28 Jan What are the Important Types of Economic Planning?
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(1). Direction and Inducement Planning:
(i) Planning by Direction:
Planning by direction is an integral part of a socialist society. It assumes complete absence of laissez faire.
Therefore, it implies complete centralized planning with no features of a private economy. Under planning by direction, planning authority takes charge of the productive resources and use them in accordance with social priorities.
In other words, there is one central authority which plans, directs and orders the execution of the plan. Market forces are not allowed to operate freely. Both saving and investment are strictly controlled by the planning authority. The state holds the commanding posts in its hands by taking over entire private industrial and agricultural sectors and banking and transport. “Without such concentration, the state would lack the means to carry out the tasks of the plan. Provisions in the plan would be mere pious wishes without any guarantee of realization attached to them.”
Planning by direction is comprehensive and embraces the entire economic life of the country. Russia provides the best example of planning by direction. Under such planning, the targets for optimum planning can be realized. Full employment can be ensured. Oligopolistic and monopolistic tendencies can easily be eliminated.
Arguments against Planning by Direction:
1. It provides no consequence of actions:
Modern economic system is so complex that no planning authority can take quick and right decisions to tackle its old problems. Prof. Lewis says that, “in planning by direction, the result is always a shortage of something and a surplus of others.”
2. Imperfect Result:
It has also been noticed that planning by direction seems accurate and perfect at the time of formation but fulfillment may be upset due to some adverse circumstances, thus, it delivers imperfect and wrong results.
In the case of direction planning, all schemes are finalized once for all and there is no scope for revision and modification. Thus, it becomes rigid. Prof. Lewis has rightly observed that “the price mechanism can adjust itself from day to day, the flow of money alters and prices and production respond, but the economy planned by direction is inflexible.”
4. Costly Affair:
Planning by direction requires the services of thousand of economists and an army of clerks for its implementation. In this way, it is costly affair to assign a large number of man power just for nothing while this job can simply be done by price mechanism.
5. Only Temptation for Higher Standardization:
No doubt, standardization is known engine of growth but, in fact, it is an enemy of happiness. It may be fatal in case of foreign trade as a country can maintain foreign trade only if it is pioneering new ideas, inventing new goods and further making adjustment in its production to consumer reaction.
6. No Place for Consumer’s Sovereignty:
In direction planning, there is no place for consumer’s sovereignty. Both consumer and labour markets are determined by the planning authority.
(ii) Planning by Inducement:
Planning by inducement is consistent with democratic planning. It referred to the planning by manipulating the market. There is no compulsion and direction but only persuasion. Therefore, in planning by inducement, the state manipulates the market economy not by command but by providing inducement to secure its objectives.
The planning authority induces the people through monetary and fiscal measures and through appropriate price policies to act in certain desired ways. In case, planning authority wishes to raise the level of production, it can do so by granting subsidies. Similarly, price control and rationing, can be adopted in case of scarcity.
Furthermore, in order to increase the rate of capital formation, planning authority can undertake public investments or encourage private investment. In a real sense, quantitative methods of credit control can help in a long way in maintaining the price level while qualitative method of credit control can help in diverting investment into desired channels.
Prof. Lewis has pointed out the following difficulties of planning by inducement:
1. Difficult to adjust Demand and Supply:
Shortage or surplus is a common phenomena in an economy. Price control and rationing may be essential until supply is augmented to meet the increased demand. Under these circumstances, the efficiency of planning is judged not by excellence of the system of rationing and price control. Shortages can be eliminated through price control. However if planning by inducement is not properly worked out, it merges into planning by direction.
2. Not Suitable to the Requirement of Underdeveloped Countries:
Another difficulty of inducement planning is that it is not conductive to the requirement of less developed countries. In fact, these countries need faster rate of increase in investment and must go into desired channels. Therefore, the state must actively direct investment into such activities where social gain is greater than the private gain.
3. Methods of Monetary and Fiscal Control are Weak:
The instruments of monetary and fiscal control are too weak and mild to bring desired changes in the economy especially in the backward countries as its problems are quite different from the problems of well advanced countries.
