The Process of Economic Planning 9780231896559

Table of contents :
Preface
Contents
1. Planning in Perspective: Possibilities and Limitations
2. Planning: The Institutional Aspects
3. Aims, Strategies, and Policies of Development Planning
4. The Elaboration of Development Plans
5. Scientific and Quantitative Evidence and Planning
6. Techniques of Planning
7. Plan Implementation
8. Planning and Politics
Index

Citation preview

The Process of Economic Planning

The Process of Economic Planning Zoltan

Columbia University Press

Kenessey

1978

New York

Library of Congress Cataloging in Publication Data Kenessey, Zoltan, 1929The process of economic planning. Includes bibliographies and index. 1. Economic policy. I. Title. HD82.K.395 309.2'12 77-3204 ISBN 0-231-03571-3 Columbia University Press New York and Guildford. Surrey Copyright © 1978 Columbia University Press. All rights reserved Printed in the United States of America

To my wife, Stephanie

Preface This work is dedicated to those interested in the betterment of the human condition through planned social action. It suggests that carefully designed, properly monitored, and flexibly executed economic planning can become instrumental in man's advancement. However, planning has not yet shown its expected full potential in furthering this goal. A major reason for this failure is insufficient groundwork, hence the emphasis on preparatory steps in the text that follows. It is hoped that students will find this a useful introductory text and that planners and policymakers will appreciate its dwelling on the initial tasks of planning. These tasks are particularly important for the sort of market-oriented, participatory, noncommand-type planning considered generally preferable by the author. The ideas contained within this work were originally presented to my graduate students in 1968 and 1969 at the Wharton School of the University of Pennsylvania and at Columbia University and in my 19741975 course in the techniques and problems of planning at New York University. I am indebted to my students for their thoughtful participation in the discussion of the subject, and in particular to Szabolcs Szekeres for his stimulating interest in it. My sincere thanks are due to Herb Levine, Peter Kenen, and Ned Nadiri for offering me the fine opportunities to expound my ideas. Ronald Findlay's views on the outline of the book and Nadiri's encouragement in completion of its draft are also gratefully acknowledged. Bernard Gronert's patience and understanding during the gestation period were also of great importance to me. My special gratitude is also due to Bernard Brunhes for a series of comments and to the Press's reader and editors, particularly Maria Caliandro, for their review and

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PREFACE

suggestions; naturally any responsibility for the study should rest only with me.* I should like to call readers' attention to the numerous references to United Nations publications throughout the book, and I hope that they will find their perusal as beneficial as I did. My emphasis on these works was fostered by their often excellent quality and availability all over the world. These sources are very helpful in showing the economic planning experiences of countries from different continents, at various development levels, and with differing social orders. Judging by recent developments, economic planning may become an increasingly important factor in the United States economy as well. I believe that the international experience with planning and some of the related ideas described in the present work will now be of even greater practical significance in America than a few years ago when I started this project.

'Neither the United Nations, with which I was associated at the time of writing this study, nor the Board of Governors of the Federal Reserve System, where I am currently serving, bears any responsibility for the views expressed in this work.

Contents 1 Planning in Perspective: Possibilities and Limitations I General Approaches to Planning II Development Plans—Systematized III A Sampling of Historical Experience with Planning 2 Planning: The Institutional Aspects IV Legal Provisions for Planning: Planning Organs V The Plan and the Market VI Some Broader Institutional-Political Issues

1 3 16 33 67 69 86 104

3 Aims, Strategies, and Policies of Development Planning

123

VII Basic Ends: Domestic Economic Aspects

125

VIII Development Strategies: International and Social Aspects

146

4 The Elaboration of Development Plans 165 IX Systematic Analysis of the Aspirations of the Population for Planning Purposes 167 X Utilization of Economic Theory and Models of Growth in Planning 183 5 Scientific and Quantitative Evidence and Planning XI Planning: The Evidence Furnished by Science and Technology XII The Base Period of the Plan: The Statistical Evidence XIII The Overall Statistical Evidence: National and Social Accounts

201 203 217 235

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CONTENTS

6 Techniques of Planning XIV Techniques of Planning: An Overall Review XV The Input/Output Approach in Planning XVI Econometric Models and Planning 7 Plan Implementation XVII The Instruments of Plan Implementation XVIII Plan Implementation and Statistics 8 Planning and Politics XIX Planning and Political Priorities Index

251 253 278 301 325 327 344 371 373 393

The Process of Economic Planning

1

Planning in Perspective: Possibilities and Limitations

I General Approaches to Planning of the decade, the 1970s are beset with worldwide problems. The term "crisis" is applied with increasing frequency, with the international energy situation, the shortages in world food supplies, and the current and forecast population levels foremost on the list of phenomena characterized as critical. The problems are not restricted to the poverty-ridden less developed areas. The international financial system as a whole is under very great strain. Inflation persists in the most affluent economies. Even the huge and relatively self-sufficient United States economy is not exempt from grave problems. The seriousness of the situation is augmented by the difficulties that governments experience in their attempts to cope with the problems. The ensuing frustrations often lead to a feeling of crisis in another area, namely, economics. Those economic models, constructs, and policies that served well under previous conditions no longer appear to be effective in resolving various current issues. The weaknesses of the economic and political institutions dealing with the problems are also apparent. The disparity between the scope of the tasks of the international economic and political institutions and the means placed at their disposal by the constituting national states is severe. Although countries were able to agree to establish an international environmental agency (The United Nations Environment Program, UNEP), no worldwide machinery exists to cope with the complexities of the international energy situation—hardly a less important concern. The unresolved national issues of inflation and balanced growth with equitable results are clear indications of similar limitations in even the best-endowed economies. One purpose of the present work is to show AT THE M I D P O I N T

