CHAPTER ONE

THE EVOLUTION OF DEVELOPMENT

THINKING

1
 1.1 Introduction
 The evolution of development thinking can be summarized in to three different
periods:
 The Early Post War Consensus
 The Washington Consensus
 The Oscillating Search for Silver Bullet
1.1.1 The Early Post War consensus
 The end of 1960s and beginning of 1970s
 This is the interesting period for the developing world because it gets attention by
academicians
 In the 1950s and 1960s the previously neglected sub-fields of Development
Economics were rediscovered.
 The dominant one-sector macro models of the day, from Keynesian to Harrod-
Domar to Solow seemed to have relatively little relevance for third world.
2
 For ease of understanding the period could be looked into five important sub- periods.
A. Dualism
 Itattracted due attention during the 1950s and 1960s. The components under dualism
are:
 Sociological dualism of Boeke (1953).
The differences between western and non-western and cultures are the major
source
 Technological dualism: Higgins (1956).
Differences between variable factor proportions in the traditional sector as major
source for dualism.
 Physiocrats : viewing land as the source of all wealth and agricultural surplus
supporting the non-agricultural sector.
 Classical dualism: Ricardo and Lewis (1951) are major proponents. potential for
3
growth is transfer of Surplus labor agriculture to non-agriculture.
B. Need for Balanced Growth or structuralism
 Rosenstein-Rodan (1943) and Nurkse (1953)
 Emphasized the need for balanced growth not only between agriculture and non agriculture but also with in each sector
C. International Trade Scene
Prebisch,1962 stated that the international trade scene painted in colors and was unfriendly for development and demanded for
equitable exchange.

D. Interventionist State
 The current theoretical thinking indicates that there is intervention state as a key instrument for development
 The reasons are:
1. pre-colonial independent countries want to exercise their own development agenda.
2. Industrialization was synonymous with development.

4
 A logical accompaniment of these views were planning models, focusing on the flow of resources
 The planning models used were:
 Planning for resources: such as Simple Harrod - Domar and Mahalonobis
models.
These models are all silent on price, and foreign exchange rate
flexibility.
The predominant view of policy makers at that time was that growth
and efficiency should take priority and the issues of equity, poverty
alleviation etc should be taken care of at a latter date.
 Multi - sector production function with multiple inputs and variable -
Input-Output models and Social Accounting Matrix.
E. Technology in generating growth
 Solow (1957) and Kuznets (1955):
 Emphasize the importance of technology in generating growth
 This provided a new point of departure for neo-classical growth theory 5

 They introduced critical elements like Research & Development etc.

 Kuznets (1971) was interested in why some developing countries were
successful and others not
 He placed major emphasis on the sources of structural change over time as
between agriculture and other sectors.
 He viewed policy as either basically accommodative or obstructive to the play
of underlying economic forces and did not view it as an exogenous variable.
1.1.2. The Washington Consensus
 Give more credit for the realization that prices matter more and that
macroeconomic stability matters less.
 The major contributors of the idea are: Little, Scitovsky, and Scott 1970,
Bhagwati 1978, Krueger 1978, Cohen and Ranis, 1971, among others
 They insisted that a re-structuring of the rails of development was needed.
6
 The main ingredients of the consensus are:
 Privatization and unified and competitive exchange rates
 Simultaneous liberalization of financial markets
 Relative openness to Foreign Direct Investment and gradual deregulation of control
systems
 Emphasize on R and D
 Changes at micro level: labor market productivity, legal, financial and other
institutional reforms
1.1.3. The Oscillating Search for a Silver Bullet
 Viewingper capita income growth as the key objective has been questioned for
sometimes.
 Seriousattention has been given to the distribution of income (both private and public
income poverty is reduced)
 The public income poverty can be seen through various human development dimensions
like infant mortality and life expectancy etc. as fundamental objectives of
7

development.
 Theoretical Revisionism
There is a need to revise some theories due to the
advancement in theoretical thinking and problems faced in
global relations recently. These are:
 New Trade Theory: the challenge to openness and favoring
import substitution leads to the two-way relationship
between growth and human development.
Recent emphasize of development economists are on:
 Micro foundations of development issues- women household
decision making and poor performance of land  labor
8

 Micro-credit organizations and NGOs in developing countries .

