Chapter Two: Classification of development planning

2.1 Classification of development planning

Planning takes different forms on the basis of:
 Differences in time periods
 Institutions affected
 Extent of activities covered
 Modes of executing the plan, etc. Therefore,
2.2 Development planning by direction and inducement
4. Planning by Inducement and Planning by Direction
Sometimes countries try to achieve objectives of planning in an indirect manner. There is
private enterprise throughout the economy and market mechanisms in full operation. The State
just offers certain inducements and incentives. This is what a predominantly capitalistic
economy like the American economy would do. As against induced planning or indicative
planning, there is compulsory planning or planning by direction under a central directing
authority.

Planning by inducement
Planning by inducement is often referred to as indicative planning. In this type of planning, the
planner either subsidizes production or controls prices, if it is intended to increase the
consumption of a commodity. The first acts on the supply side and the latter, on the demand
side. Cheaper price is an inducement for the consumer and subsidy an inducement for the
producer. This is, planning through the market mechanism. The citizen wants freedom of choice
in consumption. This freedom exerts pressure for free adjustment of production to consumption.
Similarly, the worker demands freedom to choose his own job. This means that besides
consumers' market there must also be a labour market. This leaves a narrow sphere for State
control.

The basic idea is that the market controls the entrepreneur and State can control the entrepreneur
by controlling the market. The State tries to manipulate the market by means of incentives and
inducements through price fixation, taxation and subsidies. The government seeks to influence
economic and investment decisions by offering incentives to entrepreneurs via fiscal and
monetary policies but does not control or regulate the functioning of the economy directly.
Planning by inducements avoids swollen bureaucracy. Thus, it is planning by persuasion rather
than compulsion. There is freedom of enterprise, freedom .of production and consumption
subject to some regulation or control by the state.

However, immobility of resources imposes serious limitations on planning by inducement. This

immobility creates shortages which cannot be eliminated merely by price control and rationing.
Measures have to be taken not only to distribute supplies equitably but also to augment supplies.
There are writers who are not prepared to consider indicative planning as planning in the real
sense of the word. According to them, there can be no planning without direct orders or
directions so as to compel economic activities to conform to the plan programs and objectives.

The merits of indicative planning are:

 Consumer's sovereignty remains intact
 There is freedom of enterprise
 It is flexible
 It is democratic.
As against these merits, there are some demerits too:
 It fails to achieve the objectives of planning or targets of production
 The private entrepreneurs care more for profit than for the growth of the economy
 The fiscal and monetary policies of the government are not so successful in the under-
developed countries; controls lead to black markets.
 The producers may not find the incentives offered by the state attractive enough to
follow the state guide-lines. The disincentives for the consumers may not be deterrent
enough to curb wasteful consumption
 The working of the market forces fail to bring about proper adjustment between
demand and supply and thus create imbalances in the economy.

Planning by direction
Planning by direction implies minute and detailed instructions being given both to producers and
consumers. A list of all commodities to be produced with the quantity of each has to be prepared
as well as a separate list for each of the complements and substitutes. Planning by direction is
very comprehensive. It covers the entire economy. There is complete concentration of economic
authority in the state. There is one authority which is in sole charge of planning, directing and
execution of the plan in accordance with pre-determined targets and priorities. Only planning by
direction can guarantee the success of the plan, otherwise the targets would turn out to be mere
pious wishes. This means that the economic plan should have at its back the full authority of the
state not merely in planning but also in its implementation or execution. As Dr. Oskar Lange
observes, "With regard to the socialist sector the national plan represents a binding directive. The
targets of the national plan and its financial provisions represent orders to be carried out of the
various ministries and the enterprises subject to them. They are duty bound to carry out the
directives of the plan."