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PLANNING IN PERSPECTIVE

that unless careful planning is applied to the problems faced by the world and by individual nations, there is no hope for solutions, perhaps not even for temporary remedies for most major contemporary issues. Since emphasis should be as much on the adjective "careful" as on the noun "planning," the present work strongly emphasizes the steps preparatory to planning and is structured around eight major topics: 1. 2. 3. 4. 5. 6. 7. 8.

The possibilities and limitations of planning The institutional aspects The aims, strategies, and policies of development planning The elaboration of development plans Quantitative evidence and planning Techniques of planning Political priorities and planning Plan implementation

The discussion of these eight topics follows an outline based on eight main propositions. The first link in this chain of reasoning is the claim of unavoidability of planning in our times. The need to evaluate the potential and the limitations of planning is a corollary. Secondly—given the will to engage in planning—the institutional issues arise in their various political, legal, and economic ramifications. However, the introduction of planning and the provision of the relevant institutional prerequisites gain their true significance only in the context of well thought out, balanced, and farsighted national objectives. This is the third basic proposition. Unfortunately, the setting of national objectives is one of the weakest links in most national planning efforts. Therefore the present work deals separately with four major sources of evidence relevant to the planning of national objectives: the desires and aspirations of the populace; the evidence furnished by modern knowledge (all branches of it, including economics); the quantitative evidence (particularly statistics) regarding the socioeconomic processes to be planned; and the priorities adopted by the decisionmaking political authorities. After study of the bases and setting of the broad objectives of the plan, the selection of the appropriate planning techniques is of central importance. A review of the informal and formal, overall and sectional, and

General Approaches

5

short-term and long-term planning techniques should aid in this process. Finally, the relationship between planning and plan implementation becomes crucial. Instances of nonimplementation of brilliant planning ideas and the forceful implementation of poor ones are both well known. Therefore the importance of continuous statistical and other analyses of the plan implementation should be stressed, with provisions for intervention, corrective action, and if necessary, modifications in the plan. For discussion of the eight main topics briefly outlined above, adherence to the following two basic assumptions is of particular importance: 1. Much of the difficulty experienced in economic planning by various countries is connected with the relative neglect of the ultimate aims to be served. 2. Relatively nondetailed economic planning (coupled with a wider use of market forces) is preferable to the practicing of economic planning in great detail (usually exercised in conjunction with the use of extensive administrative controls). Regarding the first assumption, it is maintained that the ultimate aims to be served by economic planning—and more generally, the wider social context in which it takes place—are neither adequately studied, systematically taken into account, nor organically embodied in the planning process. This is due only partly to unwillingness on the part of economic planners. Considerable difficulties are involved in the study of the numerous factors relevant to evaluation of the ultimate aims of society, an evaluation essential to the creation of national development plans. Noneconomic factors are very important here, and the training of economic planners often does not prepare them sufficiently for the analysis of combined economic and noneconomic factors, needed for the setting of national objectives. On the other hand, the learned representatives of the noneconomic fields of knowledge such as health, nutrition, population, or environment studies—all very important in the evaluation of national objectives—are seldom able to understand the usually complex economic implications of their proposals. Notwithstanding the very real nature of these communication difficulties, economic planning cannot become a true moving force in social development without funda-

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PLANNING IN PERSPECTIVE

mental improvements in communication and the adoption of a complex interdisciplinary approach to the evaluation and setting of national objectives. The second basic assumption adhered to in the discussion of the various topics concerns planning and the market. The relationship between the two is often perceived as antagonistic, and a heavier reliance on economic decisions within the framework of planning is automatically considered as an "antimarket" attitude. Similarly, according to this antagonistic interpretation of the interaction of planning and the market, an increase in the role of the market automatically reduces the role of centred planning. In the present work the antagonistic approach is rejected. While there are important contradictory aspects of market behavior and economic planning, a one-sided reliance on either of them does not lead to resolution of the major issues of our times. The prospects for progress lie in the correct interpretation of each of them, which then leads to the necessary dynamic interaction of the two. The question is not whether one should "lean" more toward either planning or the market. The task is to utilize both to a greater degree. The elimination of some undesirable properties from both planning and the market is essential for progress in that direction. Less detail in planning and less administrative regulation of the market may be key elements in achieving the desired dynamic interaction of the two. Strengthening both planning activities and market actions appears to be the only solution to the major problems of our times. It is interesting to note that the adoption of strengthened but less detailed planning with wider reliance on market forces necessitates a greater number of preparatory steps than usually realized. The significance of preparatory steps is actually greater than in the case of detailed planning. This is so because in the latter case the detailed administrative controls serve as quickly applicable means of correcting undesirable situations, while such corrections in a system of less detailed planning with heavier reliance on market forces may take somewhat more time. In accordance with the two basic assumptions briefly mentioned above, the present work deals in some detail with those steps and conditions, which are taken more or less for granted by most studies on the economic planning process interpreted in a narrower sense than