 Thebasic efficiency - equity trade offs led to redistribution with
growth approach of development
 The controversial relationship between growth and income poverty
alleviation is that growth is a necessary but not sufficient condition
for poverty reduction.

1.2. Historical background of economic planning

 The idea of planning has a long history
 The evolution is from three perspectives:
 Planning in eastern Europe - socialist perspective
 Planning in western Europe - capitalist perspective
 Planning in underdeveloped countries - mixed economic 9

perspective
1.2.1. Planning in Eastern Europe
 During the 19th century thinkers and writers in the Eastern Europe
became fed up with the inquiry and contradictions of pure
capitalism.
 They developed the idea of state intervention to prevent inequalities
resulting from capitalism.
 Butit was only state intervention that was advocated. There was no
mention of economic planning and how to interrelate
 In1928 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 plan was to achieve the rapid
transformation of a backward agriculture sector into a modern
industrial sector. 10
 1.2.2. Planning in Western Europe
 There could be several factors that necessitate planning in Western Europe-
 Wars
 Great depression of 1930th
 Expansion of markets and specialization.
 A series of the above historical development led to the coordination of economic policies or planning. These
are:

A. The development of science and technology made planning possible

as well improve computation facility and advances in management
theory. The intervening depression reminded the state of the
tragedy incompleteness of economic theory and public policy.
B. The 1930s great depression of the capitalist world.
 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.
 Meanwhile there was an attempt to plan economic life in Nazi German and Fascist Italy during the 1930s.
11
 The objective of the economic planning in the West
was basically different from that of the Soviet Union.
The purpose of planning in Nazi Germany was
primarily to build up the war potential rather than
improving the living standard of the people.

C. The outbreak of World War I and II necessitates the

proper and efficient planning of economic resources
for successful prosecution of the war.

D. The war devastated countries of Europe were

compelled to resort to economic planning to
rehabilitate themselves owing to:
1. As a condition for receiving assistance under the
Marshal plan, the USA insisted upon these
12
 2. 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 in19 30s.
E. The growth of markets and increased specialization led to increased
interdependence among economic activities and to greater economic
externalities which lead to adoption of economic planning. There is
a need to intervene public agencies to rectify the negative
externalities.

F. The development of democracy also lead to the adoption of

planning in order to rectify social inequalities people could vote for
those who experience an interventionist approach.
13
1.2.3. Planning in Underdeveloped Countries
 Economic planning was considered as important remedy for underdeveloped countries in their desire for
industrialization.
 Economic planning was considered as a tool to achieve rapid economic development
 However, the development or evolution of planning took a different path than the rich countries in the
following reasons:
A. In Less Developing Countries, planning was considered as an ideology rather than a means because in these
countries planning was considered as an expression of many things such as:

 Desire of self control

 Desire or expression of independence
 Expression of self-determination
 Then planning as a political and cultural goal

14
B. New leaders or elites emerged when they got independence with new visions and ideas. This brings new
decision making capacity.
 These new leaders have to plan because it was considered as a potential tool to survive and prosperity
 Planning here was not a consequent of industrialization which is the inverse of the Western.

1.3. Meaning of Economic Planning

 There is no agreement among economists with regard to the meaning
of the term economic planning
 It is often confused with communism or economic development.
 Any type of state intervention in economic affairs has also been
treated as planning.
 But the state can intervene even without making any plan.
 Planning is a technique or a means to an end, the end being the
realization of certain pre-determined and well-defined aims and
objectives 15
  The end may be to achieve economic, social, political or military
objectives
 Planning is a conscious and deliberate use of the resources with a view to
achieving certain targets of production.
 It represents a complete break from the policy of laissez-faire
 The two main constituents of the concept of planning are:
A system of ends to be pursued and
 Knowledge as to the available resources and their optimum allocations.
 Professor Lewis has referred to six different senses in which the term
planning is used in economic literature
 It refers only to the geographical zoning of factors, residential buildings,
cinemas and the like. Sometimes this is called town and country planning and
sometimes just planning.
 Deciding what money the government will spend in the future if it has the
16

