Chapter One:

Meaning of Development Planning

1.1. Concept of planning: The meaning of development planning

 Planning is the one the fundamental function of management. It is the basis of all
other managerial functions including organizing, staffing, directing and
controlling.
 It involves looking in to the future, anticipating it, and attempting to influence it
through anticipatory decisions, so that the desired goals are achieved with
maximum possible efficiency and effectiveness. These include: determination of
objective, formulations of programmes and courses of actions for their attainment,
development of schedules and time of action, and assignment of responsibilities
for their implementation, Development of criteria for evaluating performance and
performance control.
 There are many type of planning: corporate planning, firm planning, Economic
planning, strategic planning etc. Economic planning which the main concern of the
module is one type of planning which is concerned with the development of the
country/ nation. What is economic planning?
 Prof H. Levy “Economic planning means securing a better balance between
demand and supply a conscious and thoughtful control; either of production or
distribution or of both; rather than leave these balances to be affected by
automatically working, invisible and uncontrollable force”.
 For Delton “Economic planning is in its widest sense, is deliberate direction, by
persons in charge of large resources of economic activities to wards chosen ends”.
 However, most comprehensive and general definition may be stated as follows:
“Economic planning can be defined 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 changes in economy and society”
1.2. Historical Background of Development Planning (Evolution)

1 | AMU: Development Planning and Project Analysis I By: Mihretu T. & Mirikat D
The idea of planning has a long history and goes back to the time of Pluto [the first person who
talked about organized planning]. It was later developed, shaped and molded by eminent
thinkers and writers both in the western and eastern camp. However, the idea of economic
planning in its modern form is comparatively new. It is the 20th century phenomena.
Ideologically, the evolution is from three perspectives:
1. Planning in eastern Europe (socialist perspective)
2. Planning in western Europe (capitalist perspective)
3. Planning in underdeveloped countries (mixed economic perspective)

1.2.1 Perspectives of development planning by blocks

 1.2.1.1 Planning in Eastern Europe

During the 19th century, intellectual theorists, thinkers and writers in the Eastern Europe
became fed up with the inquiry and contradictions of pure capitalism. Therefore, they
developed the idea of state intervention to set matters right and to prevent inequalities
resulting from capitalism (free economy) a solution to the fallacy of laisser-faire. But it was
only state intervention that was advocated. There was no mention of economic planning and
how to interrelate was ambiguous (although they realized that laisser-faire was not working).
In 1928 the Soviet Union gave the idea of economic planning a real shape when it formulated
its first five year plan. The main objective of the socialist (Soviet) plan was to achieve the rapid
transformation of a backward agriculture sector (traditional sector) into a modern industrial
sector.

 Planning in Western Europe

There could be several factors that necessitate planning in Western Europe, among others
wars, great depression of 1930th, expansion of markets, and specialization. In Western
economics, a series of the above historical development led to the coordination of economic
policies, i.e., planning. These are:

a) The development of science and technology not only made material progress possible,
but also they made planning possible as well improve computation facility; advances
in management theory (organization coordination). The intervening depression

2 | AMU: Development Planning and Project Analysis I By: Mihretu T. & Mirikat D
 reminded the state of the tragedy incompleteness of economic theory and public
policy.
b) In the 1930’s, the capitalist world was in the midst of the biggest depression in the
world history. Capitalism failed an utter collapse and its inherent contradiction came
up to the surface. Economic growth collapsed and acute misery poverty well
experienced by people. Therefore, economist and politician favored economic
planning as a remedy for these and other economic ills. People’s mind now turned
to economic planning as panacea for their economic ills while Keynes writings also in
a way strengthen the belief in the efficacy and economic planning in capitalist
countries. Meanwhile there was an attempt to plan economic life in Nazi German
and Fascist Italy during the time (thirties).

Note: - The objective of the economic planning in the West was basically different from
that of the Soviet Union. The purpose of planning in Nazi Germany was primarily to
build up the war potential rather than improving the living standard of the people.

c) The outbreak of World War I and II necessitates the proper and efficient planning of
economic resources for successful prosecution of the war. [For coordinated management
of scarce resources]
d) In the post war period, the war devastated countries of Europe were compelled to
resort to economic planning to rehabilitate themselves owing to:-
 As a condition for receiving assistance under the Marshal plan, the USA insisted
upon these countries to formulate their rehabilitation plan covering almost every
sector of the economy.
 The USA itself has recognized the significance of economic planning when it adopts
an economic program called the “new deal” to come out of the suffering from great
depression in thirties.
e) The growth of markets and increased specialization led to increased interdependence
among economic activities and to greater economic externalities, which lead to adoption
of economic planning. There is a need to intervene public agencies to rectify the
negative externalities.

