Chap 1 Rev

CHAPTER ONE
The Evolution of Development

Paradigms and Planning
Teferi D (PhD)
AAU, Dep’t of Economics
November 2022
Lecture Outline
1. Introduction
2. Perspective of planning
3. Meaning of planning
4. Rationale of planning
5. Pre-requisite of Planning
Teferi D (PhD): DPPA-I Lecture note on Chap.1
1
1. Introduction-Evolution of Planning
 The idea and practice of planning has a long

history
 It has been in practice since human civilization
 In ancient times, construction of highway networks,
terraces for agriculture, or irrigation and flood control
systems involved a considerable amount of development
planning in Mesopotamia, Babylonia, Egypt, India and
China, as well as in Are-Colombian Indian civilizations of
Mexico, and Central and South America.
 Pluto was 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.
 But the widespread acceptance of development

planning as a means of accelerating the rate of
economic growth and achieving other development
objectives is of very recent origin. It is the 20th century
phenomena
2
 Thus, to get its current shape and
recognition, planning passed through
different phases.
 These phases can be seen as
 Pre-WW II
 Post-WW II
A) Pre-WW II
 Prior to World War II, the Soviet Union was the only
country engaged in systematic development planning,
having adopted its First Five-Year Plan in 1929.
 The Soviet leaders considered planning a corollary to socialism, the
means for creating the material and technical basis of Communism
and the highest standard of living in the world through the
establishment of high and stable rates of growth and of optimal
interrelationships in the development of the economy
3
 The Soviet Union plans were the bases for all
the plans practiced in most communist
countries until the 1990s.
 As a result, historically, the idea of central

economic planning was associated with
the criticism of capitalism as a system
of anarchy and greed.
B) Post WW II
 The war interfered with the growth of development
planning almost everywhere

 European Recovery Program, or Marshall Plan, in 1948
soon increased the number of European nations with plans.
 Colonial Development and Welfare ( CD&W) Act of 1940
required the colonies to prepare and submit ten-year
development plans for 1946—56
4
 Other European colonial powers also adopted
development planning for their colonies.
 France, Portugal Belgium, The Netherlands
 Development planning in Africa had been greatly

stimulated by the colonial powers, particularly by the
British CD&W Act of 1945 and by French postwar plans.
 By the beginning of 1965, 35 independent African nations had
formulated development plans.
 But planning in Africa has not been restricted to the newer emergent
nations. Ethiopia has had two five-year plans and, at the end of 1964
 Since WWII, national development planning has

spread throughout the world, as much to the more
advanced as to the less developed countries.
 The “demonstration effect” of Russian planning in transforming the USSR
from a backward nation into one with the second largest industrial sector in the
world in only four decades has been important in popularizing planning.
5
 Other factors that contributed for the wider acceptance
of planning
 The Early Post War Consensus/conditions
 The Washington Consensus
 The Oscillating Search for Silver Bullet
 The World Bank influence
 Aids
i) The Early Post War consensus/conditions

 Covers cease of WW II up to beginning of 1970's.
 academicians give more attention to how growth and
development could be achieved in LDCs.
 the previously neglected sub-fields of Development
Economics were rediscovered.
 Available economic models seemed to offer only limited
insights into the practical problems facing the so-called Third
World. 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.
6
 The period was characterized by
a) Dualism
b) Need for balanced growth
c) International Trade scene
d) Interventionist state
e) Advance in technology
a) Dualism
~ the division of something conceptually into two opposed or contrasted
aspects, or the state of being so divided
 The components under dualism are:

 Sociological dualism:
 Boeke, 1953 is the major proponent.
 The major source for dualism was the differences
between western and non-western objectives & cultures
7
 Technological dualism:
 Higgins, 1956 is the major proponent.
 The major source for dualism is the differences between
variable factor proportions in the traditional sector and
fixed coefficients in modern sector.
 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).
b) Need for Balanced Growth (structuralism)

 Proponents: Rosenstein - Rodan, 1943 and Nurkse,
1953 and others.
 They emphasized the need for balanced growth not
only between agriculture and non agriculture but
also within each sector, so that Say's law could
come in to play and both shoes and socks should
be produced to fill both the demand and supply
sides.
8
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
 there was strong inclination to turn to the intervention
state as a key instrument for development.
 Reasons:
 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, to promote industrialization (industrialization was
synonymous with development)
 A logical accompaniment of these views were PLANNING
MODELS
9
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.
ii) The Washington Consensus

 refers to the level of agreement between the International
Monetary Fund (IMF), World Bank, and U.S. Department of
the Treasury during the 1980s on the view, typically
labelled neoliberal, that the operation of the free market and
the reduction of state involvement were crucial to development
in the global South.
 A British economist named John Williamson coined the
term Washington Consensus in 1989.
 gave more credit for the realization that prices
matter more and that macroeconomic stability
matters less.
10
 There are the ten specific principles originally set out by John
Williamson in 1989:
1. Low government borrowing. The idea was to discourage developing
economies from having high fiscal deficits relative to their GDP.
2. Diversion of public spending from subsidies to important long-term
growth supporting sectors like primary education, primary healthcare,
and infrastructure.
3. Implementing tax reform policies to broaden the tax base and adopt
moderate marginal tax rates.
4. Selecting interest rates that are determined by the market. These
interest rates should be positive after taking inflation into account (real
interest rate).
5. Encouraging competitive exchange rates through freely-floating currency

exchange.
6. Adoption of free trade policies. This would result in the liberalization of
imports, removing trade barriers such as tariffs and quotas.
7. Relaxing rules on foreign direct investment.
8. The privatization of state enterprises. Typically, in developing countries,
these industries include railway, oil, and gas.
9. The eradication of regulations and policies that restrict competition or
add unnecessary barriers to entry.
10. Development of property rights.
11
iii) The oscillating search for 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.
iv) The World Bank influence

