Webinar 1: Why Revisit National Planning

C.P. Chandrasekhar Download Full Paper at IDEAs Website

The term “development planning” gained ascendancy in the period immediately after the Second World War, when decolonisation led to the emergence of a number of newly independent underdeveloped countries. War fatigue and the conflict between competing systems resulted in considerable concern with addressing the sharp differentials in levels of development and standards of living between these economies and the developed countries so as to ensure a durable peace. That paved the way for an interest in strategies that could accelerate development in the former.

Accelerating growth required diverting a part of the meagre national income away from consumption to investment in order to raise the rate of growth. While for a time this squeeze on consumption can be moderated by relying on foreign savings (to the extent available), in the final analysis domestic savings and investment needed to be raised. Not surprisingly, the principal developmental task as formulated by Arthur Lewis and his fellow experts in a 1951 UN report (United Nations 1951) was to raise the rate of investment or the ratio of investment to national income, so as to raise the rate of growth achievable at any given level of capital-output ratio.

Raising investment in itself was not enough. It needed to be allocated across sectors in ways that prevent other potential bottlenecks from subverting the process of development. The allocations chosen would depend on what are considered the binding constraints on development in individual countries. If, for example, the principal constraint to investment is seen as the absence or inadequate development of a capital-goods sector and there was inadequate foreign exchange to import capital goods, then the attempt at raising investment to accelerate growth would run up against a capital-goods constraint. This was the problem the Mahalanobis (1955) model applied to India sought to resolve by emphasising the need to allocate a higher share of investment to the investment-goods sector in the early stages of development, even if that meant stretching the period over which aggregate and per-capita consumption are raised to address their inadequacy.

In most developing-country contexts, a more serious constraint on growth was the shortfall in the availability of food, which constitutes an overwhelmingly large part of the goods that make up the wage basket. Increases in output and employment result in increases in wage-goods demand that far exceed domestic supply. This necessitates imports and could again lead to balance-of-payments problems or, if imports are not resorted to, triggers food-price inflation that in multiple ways constrains growth.

It has been argued (Kalecki 1970) that the principal factors constraining agricultural growth are institutional, such as semi-feudal relations, making institutional change central to relaxing the wage-goods constraint. While this cannot be denied, it is also true that within any institutional frame, achieving the maximum possible rate of growth would require a certain level of investment (in irrigation, drainage and flood control, for example). The existence of a slack, for lack of investment to exploit the available potential, could make it possible to raise the supply of necessities and at least partially resolve the wage-goods constraint by directing investment to the agricultural sector. Beyond a point this would have to be combined with the required institutional change. Thus, for any given level of the investment-to-income ratio and the associated rate of growth, there would be an appropriate allocation of investments (given initial conditions) that ensures sectoral balance and renders the growth path sustainable.

Finally, the issue is not merely one of investment allocation but one of technologies in which investment in different sectors would be embodied. On the one hand, accelerating employment (and therefore consumption) growth in the immediate future requires investing in labour-intensive technologies. On the other hand, restraining consumption and raising the share of surplus available for investment may require opting for capital-intensive technologies, given the possible rate of technological change. This may provide a case for raising the average capital intensity of technology even in a country with substantial volumes of surplus labour (Dobb 1960, Sen 1962). It would also call for matching the inevitably capital-intensive technologies adopted in some sectors (such as heavy engineering) with a choice of more labour-intensive technologies in the consumption-goods sector, for example.

Whatever the decisions taken, given initial conditions, political feasibility and technological imperatives, the essential point that emerges is that once governments choose to influence the pace of development, as they did in the immediate post-war years, they need to find ways to intervene in order to push the rate of investment, the allocation of that investment and the technologies in which the investment is embodied in directions that correspond to some ideal appropriate for the targeted rate of growth.

Area of control

Development planning in this form obviously presumes some degree of coordinated investment decision-making. The expected benefits from such coordination are two-fold. First, by overcoming the “secondary uncertainty” inherent in a regime where investment decisions are atomistic and based on guesstimates of the decisions that other decision-makers would arrive at, it reduces the waste and unemployment characteristic of capitalism (Dobb 1960). Second, by ensuring the incorporation of appropriate inter-temporal judgements in the choice of the investment ratio, the allocation of investment and the technical forms in which it was embodied, it permits a process of maximising growth subject to the consumption requirements set by social and political conditions.

The difficulty is that unlike in some hypothetical (though not necessarily actual) economy with a substantial degree of state ownership of productive assets, in which surpluses largely accrue to agencies of the state and in which the volume of such surpluses can be determined by a combination of turnover taxes and an appropriate prices and incomes policy, the state in a mixed economy is not in control of consumption and investment decisions. In the latter case, the level and allocation of investment gets determined by the “guesses or expectations of a large number of independent decision-takers (entrepreneurs), in the long run ‘revised’ by ex post movements of market prices” (Dobb 1960). Since the resulting investment in fixed capital is not by definition reversible, decision errors are costly in individual and social terms. And such errors are bound to occur since private investment decisions must be based on estimates of prices that would prevail over the lifetime of the project.

