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Lessons of Twenty Years of Planning in Developing CountriesAuthor(s): Stanislaw WelliszSource: Economica, New Series, Vol. 38, No. 150 (May, 1971), pp. 121-135Published by: Blackwell Publishing on behalf of The London School of Economics and PoliticalScience and The Suntory and Toyota International Centres for Economics and RelatedDisciplinesStable URL: http://www.jstor.org/stable/2552574Accessed: 01/03/2010 13:29

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1971]

Lessons of Twenty Years of Planning in Developing Countries1

By STANISLAW WELLISZ

Twenty years ago, when development planning was in its infancy,2 well-known economists ranging in opinion from the liberal right to the Marxian left advocated planning as the fastest and least painful path to growth.3 Today planning is firmly established in virtually all the developing countries. The statistical base on which plans are made, our theoretical understanding of the development process, and our computa- tional capability have increased enormously in the intervening period. Techniques such as input-output once accessible to the initiated few are now commonplace knowledge of planning departments, and virtually every plan brings new improvements and refinements.4 Yet today it is difficult to find a statement in favour of planning coming from anyone but a dogmatic Communist. When comparisons between planned and unplanned growth are made, their purpose usually is to demonstrate the superiority of reliance on the market mechanism over planned resource allocation.5

Doubts concerning the results of development planning notwith- standing, the question whether to plan does not arise in practice. Pressure for planning comes from within the governments' constitu- encies, impatient to know where government economic policies will lead them, from donor nations desiring to see their aid well-utilized and fitting into a rational development pattern, and from international agencies, collating the member countries' programmes and achievements.

Even if it could be proven incontrovertibly-and there is no such

1 An earlier version of this paper was presented at the first International Colloquium on Development held at the Pahlavi University, Shiraz, Iran, April 13 to 17, 1970.

2 The Draft Outline of a five-year plan published by the Planning Commission of the Government of India in July, 1951, is the first comprehensive national planning document published for a developing country.

3 For an application of advanced econometric techniques to national economic planning see, for instance, Economic Planning Agency, Government of Japan, Econometric Models for Medium-Term Economic Plan, 1964-1968, August, 1965. An excellent survey of the improvements introduced in Indian economic planning will be found in S. Chakravarty and J. N. Bhagwati, "Contributions to Indian Economic Analysis: A Survey", American Economic Review, vol. 59 (1969).

4 For arguments in favour of development planning, see inter alia Paul N. Rosenstein-Rodan, "Problems of Industrialization of Eastern and South Eastern Europe", Economic Journal, vol. 53 (1943), and Paul A. Baran, "On the Political Economy of Backwardness", Manchester School, vol. 20 (1952).

5 Hlya Myint attributes the relatively poor performance of Burma and Indonesia as compared with Thailand, Malaysia and the Philippines largely to the planning efforts of the former as against a relatively free market policy of the latter. See H. Myint, "Economic Theory and Development Policy", Economica, vol. XXXIV (1967).

1 121

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proof-that the hands-off policy is the best of all, governments could not afford to adopt a passive posture. The relevant questions are how to plan and what to plan-where to rely on the available market machinery, how to modify or improve the functioning of the market, and where and how to supplant it by other allocation methods.

For all the differences in underlying conditions, in national goals and ideologies and in degrees of technical sophistication, development planning everywhere follows much the same pattern. A typical develop- ment plan consists of articulation of over-all growth targets in terms of plan-end output levels or plan-period productive capacities by sector or by product group. Many plans discuss in detail "key projects" such as major public works and large-scale industrial undertakings. Invest- ment totals are given for the various sectors; and the financial section of the plan analyses by source the availability of investible funds- personal and business savings, government savings and net inflow of foreign funds. Virtually all plans present a set of more or less rigorous balances of inter-sectoral commodity flows, as well as national income and foreign account balances. Less frequently and less precisely plans discuss fiscal and monetary measures required to achieve the mobiliza- tion of internal and external resources called for by the plan. Finally, there is some discussion of broad issues such as employment, health, education, urbanization, and of programmes mapped out to achieve social improvement.

The development plan is a technocratic conception of a feasible programme for the fulfilment of policy-makers' goals. Plan enforce- ment requires that the market judgment and the decisions reached by individuals and interest groups be superseded to a lesser or greater extent by considerations of public interest as expressed in the plan. Arguments in favour of plan enforcement are thus based on two sets of propositions, namely that free-enterprise resource allocation in develop- ing countries is inefficient (or, to be more precise, that it is less efficient than planned allocation), and that there is a lack of congruence between private interest, expressed in the free-enterprise system, and public interest.

