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TITLES PAGE

CHAPTER 1 ...................................................................................................................................1
DEVELOPMENT PLANNING: AN INTRODUCTION ............................................................... 1
1.1 Historical Background of Economic Planning, Projection, Plans, and Forecasting .........1
1.1.1 Historical Background of Economic Planning ............................................................... 1
1.2.2 Planning in Western Europe .......................................................................................... 2
1.2.3 Planning in Underdeveloped Countries .......................................................................... 4
1.2. The Meaning and Features of Economic Planning ........................................................... 5
1.3. The Need for Economic Planning .....................................................................................7
1.4. Requisites for Successful Planning .....................................................................................18
1.5. The Case for Against Planning (Arguments Against Planning) .....................................21
1.6. Shortcomings and Problems of Planning ........................................................................23
1.7. Summary of the Chapter .................................................................................................26
1.8. Questions for Review ..................................................................................................... 27
CHAPTER 2 ..................................................................................................................................28
CLASSIFICATION OF PLANNING: MEANING, CHARACTERISTICS OF DIFFERENT
TYPES OF PLANNING AND THEIR RELATIVE MERITS AND DEMERITS ......................28
2.2. Long-Term, Medium-Term, And Short-Term Planning ................................................ 30
2.3. Fixed and Rolling Plans ..................................................................................................33
2.4. Regional, National and International Planning ...............................................................36
2.5. Sectoral and Area planning .............................................................................................38
2.6. Planning by Inducement and Planning by Direction ...................................................... 40
2.7. Centralized Planning and Decentralized Planning ......................................................... 43
2.8. Physical and Financial Planning .....................................................................................43
2.9. Summary of the chapter ..................................................................................................46
2.10. Review Questions .......................................................................................................54
CHAPTER 3 ..................................................................................................................................55
QUANTITATIVE DEVELOPMENT PLANNING TECHNIQUES ........................................... 56
3.1. Introduction .................................................................................................................... 56
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 3.2. Choice of Planning Techniques – Pros and Cones of Labor- and Capital-Intensive
Techniques .................................................................................................................................57
3.2.1. Labour Intensive Techniques .................................................................................. 58
3.2.2. Capital Intensive Technique, Modern Techniques ..................................................59
3.2.3. Appropriate Technique for Developing Countries ..................................................60
3.2.4. Labour Intensive Vs capital Intensive Techniques ................................................. 62
3.3. Economic Models and Economic Planning ....................................................................65
3.3.1. Basic Types of Planning Models and Their Characteristics ................................... 68
3.3.2. Important Considerations in Choosing Particular Planning Models .......................72
3.4. Growth Models - Review of Models in Development Economics .................................75
3.4.1. The Harrod- Domar Growth Model ........................................................................ 76
3.4.2. The Mahalanobis Model ..........................................................................................82
3.4.3. The Two sector Model ............................................................................................ 83
3.5. Input–Out Put Analysis and its Application ............................................................... 93
3.5.1. Main Features of the Model .................................................................................... 94
3.5.2. The assumptions of input – output Analysis. .......................................................... 95
3.5.3. Open in put out put system ......................................................................................96
3.5.4. Closed Input-Output System ................................................................................... 96
3.5.5. The Structural Nature of an Input-Output System .................................................. 97
3.6. Mathematical Programming and Development Planning .............................................118
3.6.1. Linear Programming ............................................................................................. 119
3.6.2. General Formulation of LP Problems and Assumptions .......................................119
3.6.3. Linear programming Technique and its Application in Planning ......................... 121
3.6.4. Formulating an LP Problem and method of Solution ........................................... 121
3.7. Summary of the Chapter ...............................................................................................135
3.8. Review Questions ......................................................................................................... 137
CHAPTER 4 ................................................................................................................................138
PLANNING IN PRACTICE: EXPERIENCES FROM ETHIOPIA .......................................... 138
4.1. Historical Background ..................................................................................................138
4.2. The Planning Process ....................................................................................................144

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 4.3. Planning and The Transition Period ............................................................................. 148
4.4. Summary of the Chapter ...............................................................................................149
4.5 Review Questions .............................................................................................................152
5. ASSIGNMENTS ..................................................................................................................153
6. REFERENCES .................................................................................................................... 155

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 CHAPTER 1

DEVELOPMENT PLANNING: AN INTRODUCTION

At the end of this chapter the learner will be able to:

 Understand the development of economic planning
 Understand the meanings and features of economic planning
 Understand the necessities to undertake economic planning
 Understand the requisites of economic planning
 Know the shortcomings of economic planning.
1.1Historical Background of Economic Planning, Projection, Plans, and
Forecasting

In this chapter we will first discuss the historical background of economic planning which
shows the development of economic planning. Then we will see the meaning and features of
economic planning, the need for economic planning, pre-request for economic planning, the case
for against planning, and shortcomings of planning.

1.1.1 Historical Background of Economic Planning

Dear students what do you think about the historical background of economic planning? Put here,
your idea precise way.
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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:

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 1. Planning in eastern Europe (socialist perspective)

2. Planning in western Europe (capitalist perspective)

3. Planning in underdeveloped countries (mixed economic perspective

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.

1.2.2 Planning in Western Europe

Dear students! Can you explain the factors that necessitate planning in Western Europe? Try
here.
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Good! 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:

First, 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

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management theory (organization coordination). The intervening depression reminded the state
of the tragedy incompleteness of economic theory and public policy.

Second, 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.

Third, 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]

Fourth, 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.

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Fifth, 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.

Sixth, the development of democracy also leads to the adoption of planning in order to rectify
social inequalities people could vote for those who experience an interventionist approach.

1.2.3 Planning in Underdeveloped Countries

Dear student!
1. Explain the main characteristics of underdeveloped countries?
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2. Do you think that the planning in developed countries is different from the developed
country? If yes how? Try here.
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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:

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 1. 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

2. 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.

1.2. The Meaning and Features of Economic Planning

One wishes one could start with a single universally accepted definition. Unfortunately, this is
not possible. Owing to a variety of reasons, the subject of planning has not matured enough to fit
in to any precise definition. However, one may lay bare the elements that together constitute
planning. For this it may be help full to consider the difficulties that have thwarted the various
definitions of planning that have been advanced at one time or another.

Dear students, can you discuss the difficulties of a definition of planning?

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i) Institutional problem: The first and foremost difficulty arises from the fact that planning
is being practiced in different institutional environments. The principal aspect of
institutional differences is in respect of the ownership of resources. At the one hand we
can have countries with practically all the resources under state owner ship and the entire
economy is being directed by the state. On the other hand there are countries with almost
all the resources in private hands, doing minimal planning exercise. The farthest from
these two sets of countries there are many mixed economics with resources part owned
by the state and part owned by the private sector. Planning in these countries presents a
picture of market orientation tempered by the executive action of the state as the principal
weapon of planning.
ii) The differing ownership pattern of resources has led to differences in the farmers and
substance of planning. In countries with no or insignificant private ownership, the market,
in the traditional sense, has virtually ceased to exist. The use pattern of resources in such
cases is therefore determined by the state, and planning in these countries has become an
integral part of lives of the people. With these socialist countries, there may again be
countries like Yugoslavia, and to an extent Poland, where the market, with public
enterprises as transactions, exists.

In economics like those of France and Uk, planning is done just to identify problems and
bottlenecks in the economy, disseminate information, formulate targets for the whole economy,
etc. in order to provide guidelines for private economies units to make sensible decisions. In
mixed economics, the market may be dominating, but the state is more dominating in
determining the course of the economy.

It is not the form of planning the nature and the extent of state direction (or the nature and the
extent of market domination)-alone that is affected. Protagonists of different socio-economic
institutions have viewed the substance of planning differently. Socialists think that planning in
the context of private ownership of resources/ or markets is a contradiction-like the hot ice. For
them it is precisely for doing things differently from the market mechanism that planning is

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needed. And if the market exists, planning cannot. The two, according to socialists, are mutually
exclusive.

Marxists, on an altogether different plane, opine that even economic categories like price, value,
income, etc. have different connotations when viewed in different systems like capitalism,
socialism and communism. As such planning, when applied to different systems, differs in kind.
Marxists go still further. For them, it is not that planning must follow state ownership of
resources. This is of course in evitable. But equally important is the need to have state ownership
of resources if planning is to make any sense. A part from the desire to see the use pattern of
resources controlled by the state, what is argued is that the social attributed of production be
unveiled and production linked directly with consumption? According to them, in a market
economy, the social character of production is shower up through exchange and by the
intervention of money. But this creates many problems, including the occurrence of crises,
resulting in a strange situation when "over production" exists along side the unsatisfied wants of
so many people.
iii) Development level: Countries have different levels and patterns of development. Besides
differences in aims there are differences in the reliability of capital stock, technical skill
knowledge. This makes difficult to have one definition for planning.
iv) Literature and practice: This concerns the very recent origin of planning both at the
academic and the application levels with the result that there is not much experience to
draw up on. Not much was written about planning before Russian revolution in 1917.
Scientific planning- planning associated with a science of econometrics made its first
appearance around 1930 in USSR. Other socialist countries started planning the
economics after 1945. Non socialist countries planned their economics in 1950's

Not only is planning being practice very necessary it has during its brief existence undergone
several charges considerable diversification of methods of planning making difficult to have one
definition possible.

1.3. The Need for Economic Planning

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Dear students! Why economic planning is needed? Write your idea on the given blank space.
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Planning has been introduced in different countries for different reasons. In socialist countries,
where revolutions preceded and public ownership of resources are 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. Again, in underdeveloped
economics, development needs have been predominant in popularizing planning. Thus, one can
describe many different factors responsible for the adoption of planning. Despite the number of
factors, one can nevertheless broadly list the major ones under the following headings -
institutional, technological and economic, and development. As an extension of the last factor of
development, we shall devote a separate section to the subject of planning in under developed
countries where the introduction of planning has been, at on and the same time , useful and
difficult but also specially favored with opportunities to succeed.

1.3.1 Institutional Requirement

The use of planning in socialist countries is inherent in their situation. One aspect of this is the
abolition of private ownership in the means of production and its replacement by state ownership.
Let us discuss each as the following

i) Public ownership
Once means of production are owned by the state, as in the case in all socialist countries, the
need for planning emerges automatically. This change in the ownership pattern from private to
public is associated with the demolition of the alternative market mechanism for the use of
resources. Whatever the reason for this change, the use pattern of resources has got to be
determined by public authority, which now commands the resources. Of course, theoretically at
least, it is not necessary or incumbent on public authority to prepare a plan and execute it. But
even then the authority must and will have some idea of how to use these resources. Thus,

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planning of some sort is the sin qua non of an institutional situation, characterized by the public
ownership of resources.

ii) Ideological considerations:

A part from public ownership of the means of production, the ideology that motivates socialist
countries also requires for its practice the instrument of planning. We may single out two aspects
of this ideology to highlight the argument for planning in socialist countries.
a) Social character: One aspect to which reference should be made is to the social character of
production. Production is social in nature. This attribute of production is exhibited in an
exchange economy (i.e. capitalism and money which is used as a media of exchange) by the
act of exchange. Production in such a system is mean to be exchanged for money, which in
turn will be used for the purchase of commodities. Such a sequence of goods for money, and
then money for goods, though concealed under the evil of money, brings out clearly the
nature of production. This of course is was not the case when in a primitive economy each
may or class or tribe produced for its own consumption, although even then there were some
rudimentary elements of exchange between men, classes or tribes. With the increase in
production forces, social attributes of production became more apparent.
Such a conception of an economy clearly requires that production activity should be a
direct responsibility of society as a whole and should not be left to individuals.
b) Capital:
An important aspect of the socialist ideology to which reference can be made is in
respect of money capital. While the substance of capital lies in the magnitude and
composition of such items as buildings, machines, tools, etc, in capitalist economies, it
has taken on the form of money capital. The ownership of money capital as it vests in
private individuals, determines the magnitude and composition of real capital. The
formation of capital in such an institutional arrangement is governed by the economic law
of profits. In other words, the productive capacity, on which hinges the fate of the
economy, is subjected to a force, which appears to be beyond the control of man.
If therefore, productive capacity is to be shaped not by the exigencies of market profit,
but by decisions of the society, money capital will have to go. But with this will also go

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 the driving force for capital accumulation, to be replaced by deliberate decisions in
respect of rate and pattern of capital formation. In other words, decisions in respect of
capital by the innumerable owners of money capital will be replaced by decisions of the
central authority owing real capital.

c) Dictating the economy:

From the above discussion about socialist economics it is clear that the one basic need
that propels them ideologically to plan is the need to dictate to the economy. Instead of
taking exchange of goods via money, or producing capital goods for profits, and thus
accepting the dictates of the economic laws of the capitalist system as a necessity,
socialist countries, with knowledge of the character of production and the real nature of
capital, want to dictate the economy. Such liberty to dictate as to what to produce instead
of being subjected to the slavery of economic laws of a capitalist system is possible only
with comprehensive planning. It is only then that production, besides being conducted in
the public sector, acquires its real social contents.

iii) National Resurgence:

Discuss how national planning can be taken as symbol of sovereignty
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Planning as an institutional means has also come handy to those who sought the fulfillment of
the national aspirations of countries recently liberated from centuries of colonial rule. Almost all
such countries have adopted planning light from the inception of their independence.

We can understand the need for planning for national resurgence by the following two points:
a) Symbol of sovereignty: A part from the dire and urgent need for telescoping development in
to a few years, newly independent countries found in planning a symbol of asserting their
liberation and sovereign status. Development planning enabled these countries to identify
themselves with the common goals they wanted to achieve as also with the means, for which

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 they were prepared to give their best. Such a national personality infused in them a sense of
being sovereign in respect of what do and how to do it.
b) Break from the past: Additionally, these countries, with backwardness hanging round their
necks like a millstone, wanted to stage a dramatic break from the past. Such an objective,
symbolized in plans in the form of higher growth rates and rapid industrialization, etc. put
their minds off from past misery and all the humiliation associated with it. With a pre- vision
of a bright future outlined and even quantified in plans, they were able to turn their back on
the past. The vistas of future opened up in the plans made them look to the past only to draw
lessons, and to mobilize efforts commensurate with the task a head.
iv) Technological and economic Factors:
Technologies of modern times are of such nature, and involve so much expense that their
fuller utilization requires that they be used in a planned way. Equally important are the
economic factors, associated mostly with the inadequacy and malfunctioning of market
economies, which necessitate the use of planning techniques to overcome these
deficiencies.

a) Technological Reasons:
Dear students! Can you discuss the technological reasons that initiate the need for
planning?
Write your answer in the following given blank space.
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_______________________________________________________________________.

Modern technologies because of certain characteristics can be put proper use if there is planning
on a national scale. We may mention the following four principal features indivisibility;
adjustability, product changes, and mass production.
Indivisibility:

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Most modern technologies involve the use of various production factors in a big way. This
inevitably results in the production of large quantities of goods and is popularly described as
mass production.

The limiting aspect of such a technology is that, being indivisible, it cannot be modified to
produce less with the combination of lesser amounts of input factors of production. In other
words, modern technology is not variable or divisible or divisible to suit just any scale of
production.

It follows that to reap the full benefits and to avoid any wastage; there should be a certainty
about factor supplies as also absence of any risk in respect of demand for goods. These
requirements can obviously be met in planning, where supplies and demand can be provided in
advance. It is this factor, which necessitates planning in capitalist countries too, where the
market is beset with uncertain and unforeseen fluctuations, both on the supply side and the
demand side. Planning in these economies is injected to eliminate risk in order to create a
favorable framework for the use of these technologies.
Adjustment:
Have you understood how indivisibility of technologies necessitates planning?
An important feature of modern technology is that it changes quickly and constantly. This gives
rise to two sorts of extraordinary problems. One is that modifying, changing or replacing capital
goods as the technology changes. The second is that of providing for fast depreciation of existing
capital goods, which is not related to the technological fixed rate of wearing out over a fixed
span of life of capital goods. New technologies for producing the same goods can be adopted,
and the depreciation of capital with existing technologies provided, with the least cost to society
only with planning. Under it, the cost of scrapping the old and the benefit of the new can be
juxtaposed and a course with net advantage to society adopted.
Product changes:
There are two reasons for product changes:
 Demand induced changes
 Technological induced change

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In case the changes are demand induced product changes can be taken if time is given for
technologies to switch over to these products. And if changes are the results of changes in
technologies production is determined by the producer in anticipation of demand for such
products both these requirements can be met in planning.

Mass production:
Modern technology is a mass production technology. Its economic use requires provision of
many other goods and services simultaneously such as important supplies storage, distribution
etc. Thus production of such goods may net be confined so itself but may have to include at the
same time many other activities leading to complex approach to planning.
b) Economic Reasons:
Dear students! Discuss the economic factor that necessitate planning.
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To overcome the deficient functioning of the market system has necessitated the use of planning.
Planning techniques perfection, and recent advance in the knowledge of economics have
contributed to its adoption to solve many problems.
Market deficiencies include many evils such as:-
 Cyclical depression
 Unprofitable production
 Un satisfied demand
 Instability in the economy
 Unfair distribution of income, wealth & opportunity in life.
 Money not needs give primacy i.e. exchange value but not use value given
primacy.
 Exploitation of labour
 Dehumanization of the whole process of production and distribution.
In general, the following facilitated the adoption of planning: -
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  Knowledge of economic advancement
 The advancement of techniques of planning
 Development and improvement of several national accounting systems.
 Developments in the fields of econometrics, mathematical economics and computing
facilities.
v) Development
This is the final factor for the need for economic planning. What do you think with this? How
this can be one factor?
For many countries’ development has been the major reason for the adoption of planning. If
development is to be compressed in to a given period planning is needed.
Dear Students, discuss the mechanics of development.
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Have you tried? Good!
Mechanics of development include the following:
1. Resource mobilization (organization)
2. The direction of investment among the different lines of production.
1. Organization resources:
The first requisite for development is to organize resources for investment. This involves two
sub problems. One is to ensure sufficiency of resources for production investment and
secondly collecting these resources. This is of particular important for back ward economies
where these are woefully small and not so much in advanced countries where investment
funds can be readily being made available. So far as he first problem goes it is in general a
political problem of how much to be permitted for consumption and how much for
investment from current incomes. These decisions acquire attributes of political decisions in
the sense that these are not left to individuals operating in the market.

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 After deciding about the amount of resources to be invested for development there is the
problem of marshalling them. In developed capitalist countries this can be done, largely by
economic incentives, through the market and other institutions.
In under developed capitalist economies and mixed economies, the deficiency of the market
and the inadequacy of development-oriented institutions can be got over largely by the
employment of administrative measures, including the establishment of the public sector. In
socialist countries, gathering of resources rests with the government.

2) The direction of investment among the different lines of production:

This problem has three sub problems
 Investment allocation
 Balancing the economy
 Efficient use of resources
a) Investment allocation
The amount of resources to be invested gives the maximum possible result, that is, the most rapid
growth of production, if they are properly allocated among different lines of production.

The first consideration, which ought to weigh in allocation, is that investment in the means of
production should be the maximum possible. Whether investment, or a part of it, is to be made
wholly or partly in domestic industries to produce means of production or in export industries to
secure means of production form abroad in a question to be tackled in the context of the
conditions prevailing in a country.
The important thing is that the largest possible proportion of resources should be devoted to
mother machines- machines to make machines and that too with most productive technological
methods such a course will enable a country to build its productive capacity rapidly. At the same
time, saving potential will increase vastly because of the capital-intensive nature of such a course,
implying that the proportion of wages paid to labor will not constitute a big picture.

Another line of investment is that relating to the production of agricultural and consumer goods.
Investment for the production of these goods is supplementary to investment in the means of

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production referred to above. The need of population in respect of food and to match the rising
incomes of those who get employment in development activities will have to be met. This is
essential for the smooth course of development. Otherwise shortages in these goods will not only
imbalance demand and supplies but will also seriously affect the sector producing the means of
production.

Another essentially supplementary investment is that which is made to create and expand
economic and social infrastructure. Such items as roads, trad sport vehicles, health facilities, etc,
are important from the angle of promoting accumulation in the sphere of means of production.
These facilities will not only add to the productive capacity in general, but will also as help in
furthering the rate of increasing productive investment.
b) Balancing the economy:
Dear students! Which balances constitute the balancing of the economy?
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An economy can be given physical expression, as also money expression. In reality, it is

described in both ways and functions in both forms, the two are very intimately related. For the
smooth functioning of the economy, in particular when larger resources than the market can
permit are going in to investment, there is need for making planned efforts to secure balances w
ith in the physical realm, as also with in the monitory or financial realm of an economy.

i) Physical balances
Within the sphere of physical production, one may refer to the need for ensuring internal
consistency Allocation of investment for each line of product for example, has to be consistent
with the output planned. If has to be seen that a certain amount of electricity are also produced to
manufacture a given amount of steel. These relations, called technological coefficients, are
known in countries, which are fairly advanced. One may put the same thing differently, and say
that there is to be a balance or consistency in the various branches of the economy because there

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are interdependent. Generally, with the help of the input output technique (using the technical
coefficient) it has to be established that inputs are consistent with our puts.

ii) Monetary balances

These balances, again to ensure smooth development, are in respect of (a) that part of income
which is earmarked for consumption goods and the supply of those goods: (b) that part of income
which is saved for investment and the supply of investment goods: (c) the funds made available
to the public sector and investment goods produced or imported (d) foreign payments and
receipts from foreign sources. These momentary balances make it possible to eliminate
inflationary (or deflationary) situations, and thereby save the economy from being distorted.
From the discussion about the need and nature of balance for development, it is easy to infer that
planning authority will have to under take this task. However, more efforts to organize recourses
and to allocate them to various lines will not in itself give maximum results. There is then a last
question in respect of development that needs to be solved- efficient use of resources

C) Efficient use of Resources

Broadly, this is a question of evaluating costs of production, value of out put and comparison of
the two. The purpose of this exercise is to achieve development with the least cost of resources.
The prices which will give us the true desirable picture of costs and value of out puts would be
those which reflect social costs of the various means of production and the social significance of
various products. Either these prices will have to be thought out, as for example shadow prices or
accounting prices or they will have to be arrived at by modifying actual prices

i) Public and private sectors

In the sphere of the public sector, efficiency can be secured by directing enterprises to make
specific investment in specific lines, as also by directing them to produce goods at specified cost.
These directives can be given in the light of cost accounting referred to above.
But this is not the case with private sectors in capitalist economies or in mixed economies, where
directives cannot operate. For this , pricing may have to be used as incentives to ensure that

17
investments are made in the desired directions, and at certain costs through, for example the
instrument of the rate of interest.

ii) High and low efficiency

While it is important to secure efficient use of resources for development, it should be noted that
a high efficiency is attainable in a highly developed economy when that economy becomes
diversified and cost accounting becomes easy and feasible. At a lower level of development,
while efficiency is important, it is not of paramount importance. The most important task for
developing economies is to provide more invisible resources for greater production.
From the above discussion, we can conclude that for growth purposes, in particular for countries
which want to do more than what the market would, a plan which perceiving things in to in
respect of organization of resources, their allocation etc. can alone facilities the process of
development. While this conclusion is in general valid for development, irrespective of
differences in need for planning.

Countries, this is of particular releverance for the development of underdeveloped countries,

planning for these countries has special attraction, not only because the development process is
actualized and its pace expedited, but also because these countries present features which make
them easily amenable to planning, despite considerable hordes in planning development. It is
therefore useful to take up the question of development through planning in under developed
countries.