(2). Democratic and Totalitarian Planning:
(i) Democratic Planning:
Democratic Planning implies a system of economic order in which the authority that vests in the state is based on the support of common masses. The economists like Hayek and Lippman have pointed out that planning is incompatible with democracy. Hayek says that “What was promised to us as the road to freedom was in fact the high road to serfdom.” Therefore, in democratic planning, the state does not control all the means of production and does not regulate economic operations of the private economy directly.
The main characteristics of democratic planning are as follows:
(i) As a consequence of democratic planning, mixed economy comes into being. Public and Private Sectors operate side by side.
(ii) Central Planning Authority has direct control over Public Sector.
(iii) Private sector is indirectly controlled by the Central Planning Authority in the national interest through fiscal and monetary measures.
(iv) People enjoy economic, social and religious freedom. People have freedom to conduct such economic activities as consumption, production, exchange, investments etc. in the national interest and social welfare of the community as a whole.
(v) People’s co-operation is sought in the preparation of the plan. There is close relationship between welfare of the people and economic activities.
(vi) One of the aims of planning is to co-ordinate the activities of public and private sectors.
(vii) People’s co-operation is sought in achieving the targets of the plan by giving them proper incentives.
(viii) Economic activities are conducted both to earn profit and promote social welfare.
(ix) Under democratic planning there is importance both of price mechanism and government-decisions.
(x) Objectives of public sector and private sector are co-ordinated
(xi) It is quite a flexible planning. There is enough scope to modify-the targets of private sector. Targets of Public Sector are subject to change according to changed circumstances.
(xii) It has a tendency of decentralization.
(xiii) Its main objective is to raise the standard of living of the people quickly. As such, consumer goods industries are given as much importance as heavy industries.
In democratic planning, the philosophy of democratic government is accepted as the ideological basis. Under this type of planning, the decisions of the private sector are influenced by incentives and partial controls through monetary and fiscal policies. People are associated at every step in the formation and implementation of the plan. Unlike fascist planning, it is not based on force or coercion. In fact, democratic planning reconciles capitalism with government interference.
Since democratic planning is a planning by the people, for the people and of the people, the state comes into the picture as a representative of the people but not as a separate identity. The state government gives wide publicity to know the opinion of the people and tries its best to seek the cooperation and active support of the people in the country. It seeks to avoid all clashes and tries to harmonies different opinions for the sake or welfare of the poor lots.
Therefore, different agencies, voluntary groups and other associations are closely linked and play pioneer role in its execution. Furthermore, the plan is fully debated in the Parliament, state legislature and in the private forums. The plan prepared by the planning commission is not fully accepted but it can also be rejected or modified. Thus, the plan is not forced from the above on the people but in fact, it is planning from below.
(ii) Totalitarian (authoritarian) planning:
When planning is adopted under a planning, it is called totalitarian dictator. Under this planning, state fully controls the economic affairs, productive resources and economic decisions. The state is the final authority in allocating the productive resources and it determines in accordance with the directions of the central authority.
The profits or production instead of being pocketed by the private capitalists go to the state for ameliorating the problems of the poor lots in the country. Totalitarian planning shows the complete socialization of entire national economy. Under such planning, plans are formulated, controlled, financed and executed by the state and people have to do nothing in it. This type of authoritarian planning has found in the writing of Maurice Dobb.
Totalitarian Planning has the following features:
(i) Public sector alone functions in this type of planning. Government has full and direct control.
(ii) Central Planning Authority formulates a comprehensive plan for the entire economy.
(iii) There is no economic freedom and all economic decisions are taken by the government.
(iv) People’s welfare can be sacrificed at the altar of rapid economic development of the country. Minimum needs of the people alone are catered to.
(v) Means of production are controlled by the government that functions as an entrepreneur. Private enterprise has no place in it.
(vi) Economic decisions are not taken by the market forces or price mechanism but by the government.
(vii) There is no economic freedom. Government alone controls all economic activities.
