Model of Economic Growth Every nation strives after development. Economic progress is an essential component, but it is not the only component. Economic development is not purely an economic phenomenon. In an ultimate sense, it must encompass more than the material and financial side of people’s lives. Economic development should therefore be perceived as a multidimensional process involving the reorganization and reorientation of entire economic and social systems. In addition to improvements in incomes and output, it typically involves radical changes in institutional, social, and administrative structures. Finally, although development is usually defined in a national context, its widespread realization may necessitate fundamental modification of the international economic and social system as well. The classical theories of economic development consist of following four schools of thought: 1. Linear-stages-of-growth model: Theorists of the 1950s and 1960s viewed the process of development as a series of successive stages of economic growth through which all countries must pass. It was primarily an economic theory of development in which the right quantity and mixture of saving, investment, and foreign aid were all that was necessary to enable developing nations to proceed along an economic growth path that historically had been followed by the more developed countries. Development thus became synonymous with rapid, aggregate economic growth. This linear-stages approach was largely replaced in the 1970s by two competing economic schools of thought ’ theories of structural change and international-dependence theories. 2. Theories and patterns of structural change: Theories and patterns of structural change uses modern economic theory and statistical analysis in an attempt to portray the internal process of structural change that a ’typical ’developing country must undergo if it is to succeed in generating and sustaining a process of rapid economic growth. Structural-change theory focuses on the mechanism by which under-developed economies transform their domestic economic structures from a heavy emphasis on traditional subsistence agriculture to a more modern, more urbanised, and more industrially diverse manufacturing and service economy. It employs the tools of neo-classical price and resource allocation theory and modern econometrics to describe how this transformation process takes place. Two well-known representative examples of the structural-change approach are the ’two-sector surplus labour’ theoretical model of Sir W. Arthur Lewis, and the ’patterns of development’ empirical analysis of Hollis B. Chenery
  25. 25. and his co-authors. 3. International-dependence revolution: The international-dependence revolution was more radical and political in orientation. It viewed underdevelopment in terms of international and domestic power relationships, institutional and structural economic rigidities, and the resulting proliferation of dual economies and dual societies both within and among the nations of the world. Dependence theories tended to emphasize external and internal institutional and political constraints on economic development. Emphasis was placed on the need for major new policies to eradicate poverty, to provide more diversified employment opportunities, and to reduce income inequalities. International-dependence models view developing countries as troubled by institutional, political, and economic rigidities, both domestic and international, and caught up in a dependence and dominance relationship with rich countries. Within this general approach there are three major streams of
  26. 26. thought ’ the neo-colonial dependence model, the false-paradigm model, and the dualisticdevelopment thesis. 4. Neoclassical or free-market counterrevolution: This theory is also known as neo-liberal theory. Throughout of the 1980s and 1990s, the neoclassical or free-market counterrevolution approach prevailed. It emphasizes the beneficial role of free markets, open economies, and the privatisation of inefficient public enterprises. Failure to develop, according to this theory, is not due to exploitive internal and external forces as expounded by dependence theorists. Rather, it is primarily the result of too much government intervention and regulation of the economy. In the 1980s, the political ascendancy of conservative governments in the United States, Canada, Britain, and West Germany brought a neoclassical counterrevolution in economic theory and policy. In developed nations, this counterrevolution favoured supply-side macroeconomic policies, rational expectations theories, and the privatisation of public corporations. In developing countries it called for freer markets and the dismantling of public ownership, central planning, and government regulation of economic activities. Neo-classicists obtained controlling votes on the boards of the world’s two most powerful international financial agencies ’ the World Bank and the International Monetary Fund. In conjunction and with the simultaneous erosion of influence of organizations such as the International Labour Organization (ILO), the United Nations Development Program (UNDP), and the United Nations Conference on Trade and Development (UNCTAD), which more fully represent the views of LDC delegates. The neo-classical approach states that underdevelopment arises from: ’ Poor resource allocation due to incorrect price policies, and ’ Government’s intervention in the economic activities. Neo-classical or neo-liberal approach states that economic growth can be put to spur by: ’ Permitting competitive free markets to flourish, ’ Privatising state-owned enterprises, ’ Promoting free trade and export expansions, ’ Welcoming investors from developed economies, and ’ Eliminating the plethora of government regulations and price distortions in factor, product and market. 1. Linear-stages-of-growth model: Following are the growth models studied under linear-stages: (a) Rostow’s Stages of Growth: The stages-of-growth model of development is taken by most of the newly independent countries. According to Walt W. Rostow doctrine,
  27. 27. the transition from underdevelopment to development can be described in terms of a series of steps or stages through which all countries must proceed. According to Rostow, it is possible to identify all societies, in their economic dimensions, as lying within one of five categories: • • • • • The The The The The traditional society, pre-conditions to take-off into self-sustaining growth, take-off, drive to maturity, and age of high mass-consumption.
  28. 28. Rostow also clarified that these stages are not merely a way of generalising certain factual observations about the sequence of development of modern societies. He argued that the advanced countries had all passed the stage of take-off into self-sustaining growth and the under-developed countries that were still in either the traditional society or the pre-conditions stage. One of the principal strategies of development necessary for any take-off was the mobilisation of domestic and foreign saving in order to generate sufficient investment to accelerate economic growth. (b) Harrod-Domar Model: This model, developed independently by RF Harrod and ED Domar in the l930s, suggests savings provide the funds which are borrowed for investment purposes. The model suggests that the economy's rate of growth depends on: • the level of saving • the productivity of investment i.e. the capital output ratio For example, if $10 worth of capital equipment produces each $1 of annual output, a capitaloutput ratio of 10 to 1 exists. A 3 to 1 capital-output ratio indicates that only $3 of capital is required to produce each $1 of output annually. The Harrod-Domar model was developed to help analyse the business cycle. However, it was later adapted to 'explain' economic growth. 2. Structural-change theory: Following economic growth model represents the structural-change theory: (a) Lewis Theory of Development: It is one of the best-known early theoretical models of economic development that focused on the structural transformation of a primarily subsistence economy was that formulated by Noble-prize winner Sir W. Arthur Lewis in the mid 1950s. His theory was later modified by his followers. The Lewis two-sector economy model became the general theory of the development process in surplus-labour Third-World nations during most of the 1960s and 1970s. In the Lewis model, the underdeveloped economy consists of two sectors: • A traditional, overpopulated rural subsistence sector characterised by zeromarginal labour productivity. Lewis classify this as •surplus-labour• in the sense that it can be withdrawn from the agricultural sector without any loss of output, and • A high, productivity modern urban industrial sector into which labour from the subsistence sector is gradually transferred.