1.4. Requisites for Successful Planning

Economic planning, to be effective, has to fulfill certain prior conditions that may be set forth as
follows:

i) Statistical data:
The availability of adequate, accurate and reliable statistical information about the existing
situation in the economy is the first pre- requisite of successful economic planning. Accurate
18
statistical information is required to fix up priorities in investment programme and to bring about
inter- industry co- ordination. Statistical data about price changes, employment, foreign trade,
foreign exchange etc; are required in the formulation and evaluation of an economic plan.

Planning in most of the underdeveloped countries is severely handicapped by the lack of reliable
data in sufficient quantity. Let it be said that planning on the basis of insufficient and defective
statistical material is full of perils for the community as a whole. The setting up of a strong,
competent and reliable statistical organization should, as a matter of fact, precede the
formulation of the plan.

ii) Economic organization

If planning is to be effective as it must be, then it should be preceded by an economic
organization that will promote and not hinder it. The economic organization should be such as
shall respond to the requirements of planning.
What sort of economic organization must an under- developed economy aim at if it is to facilitate
the tasks of planning? Write your answer in the given blank space below.

_______________________________________________.

It is axiomatic that an economic organization with a predominant or even a large private sector
is hardly suited to the needs and requirements of planning. Effective planning and private
enterprise go ill together. The planning experience in capitalist countries shows that private
enterprise never takes kindly to planning. On the other hand, its attempt is generally to torpedo
the plan from underneath. As such, its very existence in a centrally planned economy is the
negotiation of planning. But it may be feasible to do away with private enterprise all at once. It
may be allowed to continue in the initial period of planning but only as a transitional agreement,
pending its final replacement by the public sector.

iii) Government - setup:

19
What type of government set - up is suitable for effective planning? Write here, what you think.
______________________________________________________________________________
______________________________________________________________________________
_____________________________________________________________________________.
An underdeveloped country launching up on the road to rapid economic progress shall have to
decide carefully the type of governmental structure that it was going to have for itself.
Parliamentary government, whatever its other merits, was not a suitable weapon to achieve quick
economic development. Rapid, self- sustained economic expansion and democratic processes do
not fit together. Parliamentary government, even though enlightened and willing to initiate and
encourage economic progress, feels it necessary to go about its business with caution and after
retreats from sound policies.

A socialist government, on the country, has full and unfettered faith in planned development that
contrasts visible with healthily and hesitant beliefs of a parliamentary government.
But an under- developed country accepting parliamentary institutions shall have to secure an
agreement among all the political parties on the necessity and desirability of economic planning
as an instrument of growth. The various political parties operating in the country shall have to
give unqualified acceptance to the creed of economic planning before it could be credited with
future success. In case, the political parties are not agreed on the fundamental question of
planning, then it is better not to go for planning and to remain contended with slow, unplanned
haphazard economic growth. Planning is a growing and continuous process. It cannot be left to
the vagaries of election results.

iv) Reasonable Equity of Income:

Effective planning pre- supposes the existence of a reasonable equalization of incomes. NO
doubt, planning, it rightly conceived and wisely executed, itself leads to a certain degree of
equalization of incomes. But a determined effort has to be made to bring about reasonable
equalization of incomes in society because that alone will generate the enthusiasm among the
masses so necessary for the successful rage of income inequalities is bound to fail.

20
This needs special emphasis because in an under- developed country with a mixed economy,
rapid economic growth creates conditions under which concentration of wealth and economic
power and lively to thrive due to several reasons. The main reason, of course, is the scarcity of
private entrepreneurs with organizing ability and financial resources. Even if the number of
entrepreneurs is large, the licensing authorities invariably grant licenses to the bigger ones
among them taking them to be more efficient than others. In the end, therefore, a few big
business houses develop extensive industrial, financial and trading interests.

v) Public co- operation:

Public co- operation and public opinion and described as the principal force and sanction behind
planning. To the extent a plan lacks public co-operation, it cannot function properly. As profess
or W.A. Lewis says," popular enthusiasm is both the lubricating oil of planning and the petrol of
economic development- a dynamic fore that makes all things available." It must, however, be
emphasized that public co-operation, to a degree, depends up on the existence of a strong,
competent, sympathetic and incorrupt administration.
An important means of evoking the enthusiasm and co- operation of the people is to ensure that
the fruits of their efforts will accrue to them without much delay. People in a village are normally
prepared and willing to work on road construction, sinking of wells and repairing of irrigation
channels in their own village because they know that these activities would benefit them directly.
Hence, efforts should be made by the planners to go in for those projects that would benefit the
local people directly.

1.5.The Case for Against Planning (Arguments Against Planning)

Dear students, there are manly arguments against planning, which anti- planners pose. We can
describe such arguments as follows:
1. It is pointed out by the anti- planner that a planned economy would be a ' muddle' economy,
incapable of pursuing rational economic activity (amounting to almost a "leap in the dark")
because of the absence of an automatic guide to productive activity provided by the pricing
system. As such, there would be complete confusion and chaos in the field of production.

21
2. It is pointed out that the great danger arising from centrally planned economy is that of
bureaucracy and the growth of red-tapism. As such, it is argued, there is bound to be a certain
amount of loss in the efficiency of management. To this the planner replies: the danger of
red-tapism is, no doubt, inherent in government administration. But it is a difficulty that
could be surmounted and as such it should not prejudice the general case for economic
planning.
3. It is often said that there is no incentive under a socialist planned economy on the part the
workers to bring about improvement in their performance, the reason being that under
socialism all the workers are state employees with fixed grades of salary and other working
conditions.
4. It is also pointed out that a planned economy requires a huge amount of manpower simply to
draw up the plan and then make it work. To this the planner replies: what about the army of
middlemen, advertisers, distributors, salesman etc, which unplanned economy maintains to
enable it to function? These people are not only not creating weather, but they are actually
impeding the process of wealth- creation
5. An other objection against planned economy is that it tends to breed graft and dishonesty
among state employees. As professor Meade remarks "A system of direct quantitative
controls is the breeding ground for spidery and corruption. It is the father of black - markets
and carries with it an insidious threat to public morality." To this the planner replies: The
chief incentive to graft and dishonesty on the part of government officials will gradually
disappear as the right to private property and inheritance is brought under state control.
6. It is argued that under a planned socialist economy, the consumer loses his sovereignty. He/
she cannot dictate, but, on the other hand, must accept what is offered to him/her. He/she
would have to consume what the state wishes him/ her to consume.
7. It is further argued that under planned economy there is no freedom available to the workers to
choose their occupations according to their desire or aptitude, and that the workers are
diverted in to different occupations according to the requirements of the state or the
exigencies of the situation.

22
8. The critics of centralized planning further contend that there is every possibility of the state
developing under such circumstances in to a dictator ship of the worst type, constituting a
serious threat to democratic rights.
9. It is also pointed out that in the transition from an unplanned to a planned economy, there is
bound would reduce the living standards of the masses.
10. It is also argued that a centrally planned economy shall inevitably be unstable for political
reasons. One which favors and unplanned economy, the change over will involve surgical
operations supersedes when a government pledged to plan.
In addition to the above-mentioned arguments against planning we can have the following also
as follows.
 It is complained that planned economies generally operate under a veil of secrecy which
could not be very conducive in serving public co- operation for the success of planning
 It is also pointed out "a planned economy is always in some sort of crisis. There is always
a battle going on for something."
 Multi- year planning has its dangers securer future is always uncertain.
 It is pointed out that a planned economy, as a rule, involves the introduction of other
criteria, as well as the rationalistic one, particularly social and political.
 It is also argued that in a planned economy there arise a number of disadvantages-
normally, the loss of automatism and unconsciousness in many small activities of
everyday life.
 Lastly, it is also argued that national planning by individual courtiers shall lead to
international choose and conflict, the degree of choose and conflict being in direct
proportion to the number, completeness and the efficiency of separate plans.

1.6. Shortcomings and Problems of Planning

Dear students, can you explain the main limitations of economic? try here.

__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

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Economic planning suffers from different main limitations: -
A) limitations of uncertainty:
Every economic plan, how so ever well formulated it may be, suffers from the limitation of
uncertainty. The element of uncertainty increases several folds in the economic planning of an
overwhelmingly agricultural country or a country overwhelmingly dependent up on foreign trade.
A failure of crops or a stoppage of imports or a decline in exports will surely upset the economic
plan of such a country. To offset such a danger, the country concerned should have adequate
food stocks to make it independent weather conditions or there should be large stocks of raw
materials to make it independent of imports.

To get over this limitation of uncertainty, the country concerned should accumulate essential
stocks of every kind before it embarks up on economic planning.

B) Limitation of the market Mechanism:

The second limitation of planning is that imposed by the market mechanism. How so ever
comprehensive a plan maybe it has to leave some sections of the economy to the free and
uncontrolled working of the market mechanism. The vagaries of the market mechanism can play
destruction with the smooth functioning of the planned economy. In times of stresses and strains
a black market is sure to crop up in the economy up setting all the fine and intricate calculations
of the planners.

C) Limitation of the Time -Factor:

Every economic plan is formulated for a specified period of time, say, a five year period, though
there are countries which have formulated plans for as long a period as 10, 15 or even20 years.
The longer the period of the plan, the more propounded is the limitation of the time -factor. In
other words, the longer the period, the greater the possibility of the plan becoming obsolete and
out of date. The reason is obvious. There are so many changes taking place in the natural and
international spheres all the time that there can be no finality about any plan. To get over this
difficulty, it is, therefore, essential that every economic plan should be constantly reviewed,

24
altered, amended and adapted to the new conditions. Planning has to be a constant battle with the
"unforeseen". The above limitations of planning show that it is not yet an exact science and that
it is still subject to "political pressures, hunches and guess work.

Disadvantages of planning
Planning is a difficult and complex process which itself has limitation. External and internal
environment often adversely affect the management’s ability to plan effectively. The major
limitations of planning are:
A. Uncertainties of the future
B. Premium on the present. That is present is always more real than the future, and present
problems seem to be more urgent them future problems. Many of us are inclined to take care
of today and hope that tomorrow will take care of itself.
C. Past decisions acts as a barrier to future planning particularly decisions involving
commitment of substantial financial resource in a fixed assets like building, etc impose
serious limitation on planning.
D. Administrative problems. The executives’ perception to planning and reluctance to changes
that may adversely affect planning.
E. External conditions often, impose serious limitations on planning. Some of external
conditions may be : policies of governments interventions, acts and agreements of different
type , unions and other social aspects
F. Rapid change in technology, consumer tastes and preferences are further limitations to
planning.
G. Expense and Timely information. The time factor puts constraints on comprehensive
planning. Search for information, location of alternative plans and their comparative
evaluation in terms of not benefits can be an almost unlimited process.

The above limitations of planning pointout that the complexities and problems involved in
the planning process. They do not by any means diminish the importance or need of
planning for effectiveness. The recognition of these limitations will help managers in more
careful and systematic planning

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 1.7. Summary of the Chapter

There are could be several factors that necessitate planning in Western Europe, among others
wars, great depression of 1930th, expansion of markets, and specialization. We can understand
the need for planning for national resurgence by the following two points; the first one is a
symbol of sovereignty, which refers to a part from the dire and urgent need for telescoping
development in to a few years, newly independent countries found in planning a symbol of
asserting their liberation and sovereign status. The second is break from the past which is related
with backwardness hanging round their necks like a millstone, wanted to stage a dramatic break
from the past. As we discuss in detail in this chapter there are manly arguments against planning.

In general, planning is the coordination of economic activities via conscious effort. It is a

supplement to market forces. In most cases, price signals are misleading. As a result of this there
should be a certain particular apparatus that coordinates economic activities in the economy.

26
Planning is a process of cognition and compromise. The very aim of planning is to compromise
the different conflicting interests and to understand the desire of the economy by singling out
social needs.

1.8. Questions for Review

1. Discuss in details the historical development of economic planning.

2. Does an institutional problem make a difficulty to have one definition of economic planning?
If your answer is yes, how?
3. In developing countries like Ethiopia, planning was considered as an ideology rather than a
means; why?
4. What are the implications of monetary balances in an economy?
5. In the success of development plan what are the criteria needed?
6. “If economic plans are well formulated and effectively implemented, it will have a great role
in economic growth and development of a given country.” Explain this statement in detail
by giving example.
7. What was the main objective of the Soviet plan? And what do you think the main objective
of the current Ethiopian plan?
8. Assume certain business firm with profit motive with given resources, do you think planning
is necessary for the firm. If so why?
27
9. Suppose you are manager of certain public organization. Do you think planning is necessary
for you? Why?
10. Can planning with a large rage of income in equalities be effective?
11. How institutional problems make a difficulty to have one definition of economic planning?
12. Apart from Public ownership of the means of production, the ideology that motivates
socialist countries also requires for its practice the instruments of planning. Discuss the two
aspects of this ideology.
13. Explain how adjustment of technologies necessitates planning?
14. Discuss the different mechanics of development.
15. Discuss the requisites for successful economic planning.
16. Discuss some of the arguments against planning.
17. “If economic plans are well formulated, these will be effectively implemented.” Explain this
statement.

CHAPTER 2

CLASSIFICATION OF PLANNING: MEANING, CHARACTERISTICS OF

DIFFERENT TYPES OF PLANNING AND THEIR RELATIVE MERITS
AND DEMERITS
2.1 Introduction
In theory there can be varieties of planning. in practice for planning has taken on various forms
resulting from difference in time periods, geographical area, institutions effected, media of
planning, extent of activities covered, mode of executing plans, etc. Among the many types of
planning, the most Important ones are long term, medium- term and short- term planning:
regional , national and international planning: Decentralized and centralized planning: structural
and functional planning: indicative and imperative planning: fixed and rolling planning: physical
Vs financial planning: planning by direction and planning by inducement

learning objectives

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Dear distance learner! At the end of this chapter, you should be able to
Understand what medium - term, long-term and short- term planning are.
Understand what regional, national and international planning are.
Understand the difference between centralized and decentralized planning; fixed and
Rolling planning; physical and financial planning; indicative and imperative planning by
direction and planning by inducement Describe the various types of development
planning with their merits and demerits
Distinguish the distinctions that exist among the various types of planning

In theory there can be varieties of planning. In practice too, planning has taken on various forms,
resulting from differences in:

29
 Time period
Geographical area
Institutions affected
Media of planning
Extent of activities covered
Mode of executing plans etc.
Among the many types, the important ones are

Planning by Direction and Planning by Inducement

Financial and physical planning
Perspective Planning and Annual Planning
Indicative Planning and Imperative Planning
Centralized planning and Decentralized planning
Fixed planning and Rolling planning
Corrective planning and Development planning
Long-term, medium-term and short-term planning
Regional, national and International planning
Sectoral and area planning

2.2. Long-Term, Medium-Term, And Short-Term Planning

Dear students, what is the difference among long-term, medium-term, and short-term
planning? write your answer here.
________________________________________________________________________
________________________________________________________________________
_______________________________________________________________________
This classification of plans is based on the division of time into long, medium and short
periods. Long-term planning covers 10, 15, 20 and even more years. Medium term
extends over 3 to 5 years and even up to 7 to 10 years and Short-term plans relate to as
short a period as one year.

30
1.1 Long-Term Plans
Long-term planning is becoming quite popular these days to take a longish view of the
future of the economy. The statistical techniques now available make it possible to
forecast reasonably well the course of events for such a long period of time.

Characteristics of long-term planning

Greater freedom of choice: - the number and intensity of constraints on choices are
much less in long-term planning
Broadened scope: - It is possible to over-reach the narrow frame of purely economic
considerations and to explore social and human implication of economic development.
The resource availability over a longer period is much greater and more flexible than
in a short period.
A comprehension of resource availability makes for greater freedom of choice in
respect of planned activities as compared to medium term and short-term planning
periods.

Purpose of long-term planning

Long-term planning in the first place provides a vista vision of the future. This period is
long enough to allow for structural changes to take place and to work themselves out.
Changes which are associated with civilization, societies and modern science and
technology can be taken account of in this length of time. Such a long –range frame of
time thus enables one to encompass economic and non-economic movements. This helps
in presenting a total view of the future.
In the context of this future vision, planners perceive objectives and availabilities of
means for a society in the light of its philosophy or ideology which inspires the lifestyles
of that particular society.

Merits of long-term planning

Dear students, what are the merits of long-term planning? Put here your idea.

31
________________________________________________________________________
________________________________________________________________________
_______________________________________________________________________
Good! Besides the important purpose which long-term planning serves, it has certain
merits, among these; one may mention three principal beneficial implications.

A. Educative: - long term planning provides an opportunity of informing and explaining

to the public the major problems that are posed by the future society, the available
choices and the limitations which surround these choices. It helps in preparing more
realistic medium and short-term plans
B. Explanatory: - A long-term perspective is helpful in enlightening the decision makers
and those who are to implement the plans. The information made available under this
type of planning ensures integration of short-term plans into a longer-term framework.
This enables the planning authority to make adequate preparation for the solution of
problems that may arise in the future. Besides, perspective plans make it possible to
assess the long-term implications of medium term and short-term decisions.
C. Stimulant: - Long-term plans by making obvious future choices and by reducing
uncertainties enable decision-makers to act boldly in respect of decisions for shorter term
plans. Public opinion too gets adequately stimulated because perspective plans open up
prospects for progress and reduce incomprehension of the implications of the present.
Such knowledge on the part of the public reduces hesitations in respect of short-term
plans.

Limitations of Long-Term Planning

The future is uncertain. In case this type of planning is confined to prognostic forecasting
(foretelling), no firm thinking on the subject will be possible.

1.2 Medium-term plans

They extend from three to ten years. They fall between the long-period and short-period
plans. They have a two-fold significance. First, they act as link between the long period
and the short-period plans, and thereby connect the chain of time. Second, these plans
draw upon the horizon chalked out in the long-term perspective plan, and at the same
time present a framework for drawing up short period plans. It has Rationale in
32
Development activities like road building, training man power, rising of saving as
percentage of national income fall under this type of planning. The period is enough for
planners to remedy mistakes in the early years of planning. Medium-term plans are
generally indicative in nature, and provide the framework for the action to be embodied
in short-term plans.

1.3 Short-Term Plans

Short-term plans are also annual plans because the action for the period of one year is
linked with the budgets of government, usually presented after every one year. These
plans are also called controlling plans mainly for two reasons. Firstly, Government gets
authority from parliament to spend money, which is usually for one year. Secondly, It is
during this one-year period that resources are actually matched to requirements or targets.
Thus, the actual operation of any plan is controlled in the one-year document. One-year
plans, on the other hand, have the task of setting out how the government’s policy should
be carried in to effect.”

Note
Long-term plans specify (clarify) the perspective and vision of a society
Medium term plans concretize aspirations, many of them in quantitative terms, for
a shorter-period.
Short-term plans provide for action.

2.3. Fixed and Rolling Plans

A. Fixed planning: - It refers to the unchanging period of time for which a plan is
prepared. For example, a plan for a period of five years, 1975-80, will be a plan for
this period alone. The plan for this period will run its full course of five years. After
this will begin another plan of five years, spanning the next period from 1980 to 1985.
And so on. While the fixity of period is the basis of this type of planning, there is
more that goes with it than the given length of time. Fixity implies that the targets that
have been formulated /quantified are equally fixed. So are the means that have been
designed for the purpose. The plan thus is unchangeable for the period of five years.
Fixity on both the time period and the targets is the hallmark of fixed plans. A fixed

33
 plan is thus a plan that remains fixed (given) for a specified time period. Sometimes
important changes can be incorporated in fixed plans. For example, this may happen
when resources fall far short of needs. A Fixed plan lays down definite aims and
objectives which are required to be achieved during the plan period. For this purpose,
physical targets are fixed along with the total outlay. Physical targets and financial
outlays are seldom changed except under emergencies.

Merits
It makes for boldness in planning i.e. under such a planning one can design for
higher objectives with larger resources, with little fear of their being scuttled down.
It ensures effective implementation:- because this type of planning presupposes
commitment to the plan.
It provides for stability in the economy: - because it imparts certainty to the
functioning of the system.
Fixed plans act as performance-test to check on the efforts made, their adequacy or
inadequacy and success/ failure to locate the points that deserve approbation/
disapproval as also to draw lessons there from.
There is a “checking” mechanism built into the planning system. Everyone will
therefore be subjected to scrutiny.
There is bound to be disciplined thinking and action in respect of the formulation of
policies and their execution.
Demerits
Weaknesses arise from the inflexibility of such plans. Plan targets are rigidly
fixed. Changes cannot be easily made.
Wastage of resources prevails if the plan gets out of tune with the reality.
B. Rolling Plans
As the name implies, it involves the rolling of a plan at intervals, usually one year, so that
it continues to be a plan of certain number of years. To illustrate a rolling plan let us take
a hypothetical plan for the five-year period, 1980 –1985. After the first year is over in
1980, another year 1986 is added, so that it becomes a five-year plan for 1981-1986. In
1982, one year, namely 1981, gets dropped, and 1987 added. As a result, in 1982 there is
again a five-year plan of 1982-1987. And so on and so forth. Thus, as the first year is

34
over, the fifth year is stretched into the next year. The time-span of such plans roll,
shedding the initial one year, and adding one as the terminal year. Thus, every year the
time-horizon is kept for the five-year period.
Hence the Features of rolling plans are:
They are based on unfixed dates,
Revisions and adjustments are part and parcel of the technique of rolling planning
and the
Provision for change: - rolling plans always beep open the door for changes.

Merits
Flexibility:- this methodology enables planners to keep their options open and
make necessary changes if and when circumstances require. The rigidities of fixed
planning are tackled here.
Realism:- this type of planning is a realistic exercise. The targets and the
provisions for them remain feasible propositions in view of the revisions and
adjustments that are made as per changes in the circumstances surrounding the
plan.
Being flexible a rolling plan is more realistic than a fixed plan. It takes into
consideration such unforeseen natural and economic changes.

Demerits
It creates uncertainty: - one serious drawback is that it causes uncertainty, something
that knocks the very bottom out of the planning itself. Because of the recurring
changes, both the private sector and the government remain unsure of each other’s
responses.
It lacks boldness:- rolling plans make planners timid, as a result less than possible or
desirable is attempted.
Since these plans are prone to revisions, these exercises become a cover for not
making difficult decisions or taking courageous measures.
Every time a difficult situation arises, there will be the temptation of adopting the
easier course of revising downward the targets of plans. Such a planning would
amount to doing what can be done without planning. It is contended that the rational

35
 of planning lies in achieving more than what can be done in a market or non-planning
situation.
Lacks commitment: - rolling plans preclude any commitment to planning.
Weak discipline: - there are no fixed goals and means nor enough will to back it up.
There is little basis for expecting any disciplined thinking and action in respect of the
formulation of policies and their execution.
Inadequate test: - they do not provide any test to check the performance of the
economy. In the absence of established provisions, it is impossible to judge whether
and to what extent implementation has taken place. Besides, there will be no urge or
need to assess the magnitude of deviation from the original plan.

2.4. Regional, National and International Planning

These types of planning largely rest on the basis of spatial(geographical) differences.

Within a nation, planning for separate regions is described as regional planning. National
planning includes the whole of a country whose geographical area is determined
politically. International planning refers to the planning of countries at the world level.

