Development Planning

W. Arthur Lewis

• Publisher: Routledge
• Year: 2004
• ISBN:
  9781134380978
• Edition: 1
• Topic: Business
• Subtopic: Business Development
• Index: Business

Developing countries' economists and civil servants will find no other handbook on their job so readable and succinct" The Economist
"probably the most useful book which has ever been written to show how a plan is made and what the policy requirements are for its implementation" International Affairs
Many books have been published on the theory of economic development, but very little has appeared on how a Development Plan is made, what the chief snags are and what distinguishes good planning from bad. The emphasis throughout the book is on policy, although the basic techniques for making a Plan are illustrated.
Much information is tabulated for ease of reading.

CHAPTER I
Patterns of Planning

Since the end of Second World War most countries of Asia, Africa and Latin America have published one or more ’Development Plans’. These Plans differ so much in structure and content that the title ‘Development Plan’ no longer conveys a meaning. The first task is therefore to sort out the characteristics of development planning.

A Development Plan may contain any or all of the following parts:

1. a survey of current economic conditions;
2. a list of proposed public expenditures;
3. a discussion of likely developments in the private sector;
4. a macroeconomic projection of the economy.
5. a review of government policies.

Economic Survey

The Plan normally begins by reviewing progress in recent years, especially since the last Plan was issued. Changes are noted in population, national output, investment, saving, consumption, Government expenditure, taxation, the balance of payments, and the performance of each of the major industries. Giving this information is not one of the purposes of the Plan; many governments produce some kind of Annual Economic Survey with this material, and many also produce Plan Evaluations from time to time, which examine the progress of the economy in various spheres, in the light of proposals in the Plan. In the Development Plan document such information is merely a curtain raiser, suggesting the problems which must be selected for further attention.

Government Expenditure

When the first Development Plans were issued at the end of the war, the emphasis was on determining priorities in the public sector. A review of public expenditure is still an essential part of any Plan. The first move in preparing a Plan is normally to ask each Government department or agency to submit its proposals for expenditure over the period of the Plan. Most of the routine work on the Plan consists of costing each proposal as carefully as possible, and estimating potential benefits, financial and otherwise. The total of the sums requested always greatly exceeds the money the Government is likely to have; hence the prime object of this part of the Plan is to assign priorities, deciding what is to be included, and what shall be postponed or rejected.

Hardly anybody doubts the value of this kind of periodic reassessment of what Government departments are planning to do, even though it is realized that modifications have to be made in between Plans. It is very easy for Government agencies, like any other institutions, to drift from day to day. The periodic call to look ahead, and to make and defend proposals before the planning authorities, in competition with the proposals of other agencies, helps departments to keep their sense of direction.

Private Sector Targets

The passage from planning the public sector to reviewing the private sector was made at an early stage. It was inevitable, partly because these sectors are inter-related, but still more because the rate of economic development depends more on what happens in the private sector than it does on expenditures in the public sector.

Most Development Plans contain chapters reviewing each of the major industries, analysing their prospects and their difficulties, and formulating programmes for increased output or sales. Special attention is given to promoting new industries which are thought to have good prospects, having regard to current estimates of markets and resources. Some of these reviews include specific targets in quantitative terms (e.g. investment, employment or output).

Sometimes these quantitative targets are used for making policy decisions; more often they are not. A statement that the output of a particular industry is expected to increase by 45 per cent during the next five years may have no significance whatsoever; or may serve merely as propaganda, intended to encourage producers in that industry to redouble their efforts. If the figure becomes the basis of policies, such as import controls, or building licences, or subsidies, it then becomes important to know how the target of 45 per cent was chosen. Most such figures are taken out of the air, but some more solid method becomes essential if the figures are to determine policy.

To prepare a reasonable set of private sector targets for a Development Plan involves a great deal of work. Markets and costs must be analysed with the same accounting and statistical techniques that private firms use for this purpose; and, in addition, adjustments must be made wherever the gain or loss to the economy as a whole is thought to be greater or less than that which accrues to private firms. This must be done for each industry separately; and then a check has to be made to ensure that the predictions for each industry are consistent with each other and with what is predicted for the economy as a whole.