 The WB has been an important agency, from about 1950, in
starting or accelerating organized national developmental
planning in many countries.
 Based on World Bank recommendations, many countries
and dependent territories have either established or
reorganized central planning agencies, or prepared
national development plans.
12
v) Foreign Aid
 The spread of development planning has also been stimulated by
Western countries providing loans and grants.
 Whether or not these countries have favored planning for their own
economies, they have accepted planning in recipient counties and often
insisted on the formulation of plans before they extended aid to less
developed countries.
 The United States has taken a strong stand in advocating
development planning in less developed countries.
2 Perspectives of planning
 Ideologically, the evolution is from three

perspectives:
 Planning in eastern Europe (socialist perspective)
 Planning in western Europe (capitalist perspective)
 Planning in underdeveloped countries (mixed
economic perspective)
13
i) Planning in Eastern Europe –Socialist perspectives
 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.
14
ii) Planning in Western Europe- capitalist perspectives
 There could be several factors that
necessitate planning in Western Europe:
 wars,
 great depression of 1930th,
 expansion of markets, and specialization
 The development of science and technology
 Need to Reconstruction of war thorn states
a) 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]
b) In the 1930’s, the capitalist world was in the midst of the
biggest depression in the world history.
 economist and politician favored economic planning as a remedy for these
and other economic ills. Keynes writings also in a way strengthen the
belief in the efficacy and economic planning in capitalist countries
c) 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.
15
d) 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.
e) 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.
 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.
16
iii) Planning in Underdeveloped Countries – mixed perspective
 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
17
 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.
Summary
 The of idea planning was not taken up kindly in some

countries by some people.
 It was associated with socialist economies, and the hatred of
socialism was transferred to planning too.
 But remarkable achievements of Nazi Germany and USSR
popularized the idea of economic planning.
 It acquired a tremendous support after the end of World

War II when
 advanced but disrupted economies had to be rehabilitated and
 the under-developed economies were fired with the ambition
of rapid economic development
18
 Today, even capitalist countries practiced planning in
one or the other sector of the economy.
 planning has been universally accepted and the planned sector
almost everywhere is expanding
 about 20 per cent of the American economy is planned
 it becomes popular owing to the basic defects of capitalism and free
enterprise arid owing to the realization that, unless a free enterprise
economy is regulated and controlled, it would not ensure stable
growth or maximize social welfare.
 Robbins: "Planning is the grand panacea of our age“

 Lewis: "There are no longer any believers in laissez-faire except
on lunatic fringe."
 Though both advanced capitalistic countries

and the under-developed countries have
adopted planning the rationale of planning is
slightly different, ;
 the former it is corrective planning to ensure
economic stability,
 in the latter it is developmental planning to secure
rapid growth.
19
3. Meaning of Economic Planning
 No agreement among economists with

regard to the meaning of the term
economic planning
 often confused with communism, socialism or
economic development
 Some treated any type of state intervention in
economic affairs as planning
 What then is planning?
 Planning is
 a conscious and deliberate use of the
resources of the community with a view to
achieving certain targets of production
 a technique for achieving certain self-
defined and pre-determined goals laid down
by a central planning authority
20
 As a working definition
Planning is a technique or a means to achieve an end.
End refers to certain predetermined target
(well defined objective). End might be
achieving:
 Economic objectives,
 social objectives or
 military objectives or all
 The main point is not to have plan or not to have plan

but what kind of plan do we need to achieve the
objectives.
 Intervention of state in all economic activities is
inevitable, i.e.; government do intervene in an
economy in one way or another. But what matters is
the degree, type and nature of intervention.
21
4. The Rationale for Planning in
Developing Countries
 Developing countries need economic planning in order to
achieve the following objectives:
 To increase the rate of economic development
 To improve and strengthen the market mechanism
 To reduce unemployment and disguised unemployment
 To enhance the linkage between the agricultural and industrial sectors
 To create social overhead that enhance agricultural and industrial growth
 To expand domestic and foreign trade
 To eradicate poverty
 To be Self sufficient in food and raw materials
 To reduce inequality
5. Pre- requisites for planning