A. Regional Planning
This type of planning is carried out within the framework of national scheme to better
meet the special needs of a region and the wants of its population. Regional planning has
a two-fold dimension
a. It is part of the national plan
b. It is a plan on its own merit.
Some scholars view regional planning as a one-dimensional scheme. According to this
view, regional planning is planning for a region and the national economy comes into the
picture only to be controlled for the purposes of executing a regional plan.
Its rationales are:
Special needs: - there are special needs of regions which require separate
treatment because they are not properly or fully dealt with in national plans.
National plans do not necessarily fulfill all the needs which are peculiar to regions.

36
 Special capabilities:- certain regions are endowed with special capabilities like the
availability of certain types of labor, or skill or certain natural factors like
proximity to shortest sea routes to other countries, etc.
Regional Differences:- Regional difference in terms of levels of economic
development, natural resources, culture and language, etc are so large that it
becomes necessary to have regional plans to accommodate regional peculiarities
and aspirations into the national plan.
B. National planning
National planning has two essential features which make it possible to identify it from the
other two types of planning namely:-
a) It is conterminous with the political boundaries of a nation.
b) There is one political regime that has a full control over the entire area.

Rationale
National planning is the only sort that must exist before one can even legitimately
speak of regional or international planning. Further, the other two types of planning
draw off from national plans in the sense that both, at the present level of
consciousness when internationalism is still not mature, cater to the needs of and are
subservient to national plans.
The resources of a country are effectively utilized in the sense that politically it
becomes possible to make full use of national resources.
The resources of a country are effectively utilized in the sense that politically it
becomes possible to make full use of national resources.
Centralized control which national planning permits makes for a rational use of
resources.
National planning becomes useful when combined with the other two types, in
respect of full use of a nation’s resources and for a healthy growth of international
trade and the efficient economic structure of the countries.
C. International Planning
International planning concerns countries at the world level. If all the countries plan the
use of their resources through a single agency with political authority, it can be cherished.
“World planning.” Short of that, any planning effort among countries may be called

37
“international planning”. The sphere of activities planned depends upon the extent to
which the participant countries agree.
Activities covered: - The scope of international planning differs with differences in the
activities covered and the number of countries involved. From the angle of activities
covered, one can distinguish two distinct patterns in extreme forms with so many falling
in between the two. In an extreme pattern, one may conceive of countries merging into
one another, giving rise to a new politico-economic unit. This amounts to pooling of all
resources, leading to full-scale planning as if it is national planning.

At the other extreme can be another form, under which the participant countries retain
their individuality in terms of economic policies in respect of trade and exchange, but
join hands in planning one or a few activities.
Example: -1 COMECON (the council) for mutual Economic Association of the
communist or socialist countries. Example2:-Coffee Board
Number of countries: - the number of countries, depending upon the size of the
participating countries, fixes the area falling under international planning. In other words,
it determines the scope of planning horizontally or geographically. For example, Food
and Agricultural Organization. International planning is thus mostly in the nature of
cooperation and mutual assistance among member countries.

2.5. Sectoral and Area planning

A. Sectoral Planning
Meaning: - It refers to planning in terms of the sectors of an economy. These sectors can
broadly be divided into Primary, Secondary and Tertiary.
Primary sector, Eg. Agricultural crops like food grains and some plantation crops
Secondary sector, Manufacturing industrial like steel industry, cotton textiles etc
Tertiary sector, service sector
Sectoral planning can also be divided into consumer goods and capital goods producing
sectors. The basis of sectoral planning is the division of the economy into sectors of
economic significance in respect of production and consumption. Planning for these
sectors is not bounded by geographical limits, except that of national boundaries.

38
Rational
Planning in terms of sectors is the only way to comprehend the totality of
economic life
Changes in the economy can be incorporated in plans by providing for adequate
inputs, institutional reforms, and policy prescriptions.
Economic activities are conceived in terms of the sectors of the economy.
Sectoral planning supplements area planning.

B. Area Planning
Meaning: - It is planning in geographical terms. In the plan the schemes included are
bounded by the limits of space. That space may be conterminous with the boundaries of a
village or a cluster of villages, or a district, or a region etc. The programs are location or
area specific.
The area plans focus on the economy of the block. For this reason, it is called area
planning.
This is to be distinguished from the sectoral plans which are in essence technological
divisions of an economy into sectors.
The area plans are smaller unit plans, linked with larger unit plans.
Sectoral plans are not bounded by areas within a country.

Rationale
Area planning is of immense significance to a large-sized country of the continental
dimensions. Because such a country is likely to have regions with varying climatic and
resource difference. There is again the likelihood of such a country inhabited by people
of different tastes, living patterns etc Example, Ethiopia, India

Area planning allows the fuller exploitation of the potentials of the areas fixed for micro-
plans. Area planning makes planning viable not only at the small area level, but also
imparts strength and substance to the bigger area/national plans. Area planning is
necessary for the achievement of certain specific objectives.
Examples of Area planning
i) Drought prone area program

39
 ii) Hill area Development program
iii) Integrated rural area development program
Area planning is an indispensable tool for the achievement of particular objectives.

2.6. 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.

A. 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

40
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
underdeveloped 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.

B. 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

41
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.

42
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.

2.7. Centralized Planning and Decentralized Planning

Some other forms of planning may be centralized planning and decentralized planning. In
the case of the former, planning is done by a central authority. It is done from the top.
Each citizen, producer or consumer, has simply to carry out the instructions or the job or
duty assigned to him. In the case of decentralized planning, however, we plan from the
bottom. For instance, each village locally called it village shengo or village council may
be asked to prepare a plan for the economic development of the village and each industry
may be asked to prepare its own plan. Out of these plans, an integrated plan may then be
evolved for the country as a whole.
2.8. 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.

A. 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
43
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.

B. 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

44
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

45
 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.

2.9. Summary of the chapter

Dear student, as we discuss in chapter two, we can categorize economic planning into
different classification based on different criteria. Let summarize some of them in the
table below:

Types of Main Characteristics Limitations Benefits

Planning
1. Panning - Absence of laiser fair (central - Lock of economic
directions and author freedom
inducement ity) - Complexity of
- Planning by - Totalitarian from and all economic system
direction) planning activities are done - Targets are not
- Planning by by central agency fulfilled
inducement - Targets set are compulsory in - Excessive
46
 form standardization
- Undemocratic - Costly exercise
- Rationing and price control (interims of surveys,
census, etc).
- Democratic - Incentives may not
- Exercise laiser fair be adequate
- Regulations arise from fiscal - Shortages/excess
and monetary measures – to may arise
encourage savings and Fiscal/monetary
capital accumulation. measures may be
- Note the 1st world may prefer inadequate for capita,
the second and the 2nd world accumulation, saving
may prefer the first but for and grown.
the mixed economics both
are important an appropriate
blend of the two.
1. Long-term, - Uncertainty - Educative in
medium- (because forecasting character
term and - Greater freedom of choice tools are not perfect). (informative)
short-term - Gives broader scope Hence it should be - Explanatory in
- Ling-term = 10- [economic, social, flexible. character
20 years institutional considerations) - Simulative
of understanding and - It coincides
implementation. with business
- Bridge between ling and cycle.
- Medium-term = short-term
3-10 years - Quantification of objectives - Development
and means - Actual realization of activities
- Control plans because parliament the plan but the mature
approves the budget others gives vision of - Possible to
- Short-term = - It draws as indicated (framed) in future. Concrete adjust (justified
annual plans the ling and medium term targets. political

47
 regime)

Types of Main Characteristics Advantages Short comings

Planning
3. Fixed and - fixed (unchanged) plan for a given - Encourages - Inflexibility
Rolling period boldness of such plans
- Fixed Panning - Sometimes there may minor - Encourages and is
changes as result of shortage of effective impossible if
resources, development in technology implementation changes arise.
but there is no major changes - Provides stability - Brings
in the economy. wastage in
Acts as performance resources
test (barometer) because of
- Continuous form of planning for a - impose discipline inflexibility
number of years [especially year] but thinking and action
every year the time horizon is
- Rolling constant.
planning - Three main features as difference:
i) Dates are not fixed
ii) Possibility of higher revision - Flexibility - Uncertainty
and adjustment as new - More realistic and confusion
information, resources and - Lack of
teaching available. boldness,
iii) Open for changes in objective commitment
and targets - inadequate
for test

- Regional, - Focusing on the special interest of Rational

National and regions. - To entertain special
international - Translating plans of national into needs of regions
planning sub regions according to need of the existence of
- Regional regions. special capability or

48
 - more powerful if integrated with opportunity
national planning - to express cultural,
social differences of
regions
to initiate
cooperation in
execution of plans

National Planning for the economy (political Basic for the other
boundary of the country) and types of planning
government control the entire and is compressive
economy. To utilize resources
efficiently
International Planning among different countries In bilateral and
Exercise by new political and multi-lateral
economic units (eg. EU) cooperation
Individual countries remain their Eg. UN to reduce
economic and political systems such poverty
as in UN, IOEC
Basic xic to bring cooperation and
mutual assistance between countries

49
Types of planning Main characteristics Rationale

5.Sect oral & Area - Planning in terms of the - Incorporates economical

planning sectors of an economy (agr, & social sectors as
 Sect oral industry, service) components of planning
panning - Basic of planning is for growth.
dividing the economy in to - Provides information on
main sectors assuming these various aspects of the
sectors have economic economy (expenditure
significance. on environment,
- It is not bounded by investment requirement,
geographical are [in not production possibility ,
confined to specific area] contribution of the
sector to economy)
- Determine the linkage
between various sectors.
It could be fore ward
linkage or back ward
linkage.

50
 Area - Planning in terms of - It regions vary in resource,
planning geographical area the plan economical development
is bounded by space others, this variation may
(geography) necessitate for area
planning.
- WIBS- the underlying Ex RVDP, Abay basin
assumption is that there is development, Awash valley
a certain geographical development
block for which planning - Enable full utilization of
is necessary. local resources
- Provide a basis for drawing
national planning
- Helps to address specific
objectives to locality (plans
are more reliable in small,
specific objectives)
- Encourages popular
participation (because
addresses the needs of
population concerned)
- The difference between area
& regional planning is
- The former is non political
boundary
- Differences on scope
(village, woreda etc)

51
6. structural &  planning involves Appropriateness
functional planning changes on social 1. The
(whether changes in & economic former
institutions are necessary institutions seems more
or not)  Mainly involves suitable to
alteration (change) bring
- structural of the existing development
planning system. in LDCs
Ex –  The later mostly aimed to
nationalization of correct a malfunctioning
- functional industries, houses economy with a given
planning - Introduction system.
of collective Ex if the objective is to
farms improve the working of the
- Abolishing economy under a given system
of feudal functional planning.
system 2. Requirements for
- Transferring implementation
public into  The former needs
private administrative research
sector response, enthusiasm
 Planning exercise public participation & huge
with the existing resources.
institutions (no
major changes in Note:- Aside the differences,
the structure of they coexist. Once the new
economy) changes in economic & social
 Only the economic institutions are incorporated on

52
 magnitude can structural planning, then after
undertake changes functional planning will proceed
(growth in saving to improve the system.
/GDP)

7. physical & Finance  Planning in terms

planning of allocation of
- physical planning physical resources
- financial planning (human power,
machinery, material
& others)
 Targets are set with
regard to different
sectors of the
economy
 Panning in terms of
monetary terms
 Aims

In general, development is conceived as a multidimensional process involving major

changes in social structures, population attitudes, and national institutions, economic status
(reduction of inequality and eradication of poverty), and economic growth for the masses
of poor people in developing nations. Planning one of the mechanisms through which one
can bring out the LDCs from their problem. Planning is deciding in advance the objectives
of something be it organization or country in the short as well as long run and means of for
attaining them.

53
In short, there are many types of planning: corporate, planning, firm planning, Economic
planning, strategic planning etc. Economic planning 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. It seeks to promote not only a
fast growth but also significant socio-economic changes via public intervention.
However, the degree of state intervention defines the nature of different types of planning.
Development planning has experiences great development from early days of Plato to
contemporary world. Especially, market failure, WWII, advance in science and
technology have contributed much to development of Economic planning. These and
other related ideas in different part of the world at different time were shaped, reformed
and developed with social and environmental changes that have been taken place.

2.10. Review Questions

II. Multiple Choice: Choose the correct alternative and fill in the blanks

54
 1. —————— is the first country in the world implemented Planning for
economic development.
a) Russia b) England c) America d) India

2. ————— is beneficial for both the developed and underdeveloped countries a)

Capital b) Planning c) Market mechanism d) Saving

3. Principle objectives of the planning in underdeveloped countries ————

the rate of economic development.
a) fixed b) increase c) decrease d) maintain

4. In mixed economy ————— is developed the economic plan. a)

private sector b) public sector
c) central planning commission d)State

5) In India the planning started during the year—————-

a) 1951 b) 1947 c) 1991 d) 1961

II. Short Answer

1. Explain the difference between the types of planning given below.

a. Planning by Direction and Planning by Inducement
b. Perspective Planning and Annual Planning
c. Indicative Planning and Imperative Planning
d. Fixed planning and Rolling planning
e. Regional, national and International planning
2. Briefly explain the limitations of planning under capitalist, command and mixed
economy
3. Explain the meaning and need of planning in economic development
4. Describe the types of planning and its limitations.
5. Discuss the role of economic planning in mixed economy
CHAPTER 3

55
 QUANTITATIVE DEVELOPMENT PLANNING TECHNIQUES
3.1. Introduction

Although controversies still continue over the relative merits of the market mechanism as
opposed to state intervention through planning, planning in different forms has been
accepted as an important policy instrument to attain specific targets specially in most
LDCs. Reliance on the market mechanism and market prices for resource allocation is
criticized on several grounds as it is discussed in the previous chapters. It is generally
argued that uncontrolled market economy can, and often does, subject specially developing
nations to economic stagnation, fluctuating prices, and low levels of employment. In
particular the market economy is not geared to the principal objective of poor countries,
namely how to mobilize limited resources in a way that will bring about the necessary
structural change so as to stimulate smooth, progressive and balanced growth of the entire
economy. Planning has come to be accepted; therefore, as an essential and pivotal means
of guiding & accelerating economic growth especially in developing countries i.e.
whatever a country’s political ideology government interference through planning is an
indispensable. It is the degree that differs. As you have seen in the previous chapters
planning can take different forms depending on the objectives, which the nations would
like to achieve, and its level of development- short, medium and long run, sectoral and area
planning by direction and planning by inducement etc.

Here in this part we will see different planning models, which specify in quantitative terms
the relationships between objectives, constraints and policy instrument variables.

Learning Objective
Dear student! Up on completion of this part you should be able to:
 Discuss the basic essence of economic models and their characteristics
 Identify the types of economic planning models and their characteristic feature

56
  Identify the basic elements that an economic model should consists of
 Identify the major factors that has to be considered in choosing a specific
economic model for planning
 Identify the pros and cons various techniques of production.

3.2. Choice of Planning Techniques – Pros and Cones of Labor- and

Capital-Intensive Techniques

One of the problems facing under developed countries is how best to utilize the available
resources in order to accelerate the growth rate of the economy. The majority of such
countries have abundant labour but scarce capital. These two major factors pose the
problem of techniques-that of using the traditional or the modern methods of production.
Meaning: the problem of choice of techniques refers to the type of combinations for any
particular project or enterprise.

A combination chosen in any particular case gives the type of technique. The number of
alternatives open to an underdeveloped country is between labour-intensive and capital
intensive techniques between light and heavy industries and between agriculture and
industry. But the ultimate choice is one of selecting between labour intensive and capital
intensive, methods whether it is in agriculture and industry, and in light and heavy industry.
The ultimate objective is to choose that technique which is more efficient than another
technique keeping in view the existing factor proportions. An efficient technique is one
that maximizes the output from a given level of inputs or minimizes the costs of a given
output.

57
Dear students! How you heard before about labor intensive and capital-intensive
techniques of production? Please define both in few words.
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________

3.2.1. Labour Intensive Techniques

The problem of choice of techniques boil down to one of adopting output increasing
techniques that raises labour productivity per unit of capital and are capital light and labour
intensive. Figure 3.1 explains the impact of labour intensive techniques on output. Initially,
output represented by the Isoquant Q was being produced in the economy by employing
OK amount of capital and OL amount of labour.
K
K

Figure 3.1 Labor Intensive Technique Figure 3.2 Capital Intensive Technique

58
Now with the new technique the same amount of capital OK helps in producing a larger
output represented by a higher Isoquant Q1 and at the same time it uses more labour LL1.
Such techniques should also fulfill the twin objectives of skill and capital formation.
3.2.2. Capital Intensive Technique, Modern Techniques
The other alternative commonly suggested is the use of capital-intensive techniques. Since
underdeveloped countries are unable to follow the path of technological evolution of the
advanced countries, they should use the technology of the latter on an extensive scale.
Figure 3.2 depicts the use of advanced technology, which is capital –intensive. It uses more
capital OK in relation to labour OL. The level of output is higher in the technique, the
supposition that the Isoquant Q2 is above Q1 of figure 3.2.

Successful economic development particularly in the face of gross backwardness, hinges

largely upon the introduction of modern technology upon as large scale as possible. For
“continuing and compounding effect” on the growth rate of income, advanced techniques
are considered to be indispensable. Further their use will help change customary working
habits, conditions, social institutions and the very outlook of the people.

But the adoption of modern technology in underdeveloped countries is a very ticklish

question. The same capital –intensity as in the economically advanced should be neither
desired nor permitted. The reasons are:
 It is a matter of common knowledge that these countries have plethora of the
unemployed and an acute shortage of capita. Modern technology is, however,
highly capital intensive and labour saving. It involves high costs and excessively
large amount of capital thereby making it unsuitable for underdeveloped countries.
 Imports of plants and equipment are not only costly but also entail a number of
difficulties with regard to repairs, maintenance and availability of spare parts.
 Heavy imports lead to BOPs difficulties.

59
  Modern technology also requires complementary supplies of highly skilled,
technical and managerial person not available in less developed economies.
 It is meant for the setting up of larger enterprise whereas the small size of the in
such countries necessitates the expansion of small enterprises.
 Modern technology was evolved under different socio-economic and geographical
set up. It is meant to accommodate labour shortages and other requirements of
advanced country. It is appropriate to high real wages and a high standard of living.

The possibility of introducing such technology is, however, depend on ‘the technological
spread –the gap separating the techniques already in vogue in the less developed country
and those imported from abroad. The larger the gap between the local & imported
techniques, the greater will be the social discontent and unrest following industrialization
through the introduction of advanced technology.

Last, the adoption of modern technology presupposes the existence of power, transport and
communication facilities, of highly trained technical personnel and a large number of
related services which are nonexistent in underdeveloped countries. Under the
circumstances, the use of advanced technology will only result in repeated breakdown in
the machinery, lower production, increase in costs and wastage of capital.

3.2.3. Appropriate Technique for Developing Countries

The problem of economic development is concerned with changes in factor proportions
and how rapidly they change. It depends on time involved. Capital light and labour
intensive techniques may help in raising the level of output, employment and income
during short period of time to some extent. Development, however, aims at their
continuous maximization over the long period. Now the question is “should under
developed countries introduce modern technology, or continue to use backward methods of
production or adopt obsolete techniques abandoned long ago by advanced countries?”

60
Backward economies have frequently make use of obsolete equipment and technique of
advanced country. Though discarded machines are considered to be somewhat cheap and
of lower capital intensity, they entail high costs in terms of repeated breakdowns and
constant repairs. Therefore, prudence demands that developing countries should benefit
from the vast fund of knowledge in the field of technology of advanced countries and
modify and adopt the technology of the latter according to their social, economic and
technical absorption capacity and requirements. These requirements necessitates in the
initial stage of development, the adoption of labour intensive and capital saving techniques
so that the limited amount of capital available is broadly spread in utilizing large human
and other resources.

There is, however, unanimity among economists over the choice of appropriate technology.
According Yale Brozen,” the appropriate technology for an area depends on its resources,
patterns, and its markets.” So that appropriate technology:
 Should contribute towards solving the basic socio economic problem of the
concerned community.
 Should be utilized for development purpose in the name of social justice and should
be capable of satisfying the felt need of the people.
 Should be economically viable, technically feasible and should fit the socio
economic fabrics of local communities.
 Should produce some surplus ,so as to encourage capital formation and stimulate
further growth
 It should be simple and comparatively cheap and uses local resources.
 It should labour intensive and capital saving
 Should create a sense of participation and decision making at the local level.
 Should encourage production by mass rather than mass production
 Should ecologically sound and should be in complete harmony and conformity with
local environments.

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  Dependence on non-renewable resources should be minimum.
 It should be dynamic and be able to absorb innovation.

3.2.4. Labour Intensive Vs capital Intensive Techniques

The common characteristics of underdeveloped countries are the scarcity of capital and
abundance of labour. In other words, the capital labour ratio is extremely low.
Commonsense tells us that in such countries efficient production calls for labour intensive
techniques. But this is essentially a static argument. It is relevant to conditions prevailing
at appoint of time. Therefore, this technique is not very suitable for a developing country.
As Dobb says “it starts from a given endowment of capital in each country, whereas the
crucial question at issue is discussing policies of economic development concerns changes
in the capital –endowment of country and how rapidly this capital endowment should be
changed.” Though prof. Nurkse holds the view that underdeveloped countries should adopt
labour intensive of production I the early stages of industrial development, majority of
economists favor the adoption of capital-intensive techniques in such countries.

3.2.4.1. Arguments for Labour Intensive Technique

 Employment argument: it is only by using labour intensive techniques that

increasing employment opportunities can be provided to the idle or unemployed
labour force. Labour intensive techniques spread the total income generated more
widely over the population.
 Resource argument: in underdeveloped countries there is an acute shortage of
capital and entrepreneurial resources. The use of labour intensive techniques would
be more appropriate for releasing these scarce resources to be used in more
important uses.

These techniques are import light i.e. they require simple tools and implements which need
not be imported from abroad & thus there is considerable saving in foreign exchange.

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Labour intensive techniques are indispensable for counteracting inflationary pressures in a
developing economy. They quickly increase the supply of consumable goods & thus
obviate the danger of inflation.

The use of labour intensive techniques is usually found in the villages and small towns.
This would obviate the necessity of building houses and other social works for the workers.
This would mean considerable saving in the community’s expenditure on social overheads
in the initial stage of development which could be utilized on more important projects.
Moreover, labour intensive techniques, being spread out into villages and small towns,
enjoy all the advantages of decentralization and avoid the evils of the factory system. The
emergence of monopolies & concentration of economic power in the hands of the few is
also avoided.

3.2.4.2. Arguments for Capital Intensive Techniques

Enterprises using capital intensive techniques lead to a large share of the resulting income
going to entrepreneurs & a smaller share going to wage earners. Since the propensity to
save is higher on the part of entrepreneurs, savings increase and a large proportion of them
are utilized for investment. Thus, the rate of economic growth is accelerated.

Since the growth rate is much faster under capital intensive techniques than under labour
intensive techniques, more employment will be offered in the long run. In the majority of
underdeveloped countries, the growth rate of population is very high unless capital-labour
ratio is raised; output per head will not increase. This will tend to dampen the rate of
capital accumulation. So the use of capital intensive techniques is indispensable for
increasing the tempo of development.