Each industry buys from some other industries at home, and also buys some imports; it sells to other industries, to consumers and perhaps to exporters. It generates savings, pays taxes, and absorbs investment. The sum of the output predicted for each industry must equal what is predicted for total output; so also with investment in each industry, consumption of its product, exports, and so on. The only way to test the consistency of targets is to make a set of interlocking tables for each industry and for the economy as a whole. This is done by projecting national income, using standard national income and input-output procedures.¹

Exercises of this kind have gained rapidly in popularity among professional planners, mainly because macroeconomic planning provides a consistent framework for all the quantitative aspects of the Plan. In extreme cases the shape of the Plan is completely transformed. We are told in detail how much each industry will produce, import, export and invest; but there is no list of Government projects, and no indication of the policies which might bring the predicted results.

This evolution of planning concepts, from listing public expenditures, through reviewing industrial and agricultural policies, to making macroeconomic models, has not been unaccompanied by controversy. For one thing these different kinds of planning are done by different kinds of persons, each proud of his own methods, and somewhat contemptuous of the others’. A plan for public expenditure is best made by a man with Treasury experience, who is used to dealing with Government departments, and knows their tricks. A Plan centred on public policy is best made by a ‘practical’ economist, who knows the kinds of problems that emerge in developing economies, the various solutions which have been tried in various places, and the extent of their failures and successes. A Plan consisting of interdependent tables needs an econometrician, who can invent figures when they do not exist, make interdependent models, and solve any number of simultaneous equations. As these three types of men have jostled one another, they have snarled at each other, and made hostile remarks about each others’ work. Here is an example from an august source: the Report to the President of the United States from the Committee to Strengthen the Security of the Free World (known as the Clay Report) on The Scope and Distribution of United States Military and Economic Assistance Programmes:

There is a difference between sound national budgeting in economic and social terms on the one hand and theoretical long-term national development planning as it is often encountered. Extrapolations of mathematical models based on questionable statistics for debatable base periods seem to have a way of going wrong, even when it is possible to find economists who agree with each other. Furthermore these long-term projections have been of little or doubtful value and frequently have proved harmful by directing attention to the theory of economic development at the expense of its practical implementation. Sound governmental planning consists of establishing intelligent priorities for the public investment programme and formulating a sensible and consistent set of public policies to encourage growth in the private sector (p. 16).

Macroeconomic Planning

The principal danger of a macroeconomic exercise lies in its propensity to dazzle. The more figures there are in a Plan, produced by an army of professionals who have laboured mightily to make them consistent, the more persuasive the Plan becomes. Attention shifts from policy to arithmetic. Consistency can be mistaken for truth. Revision is resisted. Yet the Plan is not necessarily right merely because its figures are mutually consistent. However, this is a psychological rather than an intellectual danger. Once the point is grasped that mathematical exercises do not of themselves produce truth, a Plan with figures is no more dangerous than a Plan without figures.

The question remains: what useful purpose is served by producing doubtful target figures for the private sector? The answer turns on a number of factors, especially on the degree of interrelationship between private and public sectors, on the amount of control exercised over the private sector, on the persuasiveness of the planning process, and on the availability of reliable statistics.

That the public and private sectors are interrelated cannot be doubted, but it does not follow that one must make a mathematical model of the whole economy. Each public agency must take account of private plans when making its own. The Electricity Department must consult all potential major uses of power, in order to forecast demand. The Water Department must try to find out where new industries are to be located. Transport and other communications must also be integrated with the private sector, and so on, all along the line. This calls for much consultation with the private sector, but to include the results of this consultation in the plans of the public sector is relatively simple. Large-scale investors in the private sector have to meet the same problem every day; they have to know, or guess, how others will behave, in both the private and the public sectors. In small countries where all the chief decision makers know each other, and consultation is easily arranged, co-ordination can be achieved without elaborate models. In larger countries, like Britain or France or the United States, this argument for models is much stronger.