Shortcomings:
 It is undemocratic since the people are ignored all along. It is bureaucratic and totalitarian
and, as such, involves the treatment of human beings as mere pegs in a big bureaucratic
machine. There' is no economic freedom. Rationing and control result in black marketing
and corruption.
 Owing to the complexity and many-sidedness of modern economic system, planning by
direction does not yield satisfactory results. It is too formidable a task. No person or body
of persons can perform this task satisfactorily.
 There is bound to be shortage of some and surplus of other commodities.
 Besides, this sort of planning is bound to be inflexible. The plan once prepared must be
adhered to, no part of the plan can be altered affecting the whole plan.
 The fulfillment of the plan cannot be anticipated, because conditions keep changing.
Black markets emerge to overcome the imperfections of the plan
 Planning by direction also leads to excessive standardization which impinges on
consumer's sovereignty.
 It also involves huge administrative costs-elaborate censuses, numerous forms and army
of clerks.

As Lewis remarks, "When government is doing only a few things we can keep an eye on it,
but when it is doing everything it cannot even keep an eye on itself." These are a few
difficulties or shortcomings of Planning by direction. But the choice between these two types
of planning is determined by the system of government prevailing in the country. A
democratic government adopts indicative planning whereas a' socialist state will adopt
planning by direction.

2.3. Short term, Medium-term and long-term development planning

• On the basis of time horizon, planning can belong term , medium term or short term i.e.
annual planning. It implies the splitting up of a long period plan into relatively short
period ones.
I. Long term plan:
– It is also called Perspective plan.
– it range from covering 10 to 25 years.
• A long term plan is concerned with the technical and scientific aspects of long term
growth and development of the economy.
– long range targets are set in advance for a long period
– It lays down the broad objectives and strategies for the major sectors of the
economy.
– It cannot be detailed one but it is broken into short term plans, say five year plans.
– It is a blue print for developments/ investment to be under taken over a longer
period
– For investment in which effect/return can be seen after(over ) long period.
– For example, investment in
– education (human capital development ), and technical skills institutions.
– increasing the production,
– Health(health status of the population )
– modernization and change in technological aspect
– Industrialization
– the expansion of exports
– balanced growth and development in sectors of economy (agricultural as well as
industrial sector, regional)
– matching demand and supply of certain services or product
• All above issues are a long run affair; therefore, they requires long time to see changes.
Thus, long term planning is the most suitable.
– Long term planning is favored due to the following reasons;
• give greater freedom of choice among the available resources so as to
allocate effectively and efficiently.
• Over longer period, new ways of doing things, new technologies,
• Capital accumulation solve problem of resources
 • allow structural changes as the scope is broader and it give
consideration of such factors as economic, social and political.
• it gives a lesson to correct any said effect of the past and to plan for the
future as it is explanatory for decision makers.
• it is Informative as one learn from mistakes and its limitation
• Demerits of Long term Planning
– Rigidity
• Being rigid, adjustment arising out of unforeseen circumstances is not
possible. It is difficult to change the target once fixed, because the
public loses confidence in planning.
– Problem of uncertainty
• It consider long future which is uncertain most of the time
– Not feasible administratively.
• it tends to spread confusion, cynicism and defeatism in administration and
among the public.
– Complexity
• During the present complex environments, it is a problem to estimate the
targets more properly.
II. Medium term -plan
It ranges from 3 years to 10 years depending upon the target that a country wants to achieve
within a given period of time.
• This plan is appropriate for those activities which can be handled within 5 years, to 10
years.
• For examples,
– construction activities( roads, building and others),
– training man power
– Country five year plan e.g growth and transformation plan of Ethiopia
– Characteristics of medium term plan;
– This plans are bridge /time channel/between long term plan and short term plans.
– Medium term coincides with business cycle which cover both bad and good
period.
– The period is long enough for the planners to make adjustments whenever there is
a need to remedy.
– It also synchronize the aspiration of the society and enable planner to set
quantitative targets
III. Short -term plan (annual plan)
• it is plan of action or yearly plan. Sometimes it is called controlling plan
• It is targeted to one year plan.
• It is detailed plan for implementation which encompasses;
– activities /tasks ,Objectives and targets
– Budget , time for implementation
– Responsible bodies
• It is usually approved by the parliaments for implementation
• This type of planning has got merit of adjusting the plan for economic development to
changing circumstances of the country.
– It is easier to look ahead over short period than over longer period
 • Again, under short run planning, performance can better be judged

2.4 Fixed and rolling development planning

Professor Myrdal was the first economist to advocate a rolling plan for developing countries in
his book Indian Economic Planning in its Broader Setting. India did not experiment it for the
first time in 1978. It was introduced for purposes of defense after the Chinese aggression in 1962
and has been a great success in making the country almost self-sufficient in the manufacture of
sophisticated arms and ammunitions, frigates and aircrafts, and helped to prepare it face Pakistan
twice. It was introduced in Indian planning by the Junta Government on April 1, 1978 and was
given up on April 1, 1980 with the coming to power of the India Government.

In a rolling plan, every year three new plans are made and acted upon. First, there is a plan for
the current year which includes the annual budget and the foreign exchange budget. Second,
there is a plan for a number of years, say three, four or five. It is changed every year keeping
with the requirements of the economy. It contains targets and techniques to be followed during
the plan period, along with price relationships and price policies. Third, a perspective plan for
10, 15 or 20 or even more years is presented every year in which the broader goals are stated and
the outlines of future development are forecast. The annual plan is fitted into the same year's new
three-, four- or five-year plan, and both are framed in the light of the perspective plan. For
example, if planning is started in 1970 in a country, there would be three plans under the
technique of rolling plan: an annual plan for 1970, a five-year plan for 1970-75, and a 20-year
plan for 1970-90. The broad aims and objectives are laid down in the 20-year perspective plan.
When the plan starts in 1970, there will be an annual plan in every subsequent year that is, 1971,
1972 and so on. The five-year plan for 1970-75 will also roll on for the subsequent periods by
shedding each previous year so as to become a plan for 1971-76, 1972-77 and so on. Since
planning is a continuous process, every year the plan is revised in the light of new information,
improved data and improved analysis. At each revision it will be well to look into the future a
number of years which is determined by the nature of the factual circumstances If five years is
deemed to be a suitable horizon, this number of years may be applied at each of the yearly
revisions in the sense one would always be working in the beginning of a five-year period.
The concept of rolling plan is devised to overcome the rigidities encountered in the fixed five-
year plans. In the rolling plan, there are plan targets, projections and allocations that are not
fixed for the five-year period but are liable to revision every year in keeping with the changing
conditions of the country. It not only provides greater flexibility but also a clearer perspective
and a better view of the priorities.

Being flexible, a rolling plan is more realistic than a flexible plan. It takes into consideration
such unforeseen natural and economic changes as floods, drought, war, hike in oil prices, etc.
which may affect the economy adversely. Under a rolling plan, financial and physical targets
can be revised in keeping with such changes. But such revisions are not possible under a fixed
plan. Thus the rolling plan combines the advantages of both perspective and flexible planning

But critics are not lacking in pointing towards certain demerits of this technique of rolling plan.
They point out that since the targets are likely to be revised every year, it is not possible to
achieve the targets laid down in the plan within a fixed time period. Such frequent revisions
also make it difficult to maintain proper balances in the economy which are essential for its
balanced development. Again, when the plan is continuously revised, it creates uncertainties in
the private and public sectors of the economy. Both sectors lose the urge to make changes in
their production plans or to proceed in accordance with the previously laid down targets. To
achieve bigger targets becomes out of question. Moreover, constant revisions of the targets of
the plan develop an attitude of non-commitment and apathy among the planners

2.5 Physical and Financial planning

Here we come to the question whether we fix the size of investment in terms of real resources
which is known as physical planning or in terms of money which is known as financial planning.
Ultimately, however, financial resources will have to be translated into real resources for money
as such serves no purpose. If adequate finance is not available, it can be created through deficit
financing. In underdeveloped-countries, there always exist unutilized or under-utilized resources,
for instance, uncultivated land, unemployed labor, hoarded wealth, etc. These resources can be
mobilized by "creating" money.
 i. Financial Planning
In the case of financial planning, the planners determine how much money will have to be
invested in order to achieve the pre-determined objectives or targets. 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 social services, expenditure
on the necessary infrastructure, etc., as well as revenue from taxation, borrowings and savings.
This money is then used to mobilize the required resources. There has thus to be an integration
between physical planning and financial planning. Indian planning has been mostly financial
planning although some targets have been set in concrete and real terms, e.g., the output of food -
grains.