Further, capital poor countries ill afford to waste capital through obsolescence &
depreciation. Underdeveloped countries should, therefore, choose highly capital intensive

63
production techniques that do not become obsolete soon. Thus a small production of
capital goods is required to be replaced in the future & more capital is available for further
capital formation.
Capital intensive processes of production are more profitable than labour intensive
techniques b/c under the former productivity rises more rapidly in relation to costs. This is
due to the economies of large scale of production enjoyed by them.

In reality, the use of highly capital-intensive techniques leads to the production of quality
products & lowering costs, low costs mean low prices & provide the basis for a rapid rise
in living standards later on. Capital intensive techniques have far reaching effect on the
process of economic growth. A few capital intensive techniques have a greater total impact
on the economy than a number of labour intensive projects.

Capital intensive techniques are bound to enhance skills and efficiency and assist in
training management. For providing economic & social overheads large capital
investments are essential in underdeveloped countries.

Conclusion: so it is difficult to decide as to which technique should be adopted in an

underdeveloped country. In fact, the two approaches are not altogether different from each
other. The use of labour intensive techniques tends to increase production & employment
in the economy. On the other hand, the adoption of capital intensive techniques tends to
accelerate the rate of capital formation & then to maximize productive capacity and
employment in the long run. But in making a choice between labour & capital intensive
techniques in the context of underdeveloped country, it is necessary to consider a variety of
factors: their comparative cost of production; effects on employment, income, saving &
investment over different periods; use of domestic resources ;effects on domestic and
foreign demand; their ability to ease inflationary pressures & BOPs position. The cost of
production of goods manufactured with labour intensive method is higher than that of with

64
capital intensive techniques b/c of the inability of the former to realize economies of scale.
But it should not deter the planners from deciding upon labour intensive techniques which
economize on the use of scarce capital resources. Such methods of production create large
employment opportunities and help in increasing the supply of consumer goods, obviate
the necessity of importing raw materials, food & capital goods from abroad. Thus, they
tend to check inflationary tendencies & BOPs difficulties inherent in the development
process. But there is a snap. Use of labour intensive techniques cannot step up the rate of
capital accumulation a fast as that of capital-intensive techniques. No doubt, labour
intensive methods create more employment and thereby raise income levels, but of those
whose incomes are low and propensity to consume is high. So a small proportion the
income generated is available for saving and reinvestment. But keeping in view the larger
interest of the masses, labour intensive techniques should be used in the consumer goods
sector. For a continuing & compounding effects on the rate of growth of income, capital
intensive techniques should be confined to the capital goods sector.

3.3. Economic Models and Economic Planning

Dear student: In your microeconomics and macroeconomics you have learned different
models. Do you remember these models? What do you think is the relevance of these
models in economic Planning?
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________

Have you tried? Good

An economic model may be defined as an organized set of relationships that describes the
functioning of an economic entity, whether it be the individual household or firm, the
national economy, or the world economy, under a set of simplifying assumptions. All

65
economic reasoning is ultimately based on models although in many instances no
quantitative expressions may actually be used.

In our analysis of the behavior of households and firms we are implicitly using economic
models that employ relationships between indifference curves and budget constraints under
the simplifying assumptions of utility maximization. We use Keynesian and other
aggregate or macroeconomic models to explain the determinants of income and
employment in a national economy etc.

Similarly, economic models are helpful in economic planning not only because of their
analytical and explicative value, but primarily because of their practical usefulness.
These economic models are use full in economic planning to set out:

- The objective function or the targets that should be achieved

- The inter relationships among the different economic variables which would
indicate the general structure of the economy.
- The constraints (e.g. capital, labour, foreign exchange), which should be over come
to realize the objective function.

Dear student! What are the basic elements that an economic model consists of?
_________________________________________________________________________
_________________________________________________________________________
______________________________________________________________________

All economic models consist of the following three basic structural elements.

i. A set of variables- variables may be either independent (exogenous) or dependent

(endogenous). For instance, when considering the simple Keynesian consumption

66
 function, income is the independent variable while the level of consumption is the
dependent variable.

If we wished to construct a model to analyze the determinants of income and employment

for a national economy we should have to include the crucial variables such as
consumption, investment, government expenditure, the money supply, the interest rate and
other related variables.

Similarly, when formulating development plans with the aid of an economic model, we
shall have to identify those strategic variables such as investment, domestic saving,
government finance, foreign exchange and the supply of skilled labour, which together
constitute the major determinants and constraints on the growth and stability of the
economy.
ii. A list of fundamental relationships: The functional relationships of a model link the
independent and dependent variables together in a set of specific structural
equations.
iii. Strategic coefficients – coefficients describe the intensity with which one variable
affects, by means of its particular causal relationships, the value of another variable.
Dear student: For illustration let’s take the simple Keynesian model of income
determination model with which you are familiar.
This model can be represented by the following equations.

1. Y  C  I
2. C  a  bY
.
3. I  I
Where Y= national income=consumption I=Investment
This can be reduced to a single equation

67
Y  a  bY  I
Or
I  .

Y  a  I 
I b 
let K  I then
I b
 .

Y  Ka  I 
 
From the last equation we can found three components
.
- An independent variable I and dependent variable Y.
- A specific functional relationship expressing the nature of the causes of link
.
between I and Y.
- A coefficient K, the investment multiplier that describes the intensity of the
functional relationship.

3.3.1. Basic Types of Planning Models and Their Characteristics

As economic models specify the relationships between exogenous and endogenous

variables, a planning model specific the relationship between the goals of the society and
the instruments that are available to achieve them. By quantifying these relationships the
planners can stimulate the effects of alternative policies on the social objectives and check
whether the overall plan or objectives are consistent and feasible in terms of capacity and
resource constraints. The quantitative planning models therefore, provide a framework
within which the various agencies involved in the planning process can carry out a fruit
full dialogue regarding the possibilities and tradeoffs facing the country. In short, planning
models are useful precisely because they force the planners, policy makers and others
involved in the planning process to set out the structure of the economy and focus on the
relationships that determine the outcomes of policy changes further this analytical planning

68
methods require a comprehensive data base which forces the economists and statisticians
to assemble existing data in to a consistent and accessible form, and identify gaps where
additional information is needed.
All these planning works are best explained with the aid of certain theoretical economic
models.

You should however bear in mind that, whatever it is designed we cannot expect the
models to give formal decisive answer. Models only constitute a framework or skeleton;
and the flesh and the blood (the main parts) will have to be added by a lot of common
sense and knowledge of details.

Therefore, the use of quantitative planning techniques cannot completely replace intuitive
judgments based on experience of the working of the economic system. And there is no
single model that can be regarded as the best. Different types of models are suitable for
examining different policy problems.

Therefore, the choice of model must be guided by the problems at hand. Because what is
best for examining one type of problem may not be the most suitable for another kinds of
policy dilemma. Accordingly, we have different models. Some of them are: -

- National, sectoral, special and project models in terms of courage

- Aggregate, main sector and multi sector models in terms of degree of aggregation
- Static and dynamic models, which will be, applied for short, medium and long run
time dimensions.
- Stochastic or deterministic systems of models based on the way in which
behavioral relationships are treated between the variables etc.

69
But the models in these various classifications have over lapping components. That means
the result obtained from one type of model can be used as an input for another. This in turn
forces the estimates from different model exercise to be consistent. The interrelated nature
of various types of planning models becomes clear if we view the planning process as
planning in stages.

For instance, the results obtained for a given sectoral model is an input for national model
that complies data for the whole economy. The result for short term will have an effect for
medium term, which in turn will have an effect for the long run etc. Here in this section we
will try to see in detail planning models categorized in terms of structural complexity of
the economy.

Dear student: As you have seen in the previous units and previous section of this course
under taken for a specific sector, area or at regional and national levels. With this
understanding what basic categories does plan models could have? Can you mention them?
_________________________________________________________________________
_________________________________________________________________________
______________________________________________________________________
According to the structural complexity and the particular use to which the model is being
put, planning models can conventionally be divided in to three categories.

i. Aggregate planning model: - In these types of models the entire economy is taken in to
account and the behavior of the major variables such as aggregate consumption, production,
investment, saving, exports, imports and the like are taken in to account. These are also
called macro models.

Aggregate models are usually used to determine possible growth rates of GDP under
simplifying assumptions like that of the Harrod-Domar model which assumed that limited

70
capital resources constitute the major constraint on economic development. Such types of
models are constructed for the whole economy to achieve specific targets.

ii. Sectoral model. These models comprise two fundamentally different approaches to
development programming. The first approach attempts to divide the economy in two or
more main sectors such as agriculture and non-agriculture, or the consumption-goods
sector, the investment – goods sector and the export sector etc, with a view towards
formulating a complete plan based on the coordinated activities of these principal sectors
of the economy. This is called main sector model.

An early example of the main sector model is Arthur Lewis’s dual economy hypothesis,
which classifies the economy in to agricultural and manufacturing sector. You have
learned it in your development economics course.

The other is a single sector model, which concentrated, in a single individual sector. In this
model growth prospects in isolated sectors are assessed on their own merit and specific
industrial projects are drawn up on the basis of this partial analysis. The single sector
model is most often under taken in those economies where statistical data for an aggregate
or complete main sector model are lacking.

ii. Inter industry approach (multi-sector model): In this model the activities of all
productive sectors of the economy are interrelated with one another. The most important of
these models is the contrite input output analysis.

71
 3.3.2. Important Considerations in Choosing Particular
Planning Models

Dear student: As it is expressed in the previous section, there are a number of different
types of economic models and planning approaches from which a developing nation can
choose. A country about to commence its development programme will have to decide
which method or combination of methods is most suitable to its own special needs and
objectives. This needs an answer to a number of important considerations, which must be
specifically analyzed before reaching a final decision.

Dear student! Taking the important economic, social as well as political situations that
characterize developing countries what aspects should a planner consider in choosing a
planning model. Can you mention them?
_________________________________________________________________________
_________________________________________________________________________
______________________________________________________________________
Have you third? Good

Some of the most relevant considerations are:

i. Stages of development: - The choice of a particular programme depends up on the
existing stage of economic development a country has attained. If the economy is still
dominated by small scale subsistence agriculture, a limited monetary sector, and little or no
inter industry relations, then detailed programming can have little applicability.

It would probably be more appropriate to concentrate on individual ‘social overhead’

public investment projects aimed at creating the necessary conditions to enable the
economy to commence its economic transformation. For example, a programme with some
general ideas of possible over all rates of growth of GDP and its major components, as

72
well as considerations of population growths, or possibilities of export expansion are
important at this early stage. In the later stages, which consist of a wide range of sectors,
however, more detailed programming methods will become a greeter necessity.

ii. Institutional structure. Another important consideration concerns the institutional

structural of the economy and the relative roles given for the public and private sectors in
the development process. Where the private sector is not very influential and is expected to
play a relatively passive role, the public sector is expected to provide the initial stimulus
and continued overall direction. Accordingly, more attention will be devoted to public
investment projects and sources of government finance. However if the private sector is
considerably more active, then the plan is more likely to concentrate on the creation of
favorable conditions in which private economic activity is free to flourish.

iii. Availability and Quality of statistical Information: - To the extent that existing data are
poor and unreliable, there will be considerably less scope for the more refined type of
analysis required by some mathematical programming models.

iv. Resources and other operative constraints. The character of the development-
planning model is often greatly influenced by the particular constraints or
bottlenecks most operative in the economy. If capital constitutes the crucial
constraint, then every care must be taken to ensure its most effective and productive
utilization. Labour intensive investment projects may have to be stressed so that
limited capital funds can be distributed in to diverse channels in the economy.
When foreign exchange reserves are the operative constraints, export promotion or
import substitution will assume increased importance in the development plan and
soon.
v. Priorities and objectives

73
The specific objectives which the less developed nations needs most important to the
achievements of its long range economic goals must also be considered. These include: -
- a rapid increase in per capital income
- a high level of employment
- a relatively stable price level
- a reduction in income inequalities
- a favorable balance of payment
- a diversified and independent economy.

Though each of these objectives is desirable, there may exist a serious conflict between
them if all are pursued with equal intensity. Therefore, it is necessary to prioritize them in
light of existing economic conditions and constraints in the development plan.

Dear student! In the previous sections we have tried to see the use of economic models in
economic planning, the basic element that an economic model include, types of planning
models and their characteristics and an analysis of some of the important considerations
that needs to be taken in to account for choosing an appropriate planning model.

In the subsequent chapters the Harrod- Domar model, the two-gap model, the
Mahalanobis’s model, the input out analysis models will be discussed as an illustrations of
planning techniques that are used in some form in developing countries.
Dear students!

1. Describe the factors that needs to be considered in selecting the relevant planning
model.
___________________________________________________________________
___________________________________________________________________

74
 ___________________________________________________________________
__________________________________________________________________

2. Briefly describe the structural elements that an economic model has.

___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
3. What are the most important goals that experts in developing countries should
consider in setting targets in the planning period?

3.4. Growth Models - Review of Models in Development Economics

In drawing up a development plans, the first step is determining the maximum aggregate
growth rate that the economy expected to achieve given the prevailing economic forces
operating at the present time and without any significant external interference. This rate of
growth can be termed as the natural or independent growth rate. To determine the natural
growth rate the planner needs to understand the past and present conditions of the
aggregate value of principal variables:
- Domestic product
- Savings
- Consumption
- Investment
- Employment
- Price level etc and should present relationships among these variables.
The next task of the planner will then be to determine whether or not this “natural” or
independent rate of economic growth is desirable to the fulfillment of the priorities set for
the planning period. However in most cases the natural growth rate is below the desired
rate and here comes the question how to achieve the desired growth rate for the
achievement of settled objectives. Thus an attempt to accelerate this natural growth rate by

75
designing policies that can influence in a predetermined way that specific functional
relationships between the variable will be the most important task. An attempt has to be
made also to identify the most important strategic variable that determines growth rate. The
two simple and well-known aggregate models that deal with such issue are the Harrod –
Domar (H-D) and the Mahalanobis models. In the following section we will try to analyze
each of them.

Learning Objectives
 Know the technical manipulation of Harrod-Domar, Mahalanobis and input
output models, the basic variables that are considered in these models and their
basic assumptions
 Describe the basic features of Harrod –Domar growth model, its use in an
economic planning, the draw backs
 Describe the basic features of Mahalanobis model, its use in an economic
planning and its draw backs

3.4.1. The Harrod- Domar Growth Model

The natural rate of economic development is in most instances greatly influenced by the
scarcity of one or two productive resources of strategic importance.

Dear student: You have learned about Harrod-Domar model in your development
economics course. Do you remember the basic notion of the model? What is the strategic
factor that determines growth according to this model?
_________________________________________________________________________
_________________________________________________________________________
_____________________________________________________________________

76
Have you noted? Good
For Harrod-Domar model capital accumulation is the most strategic variable that
determines growth. Consequently, in countries where capital is felt to represent the main
bottle neck (most developing. African notions), the aggregate development model chosen
most commonly utilizes some variant of the relationships embodied in this model. In the
Harrod-Domar model, savings, investment and income are the only variables considered.
The implicit assumption is therefore other factors such as skilled man powers, balance of
payment problem etc are considered less crucial and capital accumulation is considered as
the most strategic factor that determines growth.

The main purpose of using this simplified model as a first step in the panning process is to
arrive at some estimate of the theoretical maximum achievable growth rate of national
income given the existing values of the parameter the rate of saving in the economy(s) and
k (the overall or global capital-out put retro).

Harrod- Domar states that the rise in GDP from period t to period t+1 is determined by the
net amount of new capital formation in period t and its productivity measured by the
inverse capital output ratio. Net investment (In) is assumed to be limited by the level of
saving (S), which in turn is functionally related to the level of income (Y) through a
propensity to save (s). The model also assumes a stable capital output ratio. The basic
model can be summarized as follows.

1) S= sY = the saving function

Where S = level of saving
s = average propensity to save
Y = Income
2) K = kY = Capital stock income relationship
Where K = Total capital formation (Stock)

77
 k = incremented capital output retro
2 a ) K  I n  K Y where I n  K t 1  K t  net investment

3) It is assumed that S  In  K i.e Investment is the change in capital stock

Substituting 1 and 2a in 3 we get

S  sY  kY  k or

4) sY  kY Rewriting it yields the final expression of the Harrod- Domar model i.e
Y s
5)  or gs
Y k k

Y
Where  Growth rate of income (GDP)
Y
s = saving ratio
k = incremental Capital output ratio

Equation 5 is the fundamental equation of the H-D model, which indicates that given the
statistically computed values of s and k and assuming their constancy, the maximum

growth of GDP in the economy by the retro of S . The model helps the planner also to
K
predict the required savings rate once target growth rate and the capital output ration (k)
are given.

Dear student! The natural or independent growth rate is given by the fundamental equation

of H-D model as shown by equation 5 g  s  k

 . What is the implication of this model
therefore for developing countries?

78
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
Have you tried? Good
As you already know in many developing countries, the saving rates are quite low and the
capital output retro (k) is high implying inefficiency of investment. Hence the growth of
the economy is low and may be insufficient to absorb a rapidly growing labour force or to
achieve other desired objectives. It becomes necessary therefore, to accelerate the growth
of the economy beyond this natural rate limited by given value of s and k.
And the planning problem begins at this point and it involves two issues.
1st – Fixing the desired target
2nd – determining or designing policies how to achieve it

Dear student! Suppose the population of Ethiopia is expected to grow at 3% and the
planners would like to achieve a steady 4% rise in per capital income. Further it is given
that the aggregate capital output ratio (k) for the economy is 3. What should be the
required saving rate to achieve the given target?
_________________________________________________________________________
_________________________________________________________________________
______________________________________________________________________

Have you tried? Excellent

If the population is expected to grow at 3% and it is desired a steady 4% growth in per
capital income, it is obvious that GDP must grow at 7%. Then the required savings rate can
be calculated from the fundamental equation of H-D model.
Y S  Y 
i.e   S  K 
Y K  Y 
 3 0.07 
 0.21

79
That is 21 percent of GDP must be saved so that actual saving is equal to the planned
investment required to achieve a 7% growth of GDP.

The result can also be obtained by using the following variation of the basic H-D model.
This is obtained from the fundamental equation by cross- multiplying the variables as
follows.
Ys
i.e 
Y k
Y
 s k Where sS
Y Y

From the assumption of the model

S =I
In S Y
Thus  sk Or
Y Y Y

In S Y
  k (W p  P) Where  Wp  P
Y Y Y
In
is the rate of investment
Y
S/Y is the rate of domestic savings
k- Capital output ratio
Wp is the desired growth of per capital income
P-statistically estimated rate of population growth.

Thus, since k= 3, Wp= 4% & P=3% then I n S  s = 3 (4%+3%) = 21%.

Y Y
Dear learner! This is the desired saving rate. Thus, the next question is, therefore, how to
achieve this desired saving rate. What are the sources of saving for the accumulation of
capital? Let you try

80
_________________________________________________________________________
_________________________________________________________________________
______________________________________________________________________
Have you answered the question? Good.
There are three main sources of domestic saving
i- personal savings ii- business savings and iii- government savings
Most of the planning Exercise Emphasizes the need to raise the government savings
through taxation and there by restricts consumption to fill the financial gap between actual
savings and required investment Because savings cannot be raised significantly from
private and business source since they are largely voluntary in nature.

If the mobilization of domestic saving through private savings and the public surplus are
still insufficient to finance the required rate of investment, the savings- investment gap can
be closed in two ways. It can seek foreign assistance in the form of grants and loans, or
through foreign saving by stimulating foreign exports, curtail non-essential imports and
promote import substituting industries and obtaining more foreign exchange.

Dear student! Do you think that H-D model is applicable in LDCS? Why or why not?
_________________________________________________________________________
_________________________________________________________________________
______________________________________________________________________
Have you tried? Good.
The H-D model has its advantage in that it covers the entire economy. Despite this it has
its own limitations. Its shortcomings are given as follows.
 The model is particularly workable in assuming that the key parameters such as
the marginal propensity to save and capital output ratio are constant. In reality
they are likely to change in the long run & thus modify the requirement for
steady growth.

81
  Precise computation of the capital output ratio requires sufficient technical data
regarding cost and output. However, this data is not easily and readily available
in LDCs.
 The capital output ratio fails to tell us anything about investment in human
capital required to achieve a certain rate of growth. Investment in human
capital is clearly important for economic growth, as is physical capital.
 The assumption that there are no changes in interest rates is irrelevant to the
analysis. Interest rate changes and affect investment. A reduction in interest
rates during periods of over production can make capital-intensive process
more profitable by increasing the demand for capital and thereby reduce excess
supplies of goods.
 The concept of capital output ratio is based on the implicit assumption that
when capital increases the supply of other factors also increase. But in LDCs
such factors like technical personnel, entrepreneurship etc are scarce.
 The model also fails to distinguish between capital and consumer goods

3.4.2. The Mahalanobis Model

Mahalanobis has developed a single sector model in 1952 based on the variables of
national income and investment. It was later developed in to a two-sector model where
the entire net output of the economy was supposed to be produced in only two sectors -
the investment goods sector and the consumer goods sector in 1953. This two-sector
model in turn became the basis for his formulation of the four-sector model developed
for India’s 2nd five-year plan (1956-61). This model deserves special attention from
Indian’s as it provides a contrast to the Harrod – Domar model.

The main differences between H-D and Mahlanobis model lies in the fact that the H-D
model emphasizes the desirability of raising savings that could be channeled in to

82
 higher investment without any consideration of the structure so that it assumes all
savings would be channeled to investment. It does not consider the productivity
difference. But for the case of Mahalanobis model structuralist view is adopted. And
the model emphasized that important bottlenecks can appear in the process of
transformation of savings in to investment and the only way in which such constraints
can be released is to change the structure of the economy in such a way as to allow the
economic system to produce more of capital goods to maintain a higher rate of
investment. In the Mahalanobos Model, it is also assumed that there are real
bottlenecks in the channeling of savings in to investments, which are ignored in the H-
D Model. In the following section we will try to see the two and four sectors models of
Mahallanobis in detail.

3.4.3. The Two sector Model

Dear student! Before going to the detailed construction of the model let’s see the
assumptions first. Mahalanobis two-sector model is based on the Following
assumptions.
i. The economy is divided in two sectors –one produces consumer goods(C) and
the other produces capital goods K.
ii. Once a machine is installed in one sector it cannot be transferred to the other
sector i.e., capital is not shiftable
iii. The technological coefficient in both sectors are fixed.
iv. Capital is the only scarce factor.
v. There is full capacity production in both the sectors.
vi. The economy is closed.
vii. Production of capital goods is independent of the production of consumer goods.
viii. There is no change in prices.
Given these assumptions the Mahalanobis model can be shown with the following
equations, which describe the growth path of the economy.

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Let  be the proportion of investment in capital goods,  c the proportion of investment
in consumer goods. Hence
 +  c =1----------------- ------------------------eq1
Furthermore, net investment (I) can be divided in to two parts at any point of time (t): one
 It to increase the productivity of the capital goods sector, and the other  cIt of the
consumer goods sector. Therefore,

I t =  It +  c It ------------------------------------- eq2

Given  and  c as the output _capital ratios of the capital and consumer goods sectors
respectively and  as the total productivity coefficient. Then
 k k   c c
  But   c = 1
k  c

Therefore      cc -------------------------------------eq3

The income identity equation for the entire economy is:

Yt= It + Ct ---------------------------------------------------------------- eq4

When national income changes, investment and consumption also changes. The change in
investment depends on previous Year's investment (It-1) and so does consumption on
previous years consumption (Ct-1). The change in investment in period t will be:
 It = It - It -1 and the change in consumption is:
C t = Ct -Ct -1

As a matter of fact, the increase in the two sectors is related to the linking up of productive
capacity of investment and the output capital ratio. First the investment growth path is
determined by the productive capacity of investment in the capital goods sector ( k I t ) and

its output capital ratio (  k ). So that.