The critique of the efficiency of private enterprise centres on the inability or the unwillingness of private business to seize potentially profitable business opportunities. One of the reasons for the alleged failure is the inadequacy of market signals which reflect current scarcities but fail to indicate future opportunities in the rapidly evolving environ- ment of the developing world. It is claimed, moreover, that even if future possibilities are made known through the broadcasting of development forecasts and the spreading of technological knowledge, entrepreneurial inertia is likely to prevent private funds from flowing into industry, or, at best, it will result in the concentration in a few traditional fields, such as textiles, to the detriment of potentially more profitable new activities requiring new technology. As a consequence, in the absence of the planned channelling of investment, the period of structural and techno-

1971] TWENTY YEARS OF PLANNING IN DEVELOPING COUNTRIES 123

logical backwardness is prolonged needlessly. The experience of several countries, including Iran and Pakistan, shows how powerfully policy can affect the direction of investment. In Pakistan the decline in trading profits which followed the end of the Korean war, and the government's policy of protecting and nurturing industry, resulted in a dramatic shift of investment funds from commerce to industry. At first investment went mostly to the textile sector; subsequently further shifts occurred to chemicals and other industries requiring a more complex technology, largely as a result of incentives provided within the planning network.1 Initially, "entrepreneurs needed strong incentives to overcome both external obstacles and their own initial reluctance to make major shifts";2 the Pakistan system provided such incentives via a virtual guarantee of high profits, and a rapid resource flow began. Once the initial barriers had been overcome, investible funds continued to flow in, though profits declined.3

The inability to invest large blocks of capital in a single venture is another alleged reason for the malfunctioning of the free-enterprise system. In many countries where the capital market is not well developed, the willingness of individuals and families to concentrate their investments puts a limit on the size of project. Moreover, where there is risk of political and social upheaval private individuals may be reluctant to tie down their capital for long periods of time, and may prefer a lower but quicker return. As a consequence potentially profit- able branches of industry, including petrochemicals and steel, where technical considerations dictate large-scale investment, may go begging, unless the door is open to foreign enterprise (which may be politically unacceptable) or unless planned government investment takes place.

Discrepancies between private and social profitability of investment are commonly subsumed under the label of externalities, meaning that a private venture does not bear the total cost or does not reap the total benefit resulting from its activity and, as a consequence, that the private ranking of investment priorities deviates from the social ranking. From the development point of view, "infant industries" are the most important example of the discrepancy: new industries bear the cost of learning-by-doing, while the benefits of the learning process accrue to other sectors of the economy as well: hence social interest dictates that the "infants" be given special aid and protection.4

Finally, it is alleged that the market test is incomplete in that it fails to reflect important national goals, and may even result in a pattern

1 G. F. Papanek, Pakistan's Development, Cambridge, Mass., 1947, chs. 2, 3 and 5.

2 Ibid., p. 36. Papanek talks here about the shift from commerce to industry, but the same argument applies to a shift from traditional to new industrial sectors.

I Ibid., p. 39. 4 For a review of infant industry arguments, see H. G. Grubel, "The Anatomy

of Classical and Modern Infant Industry Arguments", Weltwirtschaftliches Archiv, vol. 97 (1966), pp. 325-44.

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of allocation directly opposed to such goals. For instance, the pursuit of individual profit may result in a socially unacceptable distribution of the gains from growth, or in a socially unacceptable spatial pattern of development. It may also be detrimental to social stability or to the external safety of the country.

The defence of free-enterprise allocation rests not so much on the rebuttal of the arguments against the market mechanism (though opinions differ as to their weight) as on the critical analysis of current methods of plan preparation and enforcement. The case for planning rests on the assumption that the planning calculus is superior to the imperfect calculus of the market. Yet, to quote W. Arthur Lewis, "a plan is essentially a set of guesses about the future, since the assignment of priorities requires uncertain estimates of likely results, benefits and costs".1 The problem is whether the planners' guesses are superior to the market guesses, and, more important, whether planning, as currently conceived, accomplishes the efficiency-promoting and error- eliminating functions of the market.

The typical development plan is based on an over-all vision of the desired future structure-more often than not modelled after the pattern prevailing in a more advanced economy-into which are incorporated policy-favoured prestige projects such as steel mills and multi-purpose river projects. In determining sectoral proportions principal attention is paid to inter-sectoral consistency, either through the use of input- output or less formalized balancing methods. The virtue of consistency is the avoidance of bottlenecks and surpluses resulting in resource waste and slowing down growth. Yet the importance of consistency is open to question. Even in a closed economy there are many possi- bilities of substitution-as between bricks, cement and steel in con- struction, coal, petroleum and water power in the provision of energy, road and rail in. transport, and so on. In an open economy foreign trade greatly enhances the range of substitution and, provided the domestic cost structure does not deviate too radically from the inter- national price structure, it provides an inexpensive way of compensating for domestic imbalances. Thus consistency is of primary importance only when planning for the output of non-tradeable goods with no close substitutes, that is for certain types of social overhead capital and collective goods such as communication or transport facilities.