Public and private sectors are also interrelated in that the total size of the public sector programme must depend on what the private economy can bear. Most public sector programmes are too large. Typically a new Government comes into office having promised everybody schools, hospitals, water supplies, electricity, roads, houses, jobs and all the other good things of life. Undaunted by finding that the Treasury is empty, and that taxes bring in only 9 per cent of the national income, it proceeds to make a Plan. Postulate that the national income, now rising by 3 per cent, will rise by 7 per cent per annum through the Plan period, and you can programme on the basis that public revenue may be as much as 50 per cent larger within five years. The postulate is absurd, but that may not be obvious. Ask the planners to produce a programme for the economy as a whole, showing how all the various sectors are to expand, and this type of absurdity then becomes less plausible. But this is like using a steam hammer to crack a nut. One does not have to make elaborate models of the whole economy to come out with a reasonable basis for estimating what the public revenue will be.

The second argument for comprehensive planning turns on the degree of control which the Government exercises over the private sector. If the Government controls the private sector, through licenses, quotas and price-fixing, or attempts to influence the private sector through subsidies, it needs a well-articulated model to ensure that its decisions are both efficient and mutually consistent. A controlled private sector is like the public sector in that, if sensible decisions are to be made, they should be made in accordance with some programme. Now there is no doubt that the market economy, left to itself, gives the wrong answers in underdeveloped countries. Prices do not correctly reflect relative costs. Opportunities for reducing risks through co-ordinated action are neglected. Insufficient allowance is made for the value of knowledge acquired through unprofitable activities, and so on. The temptation to control the private sector, or at least to induce businessmen to do what they would not otherwise do, is therefore almost irresistible. Of course, an equally impressive case can be made against Government control of business; the Government is inefficient, corrupt, wasteful, not impartial, and so on. However, Government controls or influences business behaviour to some extent in every country in the world. We note merely that if the Government exercises extensive control over the private sector, it will need a programme for the private sector to ensure that its decisions are efficient and mutually consistent.

The Government may not require to forecast the prospective behaviour of the whole economy for its own decision-making; yet such a forecast may be useful in other ways. For there is a third argument in favour of such predictions, namely that the result may persuade private individuals to act more adventurously than they otherwise would. This argument turns on the interdependence of investment decisions. Suppose Firm A contemplates building a refrigerated storeroom. Its success may depend on whether Firm B goes ahead with its fishing trawlers, whether Firm C will bring down cattle from the North for slaughter, whether Firms D and E carry out their plans for employing 1,000 men, who will eat meat and fish stored in refrigerated space, and so on. For any one of these firms to go ahead it is necessary first to estimate what demand and supply will be if the others also go ahead, and secondly to be given some assurance that there will be a general forward movement. Forecasts for the whole economy help all concerned to see the possibilities created by a general expansion. The forecast cannot always provide full assurance of a general movement, but if it is constructed co-operatively, with private and public decision makers consulted at all crucial stages, the very planning process may help to give investors confidence. When a macroeconomic forecast is made for this purpose, it is known as ‘indicative planning’.

Indicative planning presupposes that the economy responds mainly to domestic demand, as is the case in mature economies. In very poor economies exports are most usually the engine of growth, and development depends mainly on opening up new export possibilities, or making better use of existing possibilities. The planners can therefore take the market for granted, and concentrate on opening up new natural resources for development, or improving the utilization of existing resources. An interrelated model begins to be useful as the economy begins to exploit the opportunities for import substitution, and to develop a complex pattern of inter-industrial relationships. The greater the interrelationships the more necessary it becomes to have an input-output model to reveal results which are no longer obvious. But in the average small, underdeveloped economy, input-output manipulations are not likely to tell the planners much that they do not already know.

The distinction between an ‘indicative’ and a ‘controlling’ Plan is important The Plans made by Communist countries are documents of authorization; they tell each industrial unit what it must produce and how much it may invest. A Development Plan, on the other hand, authorizes nothing. Even public expenditure is authorized not by the Plan but only by the Annual Budget passed by Parliament. The figures in a Development Plan indicate expectations, aspirations and intentions, but are not binding commitments. This (as we shall see later) is one reason for the irresponsible tendency to use grossly inflated figures, intended to impress the reader, without committing the writer. On the other hand, the fact that the indicative Plan does not commit helps it to ride changing circumstances better than a document which seeks to effect control.

Finally, the value of a macroeconomic exercise depends on how much confidence one has in the figures. Even in countries which are rich in statistics, forecasts of the economy have usually turned out poorly. In poor countries the econometrician has to invent many of the crucial figures. He says: ‘The income elasticity of demand for food has not been measured; let us assume it to be 0. 8.’ Or: ‘We do not know what the ore content will turn out to be; let us assume it to be 48 per cent.’ Or: ‘It seems reasonable to assume a marginal savings ratio of 0.2.’ Unfortunately, even if each of the basic assumptions were right to within 1 per cent, the final results could be highly erroneous, because so many crucial magnitudes are found by difference. For example, if we subtract 10,000 from 10,300, the answer is 300. But if we are told that each of the basic figures may be 1 per cent out, we can only be sure that the answer lies between 97 and 503, which is a range of 500 per cent! Many important magnitudes in economics are found by subtractions involving two nearly equal quantities; the balance of trade is the difference between imports and exports; personal saving is the difference between disposable income and consumption; the budget surplus is the difference between revenues and expenditures. Relatively small errors are therefore easily magnified.

The conclusion must be that it is useful to undertake statistical exercises where we have plenty of fairly reliable statistics; but the same exercises would be pointless where we would have to invent most of the statistics. It is useful to go through these exercises where we have plenty of statistics, even though we know that statistics are never completely reliable. For one thing, statistics can serve as cross-checks for each other, so reliability increases in something like geometrical proportion to the number of available figures. Furthermore, the larger and more complex the economy, the less easy it is to keep the whole thing in one’s head, and make interrelated decisions without calculation. In poor economies the statistics may easily mislead. One frequently rejects the statistics one is offered because one believes them to be wrong, having regard to what one knows about other economies at a similar level of development. (For example, we have had plenty of wild estimates of population growth, national income per head, numbers engaged in agriculture, growth of productivity, etc.) A sensible person, familiar with the economy, can often give a more correct quantitative answer than one would get from the available statistics. Also, since the economy is fairly simple, its interrelations are fairly obvious, and one can reach good conclusions without elaborate models.

In a country with poor statistics, the first Development Plan, and even the second, should concentrate on bringing order into the public sector’s programmes, and into economic policy. This is largely a matter of improving administrative machinery. The Cabinet has to learn not to take an important economic decision until civil servants and technical advisers have examined the matter from every angle. Ministries must be staffed with people competent to analyze the policies which they administer, and to prepare or have prepared, good feasibility studies of proposed projects. Experience must be acquired in planning a project, getting it started, keeping it on schedule, amending it to take account of unforeseen snags, and evaluating its results from time to time. Without a reasonably competent administrative machine, there is no basis for development planning.

Meanwhile, collection of useful statistics should also be accelerated. Then by the time one makes the Third Development Plan, there may be enough reliable statistics to justify attempting to construct an interdependent model for the whole economy. Much depends on the country’s size, and on the degree of interrelationship between its industries, since one can carry in one’s head the interrelationships of a small simple economy, but not of a large or complex country. Whether the economy responds mainly to export demands, or grows mainly in response to home demand, is also important. India is certainly ready for an elaborate mathematical model; whereas in most of the simpler African economies such a model would do no good, and, as the Clay Committee suggests, might well do harm, by deflecting attention from the major task of evolving useful policies and institutions.

Policy

In the private sector statistics may help, but what really counts is policy. The Government is seeking to induce people to do what they would otherwise not do—invest more in physical resources or in their own skills; change their jobs; switch from one crop to another; adopt new technologies; and so on. The set of policies which it will adopt to bring about these results is the core of private sector planning.

Can a Government really contribute to raising the rate of growth in the private sector of the economy? The first task of a Development Plan is to bring order, priority and foresight into Government expenditure; any Plan which ...

Table of contents

• Cover Page
• Title Page
• Routledge Library Editions—Economics
• Copyright Page
• Preface
• Chapter I: Patterns of Planning
• Chapter II: Plan Strategy
• Chapter III: The Arithmetic of Planning
• Chapter IV: The Planning Process