• The formulation and success of a plan require the
fulfillment of the following factors:
 Planning commission Administration
 Statistical data  Proper Development Policy
 Clear Objectives  Economy in
 Fixation of Targets and Administration
Priorities  An Education Base
 Mobilization of Resources  A Theory of Consumption
 Balancing in the Plan  Public Cooperation
 Incorrupt and Efficient
22
 Planning Commission: planning commission should be organized in a
proper way with team of dedicated experts (such as economists, statisti-
cians, engineers, etc)
 Statistical Data: planning needs statistical data and information with regard
to the total available material, capital and human resources of the country. It,
therefore, requires the setting up of a central statistical organization.
 Objectives: The plan should lay down the objectives clearly. The various
goals and objectives should be realistic, mutually compatible and flexible
enough
 Fixation of Targets and Priorities: targets should be both global and

sectoral.
 Global targets must be bold and cover every aspect of the economy. They include
quantitative production targets.
 Sectoral targets pertains 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
 Mobilization of Resources: There are various internal and

external resources for financing a plan. They should encourage
corporate and household savings of the private sector.
 Balancing in the Plan: A plan should ensure proper balance in

the economy, otherwise shortages or surpluses will arise as the
plan progresses.
 There should be balance between 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.
 two kinds of balances must be secured; physical balance (balancing
output of various goods with the amounts and types of investment.
Also balancing outputs of the various sectors). monetary or
financial balance (balancing the incomes with consumption)
23
 Incorrupt and Efficient Administration: A strong, efficient and
incorrupt administration is the sine qua non of successful
planning. But this is what an underdeveloped country lacks the
most.
 Proper Development Policy: The state should lay down a proper

development policy for the success of a development plan and to
avoid any pitfalls that may arise in the development process.
 Economy in Administration: The people must feel confident that

every pie that they pay to the government through taxation and
borrowings is properly spent for their welfare and development,
and not dissipated away.
 An Education Base: For a clean 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. This is not possible
unless a strong educational base is built up.
 A Theory of Consumption:. Underdeveloped countries should not

follow the consumption patterns of the more developed countries. Cheap
bicycles in a low-income country are thus more important than cheap
automobiles. Above all, nothing is so important, as abundant and
efficiently produced food, clothing and shelter for these are the most
universal requirements.
 Public Cooperation: 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. For, without
public support no plan can be success.
24
End
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CHAPTER ONE

The Evolution of Development

Teferi D (PhD): DPPA-I Lecture note on Chap.1

 The idea and practice of planning has a long

Teferi D (PhD): DPPA-I Lecture note on Chap.1

 Pluto was the first person who talked about organized

 But the widespread acceptance of development

Teferi D (PhD): DPPA-I Lecture note on Chap.1

Teferi D (PhD): DPPA-I Lecture note on Chap.1

Teferi D (PhD): DPPA-I Lecture note on Chap.1

 As a result, historically, the idea of central

Teferi D (PhD): DPPA-I Lecture note on Chap.1

planning almost everywhere

Teferi D (PhD): DPPA-I Lecture note on Chap.1

 Development planning in Africa had been greatly

Teferi D (PhD): DPPA-I Lecture note on Chap.1

 Since WWII, national development planning has

Teferi D (PhD): DPPA-I Lecture note on Chap.1

 The Washington Consensus

 The Oscillating Search for Silver Bullet

 The World Bank influence

Teferi D (PhD): DPPA-I Lecture note on Chap.1

i) The Early Post War consensus/conditions

Teferi D (PhD): DPPA-I Lecture note on Chap.1

 The components under dualism are:

Teferi D (PhD): DPPA-I Lecture note on Chap.1

b) Need for Balanced Growth (structuralism)

Teferi D (PhD): DPPA-I Lecture note on Chap.1

trade scene painted in colors and was

Teferi D (PhD): DPPA-I Lecture note on Chap.1

Teferi D (PhD): DPPA-I Lecture note on Chap.1

ii) The Washington Consensus

Teferi D (PhD): DPPA-I Lecture note on Chap.1

5. Encouraging competitive exchange rates through freely-floating currency

Teferi D (PhD): DPPA-I Lecture note on Chap.1

Teferi D (PhD): DPPA-I Lecture note on Chap.1

iv) The World Bank influence

Teferi D (PhD): DPPA-I Lecture note on Chap.1

Teferi D (PhD): DPPA-I Lecture note on Chap.1

 Ideologically, the evolution is from three

Teferi D (PhD): DPPA-I Lecture note on Chap.1

Teferi D (PhD): DPPA-I Lecture note on Chap.1

 But it was only state intervention that was

Teferi D (PhD): DPPA-I Lecture note on Chap.1

 expansion of markets, and specialization

 The development of science and technology

 Need to Reconstruction of war thorn states

Teferi D (PhD): DPPA-I Lecture note on Chap.1

a) The outbreak of World War I and II necessitates the proper

Teferi D (PhD): DPPA-I Lecture note on Chap.1

 Note: - The objective of the economic planning in the

Teferi D (PhD): DPPA-I Lecture note on Chap.1

Teferi D (PhD): DPPA-I Lecture note on Chap.1

 a) In Less Developing Countries, planning was

Teferi D (PhD): DPPA-I Lecture note on Chap.1

Teferi D (PhD): DPPA-I Lecture note on Chap.1

 The of idea planning was not taken up kindly in some