Resource-use effectiveness is of much greater importance than resource-use consistency; but the cost of obtaining information and computational difficulties reduce efficiency calculations in plans to more or less informed guesses. Only one large-scale attempt at formal multi-sector optimization has been made to date-in Hungary-and the optimization exercise (for it is yet to be translated into practice) was narrowly circumscribed: the economy was divided into 491 sectors, which meant a high degree of aggregation; only three tech-

I W. A. Lewis, Development Planning, New York, 1966, p. 25.

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niques were considered for each sector; and all relations were assumed to be linear. The official plan, derived by traditional, non-rigorous methods, was taken as a basis; and the whole purpose of the exercise was to enquire whether, with formal optimization, some of the plan objectives could be over-fulfilled, and to calculate the pay-offs among the various goals.1 The Hungarian exercise is undoubtedly an important step in the exploration of the application of formal techniques to planning, but as a practical tool-especially in countries which have the option of relying on the market mechanism-it leaves much to be desired.

Where planning is submitted to the market test, the sectoral propor- tions advocated by planners frequently turn out to be wrong. In France, where the medium-term plans are drawn up in close collabora- tion with representatives of the various industrial sectors and hence are unlikely to deviate in a radical fashion from the business forecasts, "the [planning] Commissariat has, from time to time, believed that there was too much production in automobiles, detergents, electricity and similar industries-and has often been demonstrated wrong in these fears" ;2 while in other instances the Commissariat advocated an unwarranted over-expansion. In developing countries, where planning is further removed from the level of operations, and where planners strive to make radical structural changes, the errors tend to be more serious and have more dangerous consequences. For instance, India adapted in the second and third plans a "grand strategy" of heavy industrialization which led to a premature expansion of equipment to produce capital goods and to enormous economic losses. The strategy involved a confusion between sequential inter-industry flows and optimal timing.3 While it is true that to produce consumer goods one needs machines, and to produce machines one needs equipment to produce capital goods, and, further, that one needs steel, it does not follow that "steel-equipment to produce capital goods-equipment to produce consumer goods"-is the optimal sequence of construction. The result of the Indian strategy was that consumer-goods sectors relied heavily on imported machinery and that export-oriented industries stagnated, while the heavy-equipment sector found itself without any markets: for instance, Heavy Electricals Ltd. of Bhopal in six years of operation accumulated a loss of Rs 330 mn. on an initial investment of Rs 62 mn. This enterprise, by no means a unique example of its kind, is expected to make a further loss of Rs 210 mn. by the end of 1971.4

' J. Kornai, "Multi-level Programming-A First Report on the Model and on the Experimental Computations", European Economic Review, vol. 1 (1969).

2 C. P. Kindleberger, American Business Abroad, New Haven and London, 1969, p. 82.

3 The "grand strategy" was heavily influenced by P. C. Mahalanobis's theories: see in particular P. C. Mahalanobis, "The Approach of Operational Research to Planning", Sankhya, vol. 16 (1955). For a critique of the approach, see Chak- ravarti and Bhagwati, op. cit., pp. 5-10.

4 Republic of India, Committee on Public Undertakings, 12th Report, reviewed in The Economic and Political Weekly, vol. 3 (1968), p. 820.

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The adverse effects of restraint of investment in traditional sectors are more difficult to document, but they are no less serious. While it may be true that the existing capacity in a traditional sector may suffice to satisfy demand, it does not follow that the rate of return on better equipment will necessarily be low. To argue that new investment will depress the profits of existing establishments, or even drive them to bankruptcy, is to confuse considerations of individual profitability, which call for the protection of vested interests, with social profit- ability, which disregards sunk costs as irrelevant.

The prevalent method of sectoral plan enforcement relies on the channelling of private investment by means of positive inducements and negative constraints as well as on direct government investment. The enforcement stage of the planning operation is most vulnerable to criticism.1 Planners have a comparative advantage in obtaining and processing aggregate information, but the advantage in individual project preparation lies with the entrepreneurial group, whether it is private or public. The role of the officials in charge of plan enforcement is to ensure that the individual projects, in the aggregate, fulfil the proportions foreseen by the plan, and to create conditions resulting in the desired aggregate investment pattern. Licences available to private investors determine the maximum permissible investment by sector and, simultaneously, limit internal competition: if capacity is deemed sufficient, no additional licences are issued. Inducements to invest up to the licence limits are provided by quotas, tariffs and other limitations on external competition. Not infrequently preferential credit terms, preferential capital import arrangements, tax abatements and other inducements are provided for projects with high plan priorities.