The essence of financial planning is to ensure that the demands and supplies are matched in a
manner which exploits physical potentialities as fully as possible without major and unplanned
changes in the price structure.
Finance holds the key to the success of a plan. If the country is able to raise adequate financial
resources, the success of the plan is assured. But failure to raise the enquired resources will spell
its failure. It will not be able to achieve the targets set out for it.
Financial planning has its own limitations:

 An attempt to raise taxes to too high a level will adversely affect the capacity of the
people to save which may hamper the development process.

 Owing to smallness of organized money sector and the existence of a larger non-
monetized sector, the estimates of financial resources may go wrong. Even the
physical targets may be upset. Imbalances between the monetized and non -
monetized sectors may result in shortages and in inflationary pressures. Hence
financial planning is more suitable for sector planning than for over all planning.

 Financial planning may not provide for the expansion of employment opportunities
 at a scale so as to absorb the new entrants to the labor market. Hence people's needs
both for work and employment may remain unsatisfied.

ii) Physical Planning

In physical planning, the planning authority has to work out how much land, labour, materials
and capital equipment will be required to implement the plan and achieve the targets set out for
it. Physical planning makes for concreteness in planning.. As is stated in India's Second Five
Year Plan, physical planning "is an attempt to work out the implications of the development
effort in terms of factor allocations and product yield's so as to maximize incomes and
employment". It is an input-output analysis. It implies proper evaluation of the relationship
between investment and output. In physical planning, the planners have to determine not only
the amount of investment but also work out its composition in terms of the various goods and
services required to' obtain a certain increase of output of product. For instance, it has to be
worked out as to how much of cotton, coal or electric power and other ingredients will go into
an output of 1,000 meters of cloth. That is how calculations have to be made for each type of
goods to achieve the targeted quantity. In this way, planned increase in the output of various
goods is matched with the amounts and various types of investments. Financial planning is only
a means to achieve the various targets laid down in the plan.

Thus, in physical planning, we make an overall assessment of the available real resources like
raw materials, manpower and capital equipment and devise ways and means to mobilize them in
amounts sufficient to enable us to achieve the various targets of production. These targets are
laid in physical terms, e.g., so many tons of steel, food grains, coal, sugar and so many million
meters of cloth, etc., in agricultural and industrial sectors and also for economic overheads like
roads and rail kilometers) etc., or so many buildings to be created, so many doctors and
engineers to be trained and the number and type of educational institutions, and so on. But the
various targets have to be properly matched and balanced. The test of the soundness of planning
lies in the avoidances of imbalances, stresses and strains of any type in the economy.

It is not to be understood that physical planning is a straight and simple affair and presents no
difficulties. Rather, there are formidable difficulties in the following ways:
  In the under-developed countries, there is statistical blackout so that adequate and
reliable statistics regarding the various types of real resources are lacking. It,
therefore, becomes really difficult to lay down the targets with any degree of
certainty.

 To build up a sound sectoral balance is also a tight ropedancer. That is why when the
plan is being implemented all sort of stresses and strains, bottlenecks, shortages and
gluts and inflationary pressures appear to thwart the planners' effort.

 Physical planning is not enough to prepare a sound plan for economic development. It
has to be supplemented with financial planning. If this is not done, the economic plan
will go down against financial rocks. Lack of adequate financial resources have been
a major cause of the failure on planning in India.

Thus, physical and financial planning are necessary to assure the success of the plan. They are
complementary to each other just as the right and left legs are needed for walking. There has to
be a proper balance between the two. Both techniques must be integrated in the development
process.