Exam (elaborations) ECON 304 ECONOMIC DEVELPOMENT II
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ECON 304
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Chamberlain School Of Nursing
Economic Planning:
1. It is a conscious effort on the part of any government to follow a defined pattern of economic development in
order to promote rapid and fundamental change in the economy and society. 2. Planning is a technique, “a means to
an end”, the end being the realization of c...
exam elaborations econ 304 economic develpoment ii
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Mose NG
ECON 304: ECONOMIC DEVELPOMENT II
TOPIC 1: DEVELOPMENT PLANNING
1.0 INTRODUCTION
Economic Planning:
1. It is a conscious effort on the part of any government to follow a defined pattern of economic development in
order to promote rapid and fundamental change in the economy and society. 2. Planning is a technique, “a means to
an end”, the end being the realization of certain predetermined, well defined aims and objectives laid down by a
central planning authority. The end may be to achieve economic, social, political or military objective. 3. Planning is
the making of the major economic decisions, what and how much is to be produced, how, when and where, to whom
it will be allocated by the conscious decision of a determined authority on the basis of a comprehensive survey of
economic system as a whole.
Economic planning therefore implies a deliberate control and direction of the economy by the central authority for
the purpose of achieving definite targets and objectives within a specified period of time.
In developing countries, we can identify two features of economic planning:
1. The governments mobilize domestic resources and also raise foreign finance to carry out such projects which are
expected to induce productive activities in the private sector. This involves the development of infrastructure and
heavy industries. 2. The governments adopt certain monetary and fiscal policies to stimulate private economic
activity and to ensure harmony between the social objectives of the government and the behaviour of the private
producers and businessmen.
From the above characteristics of planning in a mixed developing economy, it is clear that the market and economic
planning are complementary to one another.
TYPES OF PLANNING 1. Totalitarian/Authoritarian This happens when all the means of production are owned
and manipulated by the state e.g. the case of Soviet Union and China. In this case, the degree of intervention is
highest. 2. Democratic/ Indicative Planning In this case, the state does not own all the means of production but sets
out some guidelines for the private sector to follow e.g. France. Planning takes place through inducements rather
than control.
3. Mixed Planning Here, both the private and public sectors operate side by side. Some means of production (usually
basic and strategic industries) are owned by the state, while the free private sector is expected to attain the targets
laid down by the government in the planning docket.
In this case, social welfare takes precedence over private welfare although the private sector is free to operate on the
basis of the principle of profit maximization.
The price mechanism is far less constrained in the mixed system and does have a resource allocation role to play.
PLANNING HORIZONS
We have different planning horizons: 1. Short term plans 1-2 years. 2. Medium term plans 3-5 years. 3. Long terms
plans 10-15/20 years. They are referred as perspective plans. 4. Emergency plans-drawn from a short period of time
to deal with specific problems e.g. drought, famine, disease outbreak, war e.t.c. 5. Cyclical planning-this is meant to
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take care of cyclical problems emanating from fluctuations in growth rates, prices and employment e.t.c. Here, the
main objective is to achieve stability in the movement of major economic variables.
ECONOMIC MODELS AND PLANNING PROCESS
Economic models are frequently used to construct economic models. The models are used to set out:
1. The objective function or the targets that should be achieved. 2. The inter-relationships among different economic
variables which would indicate the general structure of the economy. 3. The constraints e.g. capital, labour, foreign
exchange, which should be overcome to realize the objective function.
Despite a great diversity of development plans and planning techniques, certain representative characteristics of the
planning process are common to most developing countries. According to Tony Killick, these are the following:
1. Planning attempts to define policy objectives as they relate to future economic development based on the state’s
goals. 2. The development plan through specific targets sets out a strategy to achieve these objectives. 3. The plan
presents a coordinated and internally consistent set of principles and policies as the guiding framework for the
subsequent day-to-day decisions.
4. The plan covers the whole economy i.e. it is comprehensive. 5. The comprehensive plan employs a formalized
macroeconomic model to secure consistent and optimum projection of the performance of the economy. 6. A
development plan typically projects a five-year period which may be linked to a longer term outlook and in turn
supplemented by annual plans.
ARGUMENTS FOR AND AGAINST PLANNING
Planning in different forms has been accepted as an important policy instrument to attain specific targets in most
LDCs.
ARGUMENTS FOR PLANNING
1. Absence of well organized markets Markets in LDCs are filled with imperfections both in structure and
operations. Therefore, market forces fail to attain efficient allocation of resources and hence the need the need for
state intervention. 2. Need for rapid institutional transformation Planning ensures institutional and structural reforms
which are necessary for development. The economic plan serves as a blue print for action in the pursuit of economic
growth and institutional reconstruction. 3. Necessity for allocating scarce resources into the most productive
channels LDCs cannot afford to waste their limited resources on unproductive ventures. Therefore, the little
available resources should be used in the most productive way and this can only be achieved if the whole economy
is brought under an overall planning mechanism. 4. Disparity between social and private valuations of investment
projects Private firms are interested in short run gains therefore; they would not agree to invest in investments that
take longer periods. 5. The path of growth via market forces is very long, hence the need for planning Given the
difference between the rich and poor countries, the task of achieving a high growth rate in the shortest time possible
is considered important. It is therefore believed that planning would accelerate the rate of growth in LDCs. 6.
Psychological Impact A specific development plan can have a tremendous psychological impact. It can often
succeed in rallying the people behind the government in a national campaign to achieve certain goals e.g. poverty
eradication.
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ARGUMENTS AGAINST PLANNING 1. If planning is necessary to avoid imperfections of the market
mechanisms, then what is necessary is to make markets more perfect instead of planning. 2. Planning is very costly
for LDCs. This includes the planning administration, running the planning administration, government intervention,
protectionist government policies e.t.c.
3. Disparity between social and private benefits-If that is the problem, then the solution may not be to plan but to tax
private businesses to provide subsidies to those firms that offer social benefits. 4. It is argued that LDCs lack skilled
manpower necessary to tackle the problem of preparing and executing an efficient planning mechanism. 5. Planning
leads to bureaucracy, inefficiency and corruption which lead to delays and wastage of resources. 6. Planning also
requires large amount of information about the various sectors of the economy and as such information is lacking in
LDCs which is likely to affect planning.
The dangers of planning are that, unqualified, corrupt administrators assume responsibility for resource allocation
and perform worse than market mechanism and that goals will be set which far exceed the country’s capacity to
achieve them, leading to the widespread dissolution with the planning process.
TYPES OF PLANNING MODELS
1. MACRO/AGGREGATE GROWTH MODELS (AGM) This is the most planning model employed in developing
countries. They deal with the entire economy at aggregate level i.e. in terms of macroeconomic variables considered
most critical in determining the level of growth rate of national output of economies e.g. aggregate consumption,
savings, investment, exports, imports, capital stock e.t.c. They provide convenient method of projecting output and
required changes in principle economic variables e.g. Harrod-Domar model, the Keynesian model and other
econometric models e.g. given targeted GNP growth rates and a national capitaloutput ratio, the Harrod-Domar
model can be used to project the amount of savings necessary to generate growth.
2. SECTORAL MODELS They divide the economy into main sectors i.e. two or more e.g. Agricultural sector and
non-agricultural sectors, consumer goods and export goods sectors e.t.c. The balanced and unbalanced growth
models are in this category. These types of models are important where comprehensive data is lacking and is
available in other sectors e.g. in LDCs.
3. INPUT-OUTPUT MODELS In this approach, the activities of the major industrial sectors are inter-related
through a set of simultaneous algebraic equations expressing the specific production processes or technologies of
each industry. All industries are considered as both producers of output and users of inputs coming from the other
industries. They show transactions and inter-relationships between the sectors of the economy.
4. PROJECT APPRAISAL AND SOCIAL-COST BENEFIT ANALYSIS (SCBA) It focuses on individual
investment projects within each sector. The methodology of project appraisal is based on the theory of social-cost
benefit analysis and the basic idea is to determine the worth of projects involving public funds by weighing the
advantages (Benefits) and disadvantages (Costs) to the society as a whole. The social-cost benefit analysis serves as
a yard-stick to guide public investment decisions which are mostly socially oriented.
REASONS FOR THE FAILURE OF DEVELOPMENT PLANS (Case of LDCs) Do plans succeed in achieving
their intended goals? 1. Deficiencies in plans and their implementations Plans are often too ambitious; they try to
accomplish too many objectives at once without considering that some of the objectives are competing and
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