Home ›› 19 Aug 2022 ›› Editorial
Whatever is the political ideology of a country, a development plan is the ideal way for the government to set out its development initiative in tackling the country’s development problems.
In that case a development plan can serve as a stimulant to effort throughout the country and act as a catalyst for foreign investment and capital from International institutions. Planning in a variety of forms is frequently advocated to the market mechanism and the use of market prices for the allocation of resources in developing countries.
However, reliance on market mechanism and market prices for resource allocation is criticized at times. But a perpetual shortage of capital and foreign exchange and a surplus of labour at existing market prices is prima facie evidence of structural disequilibrium and a very imperfect market system which may not operate to the benefit of society at large.
Because of the externalities, many projects that developing countries need and which would be profitable to society, may not appear profitable to private sectors for investment.
A disadvantage of market mechanism is that by itself it is unlikely to produce structural changes which development requires.
Therefore, interference with market mechanism is seen by some as a necessary prerequisite of a more rapid pace of development. Those that advocate some form of planning is that positive actions will help to achieve more expeditiously and reliably the goals that developing countries set themselves.
Whatever form of interference with market mechanism is there, it inevitably involves some degree of state intervention.
But in reality, the choice for the vast majority of countries is not between complete Laissez faire and total state planning of the means of production, but rather what combination of private and public enterprises; to what extent should the public sector be extended, to what extent should there be interference with private decision making, to what degree should private sector be integrated into a national development plan.
Depending on the politics of the country and its available expertise, a development plan will vary in its ambitiousness from a mere statement of aims and hopes to detailed calculation for the resources needed and the amount of output that each sector of the economy must generate in order to achieve a stipulated rate of growth of output or par capita income. Anything more than a statement of aims inevitably involves some form of model building if only to delineate the relationships between sectors of the economy and between the key variables in the growth process. Normally four types of model are used in development planning. They are macro or aggregate models of the economy, or sector models which isolate the economy, or the inter-industry models and models and techniques for project appraisal.
Models serve a twofold purpose. They enable planners to reach decisions on how to achieve specific goals. Models can perform an equally valuable function from the point of view of enabling the future to be projected with greater degree of certainty.
In most of the development plans the primary objective is the achievement of a target rate of growth of output or per capita income within the plan period. Given the time horizon of the plan and the objective function, the optimum strategy can be worked out from the initial conditions. However, one of the big dangers of planning in the developing economies the planners and policymakers are prone to choose targets based on needs and aspirations, rather than on the basis of available resources with the inevitable consequences that the targets are not achieved. It is incumbent on the planner to specify the constraints as accurately and honestly as possible to avoid disillusion with the planning process.
The first step in the formulation of a policy model must be the construction of an aggregate model of the economy to highlight and check the implications of the target rate of growth. The structural relationship given by the structural equations are the restrictions on the instrumental variables which the policy makers must consider a datum.
They represent such things as technological relationships in industry, income –consumption relationships; foreign-trade relationships, and other behavioural and institutional relationships which in the short run at any rate, are outside the sphere of the policymakers to influence. In the long run certain structural relation may change with changes in the economy induced by the planning process itself. In such situation some of the important questions that need to be answered with the help of structural equations are: Can capital be guaranteed in the quantities required? Will the exports and foreign assistance keep pace with the imports required? With the future demand for consumer goods out of increase in per capita income, exceed the supply and cause inflation? Can the required interrelationships between industries be maintained so that the bottlenecks do not arise?
There are variables that the planners intend to influence in some way in order to achieve the objectives specified within the constraints laid down. If the basic objective is a higher rate of growth, one instrumental variable is the level of savings and investment in relation to national income. This can be influenced by tax policy, inflation and assistance from abroad. If the structural relationships are given and the constraints are outlined, a solution to a policy model will give a set of values for the instrumental variables that satisfy all the structural equations in the model consistent with the constraints imposed. It should be emphasized at this point that the planner ought not to lay down rigid policy prescriptions for more than a very short period of time. Planning itself may alter circumstances in the future in an unforeseen way and planners must be ready to adopt to the new situation.
The means by which to achieve plan, goals must be flexible and so too must the planning period. The ‘rolling plan’ (plan of highly flexible nature) is used to constantly review and revise plans in the light of new development.
Given the scarcity of resources in developing countries in relation to development needs, one of the central issues in development economics is the allocation of resources among competing needs. For most developing countries the two major constraints on the growth of output are the ability to invest and import and most theories of resource allocation and most investment criteria reflect the fact. A common starting point is the consideration of resource allocation is how to maximize the level of growth of output from the domestic resources available and how to minimize the use of foreign exchange.
Apart from the decision of how much to invest, a number of allocation decisions may have to be taken. The first one is the question of which sectors to invest in, the second one is the question of which projects should receive priority given the factor endowment of a country and its development goals and the third is the question of the combination of factors that should be used to produce a given vector of goods and services which will determine the technology of production.
In practice the interdependence between decision on output and the decision on technology is inevitable. Because of the interdependence between choice of goods and choice of technology a country which decides to use relatively labour – intensive techniques within the framework of goods chosen may none the less have a greater capital intensity than another country using capital intensive techniques with different mix of goods. So a sharp decision needs to be made between investment criteria relating to the pattern of output on the one hand and the choice of technology to produce the given vector of outputs on the other.
In short, the question of resource allocation between projects cannot be divorced from consideration of the wider policy issues of Industry versus Agriculture, Balanced versus Unbalanced growth, Foreign Trade strategy etc. Influencing all decisions will be the underlying objectives of the development strategy—whether the aim is to maximize current welfare or to maximize growth and output at some future point of time.
The issue of choice is between industry and agriculture and where the emphasis should be complementary to each other. In practice the fortunes of agriculture and industry are closely linked in that the expansion of industry depends on to a large extent on improvements in agricultural productivity and improvements in agriculture productivity depends on adequate supply of industrial ‘inputs’; especially the provision of consumer goods to act as incentives to peasant farmers to increase the agricultural surplus. The emphasis on balance between industry and agriculture is of recent origin. It represents a shift of emphasis away from the ‘modern’ view of all out drive for industrialization by developing countries, and at the same time it represents a reaction against the traditional doctrine of comparative cost advantage which, when applied to developing economies generally dictates the production of primary goods and a pattern of trade which puts these countries at a relative development disadvantage.
Regarding choice of techniques, in a planning framework the valuation of present versus future welfare is the central issue regarding the choice of technology—whether technique should be Capital or Labour intensive. At the first sight it would be sensible, in a labour abundant economy to use labour-intensive technique of production. So there appears a conflict between efficiency and growth and maximization of present consumption and the level of future consumption. If the propensity to consume is higher, then very little will be left for savings and reinvestment and vise-versa.
Another broad choice of development strategy is between Balanced and Unbalanced growth. Whether or not there exists a low-level equilibrium trap, which needs a ‘critical minimum effort’ to overcome it, sound economic reasons can be advanced in support of a ‘big push’, taking the form of a planned large-scale expansion of a wide range of economic activities. The economic rationale for a ‘big push’ forms part of what has come to be known as the doctrine of balanced growth. The opposite school of thought argued that creation of imbalance growth approach is better development strategy. In this respect balanced versus unbalanced growth is an issue of development strategy which may constrain the application of investment criteria. The original exponents of the balanced growth doctrine had in mind the scale of investment necessary to overcome indivisibilities of supply and demand side of development process. Indivisibilities of supply refers to social overhead capital and indivisibilities of demand side refers to the limitations imposed by the size of market on the profitability and so feasibility of economic activities. This doctrine has been extended to refer to the path of economic development.
A major criticism of the balanced growth doctrine in that it fails to grips the fundamental obstacle to development in developing countries, namely a shortage of resource of all kinds. Balanced growth critics do not deny the importance of large scale investment program and expansion of complementary activities. They argue that in the absence of sufficient resources especially capital, entrepreneurs and decision makers, the striving for balance growth may not provide sufficient stimulus to the mobilization of resources or the inducement to invest and will certainly not economize on decision-taking if planning is required. The advantage of unbalanced growth is that there may be a certain degree of economy in use of physical resources. If capital is scarce and indivisibilities do exist, it is probably more economical to produce a few products in optimum –size plants rather than a whole range of products in sub-optimal plants. So there will be a trade of between balanced growth and technical efficiency.
It is not easy to evaluate the balanced versus unbalanced growth debate. The theories cannot be tested empirically and for other strategies are politically contentious. There is no reason at all why balanced and unbalanced growth should be presented as alternatives. One step towards the reconciliatory approach is to treat unbalanced growth as a means of achieving the ultimate objective of balance growth. Unbalanced growth would concentrate resources in a few selected areas creating shortage elsewhere. This is consistent with the ‘big push’ version of balance growth.
In view of Investment criteria traditional micro theory teaches that under perfect competition resources will be optimally allocated when each factor of production is employed up to the point where its marginal product is equal to its price, and that society’s output will be maximized when the marginal products of factors are equated in all their uses. This is called the ‘marginal rule’ for resource allocation and implies efficiency. In static analysis ‘efficiency’ in resource allocation implies maximizing the national product and this is achieved when the marginal product of factors are equated in their different uses
Bangladesh perspective: As far as my knowledge is concerned, resources are being allocated in three major formats. They are by Private Sector, by Public Sector and Foreign Sector. The private sector allocates resources considering the fair play of market mechanism and market prices. Here resource allocation takes place mainly on the expectation of profitability. e Return on Investment (ROI) dominates the investment decision. The guiding principle is the rate of profit. Where internal rate of return (IRR) is more and return period is short, private sectors are keen to invest there. Social welfare plays an insignificant role here. In the public sector resource allocation is mainly done on the basis of Annual Budget and Annual Development Plan (ADP). A series of meeting is held by the National Board of Revenue (NBR) with Civil Society, Business people, Entrepreneurs, Industrialists, Trade Associations & Chamber of Commerce, Government Departments, and Stakeholders to solicit views regarding imposition of tax and investment opportunity. Further, on the basis of Annual Development Plan different sectors are identified for development purposes. Beside ECNEC under the Chairmanship allocates funds for infrastructure development. Resource allocation in Public Sector is done with the aim of Social Welfare, Economic growth and higher GDP. Foreign Direct Investment (FDI) is another source where from resource is being allocated. Industrial Policy and Investment Policy also indicate areas where resources are to be allocated. Mega projects are implemented either on Self- financing (e.g. Padma Bridge) or with Foreign Assistance. Govt. is the sole authority to decide where to allocate resources for the economic welfare of the country.
The writer is former Director General of EPB. He can be contacted at hassan.youngconsultants@gmail.com