money to spend.
A planned economy is one in which each production unit or firm uses
only the resources allocated to it by quota and disposes of its product
exclusively to persons or firms indicated to it by central order.
 Planning sometimes means any setting of production targets by the
government whether for private or public enterprise. Most
governments practice this type of planning if only sporadically and if
only for one or two industries or services to which they attach special
importance.
 Here targets are set for the economy as a whole and intending to
allocate all the country’s resources between the various branches of
the economy.
 Theword planning is sometimes used to describe the means which
the government uses to try to enforce upon private enterprise the
targets which have been previously determined. 17
 ButFerdynand Zweig maintains that planning is planning of the economy
not within the economy
 Itis not a mere planning of towns and public works or separate section
of the national economy but of the economy as a whole
 ProfessorRobbins: economic planning is collective control or super
session of private activities of production and exchange.
 Hayek: The direction of productive activity by a central authority.
 Dalton:The widest sense is the deliberate direction by persons in
charge of large resources of economic activity towards chosen ends
 Lewis Lord win: economic planning is a scheme of economic
organization in which individual and separate enterprises and
industries are treated as coordinate units of one single system for
the purpose of utilizing available resources to achieve the maximum
18

satisfaction of the people's needs within a given time.

 Zweig : Economic planning consists in the extension of the functions of
public authorities to organization and utilization of economic
resources.
 Planning
implies and leads to centralization of the national
economy.
 Oneof the most popular definitions is by Dickinson who defines
planning as the making of major economic decisions on:
 what and how much is to be produced
 when and where it is to be produced and
 to whom it is to be allocated
 Economic planning as understood by the majority of economists
implies deliberate control and direction of the economy by a
central authority for the purpose of achieving definite targets and
19

objectives within a specified period of time

 As a working definition Planning is a technique or a means to achieve
an end.
 End refers to certain predetermined target or well defined
objective.
 End might be achieving:
Economic objectives, social objectives or military objectives or
both.
 The main point is not to have plan but what kind of plan do we need
to achieve the objectives.
 Interventionof state in all economic activities is inevitable.
Governments do intervene in an economy in one way or another. But
what matters is the degree and nature of intervention.
20
1.4. Need for planning
 Planning has been introduced in different countries for different reasons.
 Though one can describe many different factors for the adoption of planning, the major ones are the
following:
 Institutional
 Technological
 Economic Development
A. Institutional Requirement
 One aspect of planning in socialist is the abolition of private ownership of the means of production and its
replacement by state ownership.
 Another aspect of planning is the character of ideology that has inspired people in this structural change of
ownership.
 Planning has been found to be the most effective institutional medium for newly independent countries.
 Public Ownership: -once means of production are owned by the state the
need for planning emerges automatically.
21
  Replacingobstructive capitalism: Marx predicted that capitalism is
doomed to fail because of the inherent weaknesses in the system itself
 Ideological considerations: The ideology that motivates socialist
countries also requires for its practice the instrument of planning.
 National Resurgence: for the fulfillment of the national aspirations of
countries recently liberated from centuries of colonial rule.
 Almost all such countries adopted planning right from the inception of
their independence.
Symbol of sovereignty: newly independent countries found
in planning a symbol of asserting their liberation and
sovereign status.
Development planning enabled these countries to set their common
goals and gave them a sense of being sovereign in respect of what
to do and how to do it.
22
B. Technological and economic factors
 Technological Reasons
 Modern technologies can be put to proper use if there is planning on a national scale.
 Economic Reasoning
 The need to overcome the deficient functioning of the market system
C. Pre-requisite for Development
 For many countries development has been the major reason for the adoption of planning.
 Planning is an essential tool for a comprehensive and integrated development of economies that require
coordinated effort.

23
1.5. The Rationale for Planning in Developing Countries
 Developing countries need economic planning in order to achieve the following
objectives:
 To increase the rate of economic development
 To improve and strengthen the market mechanism
 To reduce unemployment and disguised unemployment
 To enhance the linkage between the agricultural and
industrial sectors
 To create social overhead that enhance agricultural
and industrial growth
 To expand domestic and foreign trade
 To eradicate poverty
 To be Self sufficient in food and raw materials
 To reduce inequality
24
1.6. Pre- requisites for successful planning
 The formulation and success of a plan require the fulfillment of the following factors:

1. Planning commission
The first prerequisite for a plan is the setting up of a planning
commission which should be organized in a proper way.
Involves experts like Economists, statisticians, engineers etc.
2. Statistical data
Thorough survey of the existing potential resources of a country
together with its deficiencies
 Such a survey is essential for the collection of statistical data and
information with regard to the total available material, capital and
human resources of the country
It requires the setting up of a central statistical organization
with a network of statistical bureaus for collecting statistical
data and information for the formulation of the plan.
25
3. Clear Objectives
 Objectives: to increase national income and per capita income; to
expand employment opportunities; to reduce inequalities of income and
wealth and concentration of economic power, to raise agricultural
production, to industrialize the economy, to achieve balanced regional
development and to achieve self-reliance etc
 The various goals and objectives should be realistic, mutually compatible
and flexible enough in keeping with the requirements of the economy.
4. Fixation of Targets and Priorities for achieving the objectives.
 They should be both global and sectoral. Global targets must be bold and
cover every aspect of the economy.
 They include quantitative production targets
 The sectoral targets pertaining to individual industries and products in
physical and value terms both for the private and public sectors.
 Global and sectoral targets should be mutually consistent.
 Prioritiesshould be laid down on the basis of the short-term and long-
term needs of the economy keeping in view the available material,
capital and human resources.
26
5. Mobilization of Resources
A plan fixes the public sector outlay for which resources are
required to be mobilized. There are various internal and
external resources for financing a plan
6. Balancing in the Plan
 A plan should ensure proper balance in the economy, otherwise shortages or surpluses will
arise as the plan progresses.
 There should be balance between saving and investment, between the available supply of
goods and the demand for them, between manpower requirements and their availabilities,
and between the demand for imports and the available foreign exchange
 In fact, two kinds of balances must be secured in a plan.
 Physical Balance and the monetary or financial balance

7. Incorrupt and Efficient Administration

 A strong, efficient and incorrupt administration is the sine
qua non of successful planning. But this is what an
underdeveloped country lacks the most. Lewis regards a
strong, competent and incorrupt administration as the first 27

condition for the success of a plan.

8. Proper Development Policy
 Professor
Lewis lists the following main elements of such a
development policy:
 investigation of development potential survey of national
resources, scientific research, market research;
 provision of adequate infrastructure (water, power,
transport, and communications) whether by public or private
agencies;
 provision of specialized training facilities, as well as
adequate general education, thereby ensuring necessary
skills;
 Improving the legal framework of economic activity,
especially laws relating to land tenure, corporations and
commercial transactions.
 helping to create more and better markets, including
commodity markets, security exchanges, banking, insurance
28

and credit facilities;

  seeking out and assisting potential entrepreneurs, both domestic and foreign;
 promoting better utilization of resources, both by offering inducements and by
operating controls against misuse; and
 Promoting an increase in saving, both private and public
 Good policies help, but they may not ensure success.
9. Economy in Administration
 Every effort should be made to effect economies in administration, particularly
in the expansion of ministries and state departments.
 The people must feel confident that every pie that they pay to the government
through taxation and borrowings is properly spent for their welfare and
development and not dissipated away.

29
10. An Education Base
 Fora clean and efficient administration, a firm educational base is
essential.
 Planningto be successful must take care of the ethical and moral
standards of the people
11. A Theory of Consumption
 Accordingto Professor Galbraith it is an important requirement of
modern development planning
 Underdeveloped countries should not follow the consumption
patterns of the more developed countries
 Cheap bicycles in a low-income country are more important than
cheap automobiles. An inexpensive electric lighting system for the
villages is better than a high capacity system which runs equipment,
30

the people cannot afford

12. Public Cooperation
Above all, public cooperation is considered to be one of the
important levers for the success of the plan in a democrat
country. Planning requires the unstinted cooperation of the
people.
Economic planning should be above party politics, but at the
same time, it should have the approval of all the parties.
Inother words, a plan should be regarded as a National Plan
when it is approved by the representative of the people

31
1.8. Limitation of Planning
As a tool planning could not be a remedy for all economic and others ills.
Broadly the limitations could be on:
Concepts
 Coordination
 Action
Follow up
The specific limitations observed on planning are:
Planning heavily depend on reliable data. The potential benefits of planning will be
undermined if there are unreliable data.
The problem of discontinuity. Planning models do not deal with random shocks.
Plans work effectively when social and economic development unchanged
continuously.
The problem of uncertainty. The problem with uncertainty could be minimized by
adopting probabilistic models but planning models are not using such methods.
32

Inflation: price instability would reduce the use of planning models.