One consequence of these circumstances is that existing prices cannot be a guide to future prices, as the atomistic, individual investment decisions made on the basis of the prevailing prices together influence future demands and supplies and subsequent movements in prices. Without an anchor, there is no reason to surmise that expectations would actually be realised, leading to unutilised capacity, closure and unemployment. Moreover, the allocation of investment may not be in keeping with that required to ensure the pattern of production needed to raise the rate of saving and investment and to maximise the rate of growth. An obvious way in which this happens is through inadequate investments in the infrastructural sector characterised most often by lumpy investments, long gestation lags, higher risk and lower profit. Given the “economy-wide externalities” associated with such industries, inadequate investments in infrastructure would obviously constrain the rate of growth.

Structural change

This, however, misses out on one fact. The thrust of development planning, and therefore the choice of regime, was also influenced by the initial conditions that prevailed in underdeveloped economies, which were all predominantly agrarian and home to substantial volumes of unemployed and underemployed surplus labour. The vision underlying development planning had two strands to it, with different degrees of emphasis on each in different versions of it. The first was to introduce the institutional changes, undertake the investments, and ensure the availability of a surplus of wage goods, so as to mobilise the surplus labour and put it to work on projects that created productivity enhancing capital assets. To the extent that capital formation was possible with “bare hands,” the resources required were the consumption goods needed to feed and clothe the labour force engaged in “capital goods production”.

The second aspect of the vision was to ensure the diversification of economic activity away from agriculture to producing manufactured goods, especially machine tools. Besides the apparent universality of this trajectory across countries, a range of arguments provided a case for such diversification: First, the conclusion derived from trends in consumption styles across the globe and embodied in rudimentary form in Engels’ Law that the demand for non-food commodities in general and manufactures in particular grows and diversifies as incomes increase. Growth must therefore be accompanied by a process of diversification of economic activity in favour of manufactures; second, the belief that, given the barriers to productivity increase characteristic of predominantly agrarian economies, the diversification in favour of industrial production is an inevitable prerequisite for a rapid increase in per capita incomes; third, the view that beyond a point even agricultural growth is dependent on manufactured inputs. And, finally, the truism that dependence on primary production places a nation at the losing end of the shifting terms of exchange in international trade, necessitating industrialisation as a device aimed at garnering additional benefits from trade and overcoming external vulnerability.

Diversifying in favour of manufacturing, especially based on demands generated in the domestic market, was of course not necessarily easy for many mixed economies. Small landlocked or island economies cannot sustain much of an industrial sector based on the domestic market and can emerge as successful manufacturing exporters only in exceptional circumstances. Hence a strategy focusing on ensuring a significant degree of diversification in favour of manufacturing may be misplaced in their case. So would attempts to apply elaborate models defining trajectories that can be pursued to achieve manufacturing-country status. As Arthur Lewis noted: “Whether the economy responds mainly to export demands, or grows mainly in response to home demand, is also important” (1966, 21). In the latter, a combination of assessments of export prospects and policies aimed at regulating imports and promoting exports to grow on the basis of an export stimulus may be important. Here, a degree of independence for private decision-making is inevitable. But what is appropriate for countries with special needs or special constraints cannot form the basis of defining what development planning is.

In any case “models’ are not the prerogatives of the so-called authoritarian planners. Often elaborate models are used to justify submitting not just private but even public decisions to purely market signals. The idea of using “border” prices and price relatives as the basis for assessing the relative costs and benefits of proposed public projects, to determine which among them should be chosen is a case in point. The claim that adopting this “rule of thumb” would be a way of approximating outcomes that would fall out of an optimisation exercise, besides resting on completely untenable assumptions about markets and price determination, obfuscates completely what the social welfare function being maximised is and what the real constraints are.

References

• Lewis, W. Arthur. 1966. Development Planning. London: Routledge.
• Mahalanobis, P.C. 1955. “The Approach of Operational Research to Planning in India.” Sankhya 16(1/2), 3-130.
• Sen, Amrtya K. 1962. Choice of Techniques: An Aspect of the Theory of Planned Economic Development. Oxford: Blackwell.
• Kalecki, Michal. 1970. “Problems of Financing Economic Development in a Mixed Economy.” In Eltis et al. (eds). Induction, Growth and Trade: Essays in Honour of Sir Roy Harrod. Oxford: Oxford University Press, 91-104. Reprinted in Kalecki 1976, 98-115. United Nations. 1951. Measures for the Economic Development of Underdeveloped Countries: Report by a Group of Experts Appointed by the Secretary-General of the United Nations. New York: United Nations.