 It =It - It -1 =  k  k I t 1

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 It = I t 1   k  k I t 1 or

It = (1 +  ) It -1 ----------------------------------------------------eq5
Putting different values for t (t= 1,2,3 ---) the solution of equation 5 are:
I1= (1 +  k  k ) I 0

I2 = (1 +  ) I1

= (1   k  k ) (1   k  k ) I 0

= (1   k  k ) 2 I 0 etc

Thus It = (1 +  ) t I0
Subtracting I0 From Both sides we can rewrite
It -I0 = I0 [(1 +  ) t -1]--------------------------------------eq6

Similarly by putting the values of t (t= 1, 2, 3 ---) in the consumption growth path.
 Ct = Ct- Ct -1 =  c c It -I we get.
C1 - C0 =  c c I0
C2 - C1 =  c  c I 1
C3 - C2 =  c  c I 2 etc and finally we get
Ct - C0 =  c c( I0 + I1 + I2 + - - - + It)- - --------------------------eq7
By substituting the values of I0, I1, - - - It indicated in equation 6 and its related equations,
equation 7 can be solved as
Ct -C0 =  c c [ I0 + (1 +  ) I0 + (1 +  ) 2 I0 + - - - + (1 +  ) t I0 ]
Ct -C0 =  c c I0 [1 + (1 +  )  (1   ) 2 + - - - + ( 1 +  ) t ]
This is the series geometric progression; when they are solved the result is the Following.
 (1  k  k ) t  1
Ct - C0 =  c c I0   or
 (1  k  k )  1 
 (1  k  k ) t  1
Ct-C0 =   - - - ----------------------------------------------------------------e8
 k  k 

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Now, the growth path of income for the whole economy on the bases of equation 4 is
Yt  I t  C t
or
Yt  Y0  ( I t  I 0 )  (C t  C 0 )

By substituting the value of equations 6 and 8 in this equation, we get.

 (1  k  k ) t  1
Yt-Yo =Io [(1 + λkβk) -1] + λcβcIo 
t

 k  k 

 1   c c 
= Io [( I + λk βk )t – 1]  
  

    c c 
= Io [(I + λκ βκ)]  
  
Suppose Io =  0Y0 where  0 is the rate of investment in the base year, and substituting it in

the above equation, we have

    c c 
Yt - Y0=  0Y0 [(1+λκβk) t - 1]   or
 k  k 

    c c 
Yt =  0Y0 [(1+ λκβκ)t -1 ]    Yo
  
Or
    c  c 
Yt = Y0 1   0 k k
k  k
(1  k  k ) t  1  -------------------------------------eq9
 
Equation 9 is the final equation of the two-sector Mahalanobis model.
Where Yt = gross domestic national income in Year t
Io/Yo =  0 = the rate of investment in the base year

λk = the share of net investment used in capital goods sector

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λc = 1- λk = the share of net investment going to the consumer goods sector.
βk = incremental output-capital ratio in the capital goods sector
βc = incremental output ratio in the consumer goods sector.

The interpretation of the model is as follows.

Assuming βk and βc to be given, the growth rate of income will depend upon  0 and λk.

Further assuming  0 to be constant, the growth rate of income depends upon the policy

instrument λk i.e choice of a higher value of λk will produce a higher growth rate and a
higher level of consumption eventually. This is because by allocating more invest able
resources to the production of capital goods; a higher marginal savings rate and a higher
output or consumption growth rate would be obtained.
  cc 
Of course taking the ratio  or of the equation, if βc > βk i.e the larger the
 kk 
percentage investment in consumer goods industries, the larger will be the income
generated. The expression (1+ λκβκ)t of the equation shows, however, that after a critical
range of time ,the larger the investment in capital goods industries ,the larger will be the
income generated.

The Four sector Model

The Mahalanobis model is not a growth model in the real sense; rather it is an allocation
model. Being associated with the planning commission, Mahalanobis Knew the maximum
funds available for net investment during the planning period in which he worked for the
commission. The objective at that time was to provide additional employment to a number
of people. Having this objective and putting the available data in a simple simultaneous
equation system he obtained the solution, which became the basis for India’s second five-
year plan.
The Four sector economic model consists of the following.
1. The investment goods sector (k)

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2. The factory produced consumer goods sector (C1)
3. The small or house hold produced (including agricultural products) consumer
goods sector (C2) and
4. Services (health, education etc) producing sector (C3).

For each of these four sectors a set of parameters is introduced:

 β’s i.e βk, β1, β2, β3 – the ratios of net income generated to investment or
output-capital ratios
 θ’s i.e θk, θ1, θ2, θ3 the net investment required per engaged person or capital
labour ratios .
 λ’s i.e λk, λ1, λ2 and λ3 – the proportion of investment allocated to each sector or
allocation ratios.
Further A stands for the total amount of investment to be made for the period, estimate
of total income (E) and employment (N) generated in different sectors of the economy
during the plan period con be had on the bases of the system of equations.
The equations of the model are:
E = Ek + E1 + E2 + E3-------------------------------e1
N = nk + n1+ n2 + n3 --------------------------------e2
A = λk A + λ1 A + λ2 A + λ3 A -----------------------e3
Now the increase in employment (N) in each sector is.
nk = λk A/ θk or nk θk = λkA -------------------e4
n1 = λ1 A/θ1 or n1 θ1 = λ1 A ----------------- e5
n2 = λ2A/θ2 or n2 θ2 = λA ------------------- e6
n2 = λ3 A/A3 or n3 θ3 = λ3A -----------------e7.
Substituting the values of λk A, λ1A, λ2A, λ3A in e3, the total investment equation
becomes.
A = nkθk + n1 θ1 + n2 θ2 + n3θ3

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 Similarly, the increase in income (E) generated in each sector can be estimated as
follows.
Βk = Gk /λkA or Ek = λkAβk ----------------------------e8
β1 = E2/λ2A or E1 = λ1Aβ1 ----------------------------e9
β2 = E2/λ2A or E2 = λ2Aβ2 -----------------------------e10
β3 = E3 /λ3A or E3 = λ3Aβ3 ---------------------------- e11
Thus
E = nk θk βk + n1 θ1 β1 + n2 θ2 β2 + n3 θ3 β3 ------------------------------e12

Because λkA = nkθk and so on for others from equations 4, 5, 6, and 7.

In his model Mahalanobis has rewrite equation 12 as:

E = Yo [(1 + η) t-1] and take it as a final one.
Where η = is a given (desired) growth rate of income
Yo = the initial income per year.
t = the number of years in which the plan is prepared.
In the system of equations given above, A, E and N are the boundary conditions. They are
constants but at the same time they are the target variables to be achieved during the plan
period. The E (estimate of total income) is derived by applying the rate η to Yo

The B’s, θ’s and λ’s are the instrument variables. The B’s and θ’s are, however, the
structural parameters, determined by technological conditions and assumed to remain
constant during the plan period. The λ’s are the allocation parameters, which are at the
choice of the planner with in certain limits.

Dear student! In the Mahalanobis model, the allocation parameter (ratio) λk for the
investment goods sector is given and the remaining ratios for the other sectors (λ1 λ2, λ3) are
obtained as solutions of the set of simultaneous equations given above. For instance the

89
rate of increase of income or the employment generated may be treated as variables to
which defined Value may be assigned. The model would then enable us, with the help of
numerical estimates of the various parameters, to study how the allocation ratios (λ’s) that
is, the proportions of total investment going in to the different sectors should be chosen so
that the desired aim can be realized.

Dear student! Suppose the planning commission in Ethiopia has planned a 5% increase in
national income. The maximum available fund for net investment for the coming 5 years is
approximated to be birr 5,600 million and the objective in this 5 Years period is to create
an additional employment of 11 million. In addition with the current technological
conditions the output – capital ratio for investment goods sector (k), factory consumer
goods (C1), small house hold industries (C2) and services (C3) are 0.20, 0.35, 1.25 and 0.45
respectively.

Capital labour ratios for the same sectors are 2000, 875, 250 and 375 respectively Further
the experts have decided the proportion of investment allocated to each sector to be 33 %
for investment goods, 17 % for factory consumer goods, 21 % for services. Given the
above data calculate the amount of investment, the increase in income, the increase in
employment in each sector as a result of the investment.
_________________________________________________________________________
_________________________________________________________________________
_____________________________________________________________________
Have you tried? Excellent.
Now try to relate your answer with the following solution.
Solution
Given
 A (Total investment) = 5600 million
 N (Total employment) = 11 million.
 Proportion of investment for the four sectors.

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 λk = 33 % = 0.33 => Investment goods.
λ1 = 17 % = 0.17 => factory consumer goods
λ2 = 21 % = 0.21 => small house hold industries
λ3 = 29 % = 0.29 => services
 Output capital ratios.
βk = 0.2, β1 = 0.35, β2 = 1.25, β3 = 0.45
 Capital labour ratios
θk = 2000, θ1 = 875, θ2 = 250, θ3 = 375

► On the bases of the above data.

1 The amount of investment in each sector is.
 Investment goods sector => λkA = 0.33(5600)
= 1850 million birr
 Factory consumer good => λ1A = 0. 17(5600)
= 980 million birr
 Small house holds => λ2 A = 0.21 (5600)
= 1180 birr.
 Service => λ3A = 0.29 (5600)
= 1600 million birr.
2 The increase in income in each sector.
 Investment goods sector => λkAβk =1850 (0.2)
= 370 million birr.
 Factory consumer good sector => λ1Aβ1= 980 (0.35)
= 340
 Small household industries => λ2Aβ1 = 1180 (1.25)
= 1470
 Service sector => λ3Aβ3 = (600 (0.45)
= 720

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 3 The increase in employment of each sector.
 Investment goods sector => λkA/θk =1850/2000
0.9 Million.
 Factory consumer good => λ1A/θ1 = 980/875
= 1.1 million.
 Small house hold industries => λ2A/θ2 = 1180/250
= 4.7 million.
 Service sector => λ3A/θ3 = 1600/375
= 4.3

3.4.3.1. Evaluation of the Mahalanobis Model

Dear learner! So far, we have seen the assumptions, the basic variables and how the model
is used to allocate investment fund between the sectors. Taking this and the characteristics
features of developing countries, what are the criticisms that can be raised from the model?
Can you mention them?
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
Have you tried? That is Fantastic. Now try to relate Your Criticisms with the following
analysis.
1. The model is confined to a closed economy.
The model assumes there will be no imports and exports of investment goods. Thus the
absence of the role of foreign trade is regarded as very unsatisfactory part of the model.
Because for developing countries capital goods can be imported with low cost instead
of being produced at home at a high cost and the welfare of the economy would be
maximized.

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 2. The model assumes an arbitrary Value for λk. It does not give any reason for this.
Thus the planners may not arrive at correct solution for the optimum allocation of
investments of different sectors of the economy.
3. In the model, the problem of unemployment has not received due emphasis. The
choice of more capital-intensive methods of production usually increases the
problem of unemployment, particularly in a labor surplus economy.
4. The model assumes a constant technique of production during the plan period. But
there is technological change during the process of development.
5. An estimation for the values of B’s and θ’s is not easy in developing countries
where data’s are not available in a complete way
6. The model assumes an infinitely elastic supply of labour, which goes with the
available capital. But skilled manpower is always a problem in developing
countries.
7. The model has also a limitation in that it ignores the pattern of factor prices while
fixing targets on the basis of the model.

3.5. Input–Out Put Analysis and its Application

Input – output is a novel technique invented by Professor Wassily W.Leontief in 1951. It is

used to analyze inter industry relationship in order to understand the interdependencies and
complexities of the economy and thus the conditions for maintaining equilibrium between
supply and demand. Thus it is also known as “inter industry analysis.”

The basic notion of input put analysis rests on the belief that the economy of any country
can be divide in to a distinct number of sectors called industries each consisting of one or
more firms producing a similar but not necessarily homogeneous product. Each industry
requires certain inputs from other sectors in order to produce its own output. Similarly,
each industry sells some of its gross output to other industries so that they too can satisfy
their intermediate material needs. In other words, the input of one industry are the out puts

93
of another industry and vice versa, so that ultimately their mutual relationships lead to
equilibrium between supply and demand in the economy as a whole.

The term in put is something, which is bought for the enterprise while an output is
something, which is sold by it. An input is obtained but an output is produced. Thus inputs
represent the expenditures of the firm while output represents its receipts. The model uses
the concept of matrices algebra in the analysis.

Learning Objective
Dear student! Up on completion of this part you should be able to know.
 The basic characteristics of the input output analysis
 How the concept of the I-O analysis is used for planning purpose.
 How the input output table is constructed for a given transactions in the
economy.
 The meaning of technical (input coefficients) and their derivation.
 How matrices algebra used in the model
 The meaning each of the elements of Leontief matrix for the given
transactions and their derivation.
 How the model is used to forecast the labor and other input requirements of
each sector in the economy

3.5.1. Main Features of the Model

Usually the input technique describes the general equilibrium analysis and the empirical
side of the economic system of production of any country. As such it has three main
elements. First, the input output analysis concentrates on an economy, which is in
equilibrium. It is applied for an economy in which input equals output or in other words
consumption equals production i.e. the model assumes that whatever is produced is always
consumed. It is not applicable to partial equilibrium analysis. Second, it does not concern
itself with the demand analysis. Utility functions are omitted. And consumer demands are

94
stated on the basis of outside information without regarding to the equilibrium of
individual consumers. The model deals exclusively with technical problems of production
i.e. what can be produced and how much quantity of raw materials should be utilized in the
production process. Lastly, the model is based on empirical investigation. The analysis
seeks to determine what can be produced, and quantity of each intermediate product, which
must be used up in the production process, given the quantities of available resources and
the state of technology.

3.5.2. The assumptions of input – output Analysis.

Dear student! As the word is Very complex, it is difficult to have a model, which expresses
all things fully. Thus most of the models in economics are constructed taking the basic
assumption ceteris paribus and other assumptions. Taking this fact, therefore, before we
are going to deal with the details of the input- output analysis, it is important to note the
basic assumptions. The assumptions that the I-o analysis includes are the following:
i- An economy is decomposed into n sector (industries) and each of these
produces only one kind of product i.e. no two products are produced jointly.
ii- The total output of any industry is capable of being used as inputs by other
inter- industry sectors, by itself and by final demand sector.
iii- There are constant returns to scale. This is the crucial assumption of input-
output analysis i.e. the one that makes the system operationally effective. This
assumption implies that in any productive process all inputs are used in fixed
proportions and increase in inputs is in proportion with the level of output.
iv- Prices, consumer demands and factor supplies are given
v- There are no external economics and diseconomies of production.
vi- All transactions may be considered in terms of money value since money is a
suitable common unit for aggregating inputs and out puts of industries.

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Dear Student! In put- out put analysis are of two systems: open and closed. But the open in
put out put system has been extensively used in the planning exercise and the emphasis in
this section is also on open in put- out put system. For understanding purpose the two
systems are discussed as follows.

3.5.3. Open in put out put system

In the open input output system the demand side is not taken in to account. The demand
side is kept open or outside the system. Demands arising from households, individuals,
government, and investors and from the outside (exports) are not considered. It is assumed
that these are determined by factors, which have nothing to do with the production. Thus
goods and services, which go to them, are treated as final goods and services instead of
intermediates, which are bought and sold by industries among themselves. Again the
services, which they provide, are primary inputs. Primary inputs are labour, land etc.
Thus we exclude final goods and services and the primary inputs but confine only to inter
industry flows. It means we confine to industries as being concerned with the processing
of intermediates. Other part of the economy such as households, government etc is not
functionally dependent up on them. In this model we seek the amount of production by
inter industries needed to achieve a forecasted final demand.

3.5.4. Closed Input-Output System

This system assumes that all parts of the economy are interdependent. The economy is
divided in to various industries. Each of the industry produces an output, which is taken
up by other industries. And each of the industry requires input in consumption from other
industries. Thus the entire economy is to be seen as one without puts moving in to the
industries as inputs, or inputs moving out of industries as out puts. Everything is
dependent up on the other. The objective here is to find the relative income of each
participant in the system.

96
 3.5.5. The Structural Nature of an Input-Output System
Dear student! As it indicated above input- output analysis emphasized general equilibrium
phenomena and it is based on the belief that an economy consists of different sectors,
which are interdependent to each other. So that each industry employs the output of other
industries as its raw material. Its output in turn is used by other industries as a productive
sector. In other words it implies there is transaction between industries.

Thus the input output model can be portrayed by table (more formally, a matrix) that
shows how the output of each sector is distributed in the form of intermediate products, for
itself and for other sectors and as final product to households, government and export.
Each sector is indicated in the table both as purchaser and supplier of a product. The input
output table is therefore important in the analysis by providing a convenient frame work
for measuring and tracing these inter industry flows of current inputs and outputs among
the various sectors of the economy.

A table summarizing the origin of all the various inputs and the distribution of all the
various outputs of all industries in an economy is these fore known as input output table.
The framework of the input output table is generally represented as follows and is
indicated in the table that follows.
Most of the important information contained in the table is located within four main
quadrants (Blocks):
i. Block I (Inter industry Transactions block)
ii. Block II (Value added quadrant)
iii. Block III (Final use block)
iv. Block IV (Direct factor purchase quadrant) - This quadrant is not as important for
planning purposes as the other three although it is necessary for accounting purposes
specially for measuring gross domestic product.

97
Block I shows the supply of output from one sector to another for use in the production
process of each sector. The producing sectors of the economy are listed as rows 1, 2, - - -, n
in this quadrant while these same industries is also listed by column as using sectors. Thus
the inter industry transaction quadrant is a " square matrix " with the same number of rows
as columns, one for each sector of the economy. Each row shows the distribution of
outputs of a sector to other sectors and each column shows the receipt of an industry as an
input from other sectors and itself. In short rows indicate outputs, columns represent inputs
and each sector is both a user of inputs and a producer of output.

Block III shows the final demand use of the sectoral output, products, which are consumed
for their own sake and not for use in further production. They may be purchased as
consumption goods by individual consumers or by the central government or they may be
sold to foreign demanders in the form of exports. The horizontal summation of the outputs
of the sector sold as intermediate goods to the other sectors plus the output sold to private,
public and foreign final demanders yields the total output of the given sector.

Block II shows the primary in put (land, labour, capitals) required by each sector in the
production of its output. The sum of value of these primary inputs used in the whole
economy yields the total value added by the sectors. For any particular sector the elements
in each column of this block when added to the elements in the corresponding columns of
the transactions block yield a value for total inputs purchased or used up by this industry
during the accounting period i.e. the total cost of operation.
Block IV- shows those primary inputs, which are employed by final users. The main
component of this quadrant would be the purchase of labour services the central
government, households for their own consumption.
Dear student! The scheme of input output is shown in the table below.

98
 Using Intermediate use Final Demand (Use)
Sector
Selling Secto Sector ___ _ Sector Total House Government Investme
Sector r1 2 N hold consumptio nt
consumpt n
ion
Sector 1 X11 X12 ___ _ X1n Xij C1 G1 I1
Sector 2 X21 X22 ___ _ X2n Xij C2 G2 I2
. . . . . . . .
; ; ; ; ; ; ; ;

Sector N Xn1 Xn2 ___ _ Xnn Xij Cn Gn In

Inter industry Block(Block I) Final Use Block (Block III)
Total Intermediate use
Labour (wages) W1 W2 ___ _ Wn Horizo Wc Wg
ntal
sum
Capital (interest) K1 K2 ___ _ Kn Horizo Kc Kg
ntal
sum
Land (rent) R1 R2 ___ _ Rn Horizo Rc Rg
ntal
sum
Entrepreneur (profit) P1 P2 ___ _ Pn Horizo Pc Pg
ntal
sum
Primary inputs

Imports M1 M2 ___ _ Mn Horizo Mc Mg MI

ntal
sum
Total Value added
Value Added Block(Block II) Direct Factor Purchase Block (Block
Total inputs purchased (Xj) X1 X2 ___ _ Xn Horizo C G I
=Intermediate +primary ntal
sum
Table 1: The Make up of a typical Input Output Table

99
Dear student! As shown in the input output scheme of the above table the value of total
output equals the value of total input i.e the horizontal summation of the elements in each
row equal to the vertical summation of elements in each column to which the sector is
represented. For instance, X1 indicated in row I equal X1 indicated in column 1 of sector 1.
What is the reason for that?

Have you tried? That is nice. The reason is the basic assumption of the input output analysis
that an output produced by each sector is used as an input for others, for itself and as final
demand, so that production equals consumption and it is always true for this model. Because
I-0 model is applicable only for an economy which is in equilibrium not for partial
equilibrium.

Hypothetical Example
Dear student: Let us now see the input output table and the procedures with the aid of
numerical figures taking hypothetical data. For simplicity let us suppose that the economy
consists of only three inter industry sectors (agriculture, manufacturing, service) and the
final demand sector. The following table provides such a numerical illustration of the basic
input output accounting system.

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 Table 2: Hypothetical input output table
Using sector Intermediate use (Xij) Final demand

Input Input to Input to Total House hold Government Investmen

to manufacturing service intermediate consumptio consumptio t
Selling sector Agricu demand n n
lture

Agriculture 50 150 0 200 30 40 20

Manufacturing 100 100 50 250 50 80 80
Service 0 150 50 200 25 45 25
Total intermediate 150 400 100 650 105 165 125
purchase
Imports 15 20 0 35 0 0 0
Government (Taxes) 10 15 30 55 0 0 0
Labour 75 15 110 200 50 0 0
Capital 20 30 25 75 0 0 0
Land 30 20 35 85 0 0 0
Value added 135 80 200 415 50 0 0
Total inputs (Xj) 150 100 200 450 155 165 125

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The elements in each row show the distribution of output to various sectors and uses while the
data in a column indicate the sources of inputs needed for production. For example reading
across the first row, altogether the agricultural output is valued at birr 300 per year, of this total,
birr 100 worth of goods go to final consumption (house hold and government consumption,
investment and export). The remaining output from agriculture goes as inputs 50 to itself, 150 to
manufacturing.

The sum of total intermediate and total final demand yields a gross output for agricultural
production of birr 300 worth. Similarly, the manufacturing produces a total output of value birr
500, of which birr 250 worth of goods is goods is sold to other sectors and used by itself as an
intermediate input, the rest birr 250 worth of the output of this sector is used for final
consumption 50 for household, 80 for the government, 80 for investment and 40 for export
demand. The disposition of the total outputs of the other three sectors can be read of the table in
the same manner.

The elements in each column show the input or cost structure of the sector. For instance reading
down in the first column we see that in order to produce its total output of birr 300 worth of
goods, agriculture uses 50 of its own output, 100 from manufacturing. Thus total intermediate
purchase of the agricultural sector equals 150. The remaining 150 birr worth of total inputs
purchased consists of the importation of 15 birr worth of foreign goods and the creation of 135
birr worth of value added in the form of payments of birr 10 to the government as taxes, 75 to
households as wages, 20 for the use of capital in the form of interest, and 30 birr for the use of
land in the form of rent. Thus the value of the total output of agriculture is equal to the total
value of all inputs purchase i.e the sum of intermediate inputs purchased and the primary inputs
used. The same procedure can be followed for other sectors.