General Approaches

7

here. It advocates an approach to economic planning with not only a heavier emphasis on the preparatory steps but also a systematic coupling of these "preparatory steps" with the planning process. 1. Some overall questions of planning Mankind and planning are old mates. In a sense they were born together. The making of the first stone tools already involved a measure of "planning" of an "economic activity." Defined as to "scheme, arrange beforehand," 1 planning is a broad human attribute. In view of the social nature of man, the interpretation of planning requires an understanding of the cultural context in which it takes place. Purely technical interpretations—which tend to concentrate on the study of planning tools—are only partly helpful to realize its full scop«. Unfortunately our knowledge of the history of planning efforts is limited, in both the technical and social aspects. Certain elements of planning, and for that matter, centralized planning, obviously must have existed in order to maintain the systems of irrigation, production, distribution, communication, and defense at various stages in such cultures as ancient Egypt, China, India, Mesopotamia, and the Inca empire. Scattered evidence is not lacking to this effect. However, the distance between the planning efforts of ancient societies and those of our age is very large. The changes in technology, population and various sociocultural aspects are obvious factors in explaining the difference between ancient and modern planning activities. So is the increased knowledge regarding the processes to be planned and the infinitely more sophisticated tools of analysis and projection assisted by computers. There is not only a large distance between ancient and modern attempts at planning—in fact, there is a historical gap between them. In this respect there is no continuity with antiquity. As mentioned, our knowledge of past efforts is very scarce and thus even a conceptual link is presently lacking. By and large, the feudalistic and much of the capitalistic stages of development explain this discontinuity. I. The Concise Oxford Dictionary of Current English, 4th ed. (London: Oxford University Press, 1961).

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PLANNING IN PERSPECTIVE

Modern economic planning is therefore a new achievement, a characteristic feature of the twentieth century. With economic progress, elements of planning were of course discernible in recent centuries. For example, the development of the railroads in the nineteenth century, despite the rather spontaneous character of this process, certainly involved elements of planning. We also know that Washington, D.C. and Leningrad were both started as "planned" cities, and eighteenth- and nineteenth-century planning efforts in other fields could also be cited. Nevertheless, compared to these efforts the situation in the twentieth century is quantitatively and qualitatively different. The decisions to plan the economic activities of entire nations, sometimes covering half of large continents, and the desires to direct toward desirable goals the complex socioeconomic machineries of modern societies are incomparably different, new endeavors of man. Thus it is justifiable to say that economic planning as a specialized activity and independent discipline emerged to meet the new socioeconomic requirements posed by the twentieth century and never before confronted by man on a similar scale. Economic planning became a rather characteristic feature of the socioeconomic scene on all major continents. The socialist economies are considered as planned economies by definition. Most of the developing nations introduced some sort of planning in the 1950s or 1960s, and most of the developed market economies are also experimenting with planning—or planning ideas—of various sorts. This widening application of economic planning all over the world is clearly an irreversible process, deeply related to modern technology and the social conditions of our age. There is no use in speculating about the distant future in this respect. Certainly for a long time to come planning will play an important role in man's socioeconomic endeavors. It is of considerable importance to assess both the possibilities and the limitations associated with this role. Our assessment may follow a number of different avenues. Three of these appear to be of major importance at present. The first avenue is to consider the possibilities and limitations of economic planning on a more abstract plane, largely on the basis of our theoretical understanding of socioeconomic processes. The second avenue is to evaluate the empirical evidence accumulated with planning endeavors in terms of whether it

General Approaches

9

permits the drawing of some general conclusions concerning the promise it holds and the realistic expectations it can fulfill. The third avenue consists of study of the desirable improvements in economic planning needed to permit this planning to play a role in society within the framework of our theoretical understanding of the subject and within the limits observed in practice for its application. Since this book is concerned largely with the exploration of this third avenue only, a selection of ideas will be given from the first two approaches, and their discussion will be largely confined to their bearing on the task set for this study. Some aspects of the accumulated historical experience are mentioned in the sections that follow. Certain theoretical considerations are described in part 2.

2. The practical needs for planning The practical needs for overall economic planning are manifold. The inevitability of planning by any sizable modern corporation or other body is of course widely recognized. No sensible investment decisions are feasible without analysis, foresight, and careful evaluation of future alternatives. Such decisions often reach the magnitude of hundreds of millions of dollars and not seldom involve billions of dollars in investment.2 Most economies of scale were achieved by a colossal increase in the size and the concentration of economic activities. An automotive plant with a production capacity of less than 200,000 cars per year is generally a losing proposition. Steel plants below a certain (very large) size and oil tankers below a colossal capacity are all becoming uneconomical and therefore avoided when new decisions are made concerning them. Such decisions obviously cannot be reached without very careful preparation, requiring a great deal of effort and time. Similarly, the implementation of the decisions is also a lengthy and involved process. Usually five to ten years elapse between the inception of an idea for expanding a certain economic service and its full-scale implementation. Clearly, such efforts require careful planning and monitoring throughout the entire process. 2. When Pan Am decided to buy a fleet of jumbo jets, the resources committed were over 500 million dollars.