(viii) All economic activities like foreign trade, foreign capital, investment and loan etc. are controlled by the government.
(ix) It is a rigid planning. People can be pressurized by the government for the achievements of the plan-targets.
(x) It is more comprehensive and efficient.
Regarding choice between democratic and totalitarian planning, some regard democratic planning as better because it gives complete freedom to consumers and producers. But this planning accelerates the pace of economic development slowly. Others regard democratic planning as imaginary since the interference by the government is indispensable. On the other hand, under totalitarian planning, there are big sacrifices by the public. But the pace of economic development is very fast. Prof. Myrdal has observed that ‘planning in any way has affected democracy’.
(3). Centralized and Decentralized Planning:
(i) Centralized planning:
The framing, adopting, executing supervising and controlling the plan is done by central planning authority. Planning authority determines targets and priorities. It is the duty of the planning authority to bring harmony in the planning process. This type of planning comes from the top to the bottom. This plan determines the equality and cohesion. The central planning authority which determines the basic policies in view of the regional and local needs.
All investment decisions are taken in accordance with goods and targets fixed by the central planning authority. All economic decisions like what to produce, how to produce, where to produce and to whom it is to be allocated are exclusively decided by the central authority. All aspects of the economy are controlled by the central authority. Again the prices and wages are also fixed by the planning authority.
Oscar Lange criticized centralized planning as it is not democratic in nature and character. The complete process of planning is regulated and controlled by authority. This planning is inflexible due to which it has less adaptability. There is no economic freedom at all. Further, the disequilibrium arising on account of centralized planning cannot be easily corrected.
(ii) Decentralized Planning:
Under this planning, responsibility lies with local and regional officials who take economic decisions about the plan. In other words, this planning starts from the grass roots. In other words, this type of planning is from bottom to top. Under this, plan is framed by the central planning authority by consulting different administrative units of the country.
The plan incorporates plans under central, state and local schemes. Also plans are prepared for different industries too. But individual firms are free to take their own decisions about investment and output. Prices are determined by market mechanism even though there are government controls.
There is complete economic freedom in consumption, production and exchange. The main defect of decentralized planning is that there is no uniformity and coordination among different sectors of the economy. This plan has been adopted in England and France.
Choice between Centralized and Decentralized Planning:
Decentralized planning is superior to centralized planning. It provides economic freedom and flexibility in the economy. Dependence on market mechanism results into shortages or surpluses in the production of goods and services. The adjustment can be made only through government. If there are shortages of goods, it will lead to inflationary pressures.
These inflationary pressures can be controlled through price controls and rationing. But these create more problems than what they solve. Also it is not possible to coordinate the decision of the planned and unplanned activities. This may lead to disequilibrium in the demand for and supply of goods and services. Again decentralized planning provides economic freedom and incentives to the market economy while centralized planning provides cohesiveness to the economy.
(4). Functional and Structural Planning:
(i) Functional planning:
Under functional planning, there is no need to build up new structure, rather the existing structure is corrected and modified. According to Zweig in his “The Planning of Free Societies’ has stated “Functional planning will only repair, not build a new, it will improve the wave of the existing order, but not supersede it. It is a conservative, or rather evolutionary type of planning which will not over turn the existing structure and moves only within its narrow border”. Thus functional planning brings no change in the economic and social set up.
(ii) Structural Planning:
In this type of planning the present social and economic structure is changed and a new structure emerges. In the developing countries, there is a structure planning. Big economic and social changes are brought about to usher into a new system.
For instance, shift from capitalist to socialist economy can be called a structural change. Structural planning can help in accelerating the pace of economic development. The Communist countries like Russia and China followed structural planning.
Choice between Structural and Financial Planning:
Indian planning is both structural and financial because under public sector, a new economic structure is built up where as under private sector, the existing structure is modified. There is not much difference in structural and financial planning. After sometimes structural planning turns into financial planning.