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 f) The development of democracy also lead to the adoption of planning in order to
rectify social inequalities people could vote for those who experience an interventionist
approach.

 Planning in Underdeveloped Countries

Economic planning was considered as important panacea (remedy) for underdeveloped

countries in their desire for industrialization. They want to achieve rapid growth in short
period of time. Economic planning, therefore, was considered as a tool to achieve rapid
economic development.
However, the development (evolution) of planning took a different course (path) than the rich
countries in the following reasons:
a) In Less Developing Countries, planning was considered as an ideology rather than a means
because in these countries planning was considered as a desire (expression) of many things,
such as:-

Desire of self-control
Desire (expression) of independence
Expression of self-determination
Then planning as a political and cultural goal

b) New leaders (elites) emerged when they got independence with new vision (ideas). This
brings new decision making capacity, which is to mean colonial administrators were gone
and these new leaders have to plan because it was considered as a potential tool
(instrument) to survive and prosperity. However, the then planning was not as a result of
popular participation (bottom up planning). it was up down planning to express the need of
the leaders who control the political structure - they dictate the plan. Planning here was not
as a consequent of industrialization, which is the inverse of the Western, developed
countries

what are some of the common consensus made over development thinking that laid

best foundations for the current development planning and development?

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 1.3. The widely known consensus made on development planning: Evolution of
development thinking and planning

1.3.1 The Early Post War consensus

This period lies between 1960’s and 1970’s. The devastating war in different countries raised
many problems of growth and development unanswered by the available economic models.
Different scholars and Economists started questioning how to return the worst economic
problems. That is why in the 1950's and 1960's, the previously neglected sub-fields of
Development Economics were rediscovered. The available models couldn’t help the
developing countries rather it became knife edge. The dominant one-sector macro models of
the day, from Keynesian to Harrod-Domar to Solow seemed to have relatively little relevance
for societies not primarily concerned with business cycles or steady state properties.
The period, for ease of understanding could be looked into five important sub- periods.
a) Polarity

The concept of dualism is taken to explain “…of two opposing ideas or principles.” It attracted
due attention during the 1950s and 1960s. The components under dualism are:
Classical dualism: Ricardo and Lewis 1951 are major proponents. Surplus labor as potential
for growth when transferred from agriculture to non-agriculture. Lewis also asserts
dualism in labor markets (competitive wage in non agriculture versus institutional wage
in agriculture as basis for dualism).
Physiocrats: viewing land as the source of all wealth, agricultural surplus supporting the
non-agricultural sector.
Sociological dualism: according to Boeke, 1953 “sociological, cultural and objectively
discrepancies between western and non western block of the world is the source of
dualism.”
Technological dualism: Higgins, 1956 is the major proponent. Differences between variable
factor proportions in the traditional sector and fixed coefficients in modern sector as
major source for dualism.


 Dear learners, what do you think be done in minimizing the externality of dualism?
____________________________________________________________________________
________________________________________________________

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b) Need for Balanced Growth (structuralism)

According to Rosenstein - Rodan, 1943 and Nurkse, 1953 sectors of economy i.e. agricultural
sector and non-agricultural sectors need to be grown in balanced way to meet say’s law.
Unbalanced growth is said to bring long run crawling.

c) International Trade Scene

Prebisch, 1962 stated that the international trade scene painted in colors and was unfriendly
for development and demanded for equitable exchange.
d) Interventionist State
The current theoretical thinking indicates that there is strong inclination to turn to the
intervention state as a key instrument for development. The reasons that this was considered
as key instrument for development are first pre-colonial independent countries want to
exercise their own development agenda. At home the interventionist felt the need to create
infrastructure, and the institutions required to permit the functioning of a national entity.
Second industrialization was synonymous with development (2 nd industrialization
revolution). The motivation was to promote industry, with relatively less attention paid to
what was viewed as a stubbornly stagnant agriculture portrayed as a drag on the economy,
and with peasants seen as non-responsive to prices and profit opportunities.