  29. 29. The primary focus of the model is on both the process of labour transfer and the growth of output and employment in the modern sector. Both labour transfer and modernsector employment growth are brought about by output expansion in that sector. (b) Patterns of Development: The patterns of development analysis of structural change focuses on the sequential process through which the economic, industrial and institutional structure of an underdeveloped economy is transformed over time to permit new industries to replace traditional agriculture as the engine of economic growth.
  30. 30. In addition to the accumulation of capital both physical and human, a set of interrelated changes in the economic structure of a country are required for the transition from a traditional economic system to a modern one. These structural changes involve virtually all economic functions, including the transformation of production and changes in the composition of consumer demand, international trade and resource use as well as changes in socio-economic factors such as urbanisation, and the growth and distribution of a country•s population. 3. International-dependence revolution: Within this general approach, there are three major streams of thought: (a) Neo-Colonial Dependence Model: It is an indirect outgrowth of Marxist thinking. It refers to the existence and continuance of underdevelopment in a highly unequal international capitalist system. The international system is dominated by unequal power relationships between the centre (the developed nations) and the periphery (the less developed countries). The poor nations attempt to become self-reliant and independent but this system makes it difficult and sometimes even impossible. According to this theory, certain groups in the developing countries (including landlords, entrepreneurs, military rulers, merchants, salaried public officials, and trade union leaders) who enjoy high incomes, social status, and political power constitute a small elite ruling class whose principal interests are in perpetuation of the international capitalist system of inequality. Directly and indirectly, they serve (are dominated by)and are rewarded by (are dependent on) international special-interest power groups including multinational corporations, national bilateral-aid agencies, and multilateral assistance organizations like the World Bank or the International Monetary Fund (IMF). Therefore, a major restructuring of the world capitalist system is required to free dependent developing nations from the direct and indirect economic control of their developed-world and domestic oppressors. Curiously, a very similar but obviously non-Marxist perspective statement was expounded by Pope John Paul II in his widely quoted 1988 encyclical letter: •One must denounce the existence of economic, financial, and social mechanisms which, although they are manipulated by people, often function almost automatically, thus accentuating the situation of wealth for some and poverty for the rest. These mechanisms, which are manoeuvred directly or indirectly by the more developed countries, by their very functioning, favour the interests of the people manipulating them. But in the
  31. 31. end they suffocate or condition the economies of the less developed countries.• (b) False-Paradigm Model: The second and less radical international-dependence approach to development, the false-paradigm model, attributes underdevelopment to faulty and inappropriate advice provided by well-meaning but often uninformed, biased, and ethnocentric international •expert• advisers from developed-country assistance agencies and multinational donor organizations. These experts offer sophisticated concepts, elegant theoretical structures, and complex econometric models of development that often lead to inappropriate or incorrect policies. Because of institutional factors such as the central and remarkably resilient role of traditional social structures (i.e., tribe, caste, class, etc.), the highly unequal ownership of land and other property rights, the disproportionate control by local elites over domestic and international financial assets, and the very unequal access to credit, these policies, based as they often are on mainstream, Lewis-type surplus labour or Chenery-type structural-change
  32. 32. models, in many cases merely serve the vested interests of existing power groups, both domestic and international. (c) Dualistic Development Thesis: Dualism is a concept widely discussed in development economics. It represents the existence and persistence of increasing divergences between rich and poor nations and rich and poor peoples on various levels. One of the elements of dualism is that there is a coexistence of wealthy, highly educated elites with masses of illiterate poor people within the same country or city. According to this theory, there is a coexistence of powerful and wealthy industrialized nations with weak, impoverished peasant societies in the international economy. This coexistence is chronic and not merely transitional. It is not due to a temporary phenomenon, in which with the capacity of time, the discrepancy between superior and inferior elements would be eliminated. 4. Neo-classical counterrevolution: This approach can be implemented through the following three models: (a) Free-Market Analysis: Free-market analysis argues that markets alone are efficient if: • Product markets provide the best signals for investments in new activities, • Labour markets respond to these new industries in appropriate ways, • Producers know best what to produce and how to produce it efficiently, and • Product and factor prices reflect accurate scarcity values of goods and resources. Under free-market, competition is effective not necessarily perfect. Technology is freely available and nearly costless to absorb. Information is correct and nearly costless to obtain. (b) Public-Choice Theory: Public-choice theory, also known as •new political economy approach•, goes even further to argue that government can do nothing right. This is because that politicians, bureaucrats, citizens and states act solely from a selfinterested perspective, using their powers and the authority of government for their own selfish needs. Citizens use political influence to obtain special benefits (sometimes also referred to as •rent•) from government policies, for example, import licenses, or rationed forex. Politicians use government resources to consolidate and maintain positions of power and authority. Bureaucrats use their positions to extract bribes from rent-seeking citizens and to operate protected business on the side. And finally state uses its power to confiscate private property from individuals. The net result is not only a misallocation of resources but also a general
  33. 33. reduction in individual freedoms. The conclusion, therefore, is that minimal government is the best government. (c) Market-Friendly Approach: The third approach is market-friendly approach, which is the most recent variant on the neoclassical counterrevolution. It is associated principally with the writings of the World Bank and its economists, many of whom were more in the free-market and public-choice camps during the 1980s. This approach recognizes that there are many imperfections in LDC product and factor markets and that governments do have a key role to play in facilitating the operation of markets through •non-selective• (marketfriendly) interventions • for example, by investing in physical and social infrastructure, health care facilities, and educational institutions and by providing a suitable climate for private enterprise.