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PLANNING IN PERSPECTIVE

The planning of individual decisions or separate processes cannot be fully successful unless they are carefully coordinated. Decisions that pertain to any of the components of the economy by necessity influence the rest of the components as well. Leontief recently summarized this situation in the following manner: The decision made today by a large company to build or not to build a new steel mill or a chemical plant, or to start a mining operation, can have major repercussions in the future. For the managers, this means taking normal business risks, but it should not be forgotten that the outcome of such necessary gambles will affect not only the stockholders of that particular corporation and the careers of those in charge but also businesses in other sectors of the economy as well. For example, the present shortage of raw materials in the petrochemical industry has stalled the phonograph-record-making business. 3

Also the various branches of government charged with responsibility for important sectors such as transportation, energy, housing, or health cannot set successful policies in a separated manner. Clearly, no national housing policy is viable without a related transportation policy, which again cannot be separated from environment policies, manpower planning, education measures, and so on. The complexity of the tasks becomes clearer if one also considers the related issues such as taxation, those problems of the capital markets having bearing on the implementation of the selected programs, and the role of the federal budget in the process. National policies, whether they pertain to welfare, business or to the regulation of various economic activities, cannot be effective unless evaluated in the context of overall national socioeconomic policies. Hence the overwhelming need for coordinated national planning. Recently adopted changes in the federal budgetary procedures of the United States 4 also reflect recognition of the need for overall coordination. While clearly short of a national economic plan, the manner in which the huge federal budget is determined and executed has a very great impact on the economic situation of the country and under the given conditions it is the most planned segment of the nation's outlays. Under previous procedures both revenues and appropriations were dealt with in a rather isolated manner. For example, expenditures were 3. Wassily Leontief, "For a National Economic Planning Board," New York Times, March 14, 1974, p. 37. 4. Congressional Budget and Impoundment Control Act of 1974 (Public Law 93-344).

General Approaches

11

acted on by separate committees in each house of Congress, commencing with the thirteen House appropriations subcommittees. The total budget was only considered after these committees had finished their work, working independently of one another. Thus overall budgetary deficits or surpluses may have come as unintended results of unrelated decisions by separate committees. To avoid such undesired results, a Joint Congressional Committee on the Budget was established to consider the budget proposal submitted by the president. The joint committee reviews, first of all, the general characteristics of the budget and the projected levels of all expenditures, revenues, and the public debt. Under the new procedures the two houses of Congress have to review the level of outlays planned for all programs, the ordering of priorities among them, and the ways revenues will be provided to fund the various government activities. The new arrangements reflect the determination to make more effective use of the federal budget as an instrument of fiscal policy and control and potentially a more powerful instrument of central economic intervention and guidance. It is noteworthy that the need for some form of overall economic planning is receiving increased attention from the more conservative thinkers on economic matters'in the United States. Herbert Stein, the former chairman of President Nixon's Council of Economic Advisers, was reported to have mentioned that "maybe we need an economic planning agency" at the December 1973 annual meeting of the American Economic Association. Perhaps more important, businessmen might not necessarily object to the idea. Henry Ford, II, speaking at a governmentsponsored "presummit conference" held on September 19, 1974 in Detroit, called for urgent creation of a cabinet-level planning agency to study lOng-terrri supply-and-demand problems. Such a study, he suggested, "might well indicate the need for new national policies to provide adequate supplies of materials or the timely development of substitutes for any whose future availability is in doubt. " s There were of course others who aired suggestions regarding planning. Leonard Silk, a member of the editorial board of the New York Times, suggested that 5. New York Times, September 22, 1974, sec. 3. p. 6.

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PLANNING IN PERSPECTIVE

this nation and many others need more effective and democratic ways of planning their long-run social and economic development. Increasing the supply of resources, human and material, and in the proportions needed, is essential to curbing inflation in a way that will not require periodic bouts of recession, depression and high unemployment. In an increasingly integrated world economy, such programs need to be international and not merely national in scope. 6

In the formulation of Charles A. Reich of Yale: The first affirmative requirement of a new society is a system of planning, allocation and design. Today there is no control over what any organization may invest, produce, use up, distribute. The need for planning has been obvious since before the New Deal, but we have refused to see it. It is time for us to grow up, to acknowledge that the great forces of technology cannot be left the playthings of corporate expansionism and personal ambition. But planning cannot be left to the planners. . . . Planning is a tool, not an end, and its goals must come from outside the process. 7

Since the Great Depression of 1929-1932 the ability of the automatic economic forces of capitalism to create desirable employment levels, adequate growth rates, and equitable distributions of incomes has been discounted in practice by economists of almost all persuasions. In keeping with the advice of John M. Keynes, governments in most Western countries have been exercising various degrees of intervention in the economic processes, particularly by means of fiscal and monetary policies. One can say that the question is really not whether planning is to be applied. The more relevant questions pertain to the "how" of planning, the acceptable ways of planning, and to the aims to be served by it. 3. Utopias and planning The social justification of planning is related to the desirable directions and states which can be pursued and achieved only by the implementation of specific plans designed for that purpose. In this context it is important to realize that, from its beginnings, the central reason for humanistic activity was a passionate concern with the human condition, a passionate dedication to the improvement of human life and 6. L e o n a r d Silk, " H o w the World Economy Got into the M e s s , " New York limes Magazine. July 28, 1974, p. 24. 7. Charles A. Reich, " I s s u e s for a N e w Society," New York Times, March 9. 1971.