Dear student! As you have learned in your macroeconomics course in order to compute the GDP
we can use either the income or the product approach of national income accounting and can
arrive at identical result. Let you try to compute the GDP from the above hypothetical example.

102
Have you tried? It is nice
Using the income or value-added approach; GDP is determined as the summation of total
payments (both intermediate and final) to primary inputs plus business tax payments. These total
payments amounted to 465. i.e 35+55+250+75+85.

Using the product approach, which defines GDP as the difference between total final demand
(100+250+100+50 = 500) and intermediate imports (35) we arrive at the same figure of 465.

3.5.5.1. The Mathematical Input-Output Model

So far we have been concerned with a descriptive explanation of the input output table.
However, the major theoretical and practical value of input output tables is that they can easily
be transformed in to a consistent mathematical model and utilized either as a forecasting tool to
predict the effects of autonomous changes in final demand on total output and employment in all
sectors of the economy.

In order to transform this input output or accounting table in to a use full mathematical model,
however, the model has taken certain assumptions of this constant returns to scale (fixed input
coefficient) is crucial for the model. Therefore, before going to the details, here use will try to
see how to drive input coefficients from the inter industry transaction block of the table (block I).
These coefficients are also known as input-output technical coefficients. These coefficients show
inputs per unit of output for a given sector. This is done very simply by dividing each column
entry in the matrix by the sum of the column.

Mathematically
Xij
aij  Where Xij = sales of sector i to j i.e the amount of product of industry i
Xj
absorbed annually as an intermediate input by industry j
Xj= the total output of industry j
103
 aij = Technical coefficients indicating the amount of product i needed to
produce a birr worth of product j

Dear student! To understand more clearly go back to a numerical input – output table given
above. Let output used for consumption investment, government and export are taken as a whole
as final demand; and the payments made to imports, taxes, labour, capital land as payment to
primary input, the above table can be reconstructed as follows:
Purchasing sector
Sectors Input to Input to Input to Total Final Gross
Agricultur manufacturing service demand output (Xi)
e
Agriculture 50 150 0 200 100 300
Selling sector

Manufacturing 100 100 50 250 250 500

Service 0 150 50 200 100 300
Total 150 400 100 650 450 1100
intermediate
purchase
Household 150 100 200 450 50 500
(Primary inputs)
Gross input (Xj) 300 500 300 1100 500 1600

Given the above data we can construct a table indicating the input requirement for the production
of one birr worth of output.

Because of the assumption of fixed proportions, to produce a birr worth of agricultural output
requires:
50/300 = 0.17 worth of agricultural goods
100/300 = 0.33 worth of manufacturing goods
150/300 = 0.5 worth of primary inputs

The same analysis applies to the other sectors i.e manufacturing and service. The result is also
represented in the form of a table and is called technical table.
The technical table consists of n-by-n elements. For a table with only 3 inter industry sectors as
in our example, the technical table consists of 9 elements arranged in a 3 by 3 square matrix.
Each column of the new matrix comprises the input coefficients of one particular sector

104
Thus, the inter sectoral technical matrix A = aij for our hypothetical example is

0.17 0.30 0.00

A  0.33 0.20 0.17 
0.00 0.30 0.17 

6.5 The Dual Foundation of the Basic Model

The analytical and mathematical content of the input output model rests on a dual foundation.
The first consists of a set of accounting equations, one for each producing sectors of the
economy. It states that the total output of each sector equals the sum of the separate amounts sold
by the sector to the industries plus the amount produced to satisfy final demand.

Let Xi = Total outputs of sector i

Xij = the amount of the product of industry i used as an intermediate input by industry j
Di = the amount of output of sector i produced to satisfy final demand

The set of equations for the three sectors therefore can be put in linear form as follows:
X1 = X11 + X12+X13+D1
X2 = X21+X22+X23+D2
X3 = X31+X32+X33+D3
That is
Xi  X ij  D j ----------------------------e1 Where i = 1, 2, 3---n

The second and most important foundation of the input output model consists of another set of n
equations (in our case n =3) one for each industry, describing the input output structure of that
industry in terms of a derived set of technical coefficients (aij)
aij  X ij X j
j

Cross-multiplying this we get

Xij = aij Xj----------------------------------------------------e2

105
Substituting e2 in e1, we get
Xi  aijXi  Di -------------------------------------------e3
That is
X1 = a11 X1+a12X2+a13X3+D1
X2 = a21X1+a22X2+a23X3+D2
X3 = a31X1+a32X2+a33X3+D3

Rewriting in terms of matrix notation, we have

 X 1  a11 a12 a13  X1   D1 
 X   a  X   D 
 2   21 a 22 a 23   2  2
 X 3  a 31 a 32 a 33   X 3   D3 

In short
X = AX+D-------------------------------------------------------------e4

Where X= Column matrix of total output

A = Square matrix of technical coefficient of production
D = Column matrix of total final demand Dear student! Let you try to represent our
hypothetical cope in the form of Equation 5.

Have you tried? Excellent

Now relate your answer with the following representation
300 0.17 0.30 000  300 100 
500  0.33 0.20 0.17  500  250
       
300 0.00 0.30 0.17  300 100 

3.5.5.2. The Leontief Matrix

106
Dear student! You have learned about Leontief matrix, its inverse and its application. Do you
remember how it is computed and how the inverse of a matrix is found? If your answer is yes,
please try to find the Leontief matrix and its inverse for our hypothetical input-output table and
relate your answer with the figures given below. If not please refer books on matrix algebra, for
easy understanding of the coming analysis.

Matrix algebra is an important tool for input output analysis. Therefore, in this section we will
try to show how a general solution is arrived at using the concept of elementary matrix algebra.
For this we start from equation 4 given above i.e.

X = AX+D which can be rewritten as:

X – AX = D
(I-A) X = D------------------------------------------------------------e5

The matrix (I-A) is called Leontief matrix. For our hypothetical case, the Leontief matrix is
1 0 0 0.17 0.30 0.00 0.83  0.3 0.00 
I  A  0 1 0  0.33 0.20 0.17    0.33  0.80 0.17 
   
0 0 1 0.00 0.30 0.17  0.00  0.30 0.83 

Now we are going to discuss the most important mathematical manipulation of input output
analysis which is used for planning with the use of matrix inversion.
From equation 5 we have
(I-A) X = D

Multiplying both sides by the inverse of the Leontief matrix i.e (I-A)-1 we get
(I-A)-1 (I-A) X = (I-A)-1D
IX = (I-A)-1D Where I = identify matrix
X = (I-A)-1D--------------------------------------------------------------------e6
107
Dear student! The inverse of a matrix (I-A)-1 is defined as that matrix which when multiplied by
(I-A) gives the identify matrix (I). And an identify matrix is a square matrix with number 1 on
the main diagonal and zero’s elsewhere. Multiplying any matrix by an identify matrix of the
same order gives the matrix itself i.e it serves as number one in any ordinary algebra. That is we
can make IX =X in equation 6.

The inverse of the Leontief matrix is given by

1
( I  A) 1  adj ( I  A)
I  A/

Where /I-A/ determinant of the Leontief matrix

Adj (I-A) = adjoint of the Leontief matrix and is obtained by transposing
the cofactor matrix

Dear student! Calculate the inverse of the Leontief matrix for our hypothetical example

Have you done” Good

Now try to relate it with the following calculations
0.83  0.30 0.00 
I  A   0.33 0.80  0.17 
0.00  0.30 0.83 

0.80  0.17   0.33  0.17 

/ I  A/  0.83    0.30 
 0.30 0.83  0.00 0.83 
 0.427

108
 0.613 0.274 0.099 
Cofactor C  0.249 0.688 0.249
0.051 0.141 0.565 

0.613 0.249 0.051 

Cofactor transpose C   adj A  0.274 0.688 0.141
0.099 0.249 0.565

0.613 0.249 0.051 

I 1 0.274 0.688 0.141
I  A 1
 adj I  A   
/I  A 0.427
0.099 0.249 0.565

1.436 0.583 0.119 

I  A  0.641 1.613 0.330 
1

0.232 0.583 1.323

The Leontief matrix (I-A)-1 has a special interpretation. Each element of the Leontief inverse
represent the quantities of the ith sector commodity (the value of the ith sector) needed in the
system as a whole in order to make available a unit of the ith sector commodity as a final good.
Thus they represent the total requirements i.e both direct and indirect for the satisfactions of the
final demand.

For example 0.641 (found in row 2 and column 1) indicates that in order to sustain each unit of
final demand (In our hypothetical case per birr worth of final demand) for agricultural goods
0.641 birr worth of manufactured goods must be produced.

Dear student! The mathematical input output analysis is represented by equation 6 above. What
implication do you think is it has for planning purpose?
______________________________________________________________________________
______________________________________________________________________________
____________________________________________________________
109
Have tired? Good
The equation implies that given any predicted or planned final demand for each sector of the
economy, the planner can determine the output level that will be produced by each sector as a
result of this given level of final demand by multiplying the given demand with the inverted
Leontief matrix. Because the model assumes fixed input coefficient for the given period and the
inverted Leontief matrix is also constant.

Dear student! Suppose the planned target settled by the planner for the next year, as final demand
in our hypothetical example is 150 birr worth of goods for agriculture; 300 for manufacturing
and 150 for service sector. What level of output should be produced to meet the target?

Have you tried? Excellent

Now try to relate your answer with the following figures
Xi = (I-A)-1 D
X1  1.436 0.583 0.119  150 
 X 2  0.641 1.631 0.330  300
     
 X 3  0.232 0.583 1.323 150 

X1 = 1.436 (150) + 0.583 (300) + 0.119 (150)

= 408.15
X2 = 0.641 (150) + 1.613 (300) + 0.330 (150)
= 629.55
X3 = 0.232 (150) + 0.583 (300) + 1.323 (150)
= 408.15

That is 408.15 birr worth of agricultural product, 629.55 manufacturing and 408.15 of service
sector output has to be produced.

Initially in our hypothetical example the total final demand for the outputs of the three sectors
was 450, the new final demand is 600 = (150+300+150), an increase by 150. Due to this
110
increment in final demand total output has increased by 346 from 1100 of the initial total output
of the three sectors i.e 1445.85 = (408.15 +629.85+408.15) minus 1100. The difference of these
total output change (346) and the change in final demand (150) is to be used as an intermediate
input which equals 196.

For example in order to produce the new level of gross output of 408.15 the agriculture sector
requires to purchase:
0.17X408.15=69.39 from agricultural sector
0.33X629.85=134.69 from manufacturing
0.00X408.15=0.00 from service

Calculating with the same procedure for other sectors i.e by multiplying per unit input
requirement (input coefficients) by the new total output the transaction block (block I) has the
following values.

Agriculture Manufacturing Service

Agriculture 63.39 188.86 0.00
Manufacturing 134.69 125.94 69.39
Service 0.00 188.94 69.39

If the final demand is added to this intermediate we obtain the new gross output of each sector.
For instance for agriculture sector the total intermediate use is 69.39+188.865 while final
demand is given as 150. Thus the total output is 408.15.

6.5.2 Determination of Employment Level

In addition to its use to the estimation of the output levels that each sector of the economy has to
produce for a given planned level of final demand, the input –output analysis is also informative
for the analysis of other important areas of the given economy. We can use the I-O model to see
the impact of any change in final demand or total output on the level of total industrial
employment in the economy.

111
The labour coefficient (li) required to produce a birr worth of output in sector I is given by
li = Li/Xi
Li = liXi
For example, the labour coefficient for our three-sector economy would be the following

11  75  0.25  Per unit labour requirment for agricultur e

300
l 2  15
500  0.03  for manufactur ing sec tor
l 3  110
300  0.367  for service sec tor

The level of employment in each industry is uniquely related to the amount of total output
produced by that industry. Thus, to find the amount of labour employed in industry i, we merely
multiply the corresponding labour coefficient li by the total output of Xi of that sector. By
summing the products of labour coefficients and total outputs of all industries throughout the
economy, we can derive the total industrial employment i.e
LT   liXi
 l1 X 1  l 2 X 2  l 3 X 3  ...  l n X n Where LT =total industrial employment

Similarly the change in employment as a result of a change in total output can be expressed as:

n
LT   liXi
i 1

Using matrix algebra we can represent the equation LT   liXi for our three-sector economy as:

X1 
LT  l1 l 2 l 3  X 2
 X 3 

In simple way
LT = lX ------------------------------------------------------e7
Where l = a matrix of labour coefficient
X = a matrix of total output
The total industrial labour employment in our hypothetical economy is:
112
 300
LT  0.25 0.03 0.367  500
 
300
 75  15  110  200
From equation 6 we get
X = (I-A)-1 D
Substituting it in equation 7 we get

LT = l (I-A)-1 D----------------------------------------------------------------e8
Now the total industrial employment required when demand changes from
100  150 
D  250 to D1  300 is
100  150 

1.436 0.583 0.119  150 

LT  0.250 0.03 0.367  0.641 1.613 0.33  300
   
0.232 0.583 1.323 150 
408.15
 0.25 0.03 0.367  629.85
 
408.15
 0.25 408.15  0.03 629.85  0.367 408.15
 270.72
Thus the industrial employment resulting from an increase of 150 in final demand is 70.72 =
270.72-200, which can be found also using the formula
n
LT   liXi
i 1
i.e

113
  X 1 
 
LT  0.25 0.03 0.367  X 2 
 
 X 3 
 
108.15
 0.25 0.03 0.367 129.85
108.15
 0.25108.15  0.03129.85  0.367108.15
 70.72
Thus there will be increased employment opportunities valued birr 70.72 as a result of the
change in final demand by 150.

6.5.3 Balance of Payment Analysis

The input output model can be used also in the area of international trade to examine the
approximate impact of any predicted or planned change in final demand or total output on the
balance of payments position of the given economy.
Exports are assumed to be determined exogenously, but imports are endogenous. The changes in
the import requirements of sectors (intermediate imports) may be calculated by multiplying the


required change in each sectors output by the sector’s import coefficient mi mixi ,  and

summing.
That is
Mi
mi    Mi  mi Xi                e9
Xi
Where Mi is equal to the value of intermediate imports of sector i. Thus the intermediate import
coefficients for our three-sector economy would be

m1  15  0.05  for agricultur e

300
m2  20  0.04  for manufactur ing
500
m3  0 0  for service
300
The total import requirement for the whole economy is

114
 n
MT   mixi                        e
i 1
10

X1 
i.e M T  m1 m 2 m 3   X 2 
 X 3 
M T  mX where m  a matrix of import coefficien t
X  a martix of total output

The total import requirement in our hypothetical economy is:

300
MT  0.05 0.04 0.00 500
 
300
 15  20  35

The total industrial import requirement when demand change is

150 
M T  0.05 0.04 0.00 300 
 
150 
 45.41
Thus the change in import requirement is 10.41=45.41-35 .The change in import requirement as
a result of change in the final demand can also be given as
n
MT   mi xi
i 1

Dear student! As it is indicated in table 2 the total exports are valued 55 birr and imports are 35.
Thus initially we have 20 birr surplus balance of payment.
Now as a result of change in final demand the total import requirement increase to birr 45.41 of
worth of goods for the economy. Thus unless exports are expanded, the increase in final demand
would lead to balance of payment problems. In our hypothetical example if we see it will be
reduced to 9.59 = (55-45.41) from the initial value of birr 20 surplus balance.
115
6.5.4 Non-Human Primary Inputs Requirement
The input output analysis is also used to examine capital and natural resource requirements for
the planned level of output or final demand. The procedure is exactly similar to our derivation of
labour coefficients i.e row vector of capital and natural resources coefficients representing the
amounts of these factors used up, per unit of total output denoted ci and ni respectively can also
be derived as:
Ci
 ci   Ci  ciXi
Xi
CT   ci xi
CT   ci xi  Change in capital requirment
Ni
 ni   Ni  ni Xi
Xi
n
N T   ni xi
i 1
n
N T   ni xi  Change in natural resource requirment
i 1

3.5.5.3. Use of Input – Output Analysis in Planning

Dear student! As you see in the previous discussion the input output analysis tells us about the
inter relationships between various sectors and the structural relations with in each factor. The
basic concept of input output analysis has been adopted by many countries, which have
undertaken programmes of economic development. The most important questions that may be
raised in planning a given economy includes, what level of total output, what will be the level of
employment and what will be the balance payment position of the country by the coming plan
periods etc.

Considering this and other questions and the basic concept of the input output analysis discussed
what importance would the model has. Would you explain the roles of the model?

116
Have you tried? Excellent
The input output analysis can help planners:
1. To for cast the sectoral output needed to sustain a given desired level of final demand.
2. To forecast the primary factor or resource required to produce the given level of sectoral
output.
3. Forecast capacity expansion (investment requirements) consistent with a given growth
target if information is available on incremental capital output ratios sector by sector.
4. To for cast import requirements and the balance of payments effects of given changes in
final demand.
3.5.5.4. Limitation of Input Output Analysis

Dear student! Can you cite some of the limitations of the I-O model?

Have you tried? Good

Despite its obvious advantages, the input output analysis cannot be wholly accepted for purposes
of planning. The assumptions set out for the discussion of I-O analysis help us to understand the
major limitations of the model.

1. The input output technique is based on the assumption of constant returns to scale and
constant technique of production in technology. However, these coefficients may not remain
constant when growth is taking place. In the long run the validity of the assumption of a
constant coefficient becomes invalid as technical progress gains momentum, substitution
possibilities arise and returns to scale might be rising instead of being constant. Thus
marginal input coefficients might no longer be equal to the average.

117
2. The I-O analysis assumes that each industry has only one way of producing a given product.
But there could be more than one process or activity to produce a commodity.

3.6. Mathematical Programming and Development Planning

The main task of development planning is to ensure that resources will be used to meet the goals
of a development programme, and that the resources are allocated efficiently subject to certain
constraints. Programming is a mathematical tool, which is now being increasingly used, in
economic analysis. Its use in the field of development planning is of much interest chiefly
because it helps the planners to allocate resources optimally among alternative uses with in the
specific constraints.

At the micro level the technique could be used to find out optimal and efficient (least cost)
methods of production. Most of the time it deals a whole complex of intenerated projects rather
than with a marginal project, and is concerned with much wider considerations than marginal
analysis. It provides a simultaneous solution to the three basic purposes of development planning,
which are: (i) The optimum allocations of resources (ii) efficiency in the use of resources; and
(iii) the balance between different branches of the national economy. One particular
programming technique which can assist in providing a simultaneous solution to these basic
questions is the technique of linear programming. Thus here in this section we will deal with
such technique.

Learning Objectives
Dear student! Up on completion of this part you should be able to:
 Describe the basic features of linear programming
 Know the major requirements for a linear programming problem, specifically the
concepts of optimality
 Know where and how linear programming can help decision makers for planning
purpose
 Discuss different advantages and drawbacks of linear programming

118
 3.6.1. Linear Programming
Linear programming is a mathematical technique for the analysis of optimum decisions, subject
to certain constraints in the form of linear inequities. It applies to those problems, which require
the solution of maximization, or minimization problems subject to a system of linear inequalities
stated in terms of certain variables. The problems of maximization and minimization are also
called optimization problems. It is a method used to decide the optimum combination output to
be produced by a given plant and equipment. It is also used to decide between the varieties of
techniques to produce a commodity. The technique involved in linear programming is similar to
the technique used in input output analysis, However, LP is more realistic than the input output
approach. The input output analysis a single method of production to a given commodity. It does
not take in to account the constraints, which a development project has to face. But in an LP
problem all the possible processes or techniques are taken in to account for achieving the desired
objective. This might necessitate the substitution of one factor by another so the LP, as a tool of
development planning is superior to the input output technique. And it is considered as a
powerful and complementary tool, which can be used to analyze the I-O tables in order to solve
the problems of choice of techniques on the supply side as well as the problem of choice of final
demand.

Most linear programming techniques have been found to be extremely useful for sectoral
planning, in respect to selecting the optimum alternative technology and location. For example,
the techniques have been frequently used in farm management for determining the optimum
combination of different crops and livestock. Similarly, transport, purchasing, assembling,
production and marketing problems are being solved through LP technique in order to minimize
costs and maximize profits.

3.6.2. General Formulation of LP Problems and Assumptions

Four important uses (generalizations) that LP can be put in any countries concerned with
allocation efficiency are:

1. It can be used for choosing between techniques for making the same commodity.

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 2. It can be used for deciding the best combination of outputs with given techniques and
factor endowments.
3. It can be used for deciding whether it is more efficient to produce commodities at
home or buy them from abroad.
4. It can be used to determine the most efficient spatial location of activities.
All these issues are optimizing decisions of one form or another and can be incorporated in to the
standard form of a programming problem which consists of three parts.
i. The objective function- it may be maximization of profits or national income or
employment or the minimization of costs.
ii. The constraints- They may be limitations of resources such as land, labour, or capital.
iii. The non-negativity conditions eg that outputs or exports should not be negative
Mathematically
Max or minimize Z= C1X1C2X2+---+CnXn
Subject to a11 X 1  a12 X 2      a1n X n  b1
a 21 X 1  a 22 X 2      a 2 n Xn  b 2
  

a n1 X 1  a n 2 X 2     a nn Xn bn

and Xi  0

Where aii, bi and Ci are given constants

Assumptions of Linear Programming Technique
The linear programming analysis is based on the following assumptions
1. The decision making body is assumed to face a number of constraints with in which it has
to operate. There may be credit, raw material and space constraints on its activities.
2. It assumes a limited number of alternative production processes
3. It assumes linear relations among the different variables. This assumption implies that the
input output coefficients are fixed in respect of all the available inputs and the number of
products to be produced.
4. Input output prices and coefficients are given and constant. They are known with
certainty and do not change during the period being studied. For instance profits per unit
of each product, amount of resources available are fixed during the planning period.
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 3.6.3. Linear programming Technique and its Application in Planning
Dear student! It is obvious that every country (developed as well as developing) faces the
problem of allocation of resources. The resources such as labour, machine material, capital etc
are available in a limited quantity. Thus the optional utilization of these resources is important to
achieve a specified objective. An optimal decision may be a decision for maximum profit
(production) or the minimum cost.

A linear programming model is the most widely used technique, which provides an efficient
method for determining an optimal decision (an optimal strategy or an optimal plan) chosen from
a large number of possible decisions. The alternatives may be the production of different
products, the selection of different investment strategies, to select production techniques that
maximize output (i.e decision whether to use labour intensive or capital intensive techniques of
production etc. In this regard this model can be applied and help planners:
 To determine the capital budget which maximizes the net present value subject to several
financial, managerial, environmental and other constraints
 In the selection of an investment portfolio form a variety of alternatives available in such
a way to maximize the return on investment or to maximize social welfares.
 Selection of a production technique, which minimizes cost or maximizes total output i.e
capital intensive or labour intensive etc.

3.6.4. Formulating an LP Problem and method of Solution

Given the above standards forms of a programming problem, let us illustrate the principle of
linear programming, and its importance use for the valuation of resources, by taking the case of
the choice of outputs that can be produced with given techniques subject to constraints over the
availability of resources.