  34. 34. Karl Marx•s Model Czarist Russia grew rapidly from 1880 to 1914; it was considerably less developed than industrialised countries like US and Great Britain. World War I brought great hardship to Russia and allowed the communists to seize power. From 1917 to 1933, the Soviet Union experimented with different socialist models before settling on central planning. Most economists believed until recently that the Soviet Union grew rapidly from 1928 until the mid 1960s. After the mid 1960s, growth in Soviet Union stagnated and output actually began to decline. In the late 1980s and early 1990s, open inflation erupted. Prices were well below market-clearing levels and acute shortages arose in what is called •repressed inflation•. The repressive political system was unacceptable to the people in Soviet Union and some countries in Eastern Europe and was universally rejected in 1989. The father of this repressive political system • Communism is Karl Marx (1818 • 1883). The centrepiece of Marx•s work is an incisive analysis of the strengths and weaknesses of capitalism. He argued that it is the only labour power that gives value to a commodity. By imputing all the value of output to labour, Marx hoped to show that profits, which is the part of output that is produced by workers but received by capitalists, amount to •unearned income•. According to Marx, this unearned income is unjustly received by capitalists. This injustice can be eliminated by transferring the ownership of factories and other means of production from capitalists to workers. Marx saw capitalism as inevitably leading to Socialism. In Marx•s world, technology enables capitalists to replace workers with machinery as a means of earning greater profits. As a result unemployment increases with the increased use of technological advances. This increasing accumulation of capital will reduce the rate of profit and investment opportunities, and therefore, the ruling capitalists will become imperialists. Karl Marx believed that the capitalist system could not continue this unbalanced growth. Marx predicted increasing inequality under capitalism. Business cycles would become ever more violent as mass poverty resulted in macro-economic underconsumption. Finally, a cataclysmic depression would sound the death knell of capitalism. The economic interpretation of history is one of Marx•s lasting contributions to Western thought. Marx argued that economic interests lie behind and determine our values. His arguments against capitalism suggested communism would arise in the most highly developed industrial countries. Instead, it was backward, feudal Russia that adopted the Marxist vision. Features of Karl Marx•s Socialist Model: 1. Government ownership of productive resources, 2. Planning is centralised,
  35. 35. 3. Equal distribution of income, 4. Peaceful and democratic evolution, 5. Labour theory of value • value of a product represents the human labour used in production, and 6. Theory of surplus value. Theory of Surplus Value: Marx propounded his theory of surplus value on the basis of his theory of value. He said that in order to enable labour to carry on the work of production, he should have some instruments of production and other facilities but he lacks these facilities. Hence, he has to sell his labour to the capitalist. It is, however, not necessary for the capitalist to pay labour the full value of the product produced by him. Here Karl Marx supported his theory on the basis of a classical theory, viz., the subsistence theory of value, according to which the level of wages is determined by the subsistence of the worker. The
  36. 36. work of labour force is not merely to produce value equal to its price but much more. This surplus value is the difference between the market value of the commodity and the cost of the factors used in the production of commodity. Karl Marx says that the manufacturer gets for his commodity more than what he has spent on labour and other costs. The excess of market value over the costs is the surplus value. This surplus is created because labour is paid much less than is due to it. He characterises the appropriation of the surplus value by the capitalist as robbery and exploitation. The capitalist class goes on becoming richer and richer through exploitation of the working class. Top
  37. 37. Planning Techniques Methodology of Planning: The planner is gone through the following steps in economic planning: (a) Collecting information: The most important aspect of economic planning is the collection of economic data. The data are not only comprised of economical data, but they also cover the demographical, geographical, and political data. The planner also considers nonquantitative data for economic planning. The planner or the team of planners must have an enough knowledge regarding the fields like sociology, religion, politics and ethics in addition to economics. (b) Deciding nature and duration of the plan: Once the planning authority gets the knowledge in respect of the economy on the basis of necessary statistics, the next step is to determine the nature and size of the plan. In this connection, the planner has to decide between the planning on microbasis and planning on macro-basis, functional or structural, centralised or decentralised, etc. Again it is to be decided that whether the planning will be on short-term basis, medium term, or long term. In most of the countries, the medium term plans are advocated. The medium term plan which mostly lasts for the period of 5 years is neither too short nor too long. In the period of five years the ruling party is in a position to implement upon its programmes, policies and manifesto. (c) Setting the objectives: After the nature and the duration of plan, the next issue is of setting the objectives. In other worlds, it is an important task before the planner to decide regarding the social and economic objectives which will have to be attained in the specified period of the plan. Most of the objectives or goals of the plan are concerned with the attainment of higher growth rate of GNP, reduction of unemployment, removal of regional disparities, removal of illiteracy, development of agriculture and industrial sectors, etc. After identifying such objectives, planner arranges these objectives in order of their importance to the society and the economy as a whole. (d) Determination of growth rate: This is the most important decision which the planner has to make while formulating the plan. It is about to determine the growth rate during the plan period, i.e., at what rate the economy will grow during this period. The economists agree that the growth rate of the economy should be one which could at least maintain the per capita income of the country. This would be possible if the growth rate of the economy or growth rate of GNP and growth rate of the population are equal. But this growth rate is least recommended. Rather, the planner will opt for that growth rate which is greater than the population rate. For example, if Pakistan wants to maintain its
  38. 38. existing per capita income while population is growing at the rate of 3% p.a., then the required GNP growth rate should not be less than 3%. If we want to grow GNP by 3%, NI should grow @ 6%. If the capital output ratio (COR) is 1:3, then we will have to invest 18% of GNP. While determining the growth rate, the planner must keep in view the growth rate of other neighbouring or developing countries like India, China, Sri Lanka, Indonesia, Bangladesh, etc. (e) Financial resources of the plan: The economic planner is aimed at utilising the resources of the country in such a way that the pre-determined objectives are attained. The real resources of a country consist of manpower, natural resources, technological advancement, infra-structure, good governance, entrepreneurial skills, etc. The planner also has to consider the various optional external resources in case the internal resources are short to fulfil the planning requirements. Such external resources consist of foreign aid and assistance, foreign grants, foreign direct investment, and foreign borrowings from various IFIs and rich countries.
  39. 39. (f) Sectoral allocation or determination of priorities: The resources at the disposal of a country are always short of the requirements. Therefore, a plan is aimed at utilising the resources in such a way that the maximum social benefit could be attained. Accordingly, the planner has to decide which project be taken-up and which project be postponed. In this way, the planner has to prepare a schedule on the basis of relative importance of projects. Then a choice has to be made regarding allocation of resources amongst different uses. Normally the planner has to decide between industrial sector development or agricultural sector development, private sector or public sector, labour-intensive technology or capital-intensive technology, etc. To settle the issue of •choice of priorities• amongst different alternatives, the planners have given the concept of •investment criteria•. (g) Role of the government: In most of the countries, the purpose of planning authority is to prepare the draft of the plan consisting of lot of proposals, schemes and projects. When once the plan is chalked out the proposals are sent to operating agencies, ministries and other government departments which are to implement the plan. The government agencies are inquired of their recommendations regarding the economic feasibility of different schemes and projects of the plan keeping in view the sectoral allocation and size of the plan. The operating agency, i.e. the government has to consider the role to be played by private sector and public sector. The government has to inform the planning agency regarding the prospective bottlenecks in the way of effective planning. These recommendations will be helpful in finalising the draft of the plan. (h) Formulation of economic policies: The role of planners in planning methodology is not just confined to preparation of schemes and projects, they also have to devise economic policies which could provide a favourable atmosphere for the operation of the plan. Accordingly, economic policies play an important role in economic planning, they provide fuel to the engine of economic development. (i) Plan execution: The last step is plan execution. For effective implementation of plan, following conditions are the pre-requisites: (i) the government should be stable, honest, sincere and constructive, (ii) the administrative system must be efficient, i.e. free of favouritism, corruption, bribery, red tapism, etc. (iii) maintenance of law and order situation, (iv) equal participation of private and public sectors in economic development,
  40. 40. (v) readily availability and computerised maintenance of government records, financial statements and cost statements, (vi) vigilant and constructive opposition, etc. Types of Economic Policies: Following are types of economic policies considered in the economic policy formulation: (a) Budgetary Policy: The planner would suggest to devise such a budgetary policy which could transfer the revenue surplus from revenue budget to capital budget. Moreover, the balanced budget would provide a guarantee for price stability.
  41. 41. (b) Tax Policy: The tax policy be stipulated in such a way that more revenues could be raised from taxes for the sake of public expenditures. Moreover, the tax policy should aim at removing income disparities and wasteful expenditures on luxurious consumption. Thus the taxes be imposed in accordance with the ability to pay. (c) Credit Policy: The credit policy be formulated in such a way that shortterm, medium-term and long-term credit could be made available to the different sectors of the economy. When the funds are obtained by the needy sectors of the economy, the pace of development will be accelerated and the plan targets will be realised. (d) Foreign Trade and Foreign Exchange Policy: According to this policy a plan should seek to earn the sufficient amount of foreign exchange by boosting the exports and reducing the imports. When the foreign exchange resources of a country increase, the problem of debt repayment will also be alleviated. (e) Tariff Policy: An economic plan should devise such a tariff policy that the unnecessary and luxurious imports could be checked. However, it should encourage the imports of essential consumer goods, capital goods, raw stuff and machinery which would be helpful in accelerating the pace of development. Moreover, tariff policy should aim at protecting the infant industries. (f) Price Policy: The price stability provides guarantee to the success of a plan. Therefore, such a policy should be devised by the planners that monopolies could not grow, the limits be imposed on profit margins, government expenditures be controlled and competitive forces be restored in the economy. (g) Wage Policy: An economic plan should aim at protecting the rights of the labour. They must be having job security, minimum wage laws and constitute labour unions. Civil and government servants should be given reasonable emoluments to attract personnel to public services. Exploitation of labour by producers should be discouraged. (h) Manpower Policy: Manpower policy is an economic policy pursuing the regularisation of skilled, semi-skilled and unskilled persons to bring a balance between the demand and supply of labour. This will lead to maximum utilisation of manpower. (i) Immigration Policy: Restrictions should be imposed on internal mobility of labour in horizontal, vertical and geographical forms. Brain drain should be checked in the early stages of development. (j) Nationalisation Policy: As a result of severe market imperfections, the planner may pursue
  42. 42. nationalisation policy in economic planning. The sector or the sectors that are causing market imperfections may be nationalised or taken into government control. (k) Privatisation and Deregulation Policy: The purpose of this policy is to reduce the burden of governmental expenditures and the operational inefficiencies caused by stateowned enterprises. To improve investment conditions and to promote healthy competition, such stateowned enterprises are given under the control of private hands. Planning Techniques: There are several planning techniques used in different stages of planning. Some of them are discussed below:
  43. 43. (a) Capital-Output Ratio (COR): The Capital-Output Ratio (COR) is used during the planning stage of determination of growth rate. COR defines the relationship between capital and output. This concept shows that how much of capital is required for how much of output. Broadly speaking, it tells us that how much of investment is required to produce a certain level of consumption goods. We also found its traces in Harrod-Domar Model of economic growth. According to COR, the sustained growth rate can be represented by the following equation: http://www.maeconomics.webs.com/Economics_of_Planning/planning_techniques_files/ planni1.gif Where Gw = sustained growth rate; s = saving ratio; v = capital-output ratio (COR). The above equation shows that if a developed country wishes to attain a sustained equilibrium growth rate the national income must grow at the proportion of saving ratio (s) to capital-output ratio (v). In planning, the planner is concerned with additional amount of capital required for additional output, then the concept of marginal capital-output ratio (MCOR) or incremental capitaloutput ratio (ICOR) is used. Its equation is shown as below: http://www.maeconomics.webs.com/Economics_of_Planning/planning_techniques_files/ planni2.gif Where w = marginal capital-output ratio (MCOR) or incremental capital-output ratio (ICOR); .K = change in capital stock; .Y = change in output; .I = change in investment. For example, if the ratio is 3:1, then it shows that to produce the goods worth Re. 1 will require to make the net investment worth Rs. 3. In other words, if the economy wants to increase the output by Rs. 1 billion with the COR 3, then the required addition to the capital stock to be provided by new investment will be Rs. 3 billion. The economists and planners also use the concept of average capital-output ratio (ACOR). This concept shows the ratio of existing stock of capital and the level of output which results from such capital. In other words, if we divide the value of total capital stock by the total annual income, we will get ACOR. It is represented as follows:
  44. 44. http://www.maeconomics.webs.com/Economics_of_Planning/planning_techniques_files/ planni3.gif Where K = existing capital stock;
  45. 45. Y = existing level of output. For example, the existing capital stock of the economy is Rs. 6 billion, while the output of the economy is Rs. 1.5 billion, then the value of ACOR will be equal to 4. More is the value of ICOR, less will be the growth rate and vice versa. For example, if the COR is 3, saving ratio is 18%, then the growth rate of the economy will be: http://www.maeconomics.webs.com/Economics_of_Planning/planning_techniques_files/ planni4.gif For COR 4 and 2, the growth rates at the same saving ratio will be 4.5% and 9% respectively. COR Saving Ratio Growth Rate 4 18% 4.5% 3 18 6 2 18 9 (b) Plan Consistency and Tabulation: A good plan must be having the elements of realism and consistency in numbers. It means that it should not only represent true picture of the economy, but it should have a balance in context with different sectors of the economy regarding numbers. Therefore, to attain such arithmetic target it becomes necessary the resources be analysed arithmetically. For this purpose •ex-ante• (expected) tabulation of balances between demands and supplies is made. All the estimations and projections are entered in interlocking tables in such a way that they are linked with one another. The interlocking tables show different items along with their statistics and importance. Following are the specimen of interlocking tables: 1. Projected Sector Growth
  46. 46. Sectors Growth in Zero Period Growth during 5 years Agriculture Industry Services GDP 2. Resources and their Uses Resources In zero period In 5 years Uses In zero period In 5 years GDP Capital Surplus of FT sector
  47. 47. Govt. expenditure Private consumption Total Total 3. Capital Account In zero period In 5 years In zero period In 5 years Fixed investment Capital
  48. 48. Stocks Corporate saving Private saving Govt. saving Foreign saving Total Total
  49. 49. 4. Government Current Account Revenues In zero period In 5 years Expenditures In zero period In 5 years Taxes Govt. expenditures Other revenues Transfer payments Saving Total Total
  50. 50. (c) Input-Output Analysis: The purpose of Input Output (IO) Analysis is to provide a balance between input, output and final demand. It is also connected with plan consistency. Efficient planning requires that how much an industry produces must be equal to the demand for that particular commodity. On the same lines, each industry wishes to have an assurance of the inputs necessary for its output. It may happen that output of one industry may be an input of another industry. Thus, the purpose of IO Analysis is to observe such input output relationships. In other words, IO Analysis encompasses the inter-industry transactions. This technique was invented by Professor Leontief in 1951. It is also known as •inter-industry analysis•. The planner constructs input-output tables where the relevant transactions are recorded. Then with the help of transaction data, the input-output co-efficients are derived. Finally, the •Leontief Matrix• is inverted to obtain a general solution. IO Table shows the values of the flows of goods and services between different productive sectors especially inter-industry flows. In the following IO Table, we have a 3-sector economy where there are two inter-industry sectors, i.e. agriculture and industry, and one final demand sector: Purchasing Sectors (All figures in million rupees) Sectors (1) Inputs to Agriculture (2) Inputs to Industry (3) Final demand (Household) (4) Total Output or Total Revenue
  51. 51. Selling Sectors Agriculture 500 1500 1000 3000 Industry 1000 2500 1500 5000 Value added (Payment to factors) 1500 1000 0 2500 Total Inputs or Total Cost 3000 5000 2500 10500 (d) Linear Programming: In economic planning, the planners wish to include in plans those methods, techniques and programmes which would ensure the optimal use of resources. Thus the programming that is used for the best or optimum use of resources is known as •linear programming•. It is programming because it has been formulated in mathematical mould and its results are shown in terms of linear relationship. It is also known as •activity analysis•. It helps the planner to allocate resources optimally among alternative uses within the specific constraints. It also helps to tackle the problems of investment planning. Linear programming can be applied in case of number of economic
  52. 52. problems concerning with maximisation or minimisation subject to constraints. Through linear programming the profit function can be formulated. For e.g., for a firm producing bicycles and motor cycles, the profit maximisation function is construction as below: http://www.maeconomics.webs.com/Economics_of_Planning/planning_techniques_files/ planni12.gif Where = maximum profit http://www.maeconomics.webs.com/Economics_of_Planning/planning_techniques_files/ planni11.gif x1 = bicycles (profit of $45 per bicycle)
  53. 53. x2 = motor cycles (profit of $55 per motor cycle) Following are the given constraints: http://www.maeconomics.webs.com/Economics_of_Planning/planning_techniques_files/ planni6.gif While x1,x2=0 (non-negativity condition) If x1=0, then x2=30; and if x2=0then x1=20 This linear relationship can be built into a graph: http://www.maeconomics.webs.com/Economics_of_Planning/planning_techniques_files/ planni7.gif (e) Project Appraisal: Project appraisal is widely used both in the developed as well as in underdeveloped countries both independently as well as an integrated scheme of national planning. The government formulate and evaluate investment projects in such a way as to be able to compare and evaluate alternative projects in terms of their contribution to the objectives of the nation. The team preparing project report consists of engineers and economists specialised in investment analysis and the relevant fields. The sociologists and natural environmentalists must also be included. There are different techniques of project evaluation, such as cost-benefit analysis, LM method, and UNIDO guideline: (i) Cost-Benefit Analysis: This technique is also known as ‘social cost benefit analysis‘. In this technique, the costs of projects are evaluated. For the purpose of analysis the cost is disintegrated into various categories, viz., project costs, associated costs, real and nominal costs, primary or direct costs, secondary or indirect costs, etc. The benefits are also classified as real benefits, direct and indirect benefits, etc. The next step is to find the present value of costs and benefits applying a certain rate of interest. Then a comparison is made between the discounted benefits with the costs of projects to get the ratio of costs and benefits. If this ratio is one or more than one, the project is acceptable, otherwise rejected. This technique is known as ‘net present value (NPV) method‘. For this we need to calculate the present value (PV), which can be calculated as below:
  54. 54. http://www.maeconomics.webs.com/Economics_of_Planning/planning_techniques_files/ planni8.gif Where C = annuity amount i = interest rate or discount rate The decision rule for a project under NPV method is to accept the project if the NPV is positive and reject if it is negative. Zero NPV implies that the government is indifferent between accepting or rejecting the project. This method can also be used to make a choice between two or more than two mutually exclusive projects. On the basis of NPV method, the various proposals would be ranked in order of NPV. The project with highest NPV would be preferable to the project with lowest NPV. Suppose the government has two proposed projects, i.e. project A and project B. Project A Project B Initial investment 60,000 59,000 Cash inflow / profit: 2005 14,000 11,000 2006 15,000 14,000 2007 16,000 17,000 2008 18,000
  55. 55. 18,000 2009 19,000 20,500 PV Factor 10% 10% The NPV of both projects is calculated as below: Net Present Value Years Project A Project B Cash Inflow PV factor @ 10% PV Cash Inflow PV factor @ 10% PV 2005 14,000 0.909 12,726 11,000 0.909 9,999 2006 15,000
  56. 56. 0.826 12,390 14,000 0.826 11,564 2007 16,000 0.751 12,016 17,000 0.751 12,767 2008 18,000 0.683 12,294 18,000 0.683 12,294 2009 19,000 0.621 11,799 20,500 0.621 12,731 PV of Cash inflows 61,225 59,355 Less: Initial investment 60,000
  57. 57. 59,000 Net Present Value 1225 355 In the above case, the planners will opt for project A, because the NPV of the project is positive and is greater than the NPV of project B. The economy will benefit more from project A than from project B. (ii) The Little and Mirrless (LM) Method of Project Evaluation: There are two main features of LM method:
  58. 58. ‘ Foreign exchange used as a ‘measuring rod‘. Rather domestic prices, foreign exchange measures the true costs and benefits of commodities produced. Therefore, the net value of all the goods produced should be converted into its foreign exchange equivalents. ‘ The amount of savings in LDCs is less than the socially optimal level. Hence, one additional unit of investment is more valuable than an extra unit of consumption at the margin. (iii) UNIDO Guideline: LM method tries to convert all the benefits and costs to an index of government income, UNIDO translates such all benefits and costs to an index of present consumption. Thus the UNIDO method tries to find out the NPV of all consumption flows because of an additional unit of investment. (f) Investment Criteria for Allocation of Resources: The 'investment criteria' is a useful planning technique used in sectoral allocation. Investment criteria refers to pattern of investment, choice of investment, choice of projects in various sectors, and choice of technique for a particular project. (i) Capital variables which would growth rate represented Turn-Over Criterion: The H-D model hints out the values of different guarantee the UDCs to maximise their growth. According to it, the is as follows: http://www.maeconomics.webs.com/Economics_of_Planning/planning_techniques_files/ planni9.gif Where g = growth rate of output S = saving income ratio C = capital-output ratio (COR) This equation states that to raise the growth, we are required to raise S or to lower the value of C. Professor Polak and Buchnan argued that given the scarcity of capital in LDCs the C should be minimised. This is called ‘capital turn-over criterion‘. According to Polak and Buchnan those investment projects should be chosen which have low C, i.e. high rate of capital turn over. (ii) Social Marginal Productivity (SMP) Criterion: This criterion has been presented by Kahn and Chenery. They are of the view that it is necessary to consider the total net contribution of marginal unit of investment to national output, and not merely that portion of contribution which is gotten by private investors. Efficient allocation consists of maximisation of national product and the principle to obtain this objective is to equate SMP of capital in different uses. SMP criterion is
  59. 59. represented as: http://www.maeconomics.webs.com/Economics_of_Planning/planning_techniques_files/ planni10.gif Where V = annual value of total output C = total annual cost of amortisation
  60. 60. K = total investment VB = variations in income because of changes in 1 unit of BOP. (iii) Maximisation of the Rate of Creation of Investible Surplus (MRIS) Principle: The objective of MRIS criterion is to maximise per capita real income at a future point of time. Thus to achieve a higher rate of growth, it is stressed upon role of capital accumulation. According to MRIS criterion, those projects should be selected which involve higher capital intensity. In other words, those projects should be select which have higher COR. (iv) Reinvestible Surplus (RS) Criterion: This criterion was suggested by Dobb and Sen. In Sen‘s model the economy is divided into two sectors, i.e. backward and modern. The modern sector is again sub-divided into two, i.e. (A) producing machinery with labour only, and (B) producing corn with labour and machines. In the backward economy the corn is produced by labour alone. Sen assumes that wages in the modern sector are determined by corn output by sector B. But since it takes sometime to set-up the modern sector, wages in the modern sector would have to be paid of with the surplus in backward sector. Sen describes how a conflict can arise between current output maximisation principle and criterion to maximise the rate of growth of output. Top Home Page
  61. 61. Schumpeter‘s Model of Economic Growth Joseph Schumpeter was a famous Austro-Hungarian economist, but never followed Austrian school of thought. His famous book was the Theory of Economic Development (1912), in which he first outlined his famous ‘theory of entrepreneurship‘. He argued that only daring entrepreneurs can create technical and financial innovations in the face of competition and falling profits, and that it was these spurts of activity which generated economic growth. After the World War I, Schumpeter joined the German Socialization Committee in Berlin - which then was composed of several Marxian scholars, and the Kiel School economists. In 1919, Schumpeter became the Austrian Minister of Finance - unfortunately, presiding over the hyperinflation of the period, and thus was dismissed later that year. Schumpeter migrated in 1921 to the private sector and became the president of a small Viennese banking house. Ill luck dogged him: his bank collapsed in 1924. He drifted once again back into academia - taking up a teaching position at Bonn in 1925. In 1932, Schumpeter took up a position at Harvard, succeeding the Marshallian F.W. Taussig. Schumpeter ruled Harvard during