Planning, Economic

views updated Jun 27 2018

Planning, Economic

I. Western EuropeJ. Tinbergen


II. Eastern EuropeJohn Michael Montias


III. Development PlanningW. Arthur Lewis



Planning is engaged in by all sorts of institutions; among them, business enterprises and governments. This article mainly deals with government planning. Present-day planning is rooted partly in socialism, partly in modern economic ideas as expressed in national accounts, Keynesian theories, and anticyclical policy generally. The latter expresses the desire to understand and influence the economy—the national economy, to begin with—as a whole. This desire was strengthened by the great depression, when it was clear that something had gone wrong. At the same time, planning, based on market analysis and similar techniques, has been increasingly applied in big business enterprises.

Over-all government planning was not applied in western Europe before World War n. Restricting ourselves to democratically ruled countries, we may say that the first examples of over-all planning were found in the United Kingdom, where the Economic Section of the Cabinet Offices prepared estimates of the national product and some of its components as a basis for the organization of the war effort.

Immediately after the war, when a number of democracies started to function again, the Netherlands and Norway followed the British example— each in its own way and for the purpose of postwar reconstruction. France soon followed in 1946. In a sense, some national planning was imposed on all member countries of the Organization of European Economic Cooperation (OEEC), created to administer the European Recovery, or Marshall, Plan, which started operations in 1948. Not long afterward Italy began an exercise in planning, known as the Vanoni Plan, for a balanced development of north and south. This plan was not given official status but served as an important background to Italian policy. In Sweden and Denmark planning developed gradually out of business cycle policy: the annual reports, for instance, of the Swedish Konjunkturinstitut hesitantly progressed in presenting estimates of the next year’s inflationary or deflationary gaps, adding suggestions for counteracting them. Several years later, in 1959, Belgium established its Programming Bureau.

The remaining countries did not have official agencies in charge of planning, but all OEEC members fully cooperated in the planning exercise of that organization for the period 1955–1960 (OEEC 1957). The planning issue became relevant for Germany when, in its Action Program, the Commission of the European Economic Community stated the necessity for some planning at the community level (European Economic Community 1962). The topic was widely discussed (Albrecht 1964; Plitzko 1964), and these discussions showed the differences in terminology and ideology still prevailing in western Europe, mainly in Germany, though even there they were more seeming than real.

This article will discuss the definition of planning which seems to be the most practical one; the theory of planning; the concepts of economic order and economic policy serving as the background of planning; the methods of short-term and long-term planning; the organization and procedure of planning activities; the supervision of plans and their testing; and the impact of planning on society.

Definition and theory of planning

Present-day western European countries have “mixed” ’rather than purely “capitalist” or “free-enterprise” economies. They have public sectors of considerable size, and they exert various types of controls over the private sectors. This state of affairs is a product of a pragmatic policy but is consistent with modern economic theory. If the question is asked what economic order—that is, what set of institutions— will maximize welfare under the constraints imposed upon us by nature—that is, the laws of technology and psychology—the answer is a mixed order (Tinbergen 1959; Myrdal 1960).

The old idea of Paretian welfare economics, according to which free enterprise would produce the optimum, is tenable only if the laws of technology exclude external effects and indivisibilities [seeWelfare economics]. Where external effects and indivisibilities do exist, activities characterized by either of them should not be left to private enterprise. A set of tasks for the community, represented by government, can be derived on the basis of this distinction. They consist of activities showing external effects or indivisible means of production and of a number of otherwise determined policy tasks. Among the former we have public production of energy, transportation services, education, and information. Among the latter we encounter the regulation of unstable markets, the redistribution of income (as required even by the Pareto optimum conditions), the organization of the monetary system, and the determination of the optimum level of savings and of an optimum level of total demand (high and stable employment). Taken together, these tasks constitute such a complicated set of activities that their efficient execution requires preparation. Planning is just that. (Over long periods the most desirable development of an economy should coincide more or less with the theoretical concept of optimal growth [seeEconomic growth, article onmathematical theory].)

We will not use the word “planning” in the sense of a particular order or policy, such as a command order with detailed intervention. Depending on the scope of the tasks assumed by the government, planning of these tasks will also be more or less extensive. Independently of the scope of the tasks, however, their preparation requires, in principle, the determination of general goals for the most desirable economic development of the country. The government’s activities then must be conducive to that most desirable development. To the extent that such an optimum development requires government activities, it represents a task-setting device for various public institutions. The delineation of private activities is not, as a rule, coercive but, rather, “indicative.” It constitutes a background for the appraisal—in the future—of the actual accomplishment of the private sector. This does not necessarily mean that all deviations from the plan must be considered “errors” of the private sector. There may have been good reasons to deviate from the plan.

Moreover, the difference between the role of the plan for the public sector and for the private sector should not be exaggerated. Only in the abstract can government completely control all its activities. In reality it consists of so many levels and units that its activities cannot all be determined at the top. The lower units, such as the municipalities, can be influenced mainly by indirect means, and there is not so much difference, from this point of view, between municipalities and private enterprises. Moreover, a certain degree of codetermination may be given to the private sector in the formation and the execution of the plan.

Planning should be seen as a manifestation of the ever-growing tendency consciously to organize human activity. In this process there is a continuous search for efficiency in its broadest sense. In the particular case of economic planning this means, on the one hand, that social or group needs are increasingly recognized as aims and, on the other hand, that no means, including planning, should be used where not positively contributing to these aims. We observe a gradual expansion of the fields to which planning is being applied; thus, education is now rapidly becoming more planned than some decades ago, and there is a tendency to extend planning to ever larger geographical areas. Finally we observe the integration of hitherto isolated and incoherent pieces of planning into a broader, more coherent frame. Thus, town and country planning are now becoming integrated into national economic planning.

Economic order and economic policy

We have already stated that the optimum economic order must be described as a certain set of institutions. Examples of such institutions are private enterprises, public enterprises, markets, social insurance schemes, tax systems, monetary systems, and hierarchies of public authorities. Institutions in turn are characterized by certain rules of conduct or as instruments of the society’s economic policy. Examples are tax rates and social insurance benefits. Apart from a static concept of an optimum order, there is a continual process of striving for and managing the optimal order, which we usually call economic policy.

In a general way, any economic policy may be described by its aims and its means. Both aims and means may be qualitative or quantitative. Most institutions as such must be described in qualitative terms; their rules of conduct or policy instruments can sometimes be described in a quantitative way. Thus, the level of a tax rate, of an import duty, or a public investment has a quantitative aspect. We will use the word “target” for a quantitative aim and the word “instrument” for a quantitative means and reserve the words “aims” and “means” for situations where both qualitative and quantitative aspects are present.

There is a causal nexus from means to aims, with intermediary consequences of the use of means which may be called intermediate or derived aims, as distinct from final aims. Thus, the ultimate aim may be higher utility or satisfaction for the citizenry, but higher consumption may be the first derived aim, higher incomes the second, higher employment the third, and higher investments the fourth. Clearly, short-term policies will be characterized more by derived or “nearer-by” aims than long-term policies will be. We will put the dividing line between short-term and long-term policies at somewhat more than a year. The standard example of short-term plans will be an annual plan and that of long-term plans a five-year plan. Often a five-year plan will be classed as a mediumterm plan and the phrase “long-term plan” or “perspective plan” will be used to indicate 15- to 25-year plans. In western Europe the emphasis has been on the shorter range, mainly because of the already developed character of the economies. For less developed economies, perspective plans are more important than for developed economies.

For short-term policy in western Europe a well-known set of targets has been (1) full employment; (2) balance of payments equilibrium; (3) a level of net investment somewhere near 15 or 20 per cent of national income; (4) an increase in the share of lower income groups in national income; and (5) stable prices. It should be noted that full employment has been interpreted variously, but often as a level of unemployment less than 2 or 3 per cent of the labor force. It should also be noted that the fourth aim has seldom been expressed in figures and, finally, that price stability has not been attained.

A compilation of the targets or “objectives” of economic policy in Western countries, including the United States, was made by Kirschen and his collaborators (Kirschen et al. 1964, p. 148). They added a listing of instruments, making a two-entry table indicating which instruments are supposed to help attain which objectives. The table contains 16 objectives: (1) full employment; (2) price stability; (3) improvement in the balance of payments; (4) expansion of production; (5) promotion of internal competition; (6) promotion of coordination; (7) increase in the mobility of labor; (8) increase in the mobility of capital; (9) international division of labor; (10) satisfaction of collective needs; (11) improvement in the distribution of income and wealth; (12) protection and priorities to regions or industries; (13) improvement in the pattern of private consumption; (14) security of supply; (15) improvement in the size or structure of population; and (16) reduction in working hours.

The main instruments of economic policy in western European countries have been public finance and social insurance, the regulation of unstable markets, and some quantitative restrictions in foreign trade. A fuller list is given in the table just discussed. It is subdivided into 17 instruments of public finance; 17 instruments of money, credit, and the exchange rate; 16 instruments of direct control; and 11 types of changes in the institutional framework.

These numbers probably do not exhaust the number of instruments available. One may enter into much more detail by distinguishing between a number of sectors or industries, and both in wartime and postwar Western economies and in communist-ruled economies, a very large number of instruments consist of investment encouragement or quantitative restrictions for single industries. In many instances there is a choice among several instruments to attain the same target.

In principle, both the aims and the means are the subject of autonomous choices of the community: questions of taste, in a way. The restrictions on this autonomy are that the means and the aims should not be mutually inconsistent; this implies that the means should, in the degree used, lead to the aims. In practice the autonomy is of little consequence because of the similarity in tastes among different nations. As a rule the aims are not very different among nations; the autonomy on the side of means usually consists of excluding some extreme means, such as forced labor and detailed intervention. The choice among the some sixty instruments mentioned by Kirschen depends largely on the effects expected from each.

The knowledge of these effects is equivalent to knowledge about the operation of the economy. Kirschen’s table suggests some qualitative knowledge of this kind in that it indicates, for each objective, the instruments supposed to effect it. What is needed for planning purposes, however, is quantitative knowledge. This has been accumulated for the last half century by an ever-increasing volume of statistical and econometric research.

The remainder of this article will discuss the various elements of the planning process, that is, of the preparation of economic policy. The main elements may be defined as the tasks, the methods, the organization, and the procedure of planning. What is meant by the tasks will be clear from what has been said in the present section. They consist primarily of making up plans, either year by year or for longer periods. In addition there are preparatory studies, especially those concerning alternative methods of production in some industries and those concerning the structure of consumer demand. There may also be special studies of the effects of the introduction of new institutions or of particular measures—for instance, to increase productivity or to regulate a given market. Studies about the consequences of European integration represent another example of an element in the planning process.