In so far as the government concessions are a function of the com- parative disadvantage of the new enterprises, prospective businesses find it advantageous to represent their position in the worst possible light, and to get the highest possible subsidies. In so far as the plan priority system disregards comparative advantage, the efficiency criterion in project selection is blunted.

The system of plan priorities also blunts the competitive pressures which in the free-enterprise system are a spur to efficiency. Not only is competition limited, but, since it has a vested interest in plan fulfilment, the government readily grants concessions to enterprises which find themselves in difficulties: the government and private enterprise become partners in promoting restrictions and protecting profits.

The tendency to foster and to nurture inefficiency is even greater where government projects are at stake. Non-economic factors play an especially important role in government project selection: losses, if they occur, can be easily hidden, while bankruptcy is an open admission of failure. As a consequence, when mistakes are made they tend to be

1 For a penetrating and exhaustive analysis of the effects of licensing on the Indian economy, see J. Bhagwati and P. Desai, India: Planning for Industrialization, 1970.

1971] TWENTY YEARS OF PLANNING IN DEVELOPING COUNTRIES 127

perpetuated with good money thrown after the bad. Moreover, enter- prises under direct government ownership suffer under severe opera- tional handicaps, so that even well-conceived projects frequently are run at a loss. Public enterprises are particularly susceptible to social pressures which lead to over-staffing, to the inability to discharge redundant or incompetent personnel, and to vulnerability to labour- union pressure. More fundamentally, there is a basic contradiction between the principles of sound business management which require constant adaptation to changing circumstances and creative improvisa- tion, and the principles of sound administration and public account- ability which call for strict adherence to set routines. For a public servant improvisation does not pay: at best he is no better off than if he adhered to a routine; at worst he may be charged with irregularities. For the management of a public enterprise there is little inducement to be efficient-if there are losses, they will be covered by the govern- ment; and there are strong reasons to avoid risk-taking, and to stick to well-established routines. There are, to be sure, some government enterprises which overcome all obstacles and operate in a highly efficient manner; their personnel deserves the highest tribute. But their existence should not blind us to the inefficiency inherent in direct government ownership and management.

The indiscriminate fostering of industrial enterprises imposes an enormous, albeit hidden, burden on the economy. A study of Turkish industrialization led Anne 0. Krueger to conclude that "twice as much output, in value terms, could be obtained from a liberalized trade regime at an equilibrium exchange rate" than was obtained from a like amount of investment under the regime of trade licences and restric- tions.' Studies of the Pakistan economy reveal a similar picture. According to Lewis and Guisinger, 12 of Pakistan's 32 industrial sectors would be competitive at world prices if the rupee exchange rate were set at Rs 10 per dollar or lower (i.e. at the free-market rate) and another 12 would be competitive at rates ranging from 10 to 20 rupees. Positing that 50 per cent. of the cost differentials can be justified by learning-by-doing or infant-industry arguments-surely a generous allowance for external effects-these sectors could still be considered economically justifiable. No such justification can be found for the remaining 18 sectors: electrical applicances would be competitive only if the rupee were devalued to Rs 63 per dollar, and silk to an exchange rate of over Rs 1000 per dollar. Some sectors, including sugar, edible oils and motor vehicles could not survive foreign competition at any exchange rate since the value of tradeable domestic inputs used in their manufacture exceeds the value added reckoned at world prices.2

1 Anne 0. Krueger, "Some Economic Costs of Exchange Control: The Turkish Case", Journal of Political Economy, vol. 74 (1966), p. 480.

2 See S. R. Lewis, Jr. and S. E. Guisinger, "Measuring Protection in a Develop- ing Country: The Case of Pakistan", Journal of Political Economy, vol. 76 (1968), Table 4, p. 1188. The exact figures are somewhat open to debate, given the complexity of the issues involved in performing the calculations and the data

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The growth of industries fostered and nurtured by plan enforcement is parasitic, and it is ultimately self-defeating. Such growth occurs at the expense of other enterprises which are deprived of productive factors which they could put to more productive use, and of customers who have to pay high prices or purchase products of inferior quality. In the initial stages profits of the parasitic enterprises are likely to be high and investment opportunities numerous, and the parasitic sectors give the semblance of being the leading sectors in the economy. Since initially industrialization consists mainly of final stages of manu- facturing, the cost is predominantly borne directly by the final users. As industrialization proceeds to earlier stages of production, ineffic- iencies are compounded and costs in the later stages of manufacturing rise. With the exhaustion of import-substitution possibilities, domestic demand puts a limit to the rate of growth of the domestic price structure relative to international prices; the new industries as well as the in- dustries relying heavily on inputs from plan-fostered inefficient sectors find themselves cut off from foreign markets, and profits and the growth rate decline. This is the situation which appears to have been reached by Argentina,1 and which is being reached by numerous developing countries.