(5). General Planning and Partial Planning:
(i) General Planning:
It refers to planning of all activities in an economy. All sectors of the economy, namely, agriculture, industry, transport, irrigation, power, social services etc. are brought under its scope. The entire resources of the country are sought to be allocated among the different sectors.
(ii) Partial Planning:
It refers to the planning of a particular sector of the economy. If planning in a country is confined only to agricultural sector, it is called partial planning. Under it, only a part of the total investment is studied. It is a short- term method which is adopted to achieve a particular objective.
(B). On the basis of Time:
On the basis of time, planning can be classified into perspective and annual plans:
(6). Perspective and Annual Planning:
(i) Perspective Planning:
Perspective planning is a long run planning where targets are fixed for long period say 15 to 25 years. But a perspective plan cannot mean one plan for the complete period. In a true sense, broader objectives are to be achieved in a fixed period by dividing the perspective plan into short-run plans of 4 to 6 years.
The long-run objectives are so divided into short- run that one by one all the objectives are achieved in the long-run. In other words, short run plans pave way for the achievement of long run motives. For instance in India, under five years plans, the objectives of employment and national income have been determined on the basis of short and long-run.
According to J.Tinbergen, “The main purpose of a perspective plan is to provide a background to the shorter terms plans, so that the problems that have to be solved over a very long period can be taken into account in planning over short-terms”. The perspective plan has so many administrative difficulties due to which the fulfillment of the objectives becomes difficult.
(ii) Annual Planning or Prospective Planning:
Annual Planning or short term planning refers to 4 to 6 years plans which are further divided into annual plans so that each annual plan may fit in short-run plan and each short-run plan may ultimately fit in the long-run^ plan. Plans are further divided into regional and sectional plans. Regional plans are linked with regions, district and localities which are further divided into sectional plans for agriculture, industry, transport, foreign trade etc. The sectional plans are again divided for different branches like iron and steel, food-grains, exports etc.
(C) On the Basis of Finance:
On the basis of finance, planning is classified into physical and financial plans.
(7). Physical and Financial Planning:
(i) Physical Planning:
Physical planning is that where targets or objectives are fixed in terms of real physical resources. Plans are also formulated on the basis of real resources of the economy, i.e., the availability of natural, human, raw materials and capital resources. On the basis of these resources, the output targets are fixed. To quote second Five Year Plan, Physical planning, is an attempt to work out the implication of the development effort in terms of factor allocations and product yield so as to maximize incomes and employment. Financial planning is followed as a mean to achieve physical targets only. But the target under it, should be properly balanced. Further physical planning has to be viewed as an over all long-term planning rather than a short-term planning.
Physical planning has the following drawbacks:
Lack of statistics:
In case of physical planning, there is lack of statistical data. The targets without adequate statisticscannot be achieved.
It is difficult to balance different parts of the economy under physical planning. Due to structural difficulties, in the underdeveloped countries it is not possible to have internal consistencies.
Shortages in physical targets lead to inflationary pressures which is really very harmful for developing countries. The rate of savings will be low which leads to low capital formation. Financial Planning Ignored. Physical planning cannot be successful without financial planning. In case of India, due to lack of, financial resources in the closing year of (he second plan, the size of the plan had to be reduced.
(ii) Financial Planning:
Financial planning helps in removing disequilibrium between demand and supply to avoid inflation and to bring about economic stability. Finance is the basic key to economic planning. Without financial resources, physical targets cannot be achieved. All objectives are fixed in terms of finance i.e, how much national income, savings and investments are to be increased.
Financial Planning has the following limitations:
(i) Mobilizing resources through taxation may badly affect the savings.
(ii) There are two sectors in underdeveloped countries i.e barter and monetary system. There is imbalance between the two sectors. It will lead to price-rise due to scarcities of supplies.
(iii) No doubt supplies can be raised through imports but this will lead to deficit in balance of payments.
(iv) Financial planning is not suitable for the developing countries.
(v) Financial planning can be successful only if there are no bottlenecks. That way, it is necessary to use sectorial planning rather than over all planning.