The methods of short-term planning

By the “methods of planning” will be understood the technical methods used to estimate the framework of figures constituting the hard core of any plan. This quantitative job must always be preceded by a qualitative analysis of the changes in the social order deemed desirable and of the significance that should be attached to the economic phenomena that are to be estimated quantitatively. For short-term plans the changes in the social order cannot be large, since such changes usually take time. The main emphasis will be on the quantitative part of the process, which may be seen as the necessary adjustment of the economy to short-term changes in world markets and to autonomous changes in private behavior, with a view to maintaining full employment and achieving some of the other targets mentioned in the preceding section, including the portion of a long-term plan of development pertaining to the year considered. As already stated, this requires knowledge of many reactions of the economy to autonomous changes and to induced ones. Examples of such reactions are demand and supply elasticities (both with regard to prices and to other determinants) in a number of markets, such as the market for consumer goods, for export goods, and so on. The main problem is to find the values of the instrument variables—taxes, public investments, credit and wage policies, etc.—given the policy targets and the changes in external or exogenous data. We will use the latter term here in the restricted sense of not including changes in instrument variables. Sometimes such exogenous variables are indicated as “other data.”

Essentially there are two methods of solving the main problem: trial and error and the mathematical method. By the latter is meant a systematic use of symbols and equations (or more generally constraints, including inequalities) expressing the reactions mentioned before and a number of technical relationships, which must be satisfied simultaneously by all the figures in the plan. As a rule, combinations of both methods will be used; one may even argue that certain portions of mathematics do not surpass the level of trial and error. Yet the weight given to one or the other of the two extremes differs among countries, and the Netherlands Central Planning Bureau is known for a rather extensive use of simple mathematical models for the framework of planning. The models used (Netherlands… 1956; Tinbergen 1956) can be characterized as generalized Keynesian models, since the Keynesian consumption equation is one of the most important.

Since the Netherlands is a small country, export and import demand play a considerable role. Supply equations have been given the special shape of price fixation equations. Capital as a factor limiting production does not enter the system: it is assumed that in the short run capital goods are redundant, but labor does enter as a limiting factor. Public finance is described in some detail, distinguishing various types of revenues. Investment is split into private and public, and the private into investment in fixed equipment and in stocks. The models used often consist of some thirty or forty equations. They are adapted to the particular purpose they have to serve. The models used for the general plan differ from those used for special studies (see below). They do not contain financial flows, that is, changes in the main types of financial assets, since so little is known about the propensities to hold various kinds of assets. Financial flows are dealt with separately, using balance equations and a number of less formalized assumptions about the changes in single asset holdings (see below). The formal model refers to the main commodity flows, prices, and current payments of incomes, expenditures, taxes, etc.

The application of the model starts with an estimate of the initial position, that is, the situation in the year preceding the plan year. This position, of course, has to be in part estimated and is presented in the form of national accounts and the balance of resources and expenditures.

The next step consists of an estimate of the probable changes in exogenous data (in the restricted sense defined before, that is, excluding policy instruments). An important part is played by estimates of the changes in exports, taking into account income changes of the country-groups of destination, changes in the price levels of competitors and of Dutch exports, incidental changes in trade policies, etc. Another important datum is the level of private investment to be expected in the coming (plan) year. Investment estimates are based partly on econometric relations but, because of the latter’s unreliability, also on a direct survey of a large number of firms. A number of items of public expenditure are also considered data, and figures for these are obtained from the treasury. Agricultural supplies are usually known from crop statistics for the current year and are estimated at the “normal” level for the plan year. Seasonal fluctuations in building and demand for fuel are also assumed to be normal.

The coefficients of the equations reflecting reactions, technological or institutional relationships, etc., are taken from econometric and statistical studies and are revised periodically.

With these figures given and with given targets, the system of equations can be used to determine the most desirable values of the instrument variables and of the economic variables not representing targets. The results are discussed with various ministries, and as a rule the published plan will be the result of these discussions, avoiding a deviation of policy and plan. The influence the plan exerts is mainly through these discussions. Sometimes alternative figures are added in order to show the possible effect of changes in instrument variables. Thus, the effects of possible changes in wages other than the ones envisaged or of public expenditure for different purposes have been shown in some plans.

Once the current money flows have been estimated, financial flows (changes in assets) are estimated so as to produce the most desirable development. The main problems involved in annual planning may be summarized, using the schema of B. Hansen (1955) as follows. From the table of resources and uses we derive the permissible volume of private consumption as the residual between production on the one hand and investment and public expenditure on the other (assuming balance of payments equilibrium on current account). From permissible consumption we derive the necessary tax level. From the financing equation for private investment we derive the necessary increase in banking credit to business. From the balance sheet of the commercial banks we then derive the necessary change in reserve requirements, which constitutes the main instrument of monetary policy.

The methods of long-term planning

France has given attention to long-term planning to a greater extent than has the rest of western Europe. The French example is now being followed by other countries, including the United Kingdom, the Netherlands, and Belgium. Long-term planning has not been entirely absent in the other countries but has been applied somewhat less systematically.

The method of the French Fourth Plan, as set out by Cazes (1962, pp. 33 ff.), was that of successive approximations. In a first approximation, a projection was made for a set of 17 sectors—presumably using input-output coefficients in addition to those already mentioned in “The methods of short-term planning”—employing three alternative assumptions with regard to the general rate of growth: 3, 4.5, and 6 per cent annual growth. In a second approximation, after the government expressed a preference for a rate of 5 to 5.5 per cent, more detailed figures were prepared by “vertical committees” covering 27 main branches and 300 sub-branches. The figures were checked by “horizontal committees” dealing with general aspects such as financing of investment, current demand versus supply, manpower and education supply, and so on.

The method is not too different from methods several authors have recommended to developing countries; one difference is in the relative scarcities of the factors of production. Capital is less scarce and labor more scarce in developed than in developing countries. This will come up in the concrete appraisal of single projects and in the choice of technologies. For developing countries this appraisal of projects is often added as a third phase. Lately, a geographical subdivision of the nation to be planned for has been added and a corresponding phase in long-term planning methods distinguished.

Long-term planning methods have also been developed for special purposes, such as the preparation of institutional reforms or educational planning. In the Netherlands, an extensive study was made of the introduction of unemployment insurance in a new form and of the introduction of profit sharing by workers. In both cases mathematical models were used in which variables appeared characteristic for the particular problem studied; for instance, in the first example the contributions to be made by employers and employees, the benefits to the unemployed, etc. A further example of special models is the model used to study the consequences of Benelux integration (Verdoorn 1960).

Organization and procedure of planning

The “organization of planning” considers the hierarchic relations within the group of persons and administrative units charged with the tasks of planning. The “procedure of planning” considers the nature and time order of outside contacts made during the execution of planning activities.

In the description of the organization, the distinction will be made between the external and the internal organization of the main administrative unit charged with planning. This unit will sometimes be an office, like the Netherlands Central Planning Bureau, within one of the ministries; sometimes it will have a more independent status, as in France, where it is called a commissariat. In a number of developing countries it is a ministry by itself. The level may thus be different, but as a rule it has some interdepartmental character. It may either be organized under the prime minister or, if elsewhere (treasury, ministry of economic affairs), have the right to deal with all ministries without special permission of the minister concerned. The ideal situation, in the author’s opinion, is for the planning unit to be directly responsible to the prime minister. The preceding remarks refer to the external organization.

The internal organization is determined by the number and nature of the divisions and subdivisions and the division of labor among them. It also depends upon the size and the background of its staff. As a rule, different divisions will deal with long-term and short-term planning work, since experience teaches that charging the same persons with these two types of work leads to neglect of the long-term tasks—they are usually considered less pressing than short-term ones. Research in the narrower sense of basic scientific analysis, as distinct from the applied type of planning proper, will be entrusted to a separate division or be the task of the long-term planning division. Current advisory work can best be entrusted to the short-term planning division. Sometimes subdivisions will be established to deal with individual sectors of economic life.

The planning unit may have branches for individual sectors, for instance, in some specialized ministries (agriculture, manufacturing industry, trade, transportation, education) or for individual regions (state planning units in a federation). But the organization may also be different, if the tasks are entrusted to the corresponding ministries or lower public authorities. In our terminology the contacts with these branches are then no longer internal but external, and form part of the “procedure” of planning.

Clearly, the number of persons engaged by the central unit depends on which of these two forms of organization has been chosen. Usually in western European countries this number is not very high. In France the Commissariat employs only about forty persons; the Netherlands Central Planning Bureau is somewhat more centralized and employs some one hundred persons, whereas the Norwegian unit is smaller. In the French system, however, about three thousand persons, distributed over some three hundred working groups, collaborate in the committees dealing with the single sectors (Cazes 1962, p. 35). This number far surpasses the number of committee members in the Netherlands, which amounts to less than one hundred.

We now come to the subject of the procedure of planning. In France, as the preceding figures show, outside contacts are highly developed. The time order of the various contacts is well illustrated in Table 1.

In the Netherlands, sector plans have occasionally been discussed with representatives of some sectors but not systematically prepared by working groups, as in France. Some steps in this direction have recently been taken. Until now, since the emphasis is on macroeconomic means of economic policy, the usual procedure, once agreement has been reached provisionally with the various government departments, has consisted mainly of consultation with central organizations of employers and employees, and with independent experts, both in the Socio-economic Council and in the Central Planning Commission. Apart from the committee work, which is far more voluminous in France than elsewhere, so far the procedure is not very different from that of the French. Major changes in general government policies in the Netherlands (where wages are, to some extent, under the supervision of the government) have as a rule been preceded by advice given by the Socio-economic Council, based on research and plans made in the Central Planning Bureau.

Supervision and testing of plans

In western Europe, planning agencies are not charged with the supervision of the implementation of plans. There is far less scope for such supervision by a separate agency than there may be in developing or in communist-ruled countries, since in the latter such an important part is played, within economic policy, by the individual public investments envisaged. Such projects may be in need of progress supervision by a special agency, although this is a debatable issue. The general view held in western Europe is that planning units are advisory bodies and that supervision proper is precisely the government’s responsibility, that is, the responsibility of the executive agencies. Indirectly, any deviation of actual policies from those recommended by the planners will show up in the next plan, since this always starts out with a survey of the year preceding the plan year. Routine statistics will show any such deviations; but there may be a need for some special statistics on the progress made in big investment projects. Such statistics have been developed in the Netherlands during the last decade. It has become customary also, in the Netherlands and elsewhere, to report not only investment planned for the coming year by private business but also actual investments completed in the year before and estimated investments in the current year, therefore covering three years in all.