the period of the ‘depression generation‘ of the 1930s and 1940s - when Samuelson, Tobin, Heilbroner, and Bergson were his students. His famous publications include Theory of Economic Development (1912), Business Cycles (1939), Capitalism, Socialism and Democracy (1942) and History of Economic Analysis (1954). He presented the theory of entrepreneurship, theory of business cycles, and theory of evolutionary economics. In order to understand the Schumpeter‘s theory of economic development, it is necessary to understand the theory of evolutionary economics. The concept of evolution is an offspring of late 18th and early 19th century debates within philosophy and the social sciences. The theory of evolutionary economics is much more inspired by the Darwinian theory of natural selection. The general definition of evolution is the self-transformation process over time of a system. Such a system may be a population of living organisms, a collection of interacting individuals as in an economy or some of its parts, or even the set of ideas produced by the human mind. Therefore, an evolutionary theory is: ‘ Dynamic ‘ such that the dynamics of the processes, or some of their parts, can be represented; ‘ Historical ‘ in that it deals with historical processes which are irrevocable and pathdependent; ‘ Self-transformation ‘ in that it includes hypotheses relating to the source and driving force of the self-transformation of the system.
  62. 62. Schumpeter‘s theory of economic development is considered as a radical theory. It is considered radical in the context that it described the capitalist system as an evolutionary system. According to Schumpeter, capitalism is the system that internally generates changes and technological progresses. According to him, the process of economic development is inherently dynamic, as opposite to static nature of the theory of equilibrium. This does not mean that Schumpeter is against the theory of equilibrium. On the contrary it is the underlying base for his own capitalist dynamic model. Schumpeter‘s model of economic development is not a substitute for the theory of equilibrium but rather a necessary complement. Without it, it is impossible to understand the functioning of an economic system. Schumpeter started through the ‘circular flow‘ as an essential block for building dynamic model. Schumpeter describes the circular flow with the following assumptions: ‘ somewhere in the economic system a demand is ready awaiting every supply, and
  63. 63. ‘ nowhere in the system are there commodities without complements. Under these conditions, all goods find a market, and the circular flow of economic life is closed. In a steady state, costs in this closed system are the price totals of the services of the production factors. Prices obtained for the products must equal these price totals. The ultimate logical consequence of this ideal model of the clearing market is that production must flow on essentially profitless ‘ profit is a symptom of imperfection. Schumpeter defines production as the combinations of materials and forces that are within our reach. The producer is not an inventor. All components that he needs for his product or service, whether physical or immaterial, already exist and are in most cases also readily available. The basic driving force behind structural economic growth is the introduction of new combinations of materials and forces, not the creation of new possibilities. Development in the Schumpeterian sense is defined by the carrying out of new combinations. This concept covers the following five cases: (i) The introduction of a new good ‘ that is one with which consumers are not yet familiar ‘ or a new quality of a good. (ii) The introduction of a new method of production ‘ that is one not yet tested. (iii) The opening of a new market ‘ that is a market into which the country in question has not previously entered. (iv) The conquest of a new source of supply of raw materials or halfmanufactured goods. (v) The carrying out of the new organisation of any industry, like the breaking up of a monopoly position. http://www.maeconomics.webs.com/Economics_of_Planning/schumpeter_files/wpe1.jpg
  64. 64. The basic structure from Schumpeter‘s model of economic development has two distinctive spheres. On the one hand is the semi-closed system of the circular flow that is either in equilibrium or striving for it. And, on the other hand, is the symbiotic pair of the entrepreneur and the sponsor that is always looking for ways to induce change in the peaceful yet boring routine-life of the circular flow. Both spheres function within an endless reservoir of new combinations, for example, scientific knowledge and technological inventions, but it is only the entrepreneur ‘ backed by the capitalist ‘ who is able to introduce new combinations and new routines in the circular flow. According to Schumpeter, entrepreneur who initiates the process of innovation is the central of the process of economic development. Entrepreneurs are neither capitalists nor inventors; they see the potential of inventions and assume risk in innovating. Schumpeter regarded the entrepreneur as something of a social deviant and noted that migrants or aliens in any society have great potential to behave entrepreneurially. Schumpeter noted that increases of taxes, public policies favouring labour organisations, price controls, and licensing requirements that increase the costs of doing business are the greatest impediments to entrepreneurship. Under oppressive conditions, for example, the former Soviet Union, China, and present day Islamic societies, very few people innovate. The creation of something new usually requires that something old be eliminated, for example, changes in the structure of demand or production result in structural unemployment. Economic growth cannot proceed without structural changes, i.e., economic development. Most technological progress is a result of activity specifically undertaken to develop new products, reduce costs, improve quality, or develop new markets. Economic evolution is based on cyclical disruptions and breaks of economic structures, an endogenous transformation that results from the ‘process of creative destruction‘ as an essential feature of modern capitalism. This points at the internal logic of the cyclical restructuring of modern capitalism for evolutionary change. Business cycle refers to regular fluctuations in economic activity. In the 19th century, business cycles were not thought of as cycles at all but rather as spells of "crises" interrupting the smooth development of the economy. In later years, economists and non- economists alike began believing in the regularity of such crises, analysing how they were spaced apart and associated with changing economic structures. Schumpeter divided a business cycle into four process ‘ boom, recession, depression and recovery. He also classified the business cycles in the following classes: (a) Seasonal cycles ‘ for a year
  65. 65. (b) Kitchin cycles ‘ covering a period of 3 years (c) Juglar cycles ‘ covering a period of 10 years (d) Kuznets cycles ‘ covering a period of 15 to 20 years (e) Kondratiev cycles ‘ covering a period of 48 to 60 years, for example, Industrial Revolution (1787 ‘ 1842), Bourgeois Kondratiev (1843 ‘ 1897), and Neo-Mercantilist Kondratiev (1898 ‘ 1950) with the expansion of electric power and the automobile industry. Top Home Page