General Approaches

13

to the emancipation of man. . . . At the dawn of the modern world, social science made its appearance in England not as a desiccated discipline of pedants seeking knowledge for its own sake but as an instrumentality for the elevation and emancipation of mankind, for the eradication of cruelty, exploitation and illiteracy. 8

While every planner rightfully tries to avoid utopistic planning like the plague, a separation of planning from social vision and broad societal goals is both undesirable and unrealistic. Later, in the context of the discussion of national objectives, we return to several aspects of this problem. However, already at this early phase of describing the issues of planning there is a need to emphasize the significance of the overall social horizon of planning. Economists often tend to disregard the broader social and cultural issues involved in planning. Some economists basically avoid them by paying mere lip service to their importance. However, the best minds of the economic profession do not allow themselves to be misguided by the improved formal technical qualities of their own concepts into a disregard of the underlying social complexities. For example, Koopmans, in his 1967 article in Econometrica about optimal growth models, underlined the following: These questions arise in large part from a feeling of uneasiness about the entire framework in which the portrayal of preference, technology, and population growth has been approached so far. The formulae by which we have been trying to capture these phenomena bear the marks of their intellectual parentage in the classical immutable laws of the physical sciences. They have no provision for the continual adjustment of preference, knowledge, practice, and custom to new experience and observation. In brief, they lack the flexibility that is an essential trait of all human response to a changing environment.®

If planning is to be an effective human response to the changing environment, planners have to utilize their techniques in the broad context of the sociocultural challenge of the epoch. This requires a familiarity with not only the technical tools of planning and the relevant economic theories, but also the various social factors and circumstances that may have an importance for their activities. The understanding of 8. J. A. Scott, Introduction to Sir Thomas More, Utopia (New York: Washington Square Press, 1968), p. viii. 9. T. C. Koopmans, "Objectives, Constraints, and Outcomes in Optimal Growth Models, Econometrica 35 (January 1967): 11.

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broad human aspirations and the analysis of attainable social goals and the political processes that could lead to their attainment are all relevant to the planning process and to the successful implementation of the plan. Even if the planner considers himself a technician who may wish to remain neutral regarding selection of the social objectives to be pursued by the plan, without a considerable degree of understanding of the broader issues at hand his activities cannot be successful even in the technical sense. 4. Planning and inflation The application of planning is often mentioned both as a remedy to inflation and as its cause in the Western economies. In reality, planning is neither at the root of the inflationary pressure nor the panacea to eliminate its dire consequences. In a meaningful sense, planning is a neutral tool and, depending on the circumstances of its application, it may foster or stem inflation. It is true that the state economic intervention of the last three or four decades was generally accompanied by inflationary developments in the Western countries. As Lord Balogh summarized, "The managed economic system of the post-war period has indeed proved far more successful than nineteenth century capitalism, both in securing material progress and maintaining employment; but throughout this period all Western or Capitalist or mixed countries suffered from an incessant increase in prices. This in the West undermined governments and threatens stability." 10 However, this phenomenon should not lead to the adoption of a faulty "post hoc, propter hoc" reasoning. The basic inflationary pressures experienced in the Western countries are not the product of planning per se, but rather the results of the particular social arrangements of the time, which of course exercise considerable influence on the modes, aims, and outcomes of planning attempts in these countries. In later parts of this work we will return to the political issues involved." Now it is sufficient to call attention to the 10. T h o m a s Balogh, " T h e Crisis of New Hungarian Quarterly 14 (winter 11. In Part 1, which deals with the m a d e to discuss some of the relevant

Capitalism: A Failure of Conventional E c o n o m i c s . " 1973): 46. issues of political priorities in general, an attempt is problems.

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15

basic neutrality of planning regarding inflation. The application of planning should not, per se, lead to inflation. Similarly, the introduction of planning does not solve the inflationary problem. The result of planning, which is a broad social tool, can be stimulating, restrictive, or neutral from the point of view of inflation, but any of these impacts would be mainly the outcome of the political decision taken regarding its directions. This is not to minimize the potential usefulness of planning to cope with the problem of inflation. There can be little doubt that the recently experienced inflationary-recessionary economic situations are in great need of appropriate remedies. The gravity of the worldwide economic problem is more and more obvious. In her article, "Hindsight and Foresight in the World Economy," Barbara Ward made the following interesting observation (in the context of the French revolution of the eighteenth century and the October revolution of the twentieth century in Russia): It is difficult to read the pre-history of any great catastrophe without wondering why the protagonists were so blind or if not blind, so powerless to act. . . . The portents were there—protests from the intellectuals, explosions of violence, a steady growth in the blind, undirected resentment of the masses. But in the vast revolutionary upheavals that followed, one has the irresistible impression of men overcome by events, of remedies applied too late, of initiatives taken just half a decade beyond the chance of effectiveness. In fact, it is precisely this contrast between policies that might have worked if applied in time and the gathering onslaught of uncontrollable events that gives to the great explosions of history a tragic Greek sense of human fallibility and ineluctable fate. 12

While it well may be that the worldwide inflation will not lead to catastrophic upheavals, the possibility of serious economic disturbances is very real. Should there be a sufficiently strong concern regarding the remedies for this situation and the mustering of political will and power to apply them to the problems, overall planning measures could be of great value in fighting the inflationary dangers. If brought into the service of worthy policies, economic planning can become an invaluable tool. Otherwise it may remain either an unused concept or a misdirected effort. 12. Columbia Forum, Spring 1969, p. 24.