If supervision proper is not considered a task of the planning unit, testing of previous plans is very much so. By testing is meant an analysis of actual compared with recommended development. In principle, actual development of any variable may be considered the result of three types of factors, each of them also used to get the estimated “most desirable” development of the same variable: (a) the values of the exogenous variables (excluding policy instruments); (b) the values of the instrument variables; and (c) the values of the coefficients of the model used. As a consequence, deviations between planned and actual values may be ascribed to (a) deviations in the values of the exogenous variables, that is, forecasting errors in these variables; (b) deviations in the values of the instrument variables, that is, between actual and recommended policies; and (c) deviations in the values of the coefficients, or errors in the model. If we like, we can combine (a) and (c) and call them forecasting errors in the endogenous variables.

It is possible to give a special form to the comparison between predicted and observed values of either exogenous or endogenous variables by counting the number of cases where, in three successive years, turning points were either (i) correctly predicted, or (ii) wrongly predicted, i.e., predicted where none occurred, or (iii) not predicted, i.e., where they did occur. The reason for choosing this particular test is that with so-called naive forecasting methods, turning points will never be found: it is essential for these methods that they extrapolate the direction of change observed between the first two years. Thus, Theil (1958) found that the Netherlands Central Planning Bureau correctly predicted 13 out of 14 turning points in a number of variables over a number of periods, wrongly predicted another 5 and did not predict the one left of the 14 observed turning points. The record for a number of forecasts made by Scandinavian institutions was that out of 21 turning points, (i) 15 were correctly forecast, (ii) 3 wrongly forecast, and (iii) 6 were not forecast.

A similar test consists of scrutinizing whether acceleration or deceleration occurred. Out of 91 Dutch cases, 71 were predicted in the correct way (either acceleration or deceleration); out of 74 Scandinavian cases, 62 were characterized in the correct way.

From other studies (by C. van der Panne, in Dutch) it was found that relatively good forecasts between 1949 and 1955 were made of price indexes, indirect taxes, public employment, and the value of exports, whereas relatively poor forecasts were made of invisibles, imports and exports, investments, productivity, and the salaries of civil servants.

The impact of planning on society

To conclude, we may ask the general question “What has been the impact of planning of the western European type on society?” Clearly the effects, if any, must be the justification of the efforts and other sacrifices made. For the time being, the answers to this question can only be approximative; and even this phrase may be a euphemism.

For well-defined markets with well-defined regulations, the impact of such regulations may sometimes be estimated with a fair degree of accuracy. For the economy as a whole only little can be said. The main point to be made is that planning has succeeded in avoiding the main inconsistency in unplanned economies of the pre-1914 type, namely, the underutilization of productive capacity as a consequence of business cycles and of structural disequilibria. It is highly probable that the disappearance of the business cycle after World War II has been obtained with the aid of macroeconomic planning of the type described in this article. A crude estimate of the contribution to national product to be attributed to anticyclical policy can be obtained from the estimates of unused capacity prevailing in pre-1914 economies. Two measures are conceivable: the extent of unused labor and the extent of unused equipment. The figures for unused labor are represented by unemployment percentages. Figures on capacity are very uncertain, as shown by recent studies by Hickman (1965, p. 114). This is due in part to the fact that production at lowest cost is well below capacity production. Therefore our estimate must be seen as only a first crude approach to the problem. But a fair guess of unused capacity may be 10 to 15 per cent, meant as an average for unplanned societies. This guess implies that anticyclical policy may have contributed 10 to 15 per cent to national income.

The further question may now be asked, “What degree of detail in planning is optimal?” It is the author’s contention that the optimum degree of detail in planning is below the degree of detail applied in the communist-ruled societies. Some support is given to this contention by a recent assessment of the fluctuations in economic activity in various countries over the period 1950–1960 (Staller 1964). These fluctuations appear to be roughly 4 per cent for all communist countries, 1.5 per cent for the Soviet Union, 4 per cent for all Western countries, and 7.5 per cent for the United States. The gain from more detailed planning as applied in the Soviet Union appears to be less than 3 per cent. This points to decreasing returns for the intensification of planning, if one tries to imagine the much higher level of planning effort in the Soviet Union as compared with western Europe. The question is in need of more precise research.

J. Tinbergen

[See alsoEconometric models, aggregate.]


Albrecht, Karl 1964 Planifikateure beim Werk: Wirtschaft zwischen Zwang und Freiheit. Düsseldorf (Germany ): Econ-Verlag.

Bjerve, Petter J. 1959 Planning in Norway: 1947–1956. Amsterdam: North-Holland Publishing.

Cazes, Bernard 1962 La planification française: Esprit et méthodes. Problèmes de Veurope 18:31–39.

European Economic Community, Commission 1962 Memorandum of the Commission on the Action Programme of the Community for the Second Stage. Brussels: The Commission.

FourastiÉ, Jean; and CourthÉoux, Jean Paul 1963 La planification économique en France. Paris: Presses Universitaires de France.

Frisch, Ragnar 1961 Survey of Types of Economic Forecasting and Programming: A Brief Description of the Oslo Channel Model. Unpublished manuscript. → Paper read at the International Association for Research in Income and Wealth, 7th Conference, 1961.

Geary, Robert C. (editor) 1962 Europe’s Future in Figures. Amsterdam: North-Holland Publishing.

Hansen, Bent (1955) 1958 The Economic Theory of Fiscal Policy. Cambridge, Mass.: Harvard Univ. Press. → First published as Finanspolitikens ekonomiska teori.

Hickman, Bert G. 1965 Investment Demand and U.S. Economic Growth. Washington: Brookings Institution.

JÖhr, Walter A.; and Singer, H. W. 1955 The Role of the Economist as Official Adviser. London: Allen & Unwin.

Kervyn de Lettenhove, Albert 1962 La programmation en Belgique. Problèmes de l’europe 18:24–30.

Kirschen, Étienne S. et al. 1964 Economic Policy in Our Time. Amsterdam: North-Holland Publishing.

Klein, Lawrence R.; and Goldberger, A. S. 1955 An Econometric Model of the United States: 1929–1952. Amsterdam: North-Holland Publishing.

Kruse, Hans H. 1962 L’Allemagne et la planification de l’économie. Problèmes de Veurope 18:12–23.

MassÉ, Pierre (1959) 1964 Le choix des investissements: Critères et méthodes. 2d ed. Paris: Dunod.

Meade, James E. 1955 The Theory of International Economic Policy. Volume 2: Trade and Welfare. Oxford Univ. Press.

Myrdal, Gunnar (1960) 1963 Beyond the Welfare State: Economic Planning and Its Implications. Yale University School of Law, Storrs Lectures on Jurisprudence, 1958. New Haven: Yale Univ. Press.

Netherlands, Centraal Planbureau 1956 Scope and Methods of the Central Planning Bureau. The Hague: The Bureau.

Organization of European Economic Co-operation 1957 Europe To-day and in 1960. Volume 2: Europe in 1960. Eighth annual report. Paris: The Organization.

Plitzko, Alfred (editor) 1964 Planung ohne Planwirtschaft. Basel (Switzerland): Kyklos.

Sandee, J. 1962 La planification économique aux Pays- Bas Problèmes de l’Europe 18:45–48.

Sandee, J. (editor) 1964 Europe’s Future Consumption. Amsterdam: North-Holland Publishing.

Staller, George J. 1964 Fluctuations in Economic Activity: Planned and Free-market Economies: 1950–1960. American Economic Review 54:385–395.

Stammati, Gaetano 1962 La programmation économique en Italie Problèmes de l’Europe 18:40–44.

Stone, Richard; and Brown, J. A. C. 1962 A Long-term Growth Model for the British Economy. Pages 287–310 in Robert C. Geary (editor), Europe’s Future in Figures. Amsterdam: North-Holland Publishing.

Theil, Henri (1958) 1961 Economic Forecasts and Policy. 2d ed., rev. Amsterdam: North-Holland Publishing.

Tinbergen, Jan (1956) 1964 Economic Policy: Principles and Design. 2d ed. Amsterdam: North-Holland Publishing.

Tinbergen, Jan 1959 The Theory of the Optimum Régime Pages 264–304 in Jan Tinbergen, Selected Papers. Amsterdam: North-Holland Publishing.

Tinbergen, Jan 1964 Central Planning. New Haven: Yale Univ. Press.

Verdoorn, Petrus J. 1960 The Intra-block Trade of Benelux Pages 291–329 in International Economic Association, Economic Consequences of the Size of Nations. Edited by E. A. G. Robinson. New York: St. Martins.

Wolff, Pieter de 1960 Wirtschaftsprognose als Grundlage der Volkswirtschaftspolitik unter besonderer Berücksichtigung der niederländischen Verhältnisse. Pages 109–124 in Dortmund, Sozialakademie, Internationale Tagung, 1959, Wirtschaftsprognose und Wirtschaftsgestaltung. Edited by Hans Bayer. Berlin: Wirtschaftsgestaltung. Edited by Hans Bayer. Berlin: Duncker & Humblot.

Zweig, Ferdynand 1942 The Planning of Free Societies. London: Seeker & Warburg.


The nations of eastern Europe, defined to encompass Poland, Czechoslovakia, East Germany, Hungary, Yugoslavia, Bulgaria, Rumania, and Albania, are ruled by Marxist-Leninist parties exercising dictatorial powers in the name of the proletariat. While the leaders of these parties may differ among themselves in points of doctrine or in their foreign policy, they are all committed to public ownership of the basic means of production and to the pursuit of certain economic goals, including chiefly the promotion of heavy industry by means of state direction and control. The economies of eastern Europe, with the partial exception of Yugoslavia, are centrally managed by a complex apparatus of government and party officials similar in most respects to that prevailing in the USSR. Yugoslavia differs from the other communist states in that its economic organization is substantially more decentralized; in the Yugoslav system, which will be described in the last part of this article, market prices play a significant role in determining the allocation of resources under the over-all guidance and supervision of state policy.

Early stages

Nationalization of large-scale industry, banking, and foreign trade in Czechoslovakia, Poland, and Yugoslavia proceeded rapidly after liberation from Nazi occupation and was virtually completed by 1946. In the countries allied with the losing side in the war—East Germany, Hungary, Rumania, and Bulgaria—which were burdened with heavy reparations payments, mainly in favor of the Soviet Union, comprehensive nationalization measures were delayed until 1947 and 1948. In the area as a whole the “socialization” of local industry and retail establishments and handicrafts, which were either placed under state management or reorganized as cooperatives, occurred chiefly between 1949 and 1951, after which date a minority of these enterprises were allowed to remain in private hands. Since then the number of private enterprises has varied from time to time as state policy became more or less liberal in the issuance of licenses and in the allocation of raw materials to the private sector. Agriculture, for a time, represented a notable exception to the policy of rapid socialization. Over three-quarters of existing farms remained in private hands until the late 1950s in all countries but Bulgaria, where a majority of farms were already collectivized in 1951. By 1962, however, collectivization was virtually completed in every east European country, with the exception of Poland.