  66. 66. Intelligence Types of Economic Planning Planning by Inducements Planning by inducement is often referred to as ‘indicative planning‘ or ‘market incentives‘. In such type of planning, the market is manipulated through incentives and inducements. Accordingly, in this system there is persuasion rather than compulsion or deliberate enforcement of orders. Here the consumers are free to consume whatsoever they like, producers are free to produce whatsoever they wish. But such freedom of consumption and production are subject to certain controls and regulations. The consumers, producers and other factors of production are induced with the help of various fiscal and monetary devices. For example, if the planning authority wishes to boost the production of corn oil in Pakistan it will provide subsidies, tax holidays and loans to the firms involved in production of corn oil. To encourage savings and investment and discourage consumption a suitable package of fiscal and monetary policies can be introduced in the market. Therefore, the desirable results can be attained with the help of incentives and without the imposition of orders and instructions. Moreover, in such planning there is less sacrifice and less loss of liberty ‘ economic as well as non-economic. Merits of Planning by Inducements: (a) Consumers‘ sovereignty remain intact. Planning by inducements is more democratic as compare to planning by directions. (b) There is a freedom of choice of profession. (c) In planning by inducements, there is freedom of enterprise. Produces are free to produce whatever they like but within in the capacity of given rights. (d) Planning by inducements is smooth and flexible. It is more popular because it enables to incorporate the changes in resources, technology and taste etc. even after the finalisation and implementation of plan. (e) Under this sort of planning, the inertia attached with standardisation can be put to an end and producers are free to produce in accordance with the desire of consumers. Therefore, there is a variety of goods and services in the market. (f) There are less administrative costs involved in planning by inducements. (g) The problem of shortages and surpluses is solved as there is an existence of
  67. 67. automated market system. The demand and supply is automatically adjusted and remain in balance under market economy. Demerits of Planning by Inducements: (a) It also fails to achieve 100% targets of economic planning. (b) Under planning by inducements, there are profit motives more than welfare of public. Private entrepreneurs care for those products which yield high profits. Products or services with less profit or no profit do not attract private entrepreneurs. Such products or services include education, health, defence, security, etc. (c) The producers may find the government policies regarding economic affairs not attractive enough to follow. There may be disputes among entrepreneurs and the government regarding tax rates, investment policies, interest rates, etc. (d) The mechanism of market economy may cause the prices to inflate esp. with reference to under-developed countries or in case of oligopoly where there is a shortage of certain products like petroleum and gas. (e) There may be disharmony between labour and producer, and there may be serious industrial disputes.
  68. 68. Planning by Directions This type of planning is practised in socialist countries like China, Former USSR, Cuba, North Korea, etc. Under planning by direction, there is one central authority which plans, directs and orders the execution of the plan in accordance with the pre-determined targets and priorities. It determines the production figures, delivery schedules, quotas regarding the production of the goods, price controls, use of foreign exchange and allocation of resources like labour, etc. amongst different competing uses. Thus, such planning is comprehensive and encompasses the whole economy. Planning by directions is similar to military or defence plans which are carried through orders and instructions. Thus the strategy of planning through directions coincides with the military strategy. Alongwith the disintegration of former Soviet Union, the methodology of planning by directions has received certain serious setbacks. Now most of the UDCs are tend to adopt market economic system. Demerits of Planning by Directions: (a) Planning by direction is undemocratic since the people are ignored all along. (b) It is bureaucratic and totalitarian. Under bureaucratic system, the individual‘s sovereignty is completely abolished. Corruption, red tapism, VIP system, tyranny and austerity are the by products of bureaucracy. (c) Rationing and control result in black marketing. (d) There are shortages of some goods and as well as surpluses of other goods. That is, there is an imbalance in production output. (e) This sort of planning is inflexible. Once the plan is prepared, there is no room for alterations in later phases of planning. A part of the plan cannot be changed without simultaneous changes in many interconnected activities. Planning by direction is so complex that it is impossible to change even a part of it as it will involve in altering the whole plan. (f) The fulfilment of plan cannot be guaranteed, as the planning by direction is hampered by black marketing and corruption. (g) Planning by direction also leads to excessive standardisation which impinges on consumer sovereignty. In other words, under planning by direction the goods produced are standardised lacking the variety. As in case of USSR, the produced TV, Fridges and Automobiles were identical having no differentiation.
  69. 69. (h) It also involves huge administrative costs, as the planning by direction involves in elaborate census, numerous forms and army of clerks. Physical and Financial Planning Physical planning is concerned with physical allocation of resources on the one side, while with the product yields on the other side. Its aim is to bring physical balance in between investment and output. Accordingly, investment coefficients are computed. These coefficients show how much amount of investment will be required for a given amount of output. Moreover, in such planning it is also analysed that what will be the composition of investment to obtain an increase in output. As, how much iron, how much coal, oil and electricity will be required to produce some specific amount of steel. While making physical planning, an overall assessment is made regarding the real resources of the economy like raw material and manpower. In financial planning, equilibrium is established between demand and supply to avoid inflation and bring economic stability. The difference between physical planning and financial planning is that the physical planning tells us the size of investment in terms of real resources, whereas the financial planning tells us the size of investment in terms of money. In financial planning, the planner determines how much money will have to be invested in order to achieve the predetermined objectives. Total outlay is fixed in terms of money on the basis of growth rate to be achieved, the various targets of production, estimates of the required quantity of consumer goods and the various

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