Dear student! Let us assume that a country produces two products: agricultural and manufactured.
Each unit of agricultural product sells at birr 1 and the manufactured product at birr 4. It takes
two workers and 4 units of capital to produce one unit of agricultural products and 10 workers
and 5 units of capital to produce one unit of manufactured product. The total number of workers
and amount of capital available are 100 and 600 respectively.
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Given this information a planner can structure a linear program to allocate the country’s
resources (labour and capital) so as to maximize the total value of output or GDP. The first step
is to define the decision variables and the parameters. The decisions are the amounts of products
(level of agricultural and manufactured output) that the country should produce. Let X1 is the
level of agricultural output that should be produced and X2 is the level of manufactured product.
The parameters of the problem are:

 The number of workers required par unit of agricultural and manufactured products.
 Units of capital required per unit of agricultural and manufactured products.
 Total available amount of resources (labour and capital)
 Price per unit of agricultural and manufactured products.

The next step is to state the objective function and constraints. The objective is to maximize the
value of total output (or GDP). Therefore the objective function is.
Maximize Y = 1X2 + 4X2
Were Y = Total value of output (total income)
1X1 = Value of agricultural output
4X2 = Value of manufacture output

The constraints are on the availability of resources. That is, in producing the two products we
cannot use more of any resource than is available. Thus the constraints take the form.

Resources used  resources available

Therefore, the constraints on the information available are:
2 X 1  10 X 2  1000    labour constriant 
4 X 1  5 X 2  600    Capitalcon striants 

The condition that negative amounts of neither product can be produced implies a further
constraint as:
X 1  0, X 2  0    non negativily constriant

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Therefore, we can summarize the country’s resources allocation problem using a linear
programming form as:
Maximize Y = X1+4X2
2X1+10X2  1000
4X1+5X2  600
X1, X2  0
The solution to the above linear programming problem is to find the values for X1 and X2, which
will maximize Y, and at the same time are feasible in the sense that the attainment of these
values does not violate any of the constraints including the non- negatively conditions.

There are two methods that can be used to find a solution for a linear programming problem:
Graphic and simplex method. If the numbers of decision variables are limited to two, it can be
solved simply by using graphic method. If the number of decision variables exceeds three the
simplex method is more appropriate.

Dear student! It is better to refer your note on the course quantitative methods for economists II
to understand the methods more. Here since our hypothetical LP problem involves only two
decision variables; it can be solved using the graphical method.
A- Graphic Method
The steps are:
First convert the inequality constraint in to equality constraint so that they can be drawn as
straight lines. Thus the LP problem can be rewritten as:
Maximize Y = X1+4X2
S. To 2X1+10X2 = 1000
4X1+5X2 = 600
X1  0  X 2  0
Second construct the graph for the constraints. To do so, the first decision variable (the level
agricultural output X1 is represented along the horizontal axis and the second decision variable
(the level of manufactured output X2 is represented along the vertical axis. Each constraint is
represented by a straight line – AB for labour and CD for capital. The none negativity conditions
are represented by the X and Y axis i.e X- axis for X2 and Y axis for X1. Third identify the
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feasible region or solution space. Any point on or below AB satisfies the labor constraint; and
any point on or below CD satisfies the capital constraint. Moreover, there is no point above AB
(or CD), which satisfies the capital constraint. Moreover, there is no point above AB (or CD),
which satisfies the constraints. The points that will satisfy both the inequality constraints and the
non-negativity constraints are given by the area OAKD. Then this area is regarded as a feasible
region. Because output levels to the right of AB would require more labour than is available.
Similarly output levels to the right of CD would require more capital than is available. Fourth,
locate the corner or extreme points. The area OAKD represents the set of all feasible solutions.
The four extreme points of the feasible region are o (0, 0). D (150, 0), A (0,100) and K (33.5,
93.3). Lastly, evaluate the objective function at extreme points and select the point that would
help to achieve the objective. The mathematical theory behind linear programming states that an
optimal solution to any problem will lie at a corner point or an extreme point of the feasible
region. Hence for our example the objective is to maximize income, the optimal solution is thus
that extreme point for which the objective function has the largest value. Thus, the optimal
solution to the problem occurs at the point K = (33.5, 93.3) i.e X1 = 33.5 and X2 = 93.3 with the
objective function value of Y = birr 406.7.

X2
125 C

A
100
K (33.5, 93.3)

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 Labour constraint

D B

0 150 500 X1

Figure 3.3: A hypothetical linear programming problem

Dear student! As it is mentioned above graphical methods of solution are applicable to problems
with only two or at most three variables. For the solutions to problem with more than three
decision variables we need to use the simplex method. However, the simplex method uses some
important properties of the graphical solution. First in this method one can find a feasible
solution by testing whether an improvement in the objective function is possible by moving to
adjacent corner point of the feasible solution space. The second point is that the optimal solution
to the problem always occurs at one of the corner points of the feasible solution space.
In the following section we will try to see how optimal solution is obtained using simplex
method for a given linear programming problem

B Simplex method
The simplex method is an iterative (series attempt) procedure that makes use of corner points of
the basic feasible region. The evaluation of corner points always starts at the point of origin
(initial basic feasible solution) that is one of the corners of the variable solution space. This
iterative search for a better corner point is repeated until an optimal solution is obtained.
Dear student: For better understanding of the technical part please refer your notes or any text
on linear algebra. Here to illustrate the procedure let us use the problem given earlier.
Max Y = X1 + 4X2
Subject to 2X1 +10X2  1000
4X1 + 5X2  600
X1  0, X2  0

The steps and procedures are as follows:

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Step1. Convert all inequality constraint to the equality form. To do so a slack variable would be
added to each constraint. The slack variables show the amount of unused capacity (or resource)
for the constraint to which it is added. In our cases it shows the number of workers left
unemployed and the amount of capital that remains unused respectively of the first and second
constraints. Slack variable are always added to the “less than” type of constraints to make it an
equality. These slack variables must be non-negative; otherwise the capacity utilized will exceed
the total availability.
Thus the given problem can now be rewritten with slack variables as follows:
Maximize Y = X1+4X2+0S1 +0S2
s.t X1 +10X2 +S1 = 1000
4X1 +5X2 +S2 = 600
X1  0, X2  0, S1  0, S 2  0
Since slack variables represent unused resources, their contribution in the objective function is
zero. Thus slack variables will have zero coefficients in the objective function as it is indicated
above
Step 2 sets up the initial solution. The logic of simplex method is based on the fact that only the
corner points of the feasible solution region can give unique optimal solution. The search starts
with a solution at the origin indicating nothing can be produced and therefore the values of
decision variables are zero i.e X1 = 0 and X2 = 0. When we are not producing anything,
obviously we are left with unused capacity of labour (S1) = 1000 and capital (S2) = 600.

Thus, the current solution has four variables. That is slack variables (S1 and S2) with non-zero
solution values called basic variables and the decision variables (X1& X2) with zero values called
non-basic variables.

Step 3 Develop initial simplex tableau. The initial decision can be summarized easily on a table
form known as “simplex tableau”. This table is constructed from the coefficients of variables of
the standard form of the problem indicated in step 2. The table is constructed as follows:
1. The first column denoted as Cb shows coefficients of the basic variables in the objective
function i.e coefficients to S1and S2 and it is zero.

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 2. The first row (Cj row) shows the coefficient of all the variables in the standard form of
the objective function i.e 1,4,0 and 0 respectively of X1, X2, and S1and S2.
3. The second column indicates the basic variables in the initial solution i.e S1 and S2
4. The third column indicates solution for the basic variables in the initial solution i.e S1 =
1000 and S2 = 600.
5. The matrix coefficients formed by decision variables (X1, X2) is called the body matrix.
The elements of the body and the identify matrices represent marginal rates of substitutes
between variables in the solution (basic variables) and the variables heading the columns.
For example the element 2 in S1 row and X1 column implies that S1 must be decreased by
2 units, if 1 unit of X1 is added.
6. The coefficients of the slack variables in the constraint functional form an identify matrix.
In this matrix the variables that do not appear explicitly in an equation are considered to
have zero coefficients in that equation. Thus zeros in S1 column of the second row and
the S2 column of the first row of this identify matrix indicates that S1 and S2 do not
appear in the second and first equations respectively.
7. The elements in the Zi row under each variable column represent the total contribution to
the objective function when one unit of a non-basic variable is introduced in to the basis
in place of a basic variable. Zi values for each variable are computed by multiplying the
coefficients of basic variables in the Cb column with coefficients in each variable column
and then add up the products obtained.
For example Zi value for the solution values column can be computed as follows
Zi = 0 (1000) + 0 (600)
=0
For X1 column Zi = 0 (2) + 0 (4)
=0
Similarly procedure for Zj value of all other variable columns.
8. The Cj – Zi (net evaluation) row represents the net contribution from adding one unit of a
variable. They are always zero under the basic variables; and they can be positive,
negative or zero under the non-basic variables.

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Dear Student: This row provides us important economic information, including the value of the
objective function (in our case the total GDP) and the answer as to whether the current solution
is optimal. For maximization problems like given above, the presence of at least one positive
number in the Ci – Zj row indicates that the objective function can be improved. Thus the
optimal solution is obtained when there is no positive number in the Cj – Zi row. For a
minimization problem, the presence of at last one negative number in the Ci-Zi row indicates that
the objective function can be improved in a subsequent iteration and the optimal solution is
attained when there is no negative number in this row.

The initial simplex table

Cj 1 4 0 0
CB Basic Solution X1 X2 S1 S2
variables (B) Values (xb)
0 S1 1000 2 10 1 0
0 S2 600 4 5 0 1
Zi 0 0 0 0
Cj –Zj 1 4 0 0
Step4. Test the solution for optimality. Dear student! This step is done by examining the Cj-Zi
row of the simplex table. If all the elements in this row are negative then the current solution is
optimal. If there exists some positive number, the current solution can be improved by removing
one basic variable form the basis and replacing it by some non-basic one for maximization
problems like ours.

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Dear student: Is improvement possible for our objective function given above looking at the
initial tableau?
________________________________________________________________________
______________________________________________________________________________
__________________________________________________________________
Howe you answered? Good.

Look at each element in the Cj-Zi row of the above tableau. There are positive numbers in X1
and X2 columns and the objective is to maximize national income. Thus we have to go to a
second iteration, which will improve the solution. That is done by replacing a basic variable in
the initial solution with a non-basic variable. Therefore we have to determine the “entering” and
“departing” variables. The process of selecting the variable to be included and the variable to be
excluded are as follows:

a- Entering variable: looking at the Cj-Zj row, the column with the largest positive number
in this row indicates the entering variable. This column is called pivot column. And the
non-basic variable at the top of the pivot column is the entering variable. For the initial
tableau of our hypothetical example the largest positive number is indicated by the
column under X2 (i.e 4). Thus the entering variable is X2.
b- Departing variable. The departing variable is selected by dividing each number in the
solution value column (i.e 1000 & 600) by the corresponding elements in the pivot
column selected in a (i.e 10 and 5). The row corresponding to smallest of these non-
negative ratios is called the pivot row. The corresponding basic variable to this pivot row
will be the department variable. For our example given the ratios are:
S1 row 1000/10 = 100
S2 row 600/5 = 120

Thus, the pivot row is the row with S1 and S1 becomes the departing variable that is replaced by
X2.
Step 5. Evaluate (update) the new solution. This step is done by selecting the pivot element.
Pivot element is the non-zero positive number that lies at the intersection of the pivot column and
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pivot row of the simplex table. In our example it is number 10 indicated in the X2 column. We
always set a circle to indicate the pivot element.

After selecting the pivot element this step involves converting the pivot element in to 1 and
remaining elements in the pivot column of the body matrix to zero by adding an appropriate
multiple of the new elements of the pivot row. To convert the pivot element (i.e 10) we divide
the pivot row elements all by 10. Thus, the pivot row will have new elements of the following
under each column.

CB Basic Solution X1 X2 S1 S2
Variables (B) Values (Xb)
4 X2 100 1/5 1 1/10 0

To make all the other elements under the pivot column zero, we have to add -5 times of these
new elements to the S2 row. That is new elements of S2 row = S2 row elements in the initial
tableau minus 5 times new X2 row elements. Undertaking the above procedures we should
construct a table with the up dated solution and this looks as indicated in the table below.

Second simplex tableau

Ci 1 4 0 0
Basic Solution X1 X2 S1 S2
variables Values
CB B Xb
4 X2 100 1/5 1 1/10 0
0 S2 100 3 0 -1/2 1
Zj 400 4/5 4 4/10 0
Cj-Zj 1/5 0 -4/10 0

Dear student! Is the solution indicated in the second tableau optimal or not? Why?
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 How you tried? Good
The above table is not optimal since there is a positive element in the Cj-Zj row implying that
GDP can be increased further by replacing one of the basic variables with non-basic variables.
Thus by repeating the procedures indicated in step 4 and 5 we can reach another improved
solution. In that the revised and optional solution is given in the third tableau given below

Third tableau
Ci 1 4 0 0
Basic Solution X1 X2 S1 S2
variables Values
CB B Xb
4 X2 1400/15 0 1 4/30 -1/15
1 X1 100/3 1 0 -1/6 1/3
Zj 406.66 1 4 11/30 1/15
Cj-Zj 0 0 -11/30 -1/15

Since all the entries in the index row of the above table are negative, no sign of improvement in
the objective function. Thus optimal solution is found. The solution values are:

Y = 406.66, X1 = 33.3, X2 = 93.34

S1 = 0, S2 = 0
C. The dual
Dear student! The solution to a linear programming problem yields, in fact, two sets of solutions.
One solution, which have been considering up to now, is the best combination of outputs i.e the
values for X1 and X2 that maximize the national income given the prices of products. This is called
the “primal”. The second solution is known as the ‘dual’, or the prices of the resources that
minimize the costs of producing a combination of outputs.
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Generally associated with every linear programming problem, there is another intimately related
LP problem i.e for every maximization (or minimization) problem in linear programming; there is
a unique similar problem of minimization (or maximization) involving the same data, which
describes the original problem. It is possible to solve an LP problem by starting from two different
points of view i.e primal and dual. The format of the simplex method discussed so far is such that
when primal is solved, its associated dual is also solved simultaneously i.e if the optimal solution
to one is known; the optimal solution of the other is readily available.

Previously we have observed how to maximize an objective function i.e national income. Let us
write out the dual of the maximizing problem and then outline the symmetry between the
maximizing and minimizing problem, followed by an economic interpretation of the dual.
Primal
Maximize Y = X1 +4X2
Subject to 2X1+10 X2  100
4X1 + 5X2  600
X1  0, X2  0

Dual
Minimize C = 100 P1 + 600 P2
Subject to 2P1 + 4P2  1
10 P1 +5 P2  4
P1  0, P2  0

Where P1 and P2 are the shadow (or accounting) prices of the factors. They represent the marginal
product of each resource included in the optimal solution. The link between the shadow prices of
an input as its marginal yield to profit can be seen through changes in profit resulting from the
subtraction of a single unit of an input form its use. Also in the dual, the objective function i.e
minimization of cost shows the total value of the inputs as it is the product of shadow prices of the
inputs as it is the product of shadow prices of the inputs and their respective maximum capacity i.e
total labour and capital available in our example. At the point of optimal solution, all inputs would
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be valued according to their marginal product and the total national income will be exhausted. If
the value of an input used in the production of an additional unit of any output is greater than the
unit income of that output, a loss will be indicated and the size of this loss is given by the slack
variable in the constrained equations of the dual.

Dear student: look at the primal and dual linear programming problems sated above. What
relation do you observe and how is the dual derived from the primal?
___________________________________________________________________________
___________________________________________________________________________
_________________________________________________________

Have you tried? Good

If the primal involves  signs the dual involves  sings; the price constants (i.e 1 and 4) in the
primal, become constraints in the dual replacing the capacity constraints of labour (1000) and
capital (600); the coefficients in the first constraint inequalities are the coefficients of the first
variable (i.e X1) in the constraints for the primal problem, and similarly for the other constraint.

The solution for the dual is found using graphic or simplex methods discussed so far. However if
the inequalities are of  type, which frequently occurs in a minimization problem, there are some
exceptions to the simplex procedures. It needs some modifications. In the case of maximization,
we started with an initial solution of zero for the objective function. However in minimization
problems we will take an initial solution with a very high cost which permits us to search for a
lower cost solution. To do so artificial variables are included in the objective function with a large
positive coefficient and surpluses variables with zero coefficients.

In addition in this case surplus variables are subtracted from each inequality constraint. The
optimal solution is reached when each element in Cj-Zj row are either positive or zero. The rest
steps are the same.

Let S1, S2 are surpluses variables; A1, A2 are the artificial and high cost M, the standard form of the
dual LP for our example is
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 Minimize C= 1000 P1 +600 P2 +0S1 +0S2+M A1 +MA2
Subject to 2P1 +4P2 –S1+A1 = 1
10P1+5P2 -S2+A2 = 4
and P1, P2,, S1,S2,A1,A2  0
The initial basic feasible solution is summarized as follows

Initial simplex tableau

1000 600 0 0 M M
Basic Solution P1 P2 S1 S2 A1 A2
variables Values
CB B Xb
M A1 1 2 4 -1 0 1 0
M A2 4 10 5 0 -1 0 1
Zj 5M 12m 9M -M -M M M
Cj-Zj 100-12M 600-9m M M 0 0

A column with variable P1 is the pivot column because of the high negative element in the Cj-Zj
row of the column (i.e 100-12M) thus P1 is the entering variable. The row with A2 variable is the
pivot row due to the smallest ratio of 4/10. Thus A2 is the departing variable. The pivot element is
10. Applying the procedures in step 5 of the maximization problem discussed previously at each
iterative search, the final table with an optimal solution is put here under.
Tableau with optimal solution
1000 600 0 0
Basic Solution X1 X2 S1 S2
variables Values
Cb B Xb
600 P2 1/15 0 1 -1/3 1/15
1000 P1 11/30 1 0 1/6 -4/30
Zj 406.66 1000 600 -100/3 -280/3

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 Cj-Zj 0 0 100/3 280/3

Since all the entries in the Cj-Zj row are either zero or positive, the optimal solution of the dual
problem (i.e. cost minimization) is obtained and is given by
P1 = 11/30, P2 = 1/15
C = 406.66

Dear student: Compare the optimal solution and elements that are indicated in Cj-Zj row under the
column of S1 and S2 variables, in the final tableau of both the primal and dual problems. What
relation have you observed between the optimal value of the decision variables under the primal
and the values under the column of the surplus variables in the dual solution?

Have you tried? Good

The solution values for the primal can be read directly from the optimal solution table of the dual.
The elements indicated in Cj-Zj row of the surplus variables columns i.e 100/3= 33.3 and
280/3=93.34 corresponds to the optimal solution of the primal decision variables (i.e X1 & X2) the
value of the objective function is the same for primal and dual problem i.e 406.66.

3.7. Summary of the Chapter

There are three aggregate planning models that focus on the macro variables such as saving,
investment as determinants of growth in developing countries context. The H-D and two gap
model deal with whether growth is limited by saving. The Harod-Domar theory emphasizes
domestic saving as the major constraint on the growth rate of economy. If the constraint is
somewhat relaxed by raising the propensity to save, the result will be an increase in growth rate
of both capital and output. The two gap model argues that growth is limited by a domestic
saving gap (the gap between saving and investment) or foreign exchange gap (the gap between
export and import). Macro- econometric modeling is generally motivated by two reasons:
135
Forecasting and more significantly, policy analysis. This model explains the empirical
behaviors of an actual economic system of inter- linked equations estimated from time series
data using econometric techniques.

The models help the planner to predict the required savings rate once the target growth rate (g)
and capital output ratio (u) are given. Moreover, the model has been applied as a basis to
development planning in more comprehensive plans for developing countries.

In summary the Mahalonobis model states that in a given period, in order to achieve a certain
growth rate for the economy the total investable amount has been divided in such a way that it
leads to the required growth rate. But since the required growth rate is to be reasonably high it
can be achieved by expanding the investment goods sector and there by producing larger
quantities of investment goods. However, investment sector is bound to generate increased
purchasing power and hence demand for consumer goods, which require comparatively less
capital but employ more labour. In this way a balance is tough to be established between the
investment goods sector & consumer goods sector.

In general, there are several economic planning and growth models; because on the real world
different countries economic growth and development, the structure their government and the
availability of economic resources are also different.

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3.8. Review Questions

1. What are the main features of input output analysis?

2. Explain the important applications of input output analysis in planning
3. What are the limitations of the input output analysis?
4. What does the input output table show?
5. How the balance of payments implication of a given growth in final demand can be
forecast by using input output analysis?
6. What are the important applications of linear programming?
7. Explain briefly the limitations of linear programming
8. A simple economy has three sectors Agriculture, industry & service. Suppose that the
final demand for agriculture, industry & service sector are birr 30,birr 250 and 120 worth
of the three sectors respectively. It is given that a birr worth of agriculture requires 10
cents, 50 cents and 15 cents worth of agriculture, industry & service sector respectively
as input; a birr worth of industry requires 25 cents, 5 cents& 10 cents worth of agriculture,
industry & service sector products respectively as input; and that of a birr worth of
service sector requires 5 cents from itself and 25 cents & 15 cents worth of goods from
agriculture and industry respectively as inputs. Given the above information and
assuming the economy is in equilibrium answer the following questions.

137
 B. Determine the technical coefficient or technology matrix of the economy.
C. Determine the gross output of each sector for the given final demand.
D. Calculate the balance of payment of this economy assuming that from the given final
demand of each sector 30% is used for export purpose and from the total primary
input requirement of each sector 25% is imported from foreign countries.
E. Determine the total output of each sector if the final demand changes to 60 for
agriculture, 300 for industry and 200 for service
F. Determine the value addition associated with the new equilibrium output level of
each sector and the new balance of payment taking the assumptions in C

CHAPTER 4

PLANNING IN PRACTICE: EXPERIENCES FROM ETHIOPIA

4.1. Historical Background

It is over three decades since Ethiopia adopted a planned approach to development. In the
immediate post-World War II period, separate programmes and plans, which were not integrated
into a general framework of a national plan covering the entire economy, were drawn up by
various government agencies and served as the bases for government policy. Subsequently,
sectoral programmes of varying durations were prepared for agriculture, industry, forestry,
transport and telecommunications, education and water resources development.

These sectoral plans and programmes were mostly proposed schedules of public expenditure.
However, they served the useful purpose of focusing attention on planning, and their
inadequacies helped reveal the limits and weaknesses of partial planning. Recognition of these
facts, combined with several other factors such as the rising preference of planning in developing
countries by western countries providing loans and grants, led the government to formulate an
overall development plan.
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Thus, an administrative machinery for formulating plans called the National Economic Council
was established in 1955. The Council consisted of a Planning Board and a Secretariat to the
Board, specifically charged with the task of drawing up plans. The Executive Committee of the
Planning Board was chaired by the country's Prime Minister and had the following members:
1) Minister of Finance; Mining and State Enterprises;
2) Minister of Health;
3) Minister of Public Works and Communications;
4) Minister of Agriculture;
5) Minister of National Community Development;
6) Governor of the State Bank;
7) Minister of Posts, Telegraphs and Telephones;
8) Minister of Commerce and Industry;
9) Minister of Information;
10) Vice Minister of Education and Fine Arts; and
11) Vice Minister of the Planning Board, Secretary.
Ethiopia's First Five Year Development Plan (1957-61) and its Second Five Year Plan (1962-67)
were prepared under this arrangement.

A number of developments, important to the economy as well as to the structure of the

government itself, have taken place during these years. The First Five Year Plan, which marked
the start of national planning for the country's integrated development, offered something much
needed but heretofore unavailable, namely, the first comprehensive picture of the economy, and
much new information came to light. Even for those areas where serious obstacles stood in the
way of complete knowledge, a start was made to overcome these obstacles; and the Second Five
Year Plan not only continued this effort but applied it more widely.

One significant outcome of this effort was the realization of the importance of statistics for
planning. The Central Statistical Office (CSO) was established during these years, originally
under the Ministry of Commerce and Industry under which the Planning Board Secretariat was
also administered.

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The First and Second Five Year Plans also drew attention to the need for creating other important
institutions, many of which have been established by the government. A development plan is
essentially a general guideline of policies to be pursued and measures to be adopted, consonant
with such policies; it defines broad areas of economic and social activity to be promoted and
describes how they are to be implemented. What gives substance to this broad action programme
are the specific projects -- the roads to link the people and markets of the country and to open up
new areas, the hydroelectric installations to generate power for industrial plants and cities, the
factories to transform the nation's raw materials into manufactures, and so on. These projects
require specialized institutions both for their elaboration and for their financing.
In this regard, not only have existing project-oriented institutions from before the First Five Year
Plan been strengthened (e.g., Imperial Highway Authority, Ethiopian Electric Light and Power
Authority, Imperial Board of Telecommunications of Ethiopia), but new ones have been created.
Among these were the previously mentioned Central Statistics Office, the Technical Agency,
which was responsible for appraising development projects and the so-called Ethiopian
Investment Corporation.

A number of proposals had also been worked out for the implementation of the Second Five
Year Plan. Notable among these were the establishment of planning units within each ministry
and government agency and effective coordination of economic and social policies both at the
higher and lower levels of the government. In fiscal administration, the most important proposal
was the relation of the budget to the annual plan. In view of this, the government had announced
policy statements with regard to the relation of the budget with the Second Five Year Plan
through the medium of annual plans. However, the indispensable administrative mechanism
through which these policies could be put into effect was not strong enough as expected.

In the field of monetary and credit institutions, the recommendations of the Second Five Year
Plan were fully implemented. The former State Bank of Ethiopia was split into the new National
Bank of Ethiopia becoming a Central Bank, and the Commercial Bank of Ethiopia operating as a
normal business bank.

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More broadly, the nation's experience with planning showed the need for reforming the
administrative machinery of the government. It was acknowledged that planning, to be truly
operative, required a modem administrative structure different from that inherited from the pre-
planning past. Accordingly, the government created a high-level Administrative Reform
Committee towards the end of the First Five Year Plan.

Among the leading objectives of this Administrative Reform Committee were:

a) the simplification of the then existing ministerial structure by the elimination of
unnecessary ministries; and
b) the transfer of certain functions from one ministry to another in order to avoid duplication
and overlapping of responsibility.
In 1962 the Committee submitted its report in which it made a number of proposals for creating
new ministries, and dissolving or reformulating the functions of others. Consequently, in 1966
the order defining the powers and responsibilities of ministers was promulgated.
Among the ministries established by Order No. 46 of 1966 was the Ministry of Planning and
Development which had the following duties and responsibilities:

a) It was generally responsible for the conduct of the government's planning activities;
b) It supervised and coordinated the activities of the government's planning administration;
c) In cooperation with other ministries and public authorities concerned, initiate, prepare
and organize long-term development plans and submit them for approval by the Council
of Minsters;
d) Receive each year from the ministries and public authorities concerned, or, if the same
are not so received, initiate and prepare annual development programmes and the
supporting development budget proposals; analyze, evaluate and consolidate the said
annual development programmes and development budgets and present them to the
Ministry of Finance for consolidation into the annual government budget;
e) In agreement with other ministries and public authorities concerned, establish appropriate
and effective procedures to ensure that approved development plans and programmes are
properly implemented and that the development budget is properly expended for the
purposes for which it was allocated;

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 f) Carry out or cause to be carried out technical and economic feasibility studies of
individual development projects;
g) Be responsible for the securing, compilation, analysis, collation and publication of data
and statistics;
h) Negotiate and conclude, in accordance with approved projects, programmes and plans,
agreements and arrangements regarding the provision of bilateral and multilateral
assistance, and coordinate the same with other ministries and public authorities concerned;
i) Formulate and enforce general credit policies of government financial institutions and
corporations engaged in the financing of development plans and programmes; and
j) Be principally responsible, together with other ministries and public authorities
concerned, for representing and protecting the interests of the government in public
financial institutions and corporations engaged in the financing of development plans and
programmes.
The country's ambitious Third Five Year Development Plan (1968-1973) was compiled under
the supervision of this ministry.

Regarding the plans themselves, the first two Five-Year Plans were conservative as testified by
the low or modest levels of investment and growth rate targets they set to achieve, while the
Third Five Year Plan was ambitious in both regards and ended up with serious under
implementation.

In 1970 the Ministry of Planning and Development was reorganized to become the Planning
Commission with more or less identical duties and responsibilities. On the eve of the 1974
revolution, the Planning Commission was headed by a minister who was aided by three vice
ministers. It had ten departments and employed about seventy national and expatriate
professionals.

After 1974, this Commission was renamed the Central Planning Commission by Proclamation
No. 128 of 1977. By late 1978, however, the planning machinery was reorganized to form the
National Revolutionary Development Campaign and Central Planning Supreme Council (NRDC
& CPSC).
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NRDC & CPSC prepared and executed six annual Development Campaign Programmes
popularly known as Zemechas. The campaigns were essentially designed to attain limited and
immediate objectives to address urgent problems of the times. Moreover, formulated in the
absence of long- and medium-term plans with the appropriate perspectives and strategies, they
could not be effective for laying the foundations for the economic growth of the country. They
also proved to be inadequate in solving pressing problems which result from the basic
weaknesses of the economic structure itself.

It was, therefore, decided to launch a long-term perspective plan to serve as a policy tool for the
realization of Ethiopia's long-term objectives. Once again, the planning institution underwent a
restructuring process to enable it perform this task. As a result, the Office of the National
Committee for Central Planning (ONCCP) was established in 1984.

Since its establishment, the ONCCP has been the organ responsible -for the preparation of
integrated short-, medium- and long-term plans of the country. As is well-known, the first major
assignment of the ONCCP was the launching of a Ten- Year Perspective Plan covering the
period 1984/85-1993/94.

Among the contents of the over-ambitious Perspective Plan were the overall and sectoral
orientation of development as well as production (see Table 1) and investment targets, financial
and manpower requirements and policy and organizational measures needed to attain the targets.
The implementation of the Perspective Plan was undertaken through the elaboration of short- and
medium- term plans.
At its head office, the ONCCP had fourteen departments representing all the sectors of the
economy and was gradually extending its regional planning offices to the then thirty
administrative regions of the country.

Table 1: GDP at 1980/81 Facto costs by Sector of Origin

Year Total GDP Agriculture Industry Service
1983/84 8840 4270.3 1418.5 3151.2
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1993/94 16593.8 6485.2 3971.9 6136.7
Average annual growth 6.5 4.3 10.8 6.9
rate (percent)
Source: ONCCP, Ten years Perspective Plan, 1984/85-1993/94. P. 24

Finally, even though significant restructuring didn't take place, it would be appropriate to
mention that in early 1991, the planning office was once again rechristened the Ministry of
Planning.

4.2. The Planning Process

Planning can be defined as "a continuous process which involves decisions or choices, about
alternative ways of using available resources, with the aim of achieving particular goals at some
time in the future" [Conyers and Hills 1984]. The national economic plan is usually made up of a
system of plans which, though they differ from each other in terms of the time period that is
covered and the degree of detail with which various indicators are elaborated, together make up a
single coherent economic plan. This system of plans includes a perspective (long-term) plan, a
medium-term plan and a short-term (annual) plan. All three types of plans have, at one time or
other, been prepared in Ethiopia.

As in other countries, here in Ethiopia, the planning process at all levels passes through a series
of iterative stages. These are:
1) the preliminary stage;
2) the analytical stage;
3) adjustments and directive stage;
4) plan elaboration stage;
5) plan adoption stage; and
6) plan implementation stage.

1. The Preliminary Stage

At the initial stage, the highest organs of the state and government (Council of Representatives
and/or Council of Ministers) give general guidelines and directives on the economic, social and
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political tacks of the coming period, which serve as the starting point for the planning institution
to initiate the planning process.

2. The Analytical Stage

At the analytical stage, evaluation of socio-economic conditions in the country as well as the
international economic situation, analysis of the state of the economy at the beginning of the plan
period, assessment of the implementation of the previous plan, identification of major socio-
economic problems, development constraints, development possibilities and alternatives and
other similar planning tasks are undertaken.
On the basis of this analysis as well as state and government directives, the national goals and
objectives of development in the plan period are determined. Consecutively, the rates and main
proportions of development needed to attain the set objectives are calculated by:
 preparing alternative growth scenarios that could bring about the achievement of the
specified objectives under various assumptions;
 analyzing the pros and cons for each scenario and selecting the best growth scenarios;
and
 integrating the above processes to serve as the marco-framework (guidelines) which
contains mainly:
o the analysis of current economic situation;
o overall objectives, goals and strategies;
o GDP and sectoral growth variants;
o investment ceilings (sectoral and global);
o the budget frame; and
o balance of payments projection.
3. Adjustments and Directive Stage
This stage involves the selection of the most appropriate course of development requirements at
various levels with the available resources. This evolved into guidelines for the drawing up of
Sectoral and regional plans (see Table 2 and 3). In Ethiopia, at this stage the planning institution
transmits the plan guidelines (i.e., macro-framework) to sectoral ministries, agencies and
regional planning offices with instruction to prepare and submit their own plan proposals
according to a specified time schedule.
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Table 2: Gross Domestic Product by Industrial Origin at 1980/81 Price (in million birr)
1981(estimate) 1982 1986 (plan) 1982-1986 Annual
(plan) growth rate
Growth Domestic 9383.7 9852.9 11976.2 5.00
Product
Agriculture 3967.8 4145.6 4939.9 5.93
Industry 1683.4 1783.7 2245.3 5.93
Service Sectors 37325.5 3923.6 4791.0 5.12
GDP at current market 10485.8 11037.2 13532.0 5.23
prices
Source: ONCCP, Macro Frame and Guideline for the Preparation of the Five-Year Plan (1982-86)
(in Amharic), P. 124

4. Plan Elaboration Stage

This involves the process of preparing a draft plan which will eventually be sent to the highest
authority in the country. After receiving the plan guidelines through their respective sector
ministries and corporations, enterprises elaborate their own plans and submit them to their
respective corporations. As corporations were the next higher unit in the structure, they examine
and adjust enterprises' plan proposals and then submit them to the respective sector ministry.

The ministries, in turn, examine and adjust their sectoral plan and submit the consolidated plan to
the respective sectoral departments of the planning institution. Sectoral departments of the
planning office examine the plan proposals in terms of their efficiency and check if they are
consistent with the set objectives, and production, service and investment targets. This stage
involves active interaction with the respective ministries, corporations, enterprises, etc. and also
inter-departmental interaction within the planning institution.

5. Plan Adoption Stage

This represents a further step for the correction and amendment of the draft plan before approval.
Here in Ethiopia, the planning office submits the draft plan to the Council of Ministers for
146
consideration. The Council of Ministers, with the necessary corrections and adjustments, will
submit the draft plan to the Council of Representatives for final approval.

6. Plan Implementation Stage

At this stage, the plan approved by the highest organ of state in the country is distributed by the
planning institution to sector ministries, commissions, regions, etc. Upon receiving the approved
plan, sector ministries, corporations, regions, enterprises and commissions prepare action plans

147
based on their respective approved plans and start implementing it. This stage also involves
follow-up and reporting activities of the implementation phase of the approved plan.

It should be underlined at this juncture, that planning being an iterative process (involving top-
bottom and bottom-up processes), the various stages are interrelated and as such no single stage
can be considered in isolation from the others. Hence, the results of earlier phases serve as inputs
into the later phases of planning work; while the results of a later stage may lead to the revision
of work done in the earlier stages of planning.

4.3. Planning and The Transition Period

The transitional period's draft economic policy, which was recently distributed for discussion,
envisages Ethiopia as moving towards a market-oriented mixed economy where all forms of
ownership and enterprises will operate on the principle of profitability and competitiveness. The
cornerstones of the draft economic policy are:
 limiting the participation of the state sector in the economy;
 intensifying the role of the private sector; and
 encouraging popular participation in development.
Evidently, the draft economic policy entails a change in the role of planning. It can be argued
that Ethiopia's so-called central planning has never been a fully operative central planning in its
classical form as that made operative in the Soviet Union and Eastern Europe. This is because
the private sector is dominant in the country's economy and it is very difficult to control and
direct a predominantly peasant economy through a central plan.

The focus of Ethiopia's planning has always been the state sector where attempt was made to set
targets and allocate skilled manpower, investment and foreign exchange. As such, it is quite
easier to bring about reorientation of the state sector.
During the transition period, planning is expected to have strengthened capacity for
macroeconomic management. In general, its role is likely to be:
a) identifying priorities and indicating the development strategy;
b) planning and guiding the state sector;
c) assist in harmonizing the activities of the private sector through economic instruments;
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 d) serve as center for policy analysis and forecasting;
e) appraising projects requiring public sector financing;
f) prepare medium- and long-term indicative plans; and
g) formulating strategies for promoting regional development as well as the coordinated
utilization and conservation of natural resources.
In general, the system of economic management of the transition period will utilize both plan and
market in a complementary way. The emphasis, however, should be towards market orientation,
except where there is private and social cost divergence and where economies of scale exist.

4.4. Summary of the Chapter

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It seems that Ethiopia's planning experience could be subdivided into the following periods. The
first period (1955-67) is marked by the establishment of the planning institution and the
restructuring of the state machinery to the needs of planning. Both the First and Second Five
Year Plans fall in this period.
After the restructuring came the ambitious Third Five Year Plan (1968-73) which stated that:
All modern development plans stress the attainment of adequate rates of growth, expressed in
terms of the expansion the Gross Domestic Product and the derived levels of per capita income.
The Third Five Year plan of Ethiopia establishes an annual target for the expansion of the GDP
by six per cent. Starting in the first year with a rate of about 5%, the momentum of planned
development is expected to increase so that by the last year of the plan the rate achieved should
be above 6%. Such 2 –ate may appear ambitious; but it nonetheless derives from the sound
criterion of maximum feasible growth. Anything less would represent a less than maximum
effort. Anything above this would depart seriously from the concept of maximum feasibility.

Between 1974 and 1978 there was little or no national planning in the country. The then
Ethiopian government believed that it was busy enough with political work and the war effort.

Late 1978 marks the start of the Development Campaign (Zemecha) years. Until 1984 six of
them were prepared. Although these annual campaign programmes were designed to attain
limited and immediate objectives, they helped to identify the major constraints of the economy.
Finally, in 1984 the Ten-Year Perspective Plan, which was even more ambitious, was launched.
Once again it was declared that:

In general, the Ten-Year Plan has set itself the lofty and difficult task of propelling Ethiopia out
of the abyss of economic backwardness by enunciating appropriate development objectives and
by creating favorable conditions for their realization [ONCCP 1984].
Technically, the Ten-Year Plan is still being implemented. However, the attainment of its targets
has been hampered by a number of intractable problems. Indeed, planning in Ethiopia has
become crisis management rather than development management.
To accelerate its economic growth over the medium- to the long-term period, Ethiopia faces
depressing needs of increasing domestic and external resource mobilization efforts. This is also
150
the main challenge of planning. This effort, however, is frustrated by recurring drought,
instability in world commodity markets and, until very recently, by the intensified civil war.

The country's saving rate has been 3 to 4 per cent of GDP while gross investment rate has
remained at only 11 to 14 per cent of GDP over the past decade. No country, even with
reasonably efficient investment can expect to achieve a satisfactory GDP growth rate with such a
low investment rate. Ethiopia's success in achieving its resource mobilization objectives will,
therefore, depend in large measure upon its ability to improve the efficiency of its resource use.
This requires a conducive economic policy environment and an effective system of economic
management.

Accordingly, planning will have to focus on macroeconomic management in such a way that it
effectively influences and harmonizes microeconomic decisions – the domain of the market. To
accelerate its economic growth over the medium- to the long-term period, Ethiopia faces
depressing needs of increasing domestic and external resource mobilization efforts. This is also
the main challenge of planning. This effort, however, is frustrated by recurring drought,
instability in world commodity markets and, until very recently, by the intensified civil war.

The country's saving rate has been 3 to 4 per cent of GDP while gross investment rate has
remained at only 11 to 14 per cent of GDP over the past decade. No country, even with
reasonably efficient investment can expect to achieve a satisfactory GDP growth rate with such a
low investment rate. Ethiopia's success in achieving its resource mobilization objectives will,
therefore, depend in large measure upon its ability to improve the efficiency of its resource use.
This requires a conducive economic policy environment and an effective system of economic
management. Accordingly, planning will have to focus on macroeconomic management in such
a way that it effectively influences and harmonizes microeconomic decisions – the domain of the
market.
In short:
The Ethiopian economy is predominantly agrarian with over 85% of its population living in
rural areas and engaged in agricultural and allied activities.

151
Agriculture contributes over 40% to the GDP of the country and generates over 80% of
total export earnings.
Under the Monarchy, three Five-Year National Development Plans were implemented:
1957-61, 1962-67, and 1968-73.
The National Development Plans formulated under the Derg aimed at the establishment of
a socialist state through nationalization of private enterprises and through restructuring the
economy.
The EPRDF government initiated the Five-Year Development Programme known as Peace,
Democracy and Development Programme.
Among the recent development programmes of EPRDF are:
Sustainable Development and Poverty Reduction Programme (SDPRP), 2002/03-2004/05.
Plan for Accelerated and Sustained Development to End Poverty (PASDEP), 2005/06-
2009/10.
Growth and Transformation Plan I 2010/11 – 2014/15
Growth and Transformation Plan II 2015/16 – 2019/20

4.5 Review Questions

152
1. Explain briefly the history of Ethiopian economic planning.
2. What is the main difference between Ethiopian economic plan during Monarchy, Derg and
Current Economic Planning?
3. Discuss the limitation of Ethiopian economic during Derg regime.
4. Explain the pillar of Ethiopian Growth and Transformation Plan I?
5. Discuss the weakness of Ethiopian Growth and Transformation Plan I.
6. Explain in detail, the challenges that face Ethiopian Growth and Transformation Plan II
during its implementation.

5. ASSIGNMENTS
1. State the basic notions and limitations of the Harrod –Domar growth model.

153
2. There are four well-defined stages through which an economic plan has to pass for its
success full working. Discuss
3. Discuss in details the historical development of economic planning.
4. In the success of development plan what are the criteria needed?
5. “If economic plans are well formulated and effectively implemented, it will have a great
role in economic growth and development of a given country.” Explain this statement in
detail by giving example.
6. What was the main objective of the Soviet plan? And what do you think the main
objective of the current Ethiopian plan?
7. Discuss the advantages and disadvantages planning of the free market economic systems?
8. Explain physical and financial planning to the Ethiopian context? What are the
limitations of developing countries to maintain physical and financial balance?
9. Every country developing or advanced nations has developed plans with various
objectives such as to achieve high economic growth, increasing employment
opportunities, balanced economic growth etc. Our country has also passed different
planning periods since the first plan of the imperial regime. Thus, please take the
planning experience of one of developing countries and prepare a term paper stating the
goals, the instruments designed, the achievements, drawbacks and lessons that can be
drawn for Ethiopia, including your recommendations in no less than 12 pages and not
more than 20 pages.
10. A farmer has 100 acres of land on which he can grow cotton, wheat or Soya beans.
Preparatory cost for each acre of land is birr 1000 for cotton, 1200 for wheat and 700 for
Soya bean. Preparatory work per acre for cotton is 7 man-days, for wheat is 8 man-days
& for Soya bean is 8 man days. Cotton yields a net margin of birr 300 per acre; wheat &
Soya bean yield birr 400 & 200 per acre respectively. If the farmer has birr 80000 for
preparation expenses & 800 man-days of labour.
A. How many acres of land should be allocated to each crop to maximize the profits?
B. Construct the dual of the primal problem
11. Suppose you are an expert in planning commission of Ethiopia and you are engaged in
preparing a medium-term plan for the next five years of the national economy, which one
do you favor from fixed and rolling type of planning. Why?
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 12. Explain the role of planning in capitalism, socialism and mixed economy.
13. It is known that free market economy is important from social as well as technological
advancement point of view and on the other hand many economists argue that,
government intervention in the form of planning is crucial for rapid economic
development especially for least developed countries. Justify in favour of or against
planning considering social and economic aspects of developing countries.
14. A simple economy has three inter-industrial sectors such as Agriculture, Manufacturing
and service, and final demand sector. Suppose that the final demand for Agriculture,
Manufacturing and service sector’s output is valued 40Birr, 80 Birr and 140 Birr
respectively. And it is given that a birr worth of agricultural product requires 20 cents
worth of agriculture, manufacturing and service sectors product each respectively as input,
a birr worth of manufacturing product requires 5 cents, 20 cents and 10 cents worth of
Agriculture, manufacturing and service sector's output respectively and that of a birr
worth of service sectors product needs 10 cents, 20 cents and 40 cents worth of
Agricultural, Manufacturing and service output respectively as inputs. The total primary
input requirement is valued 40 Birr, 130 birr and 90 Birr in Agriculture, Manufacturing
and service sector respectively.
A) Determine the gross output of each sector for the given final demand.
B) Calculate the balance of payment of this economy assuming that from the given final
demand of each sector 50% is used for export purpose and from the total primary input
requirement of each sector 50% is imported from foreign countries.
C) Find the gross output of each industry if the final demand of Agriculture,
Manufacturing and service output is estimated to be 342, 684 and 1026 respectively for
the coming period.
D) Find the total primary input requirement associated with the new equilibrium output
level of each sector and the new balance of payment taking the assumptions in b.

6. REFERENCES

1. M.L. Jhingan (2015), The Economics of Development and Planning, 40th edition, Delhi- India
155
2. M.N. Zingan, (1982-88) Economic Development and Planning.
3. I.C.Dhingra,A.K.Garg,(1983) Economic Development and Planning, S. Chand &Sons, New
Delhi.
4. Kavimandan (1983), Economic Development and Planning. (Marathi)
5. Desai &Bhalerao (1978) Economic Policy and Planning.
6. Ghosh B.N. (1982) Economic Development and Planning
7. M.L.Seth(1984) Theory and Practice of Economic Planning.
8. M.L.SETH, Theory and practice of Economic planning, 1980.
9. -AGRAWAL, Economic planning (planning principles)
10. -Durbin E.F.M, PROBLEMS OF ECONOMIC PLANNING, LONDON, ROULTAGE and
Kegan Paul, 1985.
11. -Dobb.M, An Essay on economic growth and planning, London, 1960.
12. -Chenery, Hollis B., studies in development planning; Cambridge, Harvard University press,
1971.
13. Tesfaye Asfaw: _______An Overview of the Planning Experience

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