II Development Plans—Systematized for and the gene RED usefulness of planning were discussed in chapter 1. We now consider the various types of plans, classifying them according to their time horizon, activity coverage, geographical scope, institutional character, and level of detail. T H E OVERALL N E E D

1. Short, medium, and long-term

plans

The time scope covered by various plans may range from as little as a single month to a quarter of a century. These plans of various durations are conventionally classified into short-term, medium-term, and long-term. Short-term plans have a duration of a year or less. Medium-term plans may cover any period over one year but not more than five or six years. Long-term plans—sometimes also called perspective plans—extend even longer in time, generally for ten or fifteen years in the future. a. Short-term plans

Quarterly and monthly plans. The typical short-term plan is the annual plan. There are certain shorter plans that also belong to the category of short-term plans, but at least at the national level they are of little use. Quarterly and monthly plans are foremost in this shortest category. In the Soviet Union and in Eastern Europe extensive attempts were made to utilize quarterly and monthly plans in the system of economic planning. One of the reasons for their application was the wish to eliminate the ill effects of the year-end rush to fulfill the annual economic plans. The managers of enterprises, who materially and mor-

Development Plans

17

ally were stimulated to fulfill the production and other quotas set for the given year, usually made a very large effort to achieve this goal. This often led to great cost overruns, to the abundant use of overtime, and to the depletion of all kinds of reserves toward the end of the year. Understandably, the new year was then started in a much lower gear by the exhausted manager and workers. The negative character of this "plan-induced" but "theoretically unintended" cyclical phenomenon was of course soon realized. In the minds of those who could only think of administrative, bureaucratic remedies to the problem, the logical step was to break down the annual plan into four quarterly plans and into monthly plans within the quarterly plans. It was hoped that thereby a gradual increase could be planned for the twelve consecutive months of the year. This way the peak in December need not be much higher than that of the November preceding it. Also, the level in January following it would not be lower but higher than that achieved toward the end of the year. However, in practice the year-end rush could not be eliminated in this manner and the utilization of quarterly and monthly plans was beset with a host of problems. One of the problems was of course the size of the workload involved in the preparation of such plans and then in the monitoring of their fulfillment. Especially if the granting of bonuses and material rewards is linked to the fulfillment of such plans, a great deal of time is spent on their preparation and evaluation. Very often time that should be spent on managing and carrying out the activity itself was rather spent on the "plans" pertaining to it. However, a great deal of "planning" cannot replace a great deal of "doing"—planning of production should not by its sheer weight derail production itself. Of course the lack of resources or rather the competition for resources between planning and plan-fulfillment activities is not the sole reason why quarterly and monthly plans generally failed as useful instruments. In addition to their low cost-effectiveness, quarterly and monthly plans more often than not contained unrealistic targets, which subsequently caused severe headaches when proven unattainable. Although it may be fairly realistic to set a yearly target for a country's steel production or railroad traffic, quarterly or monthly targets may turn out to be much more problematic goals. Unforeseeable problems with import supplies may affect a certain month's steel production level. Or unexpectedly

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cold weather may increase the railroad traffic through larger than usual shipments of oil and coal and put it above the planned level, let us say, in November. Then it may be followed by milder weather and somewhat decreased traffic in December—resulting in an "unplanned fluctuation." Whereas it may be useless to have overall quarterly and monthly plans (or rather quarterly and monthly breakdowns of the annual plan) at the national level, the use of quarterly and monthly targeting of individual projects may be desirable, especially if construction plans and the like are involved. It may be also necessary to have monthly and quarterly indicative targets regarding selected indicators—for example, imports of energy or foreign-currency reserves. The need for such targets has to be evaluated carefully within the context of the overall economic situation. Widespread and indiscriminate application of quarterly and monthly targets usually indicates a fundamental disbelief in the proper working of the system thus "regulated." It is generally the sign of an attitude which we will have to highlight time and again as a very costly and damaging one. This erroneous approach assumes that the central authorities have to guide, and indeed direct, the activities of everybody below them, practically all the time. However, such central interference with daily economic activities is doomed to failure because of, among other reasons, the scope of the task and the lack of initiative it breeds in the economic units subjected to it. Annual plans. As noted, the typical short-term plan is the annual plan. Modern man tends to forget that the year is not an arbitrary unit of the calendar. It is worth remembering that calendars had an economic function (as well as a religious one) from early times onward. In a sense, the development of the calendar was parallel to the evolution of foresight in economic and other respects. From the outset the cycle of recurring natural phenomena was utilized to design calendars. Some of these phenomena, such as the coming of rains or the dry season or the periodic floodings of rivers, occurred according to regular patterns, but their cyclic return was markedly irregular. However, the alternation of night and day, the phases of the moon, and characteristics related to the solar year were understood to be devoid of such irregularities. Therefore the concepts of day, month, and year became central for calendar systems. Regarding the civil year based on the solar year, the requirements were the following: it must contain the full series of the seasons; it must