The failures of planning in which sectoral allocation supersedes the market mechanism can be traced to two principal factors. The first factor is the paucity of information on the basis of which decisions are made. The market mechanism "generates, apparently at zero cost, dual prices ... i.e. a basic information that is nearly always needed and is very often sufficient" for rational decision-making.2 When the market-generated scarcity indicators are ignored, it is necessary to develop alternative scarcity indicators, a costly and difficult task which under the best of circumstances is very imperfectly accomplished by planners. Since planning of necessity is highly aggregative, the planners

problems. Among other studies of the value added by Pakistan's industries especially worthy of note are the investigations conducted by N. Islam, and, in the first place, his "Commodity Exports, Net Exchange Earnings and Investment Criteria", Pakistan Development Review, vol. 8 (1968). See also R. Soligo and J. J. Stern, "Some Comments on the Export Bonus, Export Promotion and Investment Criteria", Pakistan Development Review, vol. 6 (1966).

1 See D. Felix, "The Dilemma of Input Substitution-Argentina", in G. F. Papanek (ed.), Development Policy-Theory and Practice, Cambridge, Mass., 1968.

2 F. Bessiere, "The Concept of Separability and Optimization in Economic Organization", European Economic Review, vol. 1 (1969). Bessiere talks here about atomistically competitive markets; but the argument applies to oligopolistic pricing as well, since, as shown by Harberger, the magnitude of distortions in such markets tends to be relatively minor. Thus he calculated that if resources in the United States in the 1924-28 period had been allocated in a perfectly competitive fashion, aggregate consumer welfare would have increased by one-tenth of 1 per cent. The same author estimated that in Chile in the 1950s monopoly elements on the capital and labour sides accounted for a 10 per cent. welfare loss. The Chilean figures may be taken as typical of the order of magnitude prevailing in developing countries. See A. C. Harberger, "Monopoly and Resource Allocation", American Economic Review, vol. 44 (1954), pp. 77-87; and "Using the Resources at Hand More Effectively", a summary of a study done at the Centro de Investigaciones Economicas of the Catholic University of Chile, mimeographed, n.d.

1971] TWENTY YEARS OF PLANNING IN DEVELOPING COUNTRIES 129

disregard the detailed information-both internal and external-on the basis of which enterprises make actual operating decisions, and the utilization of which often makes for the difference between productive and wasteful resource use. The second factor is the blunting of efficiency- promoting incentives, and the elimination of an automatic error- correcting mechanism. Even if it were true that planners make fewer mistakes than entrepreneurs operating in a market regime, in the long run the planned performance would be worse than the market per- formance because the market eliminates errors while planning cumu- lates them.

It is sometimes believed erroneously that plan fulfilment is a test of performance comparable to, or even superior to, the value-added test of free-market economies. The exact fulfilment of a plan might mean either that the planners are good forecasters or that they are able to enforce the plan. If the latter is the case, there is no guarantee-as the examples cited above show-that the country would not have been better off had there been greater deviations from the plan. Over- fulfilment might indicate either that the economy had beeen buoyed up by the plan or that the plan had been too modest. Under-fulfilment might mean either that planning had spurred the economy to greater efforts or that the plan had been over-ambitious. Thus any result can be interpreted in either a positive or a negative light: plan fulfilment makes good propaganda, but as a measure of performance it is meaningless.

The critique of the traditional methods of plan enforcement does not negate the need for planned development: it merely points to the fact that planners should not try to do what the market mechanism can do better. The most obvious strategy for planning, firmly grounded in the comparative advantage principle, is to concentrate primarily on the functions which the market is least able to take care of, that is, on the setting of the "rules of the game" and on deciding on the nature and volume of collective goods and services. These are functions of utmost importance, all too often neglected by planning offices pre-occupied with the onerous and largely futile task of direct investment allocation.

The most obvious, and probably the most important, function of planning consists of the co-ordination and rationalization of govern- ment policies. No modern government pursues laissez-faire; and all too often policies pursued by different authorities are designed on an ad hoc basis without due consideration of priorities and of possible con- flicts. Planning encourages authorities to think in terms of opportunity costs, and to explore direct as well as indirect effects. of policies; it raises issues of efficiency of use of policy instruments which normally do not arise in the course of administrative decision-making, and leads to the concretization of so-called policy-makers' preferences. It is a fiction-accepted for reality by some economists-that policy- makers have a preference function which is known a priori. In fact preferences emerge gradually as the planning process reveals the pay- offs among the available alternatives. The learning process inherent in

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planning and in the "dialogue" between policy-makers and technicians may be of greater importance than the plan itself which presents the final step in the process. By the same token planning by successive approximations, though less elegant than planning by use of a single formal model, is likely to be of greater use to the policy-makers:

The use of a formalized model presupposes that all the problems to be solved are defined clearly and explicitly prior to the commencement of the planning exercise. In fact plan preparation is a process of gradual exploration of the nature of the problems. ... In the course of the dialogue (between the planning technicians and the policy-makers) the volume of information contained in the technical studies increases . .. the constraints which must be taken into account gradually emerge, and a series of political iterations gives an opportunity to the policy-makers and to society to "reveal" their preferences as the nature of the problems and of the constraints becomes clearer.'