By 1949–1950 the principal features of the Soviet economic model had been adopted in the management of the socialized sector of the east European states. The resulting economic systems were virtually identical up to 1956. Each Politburo, ostensibly under the guidance of the Central Committee of the Party, formulated the general economic policies of the country. The Secretariat of the Central Committee supervised the execution of these policies by government organs. Responsibility for drafting long-term plans (from four to six years in the several countries) and for elaborating current (one-year) plans was vested in a Planning Commission formally attached to the Council of Ministers. In the late 1940s the economic ministries, which supervised the management of the state-owned industries, were organized according to broad sectors (e.g., industry, light industry, agriculture). In the course of time, these ministries underwent progressive fragmentation. By 1955, for instance, Czechoslovakia’s machine-building and equipment industry was managed by three separate ministries. Enterprises were directly subordinated to industrial departments of the ministries, called chief administrations or central boards (e.g., in Poland, the Central Board for Agricultural Fertilizers under the Ministry of the Chemical Industry). In conformance with Soviet practice, enterprises were normally placed on khozraschët: they became autonomous accounting and financial entities which, subject to the directives they received from their superior authorities, were expected to minimize costs, show profits, and pay taxes to the central budget; each had its own account at the national bank, which financed its short-term credit requirements.

Up to 1953–1954, the trend was toward ever more comprehensive planning under centralized direction. The bulk of materials consumed by industry were rationed out by the Planning Commission to economic ministries on the basis of balanced estimates. In theory, all state-run enterprises were supposed to take an active part in the process of elaborating the plans: on the basis of the control figures handed down by their ministries, they drew up counterproposals, which usually proposed more ambitious output targets than those they had received and which also called for more materials and other resources than the control figures provided for. When the Planning Commission summed up the “counterplans,” they frequently turned out to be internally inconsistent. The changes in targets and materials allocations the Planning Commission eventually had to make to harmonize the plans rendered most of the preliminary paper work nugatory.

The above system, known as “planning from below” or “counterplanning,” was replaced in Czechoslovakia in 1953 and in Poland in 1954 by a new scheme known as “planning from above,” where enterprises were formally cut out from the planning process. Henceforth, the option to consult subordinate enterprises was left to the discretion of the ministries. They could do so, if they wished, to obtain information on the consumption of materials or on productive capacities at the plant level; but they could also rely on statistical data obtained through other channels. This more centralized procedure for elaborating the plans was accompanied by a gradual reduction in the workload of the Planning Commission, as an increasing number of balancing and allocation decisions were delegated to the ministries and to lower administrative organs. The new scheme was designed to enable the central authorities to cut the time spent on the mechanics of plan setting and to concentrate their efforts on improving the substance of the plans.

To this reform, which took place about the time of Stalin’s death, there corresponded certain changes in economic policy which also affected the role of the plans as instruments for governing the pace and pattern of economic growth. Prior to 1953, industrialization proceeded at an extremely rapid pace in every nation of the area, irrespective of its initial level of development. The long-term plans promulgated during the Korean War overtaxed the capacities of the individual economies, which could not simultaneously build up their heavy industries, including armaments manufactures, expand their output of consumer goods, and promote their agriculture. The yearly plans, which were bent toward the achievement of the long-term plans, also overcommitted resources. Hence, priorities had to be established to determine which sectors would suffer the shortfalls. Each year, resources in short supply were deflected from light industry, residential construction, and agriculture and toward metallurgy, machine building, and other branches of heavy industry. Since the yearly plans were often poorly balanced, crucial allocation decisions had to be taken in the course of the plan-year on an ad hoc priority basis. The rationing of consumer goods, which prevailed in the entire area in the early 1950s, was symptomatic of this abnormal state of affairs.

Increased emphasis on consumer goods. In the summer and fall of 1953, however, a New Course was launched by the ruling parties of eastern Europe, in line with developments in the Soviet Union, which significantly raised the priority standing of consumers’ goods and services. Consumers’ rationing was generally abolished either just before the death of Stalin (as in Poland) or shortly thereafter (as in Czechoslovakia and Rumania). From then on, shortfalls in the output of consumer goods manifested themselves in declining inventories in retail stores, in queues, and in overt or covert price increases; in countries such as Czechoslovakia, which are dependent on food imports to supply their population, agricultural failures gave rise to balance-of-payments crises. Now that the claims on resources of heavy and light industry and of agriculture were more nearly equal, an allocation system based on ad hoc priority decisions was too blunt an instrument to carry out state policy. The current plans had to have sufficient “authority” to guide the economy throughout the year.

The need for a priori consistency of the plans compelled the planners to budget their resources more realistically. The trend toward more careful balancing was reinforced after the Poznan riots of June 1956 and the Hungarian revolution in October and November of the same year. Since that time the ruling parties in the region, but especially in the more developed nations, have recognized as a political constraint on the formulation of national economic plans that the total level of consumption and the average level of urban real wages must not be adversely affected by investment efforts or by circumstances of any sort. (It is remarkable, for instance, that private consumption increased slightly in Czechoslovakia in 1963, even though national income declined by 3–4 per cent during that year.) Another factor making for a more systematic attempt to achieve consistency in the current plans after 1953 was the increasing relative scarcity of labor available to industry, not only in Czechoslovakia and East Germany, where the pool of surplus labor from agriculture had been exhausted some time previously, but even in Rumania, where the intake of labor from the countryside was greatly reduced, compared with the first industrialization campaign after 1949. (The area-wide shortage of housing and other urban facilities contributed to the decision to slow down rural-urban migration.) The increasing scarcity of manpower reduced the planners’ ability to correct mistakes in the allocation of materials or investment funds by lavishing surplus labor on the sectors that had not received their share of critical resources.

In the years since 1956, the economic reforms carried out in certain of the east European states have broken the previous pattern of institutional uniformity and have given rise to discrepancies from the Soviet model as well as to divergencies among the individual states of the region. Before describing the reforms that eventually caused the systems to diverge, it may be in order to consider the problems the central planners of these economies continued to face in common.

Principal planning problems

The principal problem the central planners have to solve consists in preparing an internally coherent set of balanced estimates for materials and equipment. The “material balances” actually worked on by the Planning Commission in each country are those for “funded” materials and equipment, that is, for the crucial items which it rations out with the approval of the Council of Ministers. In Czechoslovakia these items made up less than half of the total consumption of materials in the mid-1950s. In both Czechoslovakia and East Germany, this proportion was higher in heavy than in light industry and in the production of raw materials and semifabricates than in processing sectors. What is also significant is the share of each material’s “consumption for productive purposes,” calculated according to standard norms based on approved engineering practice. In Poland, according to a special survey conducted in 1959, this share was over 90 per cent for steel semifabricates and for cement, 84 per cent for sulfuric acid, 67 per cent for bituminous coal, between 60 and 65 per cent for tanned leather, salt, soda ash, and pine lumber, and as little as 5 per cent for refined petroleum products. The principal gaps in the availability of information at the planning center are, first, the coefficients relating the inputs of nonfunded materials to the outputs of funded or nonfunded goods and, second, the coefficients corresponding to the consumption of funded products not subject to standard norms.

The reliability of the coefficients themselves has often been limited. Allotments of materials were made to economic ministries, which then subdivided them among their central boards. These latter ultimately parceled out their quotas among their subordinate enterprises. At each administrative level—whether functional or regional—lower organs bargained for more generous rations of materials from their immediate superiors. If the central authorities persisted in drafting overambitious plans, then there was pressure from above, at each echelon, to cut back requirements below what enterprises considered a safe minimum. While the range within which this bargaining can affect final allotments has become more narrow with the passage of time, the bargaining process has not been eliminated.

Decreasing or increasing returns to scale have also been a source of instability in the technical coefficients. If an industry has surplus capacity that may be utilized during periods of peak demand for its products at a high unit cost—due to the operation of worn or obsolete equipment—its average input coefficient will tend to rise with the level of its output. When the product was homogeneous—electric power, for instance—the coordinating organ on occasion made rough adjustments in the coal- or oil-input coefficients for varying levels of power output; but where the product-mix was complex, this task defied bureaucratic solution.

Another factor bearing on the stability of coefficients, about which next to nothing is known at the planning center, is the possibility of reducing the consumption of material inputs by the substitution of other factors. Enterprises were frequently forced to adapt to materials shortages by expending more labor on their products. At best, the central authorities could make a rough adjustment in the allotments of materials to enterprises in anticipation of these economies; but neither input–output nor any of the planning techniques in use at present are capable of predicting with any degree of precision the enterprise’s ability to make these adjustments without running into acute shortages of material inventories, such as may eventually cause production breakdowns.

In the absence of electronic computers, which were not available in planning practice in any country of eastern Europe during the period under consideration, the preparation of an internally consistent central plan is a laborious and time-consuming task. Given the limited information on input coefficients and productive capacities available to the Planning Commission, failure to make optimal use of this information in order to relate the total outputs targeted in the various sectors to the quantities of each product available for final demand adds a significant source of potential error. The principal theoretical problem in this regard is the occurrence of “feedbacks” on output levels due to interdependencies in the technology matrix. If the planners proceed from a known final demand to calculate a mutually consistent set of output levels, they will find that as soon as they have added enough output to an initial level to satisfy materials requirements derived directly from final demand, they will need to make a secondary adjustment to meet the added demand for materials caused by this last increase in output. Theoretically, it may take five or six rounds of adjustment before a satisfactory degree of consistency has been achieved (satisfactory at least in terms of the range of error to which the coefficients are subject). In practice, however, feedbacks were reduced by two factors. It was known in advance that a certain number of sectors—in eastern Europe these were generally the sectors producing raw materials and semifabricates—would be operated at capacity; their output being known in advance, no feedback effects had to be allowed for in these sectors. The only feedbacks were those associated with sectors that were free of capacity restraints in the normal range of their operation, and these feedbacks were likely to be small. Furthermore, the balancing usually started with trial levels of gross output for all sectors. If these output levels were not too far removed from the final, mutually consistent targets, large feedbacks were avoided. Since there was flexibility on the final demand side, insofar as the planning authorities were more or less indifferent between various closely related bills of goods, fewer output adjustments were necessary; this also helped to cut down on the computing workload.

While it was possible to prepare a single balanced version of the plan, there was usually no time to draw up alternative versions or to trace the effects of a change in demand for one or more endproducts on the outputs that were not tightly restricted by capacity limits.

Another computing task which, while presenting no theoretical difficulty, was still extremely demanding on the limited bureacratic facilities of the central planning organizations is the reconciliation of the material and equipment balances with the “synthetic” plans. These include the costs and profits plans of industry and trade, investment plans, the state budget, and all other macroeconomic plans that may be affected by the material balances (via reductions in material costs, larger sales due to increased outputs, etc.). Repeated references in the economic literature of the area to national economic plans whose component parts were not harmonized testify to the difficulty of elaborating “complex” plans.