A logical accompaniment of these views were PLANNING MODELS, focusing on the flow of
resources, domestically financed investment supplemented by foreign capital and paying
relatively little attention to changes in the behavior of the system or the relevance of
technology.
The planning models used were:
 Planning for resources: such as Simple Harrod - Domar and Mahalonobis models.
These models are all silent on price, and foreign exchange rate flexibility. The
predominant view of policy makers at that time was that growth and efficiency should
take priority and the issues of equity, poverty alleviation, etc should be taken care of at
a latter date.
 Multi - sector production function with multiple inputs and variable (Input-Output
models, Social Accounting Matrix). The real focus of planning shifted from resources

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 focus to devising strategies for policy change to accommodate the changing
requirements of transition.

e) Technology in generating growth

Solow, 1957 and Kuznets, 1955 contribute to emphasize the importance of technology in
generating growth. This provided a new point of departure for neo-classical growth theory,
not only replacing Harrod-Domar with a substitutable production function, but also
enthroning exogenous technology change. They introduced critical elements like Research &
Development (R and D), patents and other forms of scientific endeavors leading to new
growth theory.

It was, however, Kuznets 1971, though mainly concerned with describing modern growth
rather than analyzing the transition process in getting there, which provided another essential
ingredient focused precisely on the developing world at the end of the post-war consensus
era. Kuznets was interested in why some developing countries were successful and others not
and placed major emphasis on the sources of structural change over time as between
agriculture, industry and services. He viewed policy as either basically accommodative or
obstructive to the play of underlying economic forces and did not view it as an exogenous
variable.

1.3.2 The Washington Consensus

It is undoubtedly unfair to attribute the realization that policy change is the key ingredient of
successful development to the international financial institutions. It rather would give more
credit for the realization that prices matter more and that macroeconomic stability matters
less. The major contributors of the idea are: Little, Scitovsky, and Scott 1970, Bhagwati 1978,
Krueger 1978, Cohen and Ranis, 1971, among others, who insisted that a re-structuring of the
rails of development was needed.

The main ingredients of the consensus are:

 Privatization and unified and competitive exchange rates

 Simultaneous liberalization of financial markets (domestic and international)

7 | AMU: Development Planning and Project Analysis I By: Mihretu T. & Mirikat D
  Relative openness to Foreign Direct Investment (FDI) and gradual deregulation of
control systems
 Emphasize on R and D
 Changes at micro level: labor market productivity, legal, financial and other institutional
reforms
 Program lending changes in to structural adjustment lending. Both program and
structural adjustment lending were subject to debates ranging from cost effectiveness of
the resources spent to all the way the conditionality lists imposed on internal affairs of
the recipient country.

1.3.3 The Oscillating Search for a Silver Bullet

Viewing per capita income growth as the key objective has been questioned for sometimes.
Serious mainstream attention has been given to the distribution of income, to the extent to
which private income poverty is reduced and to the extent to which public income poverty
(the distribution of public goods) is being addressed. The public income poverty can be seen
through various human development dimensions like infant mortality, life expectancy,
literacy as fundamental objectives of development. The basic efficiency - equity tradeoffs led
to redistribution with growth approach of development. The controversial relationship
between growth and income poverty alleviation is that growth is a necessary but not sufficient
condition for poverty reduction.
Theoretical Revisionism

Recently with the advancement in theoretical thinking and problems faced in global relations,
there arises a need to revise some theories. These are:
 New Trade Theory: the challenge to openness (globalization) and favoring import
substitution (infants) leads to the two-way relationship between growth and human
development.
 Recent emphasize of development economists are on: micro foundations of development
issues (women household decision making; poor performance of land, labor and credit
markets) and micro-credit organizations and NGO's in developing countries.