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always begin in the same season; and the lunar calendar should, as far as possible, be incorporated in it.1 Particularly in agriculture the significance of annual intervals has remained great in modern times. The impact of the seasons is large in other areas as well. Transportation is a vast modern activity heavily affected by seasonal patterns, regarding the carrying of both freight and passengers. Related areas such as tourism and the distribution of energy carriers (oil and coal) are other examples. Construction activities are also seasonally influenced. In short, the annual cycle of human activities, particularly in the economic sphere, still lends itself as a useful basic measure of targeting and evaluation. Economic plans designed to span one year are also referred to as "operative plans" or "adjustment plans." The adjective operative is intended to refer to the action-oriented character of the annual plans. This is in part related to the immediate character of the tasks incorporated in it. The task of constructing 100,000 housing units over the fiveyear period ahead obviously does not carry the same notion of immediacy as the target of building 20,000 such units over the next year. Usually the annual plan is more detailed in coverage, is more specific in respect to the instruments regulated by it, and is accompanied by higher expectations regarding its accuracy than are medium-term plans. The operational character of the annual plans means that they provide the framework for current economic management and policy. This does not mean that the annual plans can be dogmatically followed. Properly conceived, they provide an interrelated but global view and guidance for current policies and management of the economy. They have to provide for uncertainties and set aside reserves for unexpected events: Many unforeseen changes may occur even within the time-span of a year. Export prices of primary products may go down, import prices of capital goods and essential intermediate goods may go up, harvests can fail, seasonal surpluses or shortages of manpower may emerge, trends of current production in important consumer and capital industries may change, inflationary pressures may develop and so on. Accordingly, even an annual plan may not be implemented to the last letter in as much as it too is formulated on the basis of many assumptions and 1. Consequently, as far as possible the months used in the civil calendar must be of equal length.

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extrapolations which may not prove entirely correct. Moreover, annual plans are not so detailed as to envisage all the possible current changes in their immense variety.2

When annual plans are referred to as adjustment plans, the comparison implied is with those medium-term and long-term plans that envisage structural changes in the economy. Within the time span of a year, generally no structural changes can be effected. Therefore annual plans can hope more for the achievement of certain adjustments than for major reorientations in economic life. The differences between short-term and medium-term plans are significant, and the ensuing differences in scope, the indicators covered, and the approaches selected for them are quite marked. Some of these differences are discussed later, when the interrelationship of various kinds of plans is reviewed. b. Medium-term plans

As mentioned, medium-term plans usually cover a time span of two to six years. Nowadays, the typical medium-term plan is a five-year plan. Shorter time spans are often utilized to set out and achieve special goals, like the two- and three-year plans of reconstruction introduced in several European countries to cope with the aftermath of damage that occurred during the Second World War. However, the time span of the typical development plan is generally somewhat longer and its scope more varied. Medium-term development plans usually aim at some structural reorientation of economic activities and generally cover production and resource allocation over the entire field of the economy. Reconstruction plans after the Second World War often concentrated on the most damaged and otherwise key sectors of the economy (e.g., transportation) and in other areas generally fostered the attainment of prewar levels in a broad manner. As compared to short-term plans, the preparatory work on mediumterm plans is usually a more lengthy process. In the system of short-, medium-, and long-term plans, some planners consider that the medium2. Techniques of Annual Planning: With Special Reference to Asian Countries (New York: United Nations. Economic Commission for Asia and the Far East, 1970), p. 3.

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term plan is of outstanding importance. 3 According to their reasoning, medium-term plans are the framework for formulating the resolution of the conflicts and contradictions between long-term overall development goals and the past and present characteristics of the economy. Market impulses still have a larger effect on medium-term plans, while their impact on long-term plans is much smaller. On the other hand, mediumterm plans provide the planner with more leeway for influencing the markets than is the case with short-term plans. Another reason why special importance is often assigned to mediumterm plans lies in their considerable long-term impact. While no economy can be radically changed within a five-year period, the structural decisions made, the investment objectives pursued, and the incomes policies followed within such a period usually have a lasting effect on the economy. This effect may go far beyond the scope of the five-year span of the medium-term plan itself. By the policies adopted for a given fiveyear plan, "future options may be prematurely narrowed down by too early irrevocable decisions which, within the frame of the short- or medium-term period, look reasonable and internally consistent." 4 Although medium-term plans may have unquestionable long-term impact, very often the alternatives open in the period of the mediumterm plan are not numerous. The margins of choice in the framework of medium-term planning are relatively limited. c. Long-term plans

In the longer run the margins of choice are increased. Different variants of the plans with their possible results become much more clearcut in a long-term than in a medium-term framework. Therefore growing attention is paid to the long-term formulation of development goals and related economic and social policies. Long-term plans usually have a time span of over ten years. Some of the long-term studies may cover thirty or even forty years ahead. However, the typical long-term plan will be more likely a fifteen- or twenty-year plan. According to one definition the long-term plan is 3. G. Kovacs, ed., Nepgazdasagi Tenezes es ¡ranyitas [Economic Planning and Management] (Budapest: Kozgazdasagi Kiado, 1969). p. 38. 4. Long-Term Planning (New York: United Nations, 1971), p. 1.