The need for planning for the co-ordination of government policies is clearly revealed when we consider the nature of the traditional govern- ment budget:

In a majority of countries, budgeting is conceived largely in financial terms. The financial accountability... is usually the overriding consideration and this permeates the entire budgetary process. Em- phasis is placed mainly on the observance of appropriation limits. Moreover, the object-cum-organizational classification of expenditures in the budget does not enable identification of programmes or projects and, furthermore, is not related to the cost of major inputs or the work performed. In other words, the system of budgeting does not provide information on what a government is actually doing and what it gets from the money spent.2

The planning programming budgeting approach, based on "a budget classification in which functions, programmes and their subdivisions are established for each agency, and these are related to ... meaningful functional data",3 is a first step toward the appraisal of the function and efficiency of government outlays. The establishment of a multi- period budgetary plan, such as that pioneered by Norway,4 and ensuring programme continuity is a further step. Such formal devices do not by themselves constitute planning, but they help officials and administrators to formulate their programmes in economically mean-

1 "Methodes de programmation dans le VI plan", Etudes et Conjoncture, no. 12, Dec., 1966, p. 23 (my translation). J. Kornai, op. cit., expresses much the same point of view in his discussion of Hungarian multi-level planning.

2 United Nations, Department of Economic and Social Affairs, A Manual For Programme and Performance Budgeting, New York, 1965. p. 1.

3 Ibid., p. 3. 4 For a brief statement of the purpose and methodology of Norwegian multi-

period national budget planning, see Royal Norwegian Ministry of Finance, Extension of Economic Planning, Government Bill No. 1, Supplement No. 1 (1962-63), Oslo, 1963.

1971] TWENTY YEARS OF PLANNING IN DEVELOPING COUNTRIES 131

ingful terms and promote rational choice in an area where the market does not provide automatic signals.

One of the chief concerns of the developing countries is to ensure an equitable distribution of the gains from economic growth. However, the traditional methods-direct redistribution via taxation and subsidies- are ineffectual where the wealthy are few and the poor are many, and the cost of redistribution (even if it is administratively feasible, which it often is not) may be high in terms of the slowing-down of growth.' The alternative, and in the long run the more effective way, to ensure social equity is through the planned provision of collective goods and services increasing the productivity and the living standards of the masses.

Education plays a key role in a programme of mass betterment and of increasing access to economic opportunities. The democratization of access to higher educational opportunities contributes to the social transformation of society from one governed by a traditional elite to one in which position is more nearly related to individual effort and merit; and incidentally, by increasing the relative supply of the highly skilled, it is likely to lead to a diminution of the wage spread. In every society the number of commanding positions is limited, however, and the over-production of highly skilled individuals is a familiar pheno- menon. Mass betterment requires mass education of a type which increases the efficiency of performance of ordinary tasks. Recent studies show a very strong correlation between general (primary and secondary education) and the rate of growth of economies, the rate of investment being held constant.2 Technological progress, not capital accumulation, is the main contributing factor to economic growth; the higher the educational level, the easier and faster is the adaptation of new tech- nology. Moreover, since general education facilitates the acquisition of specific skills, an educated labour force acts as a magnet to modern, skill-intensive industries.3

The broad masses not only need new education but also a new tech- nology. The organized industrial sector in developing countries provides employment for a small fraction of the total population, and labour in the organized sector (low as their wages may be) forms an economic

1 The bulk of private monetary savings in free-enterprise and mixed-economy countries comes out of profits rather than out of wages. See, for instance, H. S. Houthakker, "On Some Determinants of Saving in Developed and Under- Developed Countries", in E. A. G. Robinson (ed.), Problems in Economic Develop- ment, 1965. Redistribution from profit- to wage-earners would decrease the monetary savings, and have an adverse effect on investment in the organized sector. In so far as high rewards provide entrepreneurial motivation, a steeply progressive tax rate might also discourage potential entrepreneurship.

2 See M. Parvin, "Technological Adaptation and the Rate of per Capita Income Growth," unpublished Ph.D thesis, Columbia University, 1969.