To construct efficient as well as consistent plans, the Planning Commission would have to collect information on alternative production processes open to enterprises and to choose from among these processes the ones most likely to economize on factors in short supply. In practice, the central planners had no systematic procedure either for collecting or for processing this information. (There was no analogue in current practice to linear or nonlinear programming.) This deficiency was especially serious insofar as it affected investment and foreign-trade decisions, which normally involve choice either among domestic processes for producing a given good or between domestic production and imports. (Since exports alone in countries such as Czechoslovakia, East Germany, and Hungary represent between 30 and 45 per cent of national income, the correct allocation of resources between industries supplying the national market and industries oriented mainly toward exports is crucial.) Since the mid-1950s, economic calculation, based on comparisons of capital outlays with economies in operating expenses and on comparisons of the domestic costs of exportables with their foreign-currency prices, has become an important alternative to the traditional method of balanced estimates in arriving at suboptimal decisions. These calculations, however, are undermined by defects in domestic prices, to the extent that the latter are used to compute costs and returns.

As late as 1965, the price systems of the east European socialist states, with the single exception of Yugoslavia, were still grounded on the principle that the price of each producer good should be set at its average cost of production among the enterprises responsible for the bulk of its output, plus a small profit margin calculated as a percentage of costs. Since price reforms were promulgated only once every three to five years, and relative costs tended to change rapidly, the structure of current costs soon diverged from established price ratios. Even current cost levels did not express opportunity costs, if only because neither interest charges on capital nor rents on the use of land were accounted for. It should also be noted that prices of imported goods, owing in part to the artificiality of exchange rates applied to foreign prices, were improperly related to the domestic prices of home-produced substitutes.

1956–1965: divergencies among states

During 1956 the excessive centralization of the command economies came in for sharp public criticism, particularly in Poland and Hungary. The immediate reforms that were promulgated at the time, however, went no further than the extension of certain rights and prerogatives to the directors of enterprises, in line with recent Soviet initiatives in this direction. Prior to mid-1957, when the Soviet government abolished most ministries in charge of industrial sectors and subordinated most industrial enterprises to regional economic councils, the organization of the east European economies was still closely patterned after the Soviet. It may fairly be said that the first important divergence stemmed from the failure of the east European states to follow the Soviet example and shift from a functional to a regional hierarchy of economic organs.

Bulgaria and East Germany. Only two countries—Bulgaria and East Germany—eventually adopted, in whole or in part, the new Soviet design. Both of these countries abolished their industrial ministries. In East Germany, the supervision of industrial sectors was entrusted to specialized departments of the state Planning Commission, whose role as chief planning organ was reinforced, from 1958 on, by new executive responsibilities. Enterprises of national significance were grouped in associations (Vereinigungen Volkseigener Betriebe) directly subordinated to the Planning Commission. Economic councils were also formed in regions (Bezirke) and districts (Kreise), but, in contrast with the situation of the councils in the Soviet Union, they had direct authority only over enterprises of local importance. In view of this crucial limitation on the power of the councils, the reforms of 1958 and 1959 did not alter the essentially functional character of East Germany’s industrial organization.

In Bulgaria, however, out of 800 large enterprises formerly attached to ministries, 700 were given over to district national councils. The remaining 100 enterprises were placed under the central control of the Committee for Industry and Technical Progress, the Committee for Construction and Architecture, the Ministry of Transportation and Communication, the Ministry for Education and Culture, and the Central Union of Cooperatives. In conjunction with the reorganization of the economy, 30 districts, corresponding to natural economic regions, were carved out of the 12 existing districts. But even in Bulgaria the regionalization was not complete, inasmuch as the branch committees, in particular the Committee for Industry and Technical Progress, retained exclusive responsibility for issuing methodological instructions to enterprises and continued to exercise certain “directional” functions, described in official language as “the fulfillment of the plan of industrial enterprises for the development of new products, for inter-enterprise cooperation and specialization, for the introduction of technical progress, for the timely manufacture of essential machines and equipment earmarked for construction projects of national importance, and for the distribution of machines and equipment among districts in cases where the districts concerned have not reached agreement with each other.”

In Albania, Czechoslovakia, Hungary, Poland, and Rumania, the old system of industrial management by specialized ministries has been maintained to the time of writing in 1967. Within this system, however, Czechoslovakia, Poland, and, to a minor extent, Hungary have introduced reforms tending toward the devolution of administrative powers onto lower organs and toward the increased autonomy of socialized enterprises. In 1964 and 1965, Bulgaria and East Germany also took further initiatives in this direction. The only countries that have adhered strictly to the old, tightly centralized system for planning and managing industry are Rumania and, as far as is known, Albania.

Czechoslovakia. The most comprehensive of the reforms tending toward decentralization were undertaken in Czechoslovakia for the first time in 1958 and 1959 and again in 1966 and 1967. In 1958, enterprises were consolidated into “productive economic units”–operating as enterprises in their own right or as associations of enterprises —which were directly responsible for the entire production of a sector; in certain cases where production facilities were spread over a large number of plants, the productive economic units were entrusted with the guidance and supervision (“gestion”) of the entire output of the sector, including by-products originating in other units. The balancing and distribution of less essential products formerly carried out in the Planning Commission and in the ministries devolved on the productive economic units, which were expected to keep in close touch with their customers and to coordinate their production decisions with each other, without supervision of higher authorities. The old ministries remained in operation, but their activities were oriented less toward routine direction of their subordinate enterprises than toward ensuring the technical progress and the rationalization of production in their sector. Two new types of incentives were created: (1) to recompense the managerial staff and workers, the average wage of the enterprise was linked to labor-productivity increases, and a bonus fund was set up on the basis of the fulfillment of the enterprise’s profit plan; (2) to widen the financial autonomy of the enterprise, it was authorized to keep a significant share of the year-to-year increases in its registered profits, which share could be raised by higher authorities if the enterprise agreed to take on more challenging tasks. As a result of the new system of “enterprise stimulation” and of certain changes in financial regulations, the share of decentralized investments, in large part financed from enterprise profits and depreciation allowances, rose to 60 per cent of total investments in 1960 and 1961.

While the 1958–1959 reforms enlarged the autonomy of Czechoslovak enterprises in a number of areas, price setting for all important producer and consumer goods remained the exclusive prerogative of the central authorities. No alteration was made in the practice of pegging producers’ prices to an initial level of average unit costs and keeping them in force for several years, regardless of changes in supply and demand relations. In 1963, when the reforms were for the most part abandoned and recentralization took place, the failure to adapt the price system to the decentralization was widely criticized. The collapse of the reforms and the eventual abandonment of the five-year plan originally scheduled for 1961 to 1965 were attributed by the partisans of decentralization to the distorting effects of prices on the decisions of enterprises, to the plan’s excessive tautness, which made demands on the construction sector and export industries widely in excess of their capabilities, and to a crisis in the balance of payments, due in large part to shortfalls in agriculture. The proponents of tight central controls, including the highest Party authorities, laid the failure to an excessive devolution of powers on lower organs and to a slackening of discipline. In late 1964 and early 1965, after a year and a half of debate, the views of the decentralizers apparently prevailed. The Central Committee of the Communist party called for another round of decentralizing reforms. This was effected in 1966–1967.

The newest Czechoslovak reforms, in a significant departure from all previous attempts at remodeling the economic system, now provide for some flexibility in producers’ prices. Prices set by free negotiation between suppliers and purchasers will apply to goods representing an estimated 7 per cent of total industrial output. The bulk of these freely priced items are produced in consumer goods industries. In addition, lower and upper limits within which prices are allowed to fluctuate have been imposed on a wide range of goods. Recent experience has shown that prices quickly gravitate to the upper limit, so that the significance of this innovation is rather restricted. These limits and the prices of all other goods will still be set by central organs. In general, the quasi-monopolistic position of enterprises, most of which have once again been consolidated and now compass the bulk of the output in their speciality, and the narrow leeway open to buyers to substitute imports for domestic supplies rule out any substantial degree of competition in the newly created “markets.”

The 1966–1967 economic reforms also call for the imposition of charges on the fixed capital and the inventories of enterprises, at rates of 6 and 2 per cent respectively, to be paid into the state budget. (As early as 1964, Hungary had introduced a similar “capital users’ charge,” calculated at a rate of 5 per cent of the gross value of fixed assets and of working capital.)

The chief incentive to enterprises now consists in the part of “gross income” (equivalent to value added) left to them after deduction of capital charges and of various other obligations to the state. This residue is earmarked for decentralized investments, contingency reserves, housing projects and other social amenities, and wages, salaries, and bonus payments to the staff of the enterprise.

In the spirit of the new system, plans are to be implemented via financial pressures and inducements rather than by direct commands. Output targets and limits on the consumption of materials and other inputs, however, may still be issued to enterprises by central planning authorities. Although it is not yet apparent how widely the central organs will avail themselves of their prerogatives, there was considerable apprehension among the proponents of the reforms that this permissive regulation might be used to reimpose the petty tutelage over enterprises that prevailed in former years.

Poland. In Poland, wide-ranging discussions took place between 1956 and mid-1958 which became known as the “debate over the Polish economic model.” The Economic Council, whose membership included Poland’s most influential economists, issued a number of “theses” on the economic model and on price-setting policy which proposed the establishment of a partially decentralized economic system, guided by prices shaped under the influence of supply and demand. However, these theses were not approved by the Party and never received legislative sanction. The decentralizing measures actually promulgated in 1959 did not go as far as the Czechoslovak reforms. Moreover, these measures were eroded by centripetal forces between 1960 and 1963. The associations of enterprises, created in 1959 to replace the old central boards formerly operated as functional departments of the ministries, gradually ceased to represent the interests of their members, as their mission had initially been conceived. In July 1964, however, new legislation designed to widen the powers of the associations was put into effect, which may tend to reduce the excessive degree of centralization attained in recent years.

In Poland, as in Bulgaria, Czechoslovakia, East Germany, and Hungary, a number of enterprises have been assigned a special status. Their managers are for the most part rewarded according to a bonus system based on profits; some of them have also been given a privileged position in choosing their suppliers and in procuring the materials they require to adapt the structure of their output to market demands. A few have been given permission to alter their sales prices. These experiments, if they are successful, may pave the way to comprehensive legislation covering the bulk of industry in the countries mentioned.

Yugoslavia. The “Yugoslav model” has exerted considerable influence on the character of the economic reforms at present contemplated in the experimenting countries. It may be observed that the first steps taken toward decentralization in Yugoslavia in 1950 and 1951 were also aimed at relaxing the rigid system of distribution in light industry. Retail trade establishments, formerly bound by the plan to specific sources of supply, were allowed to choose their suppliers among wholesalers and manufacturers.

These first reforms, in the case of Yugoslavia, were approximately coeval with the formation, in July 1950, of the workers’ councils, which already entailed a more radical departure from Soviet precedent. (In Poland and Hungary, workers’ councils were set up in many enterprises in the summer of 1956; they were liquidated in Hungary by the end of the same year and had lost all effective power in Poland by 1959.) The members of the Yugoslav councils, which represent a little over 10 per cent of the total number of employees in the socialized economy, are elected from among the workers and the management staff of each enterprise. The main prerogative of the workers’ council is to determine the share of the profits remaining at the disposal of the enterprise to be distributed as bonuses and extra income to the staff and the share to be plowed back as investment. The council also has a voice in appointing and dismissing enterprise directors. In general, it is expected to supervise the over-all orientation of the enterprise, including the composition of its output, technologies employed, and price-setting decisions.

Prior to 1952, the influence of Yugoslav workers on output and price policy was hampered by the centralized system, which bound up the enterprise in minute regulations. At the beginning of that year, a sweeping program of decentralization was undertaken. Operational planning by central authorities was scrapped, along with its panoply of allocation orders and mandatory production targets. The Planning Commission, as well as the interindustrial councils, which had inherited many of the operational responsibilities of the economic ministries abolished in early 1950, were deprived of their executive powers. Henceforth, the coordination of production and investment decisions was to be achieved through a flexible price mechanism, while the federal government, using indirect financing controls and centralized investment policy, was to prod the economy toward the goals specified in the long-term plans.

Prices were freed in three steps. First, the planners worked out new “economic prices” for raw materials and semifabricates. These prices were roughly on a level with the free prices of nonrationed consumer goods (which far exceeded the former prices of administratively rationed producer goods), while imported materials were priced according to a higher, more realistic exchange rate. Second, after January 1, 1952, all producers, wholesalers, and retailers of manufactured goods were invited to set prices for their products on the basis of market demand and costs, in line with the recently established level of materials prices. In the third phase, which was put off until May 1952 to avoid upsetting the freshly established markets, prices of raw materials and semifabricates were finally allowed to seek their natural level. By taxing enterprises in proportion to their wage bills, however, the federal government retained a decisive influence on cost levels and, indirectly, on prices. Later, as more flexible financial regulations were introduced, the central authorities partially relinquished even this indirect method of price control.

In May 1954, the Yugoslav government found it necessary to impose price ceilings on a few raw materials and semifabricates to curb monopolistic tendencies and an incipient inflation. By 1955 the list numbered 40 materials, including steel, gasoline, copper, and lumber, altogether amounting to some 50 per cent of the total value of materials bought by industry. In addition to these outright controls, less stringent regulations were later issued to prevent unjustified price increases in other sectors. The extent to which the government has resorted to these more flexible price regulations has varied with the degree of inflationary pressure to which the economy has been exposed: they were loosened in 1961 and tightened again in 1963 and 1964 to check inflationary tendencies.

Foreign exchange, except for short-lived experiments in the mid-1950s, has remained subject to centralized allocation. Up to 1961, the foreign exchange proceeds of exports were converted into domestic currency at the official exchange rates, which were then multiplied by coefficients varying according to the type of product exported. The coefficients were calculated to cover the domestic costs of exporters, whether the items exported were high-cost or low-cost. Coefficients were also applied to the payments in domestic currency for imports. They were scaled so as to discourage what were considered to be unnecessary imports and to protect high-cost domestic producers from foreign competition. In 1961 the dinar was devalued and the coefficients were nominally abolished. Nevertheless, exports were still facilitated by subsidies in the form of bonuses amounting to 10 to 32 per cent of the official rate. Quantitative restrictions remained in force for 70 per cent of the total value of imports.

Together with the allocation of foreign exchange, the distribution of investments provides the government with significant leverage to conduct its economic policy. The federal government makes available to the Investment Bank and to the Agricultural Bank, via the general fund, fiscal receipts from the socialized sector—including taxes on capital assets, on profits, and on the turnover of retail trade—together with the proceeds of foreign loans. The general fund of the federation, in addition to seven constituent republics’ investment funds, which are also managed by the Investment Bank, make up 70 per cent of the resources used for investment lending. The Investment Bank lends these funds to socialized enterprises, in contrast with the situation prevailing in the rest of eastern Europe, where almost all long-term investments are financed by outright budgetary grants. Enterprises are induced to economize on funds not only by the necessity of repaying loans, along with interest charges, but also by having to invest some of their own funds in projects in which the Investment Bank participates. This method of matching funds provides the central authorities with additional control over the volume of investments.

The Investment Bank distributes investment funds in accord with Yugoslavia’s long-term development plan. While the economic viability of projects and their profitability in terms of dinars are taken into account, these are not overriding considerations. In the mid-1950s, however, some of the bank’s funds were auctioned off to enterprises according to the rates of return claimed on investment projects and to the interest rates borrowers were willing to pay for borrowed funds; but this system could not be allowed to remain in effect under conditions where prevailing prices provided such an inadequate reflection, in terms of the planners’ priority scale, of the relative importance to the national economy of the different sectors.

In 1965, the Yugoslav economy, despite the introduction in recent years of various recentralizing measures taken in conjunction with the government’s efforts to subdue inflation, remained far more decentralized than any other east European economy. Nevertheless, a number of Yugoslavs concerned with economic affairs, including high-placed officials in Croatia and Slovenia, have voiced their support for further decentralization along market lines and for the elimination of some of the formal and informal controls hemming in the management of socialized enterprises. Opposition to these views emanates from economists and officials concerned with the development of the less industrialized regions of the country, such as Macedonia, Montenegro, and Bosnia and Herzegovina, where socialized enterprises are not yet capable of withstanding competition from abroad or from the more advanced republics to the north and where, in the opinion of these “centralizers,” funds ought to be invested on a priority basis even if market criteria cannot be met. As in the rest of eastern Europe, divergent views on the goals of development policy and on the speed at which they might be attained underlie the conflicts among the proponents of different institutional means for integrating the national economy.

John Michael Montias

[See alsoCommunism, economic organization of; Economic data, article onthe soviet union and eastern europe; Economic thought, article onsocialist thought.]


Academia Republic ii Populare Romîne, Institutul de CercetĂri Economice 1964 Dezvoltarea economică. a Romîniei: 1944–1964 (The Economic Development of Rumania: 1944–1964). Bucharest: The Academy.

Alton, Thad P. 1955 Polish Postwar Economy. New York: Columbia Univ. Press.

Arnold, Hans; Borchert, Hans; and Schmidt, J. (1955) 1961 Ökonomik der sozialistischen Industrie in de Deutschen Demokratischen Republik. 6th ed. Berlin: Die Wirtschaft Verlag.

Balassa, BÉla A. 1959 The Hungarian Experience in Economic Planning: A Theoretical and Empirical Study. New Haven: Yale Univ. Press.

Brus, Wlodzimierz 1961 Ogólne problemy funkcjonowania gospodarki socjalistycznej (General Problems in the Functioning of a Socialist Economy). Warsaw: Państwowe Wydawnictwo Naukowe.

DabČeviĆ-KuĆar, Savka 1963 Decentralized Socialist Planning: Yugoslavia. Pages 183–216 in Massachusetts Institute of Technology, Center for International Studies, Planning Economic Development: A Study. Edited by Everett E. Hagan. Homewood, Ill.: Irwin.

Fleming, J. Marcus; and SertiĆ, Victor R. 1962 TheYugoslav Economic System. International Monetary Fund, Staff Papers 9:202–242.

Hoffman, George W.; and Neal, Fred W. 1962 Yugoslavia and the New Communism. New York: Twentieth Century Fund.

Kaser, Michael 1965 COMECON: Integration Problems of the Planned Economies. Oxford Univ. Press.

Kornai, JÁnos (1957) 1959 Over centralization in Economic Administration: A Critical Analysis Based on Experience in Hungarian Light Industry. Oxford Univ. Press. → First published in Hungarian.

Marczewski, Jan 1956 Planification et croissance économiques des démocraties populaires. 2 vols. Paris: Presses Universitaires de France.

Michal, Jan M. 1960 Central Planning in Czechoslovakia: Organization for Growth in a Mature Economy. Stanford Univ. Press.

Montias, John M. 1962 Central Planning in Poland.New Haven: Yale Univ. Press.

Porwit, Krzystof (1964)1967 Central Planning: Evaluation of Variants. New York and London: Pergamon Press. → First published in Polish.

Prague, VysokÁ Škola EkonomickÁ, Katedra NÁrodohospodÁŘskÉho PlÁnovÁnÍ 1963 Národohospodářské plánováni v ČSSR (National Economic Planning in the Czechoslovak Socialist Republic). Prague: Nakladelstvi Politické Literatury.

Pryor, Frederic L. 1963 The Communist Foreign Trade System. Cambridge, Mass.: M.I.T. Press.

SirotkoviĆ, Jakov 1961 Problemi privrednog planiranja u Jugoslaviji (Problems of Economic Planning in Yugoslavia). Zagreb (Yugoslavia): Naprjied.

Spulber, Nicholas (1955) 1957 The Economics of Communist Eastern Europe. Cambridge, Mass.: M.I.T. Press.

United Nations, Economic Commission for Europe1961 Economic Development in Rumania. Economic Bulletin for Europe 13, 2:55–107.

Ward, Benjamin 1957 Workers’ Management in Yugoslavia. Journal of Political Economy 65:373–386.

Wellisz, Stanislaw 1964 The Economies of the Soviet Bloc: A Study of Decision Making and Resource Allocation. New York: McGraw-Hill.

Zauberman, Alfred 1964 Industrial Progress in Poland, Czechoslovakia and East Germany, 1937–1962. Oxford Univ. Press.


This article confines itself to development planning in economies with substantial private enterprise sectors. In this context, a development plan is a document which sets out the chief measures that the government intends to take in order to raise national output per person. The typical development plan will include most of the following: (1) a survey of current economic conditions, especially national income, productivity, foreign trade, and trends in each major industry; (2) a survey of the current social situation, especially population changes, education, health, housing, and social security; (3) an evaluation of progress achieved under the preceding plan; (4) a statement of general objectives of economic and social policy; (5) estimates of growth, or targets, for each major economic or social component during the period covered by the plan; (6) suggested measures designed to raise the rate of economic growth, especially measures to stimulate saving and investment and to increase productivity, and measures to improve the institutional framework of economic activity, such as land reform or reorganization of the markets for commodities, labor, or capital; (7) a program of government expenditures, capital and recurrent.

The plan normally looks several years ahead. Typical periods are three, four, five, and six years. Longer plans are sometimes made for 10, 15, or even 20 years ahead; these are sometimes called “perspective” plans. The shorter (three- to five-year) plans include statements of what the government intends to do. A 15- or 20-year plan cannot serve this purpose; its object is partly to try to identify long-term trends, as a guide to planning services which require a longer perspective, such as harbors, hydroelectricity, roads, and education. A five-year period is too short for perspectives in such matters but is also too long for specific commitments to some others. Hence, governments normally make a new capital budget every year, and this, rather than the plan, is the final commitment to expenditure. Similarly, statements relating to policy are not final until embodied in legislation.

The first documents resembling development plans were published just after World War II. Most countries had established economic controls during the war, including rationing of some consumer goods, raw materials, or foreign exchange, and this experience gave to the idea of planning a degree of respectability which it had not achieved before the war. In Europe the emphasis of these plans was on reconstruction, with equal attention to the private and public sectors, but in the less developed countries the prime concern of the early plans was to improve government policy making, and to establish priorities for government expenditure.

There is nothing novel in surveys of current economic or social conditions; many governments have issued such surveys from time to time and several now do this annually, whether or not there is a development plan. There is also nothing novel in announcing measures designed to raise the rate of economic growth. What development planning introduced was a comprehensive review of public expenditures looking several years ahead, with publication of a priority list. Before this concept was introduced, it was not usual for governments to review all their likely expenditures for more than a year ahead; reviews stretching five or ten years ahead were a novelty and were an improvement of government procedures. Despite much subsequent elaboration of planning techniques, medium-range projection of expenditures continues to be the main object of a development plan.

With time, the emphasis of a development plan has tended to shift away from the review of government expenditures and toward other measures designed to raise the rate of economic growth. The general economic survey aspect and concern for the economy as a whole have increased. Some development plans are now devoted mainly to discussing such subjects as industry, agriculture, mining, investment, saving, and the balance of payments, and a few give only a sketch of proposed government expenditures.

The nature of a plan for industry or agriculture or mining depends, in the first place, on whether the sector is under public ownership and operation, as in countries under communist control. Where public ownership and operation are in effect, a plan acts as an authorization to managers of industrial plants, telling them how much capital they may invest, and even perhaps how much of each commodity to produce and how much labor and material to use. Exactly what such a plan must contain is now under active discussion in communist countries.

If industry depends on private investment, a development plan can exert negative control but not positive control; i.e., it can prohibit investment in certain fields, but it cannot force persons to invest in other fields if they do not wish to do so. Hence, in the private sector, “plan” is not quite the right word for what a development plan tries to do; it is as much concerned to analyze, inform, persuade, and indicate inducements which the government offers as it is to describe the restrictive controls with which the economy will be managed.

How comprehensively the private sector is treated varies from plan to plan. If the government intends to take the initiative in inducing private investors to follow a particular course, or in shaping industrial institutions (e.g., marketing), or in providing finance through credit institutions, the plan may contain an extended discussion of each major industry, indicating what the government hopes will be the outcome. The closer the relations between government and commodity production, the more extensive must be the sections of the plan which deal with individual commodities.

Beyond this, a development plan may make a projection, for the whole economy, of output, consumption, saving, investment, imports, and exports in every sector for, say, five years ahead. The primary purpose of such a projection is to provide a consistent background for policy. It ensures that assumptions about investment are consistent with assumptions about domestic savings, foreign borrowing, and the budget surplus; that each of these, in turn, is consistent with assumptions about income, taxes, government expenditure, and demand and supply in each major sector. The use of an input–output matrix is particularly helpful in economies where industries use each others’ products as raw materials or equipment, since it is otherwise difficult to assess the full ramifications of an expected change in demand for any particular commodity (e.g., to trace the effects of an expected increase in the demand for bicycles on the steel, iron ore, rubber, coal, oil, chemical, and other industries which produce components or components of components). A projection is not a plan; it is a background exercise which planners do to clarify the interrelationships in their thinking. It is worth doing in complex economies, where interrelationships are not easily held in the head, but is less useful and hardly necessary in small countries with simple economies.

A forecast for the whole economy is also the basis of what is now called “indicative planning.” The argument here is that it helps investors in any one industry to know what is proposed in all other industries, since these others generate demand for its product. If all investors believe that the economy will grow only at an average annual rate of 3 per cent, they will keep their own investment levels low, and so bring about a low rate of growth. If, on the contrary, they all expect an annual growth rate of 10 per cent, they will all make large investments to cope with this rapidly growing demand, and so the growth rate will be high. Consequently, if, after consultation with all concerned, the government issues a projection based on the highest rate of growth that can be achieved with the resources likely to be available, this “indication” of what is possible in each industry may itself serve to induce a higher level of private investment than would otherwise occur. France is the leading practitioner of indicative planning, which is gaining ground mainly in western Europe because the sophisticated relationship between government and private enterprise which the exercise requires is more common and the statistics more readily available in the advanced than in the poorer countries.

Policy objectives

The elements which go into deciding what to put into a development plan cannot be described in a few words. The following section sketches briefly a few of the principal concerns of development planners.

At low levels of development, ignorance is the principal obstacle to development: ignorance of physical resources, ignorance of markets, and ignorance of techniques. The first object of the plan must be to reduce ignorance.

Development planners begin with surveys. The land should be mapped and surveyed for minerals, water, and fertile soils. Adequate staff must be provided for the departments of geology, hydrology, meteorology, survey, and soil survey. Equally important is research into the utilization of these natural resources, especially agricultural research, and research into industrial uses of local products. Next comes economic, statistical, and market research. The planner’s first task is to see that all these fields of survey and research are covered, since it is these that will yield potential development projects.

Development flows from applying skills to natural resources. A policy for improving skills is therefore fundamental to planning. This covers all levels of training and education, including general (primary, secondary, university) as well as vocational (trade schools, farm institutes, specialized institutions) education, institutional as well as onthe-job training, and adult education (especially agricultural extension) as well as schooling for the young. Since a poor country cannot afford all the education which is offered in rich countries, choices have to be made. It is possible by projecting national income to estimate roughly how many jobs there will be for persons with various kinds of special skills, and provision can be made for training them. Projecting the effects of general education is more difficult and not, perhaps, so helpful, since in most poor countries today the demand for places in school exceeds any figure that could be reached by trying to estimate the productivity of general education expenditures.

Infrastructure plays an important role in attracting (or its absence in repelling) new investment. Electric power, water, and communications (railways, roads, ports, telephones) often absorb nearly as much capital as industry and agriculture added together. Because of the need to build in advance of demand, such investments are especially risky in less developed countries. Thus, the governments of such countries play a larger role in providing infrastructure, or in guaranteeing investment in such undertakings, than is necessary in more developed countries.

The planner’s objective is to discover the most productive projects, public or private, and to ensure them priority. Productivity cannot be calculated simply in terms of current prices, since current prices do not necessarily reflect the true relative scarcity of resources or the true net benefit to the economy as a whole, and also may not sufficiently reflect future gains. A large part of the literature of development economics discusses the desirable criteria for investment; the substitution of “accounting prices” or “shadow prices” for current prices when calculating costs and benefits to the economy as a whole; and the assessment of benefits and costs deriving from the interdependence of investments. Such calculations show that the set of projects which private investors would choose if seeking to maximize their profits is not necessarily the set which maximizes national income. Hence, if the government seeks to maximize national income, it must offer inducements to invest in some projects and impose restrictions on investment in others. Administering such inducements and restrictions is an important art, in which the poorer countries tend to be relatively unskilled.

Investment criteria include capital-intensity, that is, the ratio between the capital invested in a project and the number of persons whom it employs. In countries plagued with unemployment, open or disguised, labor-intensive techniques are preferable to capital-intensive techniques if the difference in cost per unit of output is not very great; for lower productivity per man may yield a larger total output if more men are employed.

Another consideration is the distribution of investment among the geographical regions of the country. It is desirable to concentrate investment where the growth potential is greatest, but this may have to be modified in favor of reducing regional disparities in per capita income or of providing work where unemployment is relatively high.

Given an adequate infrastructure and adequate knowledge of feasible investments, the planners must persuade or induce entrepreneurs to invest. Persuasion and inducement are seldom needed for investments within the scope of small-scale enterprises; in most underdeveloped countries there is no shortage of small businessmen to invest in commerce or small industrial enterprises, such as grain mills, printeries, trucking, bottling plants, cinemas, and the like. What is lacking is experience in building and operating large factories or mines. Most governments are anxious to attract outside entrepreneurship for such undertakings and at the same time to arrange training programs in which their own people may acquire managerial skills.

Most countries start developing by exporting agricultural products or minerals. The income thus generated creates demands which are met in the first instance by imports, but which also present an opportunity for domestic production of substitutes for imports. The possibilities of import substitution are limited, however, partly by natural resources and partly by the economies of specialization. When these limits are reached, further development will bring an increase in imports which has to be matched by an increase in exports. Development planners therefore need to watch the effect of development on imports and to keep the import propensity in balance with the export propensity, either by increased efficiency in import substitution or by increased efficiency in exporting. Failure here brings a balance of payments crisis and structural inflation.

Failure of agricultural output to expand at an adequate rate is normally one of the main causes of slow economic growth or of structural inflation. Small farmers are quick to take up profitable crops and have produced large supplies of such commercial crops as cocoa, coffee, bananas, rubber, and cotton. Now that population is increasing more rapidly in the less developed than in the more developed countries, the challenge to farmers is, rather, to meet domestic needs by increasing the productivity of existing crops (especially domestic foods), and this seems harder to achieve. Measures to raise agricultural productivity (especially new breeds and varieties, use of fertilizers, disease and insect controls, irrigation, and new methods of processing and storing) are the core of any good development plan, since increases in agricultural output are needed to raise living standards, to provide an expanded market for industrial output, and to serve as a basis for higher savings, taxes, and earnings of foreign exchange.

Before World War II, governments of poor countries spent mainly on day-to-day administration of law and order. Planning can easily double the recurrent budget and add as much again in public expenditure on capital account, if the money can be raised. Public expenditure increases partly because an infrastructure of services is required to support an increased output of agriculture or manufactures, but it increases just as much because the public demands some services for their own sake, irrespective of their effect on productivity (e.g., curative medicine, general education, social security benefits). How much to spend on public services is a political rather than an economic decision, in the sense that from the economic standpoint the public should have as much service as it is willing to pay for.

When development planning began, most poor countries were spending less than 20 per cent of gross national income on gross capital formation and public expenditure together, whereas the rate of growth and standards of public service they now demand would require at least 30 per cent. Foreign investment and foreign aid contribute, but at the beginning of the 1960s the net inflow from these sources averaged only about 4 per cent of the poorer countries’ incomes; the main part of the cost must be met from domestic sources. Domestic private saving is low and has to be supplemented by public saving out of taxes and other revenues. Rapidly increasing demands for public expenditure and for public savings have forced equally rapid increases in taxation; in this sense, creating a good tax structure with adequate rates is fundamental to success on both the economic and the political levels. What development planning tries to ensure is that the moneys so raised will be spent intelligently, but this depends even more on political institutions and good sense than it does upon economic techniques.

Development plans are full of figures, but policy matters more than figures. The public sector, to which most of the figures relate, is seldom as large as 20 per cent of a poor economy, and development cannot be ensured even by the most intelligent planning of the public sector. In the last analysis, economic growth depends on the willingness of thousands or millions of private citizens to make some change: to change their jobs, acquire new skills, try out new techniques, or invest in new resources. The secret of successful development is to provide a framework which induces people to make the best use of the opportunities which exist in their economy.


Development plans vary widely in the extent to which they are taken seriously. A few are followed faithfully by the governments which have issued them, a few cease to be consulted within six months of publication, and the rest range between these extremes. The hazards of the plan derive from three sources: (1) lack of realism and commitment; (2) differences between those who make the plan and those who make economic decisions; (3) difficulties in forecasting.

The original purpose of planning was to select priorities in government expenditure. However, a five-year plan is not an expenditure authorization; normally authorization occurs only in the annual budget. Hence, what a government actually authorizes in due course is not necessarily tied to what it has put into the plan; and it cannot be assumed that the plan is a true statement of what it intends to do, even at the moment when the plan is issued.

If this is true of the public-sector part of the plan, it applies even more to the private sector. Nobody is committed by what the plan says about the private sector. Hence, those who prepare the plan are not constrained by having to put into effect what they are saying.

Why does a government issue a plan to which it does not intend to adhere? Such a plan usually predicts a larger achievement than is possible with the available resources. This may be done for one of two reasons, either as a political smoke screen or as a means of attracting larger resources.

A development plan has something of the same status as a party’s political program. It is not a final commitment (only the annual budget authorizes), so the government can make promises which it would like to carry out if it had the resources, without stopping to count the actual resources too closely at the moment of publication. Obviously a document published in this frame of mind does not deserve to be called a plan, since the essence of planning is matching needs against resources and determining priorities.

The second reason for publishing a plan in excess of available resources is to attract more resources. A large gap between needs and resources may attract either internal or external resources. One problem of poor countries is that people have not learned to pay large sums in taxes. Their governments have in the past taxed only for administration, war, and personal enrichment, so it is axiomatic that paying taxes is a useless burden. The modern welfare state, supplying schools, hospitals, agricultural education, farm-to-market roads, village water supplies, and so on, is a new phenomenon; the public is accustoming itself to demanding these services from the government faster than it is accustoming itself to paying taxes. The strategy of making a plan in excess of resources demonstrates to the public that it can have more of what it wants if it is prepared to pay more taxes. The government of the typical underdeveloped country has substantially increased the share of taxes in the national income over the past 15 years, and this has certainly been aided by the practice of setting high targets for the public sector in development plans.

The same strategy may work with administrators of foreign aid. These administrators look for gaps in a development plan which they think they can fill. A plan which showed resources equal to desired expenditures would leave no room for foreign aid. This problem can, however, be solved without violating the chief purpose of planning, which is to determine priorities. A good development plan assigns degrees of priority to the projects which it includes. Hence, there is always a list to use for drawing out more taxes or more foreign aid.


The plan may be well designed in every sense but yet may fail because it is made by people who cannot put it into effect. This is obvious in regard to the private sector; what the planners write may bear no relationship to what investors mean to do. But it applies also to the public sector. A government is not monolithic; power to make decisions is diffused among many ministries and departments. Many a “good” plan fails because it is ignored by the very ministries which are supposed to implement it. Hence, the machinery for implementing the plan is of crucial importance.

If the plan is to have a good chance of being implemented, the agency which makes the plan must meet three tests: (1) it must have the support of the head of the government; (2) it must allow all the leading decision makers in the economy to participate in drawing up the plan; and (3) it must control crucial decisions at the stage of implementation.

Governments usually establish a special agency for making a development plan. Its size varies according to the size of the country, the complexity of the plan, how the preparatory work is shared with other government agencies and departments, and the extent of the planning agency’s responsibility for implementation. Normally ministries and departments prepare their own proposals and have preliminary survey and estimation done by their own engineering and other experts; but if the departments are weak in these techniques, a good deal of preparatory technical work will fall on the agency, which must then have its own architects, engineers, accountants, and other experts. The agency should also be able to rely on the statistical authorities, the government’s economic advisory services, and the development corporations for a great deal of the statistical and economic material it needs but may have to supplement this to a greater or lesser extent with its own investigations. There is no formula for dividing the preparatory work between the planning agency and other government agencies, other than that the planning agency will find itself having to do such necessary work as the others fail to do. Similarly, implementation depends to some extent on the competence of the other agencies. There are cases where the planning agency has become the sole authority for executing all public works, cases where it merely records how implementation is proceeding, and extreme cases where it has nothing whatsoever to do with implementation.

Since the plan accords priorities to ministerial proposals, rejecting many outright, the planners must have authority vis-à-vis the ministries. Typically the planning agency is responsible to the prime minister or president, and its chief executive officer is frequently a well-known administrator brought in from outside the civil service and paid above the civil service rates. Unless the agency’s head has the confidence and support of the head of the government, the agency will have no effective influence on what goes into the plan.

This is not enough, however. The planning agency needs the support not only of the head of the government but also of his strongest ministers. A typical device is to have a special subcommittee of the cabinet for “development plan affairs” which includes the minister of finance and the chief ministers for industry and agriculture. However, the problem is not confined to ministers. Department heads and civil servants are also powerful and can sabotage a plan if they do not agree with it. The only way to have fair certainty that the plan will be effective is to bring into the planning process all the leading persons in the government apparatus, ministerial and administrative, who have the power to make important decisions, and produce a plan which is, as far as practicable, acceptable to them.

The same goes for the part of the plan relating to the private sector. A plan for private investment in which the private investors have had no say is not likely to have much effect. Hence, persons knowledgeable and influential in all the industries where substantial change is desired must be consulted in the making of the plan.

The machinery for consultation varies in structure and formality. In some small countries all the chief decision makers can sit around the same table, whereas large countries need a network of planning committees including officials and private citizens. Typically, not enough opportunity is given for consultation. The planning agency makes a plan which is unacceptable to important decision makers outside its circle, and they simply ignore it. This is especially apt to happen in countries with a federal structure, where the plan covers many functions which are state or provincial responsibilities without adequate assurance that state and provincial authorities are willing to play the role which the plan assigns to them.

If the plan is to be effective, the planning agency must have some control over its implementation. In the public sector, implementation is governed by the annual capital budget, which is the authority for expenditure. The planning agency is in the strongest position when the making of th annual capital budget is assigned to it rather than to the authority which makes the annual recurrent budget (the ministry of finance or the budget bureau). This division brings its own problem Since capital expenditure brings recurrent expenditure, the planning agency must consult the budget bureau when making the capital budget, and the budget bureau must consult the planning agency when making the recurrent budget. If, as is some times the case, the planning agency has no control over the annual capital budget, the plan is soon forgotten, and actual expenditure may bear little relation to the plan forecast.

The part of the plan relating to the private sector is not so easily controlled by a single agency. Implementation may involve the issue of licenses (for building, imports, or investment), tariffs, subsidies, recommended legislation, and many other kinds of action, vested in half a dozen ministries. The planning agency should be represented on all committees which make decisions involved in implementing the private sector of the plan, though it cannot hope to have a controlling voice.

Implementation does not depend entirely on machinery. The most important prerequisite is a realistic plan. If the plan makes assumptions which are far from reality, civil servants and private persons are forced, willy-nilly, to ignore it when making important decisions.

However realistic the plan may be at the time it is made, its influence will decline unless it is continually revised. Events turn out differently from what was expected; new physical resources are discovered; the financial situation changes; and so on. With the passage of time the relevance of the published document must inevitably decline. Hence, the plan must be flexible. The private-sector part of the plan is necessarily flexible. If investors turn up with good schemes not previously considered, they will not be turned away; and if other investors decide to abandon proposals which were highly regarded at the time of making the plan, they cannot be forced to continue. Usually the government’s concern is only to ensure a high level of private investment; whether this is in one project or another is likely to be of secondary importance, except in industries considered (rightly or wrongly) to be “strategic” in some sense. Not all governments see the situation in this light; some believe that their officials’ assessment of investments is better than the private investor’s and try to induce or coerce the private investor to keep in line with the published plan; they have only limited success.

The public-sector part of the plan is revised every year for the annual budget. Whether conditions have changed or not, the government is continuously besieged by ministers trying to bring forward schemes which are not in the plan, some that were previously rejected, some that are new. As time passes, the published plan must become less relevant. Some countries will openly abandon a plan two or three years before it is due to expire, and issue a new one in its place; others establish new priorities without formally abandoning the plan; still others abandon both the plan and any consistent priorities.

A plan must not be considered to have failed merely because things turned out differently. Its value lies in organizing consistent thinking at the time it is made. Constant revision is as important a part of planning as is the process of making the original document. The fact that the economy will not turn out as forecast is not an argument against planning. Decisions cannot all be postponed because we cannot forecast the future correctly; planning helps to clarify what we expect, to reveal its inconsistencies, and therefore to improve the process of making decisions.

W. Arthur Lewis

[Directly related are the entriesCapital, human;Capital, social overhead; Foreign aid, article oneconomic aspects; Input-output analysis.]


Haq, Mahbubul 1963 The Strategy of Economic Planning: A Case Study of Pakistan. Karachi: Oxford Univ. Press.

Hirschman, Albert O. 1958 The Strategy of Economic Development. Yale Studies in Economics, No. 10. New Haven: Yale Univ. Press.

Lewis, John P. 1962 Quiet Crisis in India: Economic Development and American Policy. Washington: Brookings Institution.

Lewis, W. Arthur 1966 Development Planning. London: Allen & Unwin.

Mason, Edward S. 1958 Economic Planning in Underdeveloped Areas: Government and Business. New York: Fordham Univ. Press.

Massachusetts Institute of Technology, Center for International Studies 1963 Planning Economic Development: A Study. Edited by Everett E. Hagen. Homewood, Ill.: Irwin.

Tinbergen, Jan 1958 The Design of Development. Baltimore: Johns Hopkins Press.

United Nations, Secretary General 1963 Planning for Economic Development. New York: United Nations.

Walinsky, Louis J. 1963 The Planning and Execution of Economic Development: A Nontechnical Guide for Policy Makers and Administrators. New York: McGraw-Hill.

About this article

economic planning

All Sources -
Updated Aug 08 2016 About content Print Topic