Best Guesses as to the Way Forward

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  Avoid dealing with large number and going towards a set of small number comparative
historical studies encompassing typologically ''neighboring'' countries.
 Need to pursue on the two-way relationship between growth and human development.
 Closer look on the pros and cons of decentralization and its relation to democratization
and decision making by the broader body politics.
1.4.The rational for development planning
Planning is indispensable for any economy to root out the evils and drawbacks of
economic structure of a country and to achieve an overall development of the nation.
Some of the specific rational for development planning are:
1. Planning is needed to increase the rate of economic development. In the world two
–third of the countries are underdeveloped. A number of these characteristics are both
the cause and consequences of poverty. These are explained through vicious circle of
poverty that tends to perpetuate the low level of development in LDCs in circular
manner. (See fig.1.1). It can be stared from low per capital income that lead to low
saving which in turn result in low capital formation that lead to low capital per
worker that may result in low productivity and hence low per capital income and
under development.

Economic under
development

Low per capital income

Low productivity Low saving

Low capital per worker Low capital formation

Figure1.1: Vicious circle of poverty

Even though the general characteristics are not common to all the underdeveloped
countries, yet abroad answer to the questions “why a poor country is poor” is

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development. That is breaking this vicious circle of poverty that required raising
capital (increase the rate of capital formation). This can be achieved through raising
the level of income, level of saving and investment. This can only be possible by
external intervention (government interventions) through integrated planning. This
development planning require policy decision (how, what) through systematic
analysis of the external and internal environment. Hence, need for planning.
Therefore, development planning provides useful set of analytical technique for
economic decision making and policy formulation, and interventions.
Further more; planning accelerates the path of growth in LDCS. The economic
progress through market force considered very long and given the present
development between rich and poor countries. High rate of growth with in the
shortest possible time is considered to be of very essential.
2. Need for removing widespread unemployment including disguised unemployment.
In most developing countries unemployment (excess labor ) is widespread while
capital resources is relatively scarce. It is necessary to utilize such scarce resources (e.g.
capital, skilled man power, foreign exchange rate…etc) in the most productive way
through an over all planning mechanism. As the market mechanism may not provide
gainful employment for the labor, it can come only through state interventions with
appropriate plans.
3. Market imperfection. In many LDCs, product and factors markets are imperfect and
forces of market fails to attain efficient allocation of resources. Hence, state
interventions in the form of planning is necessary to obtain an efficient allocation of
resources since prices gives “ wrong” signals to the decision makers.
4. Planning is important to bring about balanced development of the economy. The
economy comprised of different sectors: agriculture, industry, service… etc. The
development of these sectors may not be at the same rate. Industry may grow at faster
rate, as compared to agriculture. But there is linkage between agriculture and
industry, raw material, market, product, etc. Hence, for faster development of one
sector the development of other is essential and should be at the same rate. Further
more, the two sector cannot be develop in the absence of economic and social over
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head capital such as health, development of infrastructure , rail way, electric power
supply, road, education etc. State is primary responsible for providing social
infrastructure.
In addition, without intervention of concerned bodies in the system, the market may
result in, unbalanced distribution of reward for factors of production, accumulation of
capital in a few hands resulting in unequal distribution of wealth, exploitation of
laborers, poor, and creation of monopoly, and uneven economic cycles which the
system cannot cheek. All these require a harmonious approach that requires
simultaneous investment in different economic and social sector. This can be taken
care of by the development planning.
5. Externalities. Private sectors usually do not pay much attention to the dynamic
externalities which could be generated in the process of development. These lead to
the differences between marginal social benefit and marginal private benefit and
privates have less interest to maximize social return. Private investors are usually
interested in maximizing short and not long term profits and these gains may lead to a
resources allocation which is less than societal optimal in the long run. In their trial to
maximize their self interest, they may harm the society. Hence, state intervention is
justified on the base of need to minimize the difference between the two.
Perhaps the desire to accelerate the economic growth, promotion of self –reliance, in
adequacy of the imperfect market mechanism, the inefficiency of the existing private
sector and the need for structural reforms, are the main reasons for the adoption of
planning in most LDCs.
1.4.2. The case against planning
Economic planning, though having numerous advantages, is not fully free from
demerits. Some of the disadvantages of economic planning are: First market
imperfection, it is argued that if planning is necessary to avoid the imperfections of the
market mechanisms then what is necessary are to make the market more perfect,
rather than planning.
Second, lack of information and information asymmetric in market in LDCs. Imperfect
operation of the market in an underdeveloped country can be attributable to ignorance
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in the sense of lack of familiarity with market mechanisms and awareness of relevant
information or to the prevalence of other modes of behavior other than rational
maximization of returns from effort. These may not be corrected through planning.
Planning requires a large amount of information about many branches of the
economy. The availability of such information is doubtful. Further more, the cost of
acquiring and planning are quit large for LDCs.
Third, lack of resource and competent administration, or skilled man power. It is
argued that many LDCs lack the skilled power necessary to tackle the problem of
preparing and executing an efficient planning mechanism. Given wide intervention
by the state in the decision making process, an inefficient and corrupt bureaucracy
may easily increase the waste of the resources that would otherwise have resulted in
the operation of the imperfect market. If the power is concentrated within the hands
of few bureaucrat, vested interest could further growth and technical change.
Further more, some scholars say, central planning restricts individual activities and
every extension of state activity is a nail in the coffin of individual freedom.
Individuals are not allowed to do whatever they went”. But the others argue that
individuals enjoy sufficient economic freedom under the general guideline of
economic policy and plan frame “The debate is still not closed and it is continuous.
Most LDCs have shown the tendency to adopt planning as an important policy to
achieve a higher rate of growth. The countries differ in their level of state owned
property; in some countries like Chain resources is owned by state, where as in others
some of factors of production are owned by state and totalitarian forms of planning
work along with the market mechanism. It has been observed that in most cases the
price mechanism is not suppressed and market prices are sometimes relied upon by
the planner for allocating resources.
1.5. Requisites for successful development planning
The formulation and success of a plan require the fulfillment of the following factors:
 Planning commission  Fixation of targets and priorities
 Statistical data  Mobilization of resources
 Clear objectives  Balancing in the plan
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 Incorrupt and efficient administration
 Proper development policy
 An education base
 A theory of consumption
 Public cooperation