3 For a statistical exploration of the skill-intensity of various industries, see D. B. Keesing, "Labour Skills and the Structure of Trade in Manufactures", in P. B. Kenen and R. Lawrence (eds.), The Open Economy, 1968; and the same author's research memoranda circulated by the Stanford University Research Center in Economic Growth.

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elite compared to the masses of small-scale farmers, landless agricultural labourers, petty traders and casual workers. Modern technology, developed in advanced countries and concerned with mass production by labour-saving methods, is not an answer to the production prob- lems of the broad masses in developing countries.

What can be accomplished by applied research and by bringing better means of production within reach of the many has been shown by the "green revolution". Once the new wheat technology was deve- loped and its success demonstrated, and the necessary inputs were made available to the cultivators, the new technology was accepted at a rate surpassing most expectations. For instance, in the Indian Punjab the first trials with Mexican dwarf wheat varieties were carried out in 1963-64; by 1968-69 over 85 per cent. of the irrigated wheat land was sown with the new varieties. Such a high rate of acceptance of a revolu- tionary new technology belies the idea that the mass of people is tradition-bound and unresponsive to new opportunities. What is missing usually are the opportunities, not the will to seize them. How to apply our scientific knowledge to small-scale farming, but also to the problems of small-scale labour-intensive production, to trade and to housing- and how to bring the new technology to the people-requires planning of the highest order; and, indeed, it calls for international co-operation, for technology is a collective good which knows no national boundaries.

Another area of major concern to developing countries is the creation of a satisfactory spatial pattern of growth, avoiding over-congestion of some areas and neglect of others. An unplanned approach typically leads to over-concentration often unwittingly fostered by public authorities. Business activity naturally tends to gravitate to major urban centres which provide attractive living conditions for managers and the technical staff, where labour is readily available and social overhead capital is adequate. In countries where ready access to the government is one of the main determinants of business success, the capital city presents special attractions. The rise in activity attracts labour and it usually induces the government to improve yet further the provision of social overhead. It frequently happens-as with Karachi in the 1960s-that while authorities bemoan concentration no viable alternate sites are provided for business. Under such circumstances decentralization by fiat, be it through prohibition of new ventures within the congested area, the use of location-specific licences, or the siting of new government-sponsored ventures, either imposes hidden and often very substantial costs on the economy or it is ineffective. For instance, an official Indian committee of inquiry found that in the ab- sence of genuine regional planning "licensing as it has operated during the last ten years has not been effective except in a very limited way for the attainment of the objective of regional dispersal";' and much the

1 Government of India, Department of Industrial Development, Ministry of Industrial Development, Internal Trade and Company Affairs, Report of the Industrial Licensing Policy Inquiry Committee, Main Report, 1969, p. 114.

1971] TWENTY YEARS OF PLANNING IN DEVELOPING COUNTRIES 133

same could be said of Pakistan. A regional approach, based on an analysis of the potential of selected "growth poles", and providing the required infrastructure, combined with a decentralization of govern- mental control functions, obviates the need for location-specific licensing since it induces enterprises to gravitate to the most advantage- ous sites.1

Every developing country has programmes for various types of social overhead capital, but they are inter-co-ordinated only loosely, if at all. Every country, too, has programmes for health, education and other social services. What is missing in all cases is an integrated plan for the social setting of growth, relating the probable rate of develop- ment to a programme of urbanization and location-specific overhead investments, of transport and communication links, of urban and rural cultural, health and welfare services, and of education. What is needed is not a single plan document settling in a more or less arbitrary fashion on a single set of measures, but an exploration in depth of various policy alternatives and their likely consequences: only such an explora- tion can reveal what are the possible alternatives and permit a rational choice of a course of action.

The development of a social plan is a long range and arduous project -all the more so since our understanding of allocation of factors to the production of non-marketable goods is in its infancy. It is known, for example, that cost-benefit analysis of highway construction is likely to give erroneous results, but we are unable to design a practical method of applying the theoretically-correct national-income test.2 The import- ance of the best use of educational resources to fulfil educational needs is universally recognized, but the determination of educational require- ments (let alone the prediction of future requirements) has not gone past the experimental stage;3 the same is true of the development of modern techniques applicable to education in developing countries.4 In other areas of social investment, for instance urbanization, we are like- wise groping. This is all the more reason why such problems should receive the urgent attention of planning offices: where fundamental social decisions are made in an ad hoc manner, even a plan which makes no pretensions of being optimal is likely to bring great improvements.

It must be recognized that the governments of most of the developing countries are not likely to be content with the planning of government policies and of the social sector, and that they desire to exert a more direct influence on the volume and pattern of investment. This, too, can

1 See, for instance, H. W. Richardson, Regional Economics, 1969, esp. chs. 14 and 15.

2 See Anne Fetter Friedlander, Thle Interstate Highway System, Amsterdam, 1965, esp. ch. 2.

3 For a pioneering study, see S. Bowles, Planning Educational Systems for Economic Growth, Cambridge, Mass., 1969.

4 The trials and tribulations of a mass educational programme are described with frankness and insight in A. Curle, Planning for Education in Pakistan: A Personal Case Study, Cambridge, Mass., 1966.

134 ECONOMICA [MAY

be accomplished through rational planning which would avoid the pitfalls of the methods now used.

Many of the governments of developing countries already make a substantial contribution to growth via resource mobilization. In the words of the Pearson Report, the high investment rate achieved by the developing countries in the 1960s "is attributable partly to the growing ability to collect revenues ... In 1960-65 at least seventeen developing countries were collecting over 20 per cent. of their national income in tax revenues, another twenty countries between 15 and 20 per cent., and twenty-nine countries between 10 and 15 per cent. The ability of governments to tax is important because it ... raises funds for invest- ment or for increased social services',

It is possible, too, to affect the private pattern of investment through planning without the direct vetting of individual projects. The planning process itself modifies private resource allocation by generating informa- tion not available through the market, such as aggregative information concerning the likely over-all rate of growth of the economy, the likely trend in the wage rate, the cost of money, the availability of foreign exchange, the tax rate and so on. Multi-sector forecasts also provide useful information to private industry, especially to enterprises which sell a substantial proportion of their output for intermediate domestic use, and which cannot, therefore, make a direct linkage between the probable over-all increase in consumer demand and the demand for their particular product. In so far as the plan makes a correct assessment of the macro-economic trends and of the growth of the various sectors, and a correct assessment of the functional relation between the applica- tion of policy instruments and the private sector's response, it aids the private investors in making a correct assessment of business oppor- tunities, and hence it tends to be self-justifying.

There remains the problem of the unwillingness or inability of the private sector to seize business opportunities and the problem of the discrepancy between private and social interests. One solution lies in the non-discriminatory application of direct policy instruments. For instance, all industries deemed to perform a "teaching function" could receive a subsidy equal in magnitude to the estimated value of the "lesson". Similarly, the market signals could be modified to attain a desired level of production of militarily important commodities or a desired pattern of employment. The use of an optimal mix of instru- ments applied in a systematic and non-discriminatory fashion ensures the channelling of resources in a desired pattern at least economic cost, and the avoidance of mistakes and aberrations inherent in the case-by- case approach.2 What is most important, the approach through modi-

1 Partners in Development, Report of the Commission on International Develop- ment, 1969, pp. 30-3 1.

2 See J. N. Bhagwati and T. N. Srinavasan, "Optimal Intervention to Achieve Non-Economic Objectives", Review of Economic Studies, vol. 36 (1969).

1971] TWENTY YEARS OF PLANNING IN DEVELOPING COUNTRIES 135

fication of market signals preserves efficiency tests and permits an explicit appraisal of the costs of the pursuit of social objectives.

There is room, too, for direct entrepreneurial activity on the part of the government. Some countries, such as Iran, have a preference for free enterprise and adopt as a principle that "the Government should refrain from investing in industries in which the private sector is interested" ;1 others, such as India and Egypt, in varying degrees pursue policies fostering public in preference to private enterprise. Given the objectives of the public investment, as reflected in the policy-modified market signals, for the sake of economic efficiency each government enterprise should be treated as an autonomous unit. In this respect the Yugoslav experiment of market socialism is of special relevance to developing countries.

The disenchantment with planning in developing countries results largely from the failures of administrative allocation of resources and from the crippling of the market mechanism. Planning, properly understood, consists of a rational application of macro-economic policy instruments, of generating information which is not made available through the market and, if necessary, of modifications of the market signals. The chief task lies, however, in the rational provision of collective goods, such as social overhead capital, internal and external security-but also of public health, public education and new techno- logical knowledge. Collective goods play a commanding role in shaping the future of society and in determining to a degree which is often insufficiently appreciated where, how and for whom individual goods will be produced. The decision how to produce and how to allocate such goods puts on the planners a heavy responsibility and gives them control of the "commanding heights" of the economy-a control which is much more powerful than the control over steel, banking or other "key sectors". In contrast to the administrative meddling which now goes under the name of planning, and in contrast to the preparation of detailed investment "menus" which are at best useless and at worst lead to serious resource misallocation and to resource waste, such planning is not antithetical to rapid growth, and it may be a positive aid in avoiding those costly mistakes made in the past in countries now deemed to be highly developed.

Columbia University.

1 Imperial Government of Iran, Plan Organization, 4th National Development Plan, 1968-1972, Teheran, 1968, part 2, p. 127.