(D) Other Types:
Other types of plans are discussed as under:
(8). Indicative and Imperative Planning:
(i) Indicative Planning:
Indicative plan is not imperative but flexible. In socialistic countries, planning is comprehensive where planning authority decides about the investment in each sector. Planning authority fixes the prices of the products and factors. All it decides is what to produce and in what quantities to produce. As this planning is rigid, any deficiency in one sector would adversely affect the economy which cannot be corrected easily.
Indicative planning is peculiar to the mixed economy of France. But this is quite different from the type of planning which exists in other mixed economies. By mixed economy, we mean simultaneous working of public and private sector. It is the state which controlled the private sector in different ways, i.e. by quotas, price, licenses, etc. But under indicative planning, the private sector is not rigidly controlled to achieve the targets and priorities of the plan.
The state gives full assistance to private sector but does not control it. It, rather, directs the private sector in certain areas to implement the plan. This plan was used in France from 1947-50 as Monnet Plan. France’s experience shows that the firms do not play the game when development programme does not coincide with profit expectations.
Generally monopolistic firms do not bother about government policies and use their power for personal benefit. Same way under inflationary pressures, the government resorts to direct controls rather than maintaining prices mechanism through monetary and fiscal policies.
(ii) Imperative Planning:
It refers to that where all economic activities and resources of the country operate under the direction of the state. The resources are optimally used by the state in order to achieve the targets of the plan. Consumer’s sovereignty is sacrificed under this type of planning. The consumers get fixed quantities at fixed prices. The government policies are rigid which cannot be changed easily. Any change can adversely affect the economy.
(9)Rolling and Fixed Planning:
(i) Rolling Planning:
Rolling plan was advocated by Prof. Myrdal for the development of developing countries. India experienced it for the first time in April 1978 under Janata Party rule and continued up to April 1980.
In the rolling plan, every year, three new plans are made:
(i) There is a plan for the current year which includes annual budget and the foreign exchange budget,
(ii) There is a plan for number of years say 3 to 5. It is changed every year keeping in view the needs of the economy,
(iii) A perspective plan for 10 to 20 years or more is presented where broader goals are stated. The annual plan is fitted into same year’s new 3 to 5 years plan and both are framed in the light of perspective plan.
Rolling plan is framed with a view to remove rigidities. It considers the unforeseen changes like natural calamities or economic changes. Under this financial and physical targets are revised. In this way, the rolling plan gives the benefits of both perspective and flexible planning.
But under rolling plan, long-term subjective cannot be achieved since the targets are revised every year. Such changes cannot maintain proper balances in the economy so as to achieve balanced development. Moreover frequent revision of the plan leads to uncertainties between both the public and private sectors. Further revisions of the targets make the attitude non-committal. This plan has been successful in Poland and Japan, but it failed in Mexico and Burma.
(ii) Fixed Planning:
Fixed planning is for some fixed period, say four or five or six or seven years. A fixed plan fixes definite objectives which have to be achieved during the plan period. Physical targets and financial outlays do not change except under emergencies. Under this plan, targets are achieved which are laid down in the plan.
This plan helps in maintaining proper balance in the economy. Further, there is no uncertainty in this type of planning. Fixed plan, with given objectives, ensures public cooperation. This type of planning needs political will for its successful implementation.
(10). Socialistic and Capitalistic Planning:
In socialistic planning, the economy depends on economic planning. The central authority formulates a plan for the entire economy. Capitalistic planning is focused on the unplanned economic order which gains momentum from some invisible forces in the market. The main feature of this type of planning is the absence of a central economic plan.
(11). Flexible and Rigid Planning:
Flexible planning refers to the possibility of adjustment, readjustment in targets, output and resources. This type of planning is dynamic. Rigid planning deals with fixed targets which are not subject to change in any adverse circumstances of the country.
(12). Regional, National and International Planning:
Regional planning refers to the decentralized control exercised over the region of a particular country. When economic planning is applied for the nation as a whole, it is known as national planning. International planning is meant for a state of affairs in which the resources of more than one country are the property of the countries as a whole.