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1. Planning commission
The first prerequisite for a development planning is the setting up of a commission
which should be organized in a proper way. It should be divided and sub-divided into
a number of divisions and sub-divisions under such experts as economists,
statisticians, engineers, etc, dealing with the various aspects of the economy.
2. Statistical Data
A prerequistes for sound planning is a thorough survey of the existing potential
resources of a country together with its deficiencies. As Baykov puts it “Every act of
planning is not mere fantastic castle building presupposes a preliminary investigation
of existing resources”. Such a survey is essential for the collection of statistical data
and information with regard to the total available material, capital and human
resources of the country. These survey data are essential for fixing targets and
priorities in planning.
3. Objectives
The plan may lay down the following objectives: to increase national income and per
capita income; to expand employment opportunities; to reduce inequalities of income
and wealth and concentration of economic power, to raise agricultural production, etc.
The various goals and objectives should be realistic, mutually compatible and flexible
enough in keeping with the requirements of the economy.
4. Fixation of Targets and Priorities
The next issue is to fix targets and priorities for achieving the objectives laid down in
the plan. They should be both global and sectoral. Global targets must be bold and
cover every aspects of the economy. They include quantitative production targets, so
many more million tons of foodstuffs, coals, steel, fertilizers, kilowatts of power
capacity, road, railway, .etc. Sectoral targets pertaining to individual industries and
products in physical and value terms both for the private and public sectors. Global
and sectoral targets should be mutually consistent in order to attain the required
growth rate for the economy. This necessitates determining priorities. Priorities should
be laid down on the basis of the short-run and long run needs of the economy keeping
in view the available material, capital and human resources.

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5. Mobilization of resources
A plan fixes the public sector outlay for which resources are required to be mobilized.
There are various internal and external sources for financing a plan.
 Internal sources of finance for the public sector:- saving, profits of public
enterprises, net marketing borrowings, taxation and deficit financing are the
principal are internal sources of finance.
 Net budgetary receipts corresponding to external assistance related to the
external sources of financing the plan.
The plan should lay down such policies and instruments for mobilizing resources
which fulfill the financial outlay of the plan without inflationary and balance
payments pressures.
6. Balancing in the plan
A plan should ensure proper balance in the economy, otherwise shortages or surplus
will arise as the plan progresses. There should be balance saving and investment,
between the available supply of goods and the demand for them, between manpower
requirements and their availabilities, and between the demand for imports and the
available foreign exchange.
In fact, two kinds of balances must be secured in a plan.
 The first is the physical balance which consists of balancing the planned
increase in output of various goods with the amounts and types of investment
as well as balancing of outputs of the various sectors of the economy.
 The second is the monetary or financial balance which consists of balancing the
incomes of the people with the amount of goods available to them for
consumption, the funds used for private investment, the funds used for public
investment, and balancing of foreign payments and receipts. The lack of these
financial balances will lead to disequilibrium in the supply and demand for
physical goods thereby leading to inflationary and balance of payment
pressures during planning.
7. Incorrupt and Efficient Administration

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 A strong, efficient and incorrupt administration is the sine qua non of successful
planning. But this is what an underdeveloped country lacks the most. Lewis regards a
strong, competent and incorrupt administration as the first condition for the success of
a plan.
8. Proper development Policy
The state should lay down a proper development policy for the success of
development plan and to avoid any pitfalls that may arise in the development process.
Professor Lewis lists the following main elements of such a development policy:
a) Investigation of development potential survey of national resources, scientific
research, market research.
b) Provision of adequate infrastructure whether by public or private agencies.
c) Provision of specialized training facilities, as well as adequate general
education, thereby ensuring necessary skills.
d) Improving the legal framework of economic activity, especially laws relating to
land tenure, corporations and commercial transactions.
e) Helping to create more and better markets, including commodity markets,
security exchanges, banking, insurance and credit facilities.
f) Seeking out and assisting potential entrepreneurs, both domestic and foreign.
g) Promoting better utilization of resources, both by offering inducements and by
operating controls against misuse.
h) Promoting an increase in saving, both private and public.
9. An education base
For a clear and efficient administration, a firm educational base is essential. Planning
to be successful must take care of the ethical and moral standards of the people.
10. A theory of consumption
According to Professor Galbraith an important requirement of modern development
planning is that it has a theory of consumption. LDCs should not follow the
consumption patterns of the more developed countries.
The theory of consumption should be democratic and prime attention must be accorded to goods
that are within the range of the model income that can be purchased by the typical family.

16 | AMU: Development Planning and Project Analysis I By: Mihretu T. & Mirikat D
Cheap bicycles in a low-income country are thus more important than cheap
automobiles.
11. Public cooperation
Above all, public cooperation is considered to be one of the important levers for the
success of the plan in a democrat country. Planning requires the unstinted cooperation
of the people. Economic planning should be above party politics, but at the same time, it
should have the approval of all the parties.
1.6. The need for planning in LDCs, Ethiopia
Planning is beneficial for the developed and underdeveloped countries. For the
developed countries to maintain or accelerate growth already achieved, and for under
developed countries, like Ethiopia, to overcome poverty and to raise the standard of
living. Unless the underdeveloped countries like Ethiopia wake up and follow the
planning, they will be left far behind in the race of economic well-being.
Planning has been introduced in different countries for different reasons.
 In socialist countries, where revolutions preceded and public ownership of
resources followed, planning became an institutional need of the system
 In non-socialist countries, with private ownership, several factors have
necessitated the use of the instrument of planning.
 In underdeveloped countries, development needs have been predominant in
popularizing planning.

The following arguments reveal an urgent need of planning in underdeveloped and

developing countries.
The Market Failure Argument: This refers to a condition where both factor markets
and commodity markets in Less Developed Countries are characterized by
imperfections in structure as well as in operation. The markets are badly organized
and hence there exist price distortions which give wrong signals to both consumers
and producers such that these signals and incentives are a poor reflection of the real
cost to society of the goods, services and resources utilized. Moreover, the failure of
the market to price factors of production correctly is further assumed to lead to gross
disparities between social and private valuations of alternative investment projects.

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Moreover, the failure of the market to price factors of production correctly is further
assumed to lead to gross disparities between social and private valuations of
alternative investment projects. In the absence of governmental interference, therefore,
the market is said to lead to a misallocation of present and future resources or, at least,
to an allocation that may not be in the best long run social interests. This argument
designates one of the most widely expressed reasons for heavy government
involvement in the economies of the less developed nations. Market failure can be
explained under the following three contexts:
i. A case where the market cannot function properly or no market exists. The
existence of public goods gives rise to the problem of ‘free rider’, in which case
it becomes prohibitively expensive to try to exclude nonpaying individuals
from consuming such goods.
ii. A case where the market exists but involves an inefficient allocation of
resources. Market power, usually manifested through the existence of
monopoly, occurs when firms can influence price by restricting quantity
produced.
iii. A case where the market produces undesirable results as measured by social
objectives. With externalities, consumers or firms do not have to pay all the
costs of their activities or are unable to receive all the benefits.
By and large, the uncontrolled market economy in the developing countries can, and
often does, subject these countries to economic dualism, fluctuating prices, unstable
markets and low levels of employment. In particular, it is argued (by proponents of
economic planning) that the market economy is not geared to the principal operational
task of poor countries: that of mobilizing limited resources in a way that will bring
about the structural change necessary to stimulate a sustained and balanced growth
of the entire economy. Consequently, planning came to be accepted, as an essential
and pivotal means of guiding and accelerating economic growth in almost all
developing countries.
The Resource Mobilization and Allocation Argument: This mainly refers to
prioritizing the economic sectors that will guarantee economic transformation in the

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long run. For instance, it may be required to mobilize resources so as to reallocate
them from consumer goods producing sectors to capital goods producing sectors. It
may also be necessary to reallocate skills from where they are less productive to where
they are more productive. This may not be an easy task because of the fact that people
naturally prefer to attach more weight to their present consumption than to the future.
Attitudinal or Psychological Impact Argument: It is often assumed that a detailed
statement of national economic and social objectives in the form of a specific
development plan can have an important attitudinal or psychological impact on a
diverse and often fragmented population. It may succeed in rallying the people behind
the government in a national campaign to eliminate poverty, ignorance, and disease.
By mobilizing popular support and cutting across class caste, racial, religious, or tribal
factions with the plea to all citizens to work together toward building the nation, it is
argued that and enlightened central government, through its economic plan, can best
provide the needed incentives to overcome the inhibiting and often divisive forces of
sectionalism and traditionalism in a common quest for widespread material and social
progress.
Foreign Aid Argument: The formulation of detailed development plans has often
been a necessary condition for the receipt of bilateral and multilateral foreign aid.
With a shopping list of projects, governments are better equipped to solicit foreign
assistance and persuade donors that their money will be used as an essential
ingredient in a well conceived and internally consistent plan of action.
Development Argument: The economic vicious circle of poverty arising due to low
income, low savings and high propensity to consume, and further lower investment
and low capital formation, low productivity, low income and poverty must be broken
and it can be done only by planning. Planning is like a shot in the arm which enables a
sick person to overcome his sickness. Planning alone can create more jobs and remove
the wide spread unemployment and disguised unemployment which is a common
feature of underdeveloped countries. It is the sovereign remedy for raising national
and per capital income, for reducing inequities in income and wealth, for increasing
employment opportunities and for achieving as all round rapid economic

19 | AMU: Development Planning and Project Analysis I By: Mihretu T. & Mirikat D
development. It is commonly said that the pendulum has swung too wide in favor of
planning that is cannot swing back against planning.
Planning alone can transform an agricultural and primary producing economy into a
more balanced economy with heavy, medium and light industries. Agriculture and
industry stimulate production in each other by creating demand for their products.
Development of agriculture is also essential to supply the raw material to the
industrial sector. Economic planning held in designing the plans of agricultural and
industrial sectors of developing economies.
Planning alone can help an underdeveloped economy to build up its infrastructure
irrigation and power, transport and communication and schools and hospitals. The
establishment of these social economic overheads is essential for an all-round
harmonious and integrated development. The private enterprise is guided by profit
motive and is not interested in these items of social gain.
One of the principle objectives of the planning in underdeveloped countries is to
increase the rate of economic development. In the words, D.R.Gadgil “Planning for
economic development implies external direction or regulation of economic activity
by the planning authority which in most cases identify with the government of
state.” It means planning increases the rate of capital formation by raising the levels
of income, saving and investment. It is only a central planning authority which can
control banking and other credit institutions when these are under private enterprise
they have a tendency to crowd in urban areas. The vast rural areas are completely
neglected and thrown to the wolves, the indigenous money-lender. A planned
economy can revolutionize the economy by providing financial institutions and by
mobilizing savings and investments

20 | AMU: Development Planning and Project Analysis I By: Mihretu T. & Mirikat D