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a coherent series of objectives and methods in respect of a distant future expressed in the form of general guidelines and approved by the competent authorities. Long-term planning, in this sense, is identified with the process of formulating general guidelines. It may be sectoral, regional or urban, or again may cover the economy and society as a whole. 5

It is clear that many facets of socioeconomic processes cannot be studied except within the context of two or three decades. Policies regarding demography, education, and health need to be evaluated over the period of the lifetimes of the generations involved, or at least in the perspective of twenty to forty years ahead. The effects of birth control (or family allowance) policies adopted today will manifest themselves in an economically important manner not only five or ten years from now, when they may have an impact on school enrollment, but twenty or thirty years later through the impact on the size of the labor force at that time. Plans regarding institutional changes usually need long-term planning as well. Certain scientific and technological developments also have to be viewed in rather long-term contexts. For example, energy policies in general and policies pertaining to nuclear energy development in particular require a very long-range look, but other instances can be cited. The appropriate development of transportation capacities in modern times calls for a long-term approach to the prospects of the various modes of transport utilizing rail, roads, waterways, and air. The importance of long-term considerations concerning the international division of labor and the structure of foreign trade of any nation is obvious. The rearrangement of imports or changes in export directions are seldom feasible on a short-term or even a medium-term basis. No matter how desirable, the implementation of major structural changes in the composition of trade flows usually takes at least eight to ten years. Important changes in the regional distribution of economic activities are another matter for long-term consideration. Many countries, even if otherwise developed, have some more backward regions requiring special care for their development. The disparity in development levels between northern and southern Italy is a frequently cited example. The elimination of such disparities is usually a difficult and lengthy process, which has to be planned and executed over a period of decades. 5. I b i d . , p. 5 .

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Internal (and sometimes international) migrations of population and manpower also call for long-term plans to cope with the problems related to them. The consequences of larger-scale migrations for housing, industry, agriculture, transportation, and so on are all highly significant and demand the application of long-term analysis and planning in the respective areas. Naturally the various phenomena described above in the long-term context have also important bearings on medium-term and short-term planning measures. In one presentation, therefore, the long-term plan is considered the basic element in the system of plans. The medium-term plans are conceived of as breakdowns of the long-term plan, and the annual plans, as yearly breakdowns of the medium-term plan. Thus a country's long-term plan covering, let us say, twenty years is subdivided into four consecutive five-year plan segments, and each five-year plan is further subdivided into annual portions. There is a certain element of validity in this picture, but it is essentially a simplistic one. We will return to the question of the relationship among the various plans in a later segment. However, it is useful to remind ourselves that as yet very few countries have meaningful long-term plans and therefore medium-term plans are usually formulated without the benefit of such plans. Annual plans have a much stronger relationship with medium-term plans, but even in their case the important differences in the scope and functions of the two prevent the adoption of a simple "breakdown" approach to arrive at annual plans on the basis of the medium-term plans.

2. Types of plans according to activity coverage After reviewing a classification of plans according to their time horizon, we turn to the various categories of plans distinguished by their activity scope. Four major categories are reviewed: overall (national) plans, sectoral (industrial) plans, functional plans (designed to cover specific program areas), and plans for major projects. a. Overall plans

The activity coverage of overall national plans is global. They pertain to all of the major economic processes such as production, consumption, capital formation, and distribution of incomes. Whether

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short-, medium-, or long-term, these plans ideally concern every key economic phenomenon at the national level. Their indicators not only relate to overall (global) magnitudes at the national level, but deal with them in an organic, interrelated manner, in the context of the totality of the economic process. Usually the overall plans are the embodiment (in the form of actual targets) of the nation's development strategy. As such they serve as a framework for all other plans (sectoral or functional) and projects. If a country's five-year plan is mentioned without further qualifications, generally the reference is to an overall plan of the nation. In most cases the overall plans are related to (or based on) a macroeconomic model for the country. There are various types of models adopted for purposes of overall planning. 6 Some of the models are relatively informal and only verbally stated. Others, particularly those used for longer-term studies and plans, are formulated more exactly. The formalized models also vary considerably in their character, level of aggregation, and other factors. Generally they encompass some kind of a production function (often a Cobb-Douglas type) and the implicit assumption that the growth of the Gross Domestic Product (GDP) is the final goal of society. Many planners find the properties of the Leontief input-output model particularly useful for their purposes. One of the advantages of this model is the systematic linkage it provides between the overall and the sectoral plans. Another attractive feature of the Leontief model is the possibilities it offers for checking consistency among the various plan segments in the interindustry framework serving as its basis. Econometric models have another advantage—their stochastic character provides a useful basis for probabilistic targeting, error measurement, and quantification of the impact of unknown residual factors. b. Sectoral (industrial) plans

In most planning situations there is a strong need for sectoral plans. Sectoral plans frequently have preceded the introduction of overall plans. The famous GOELRO (Gosudarstvennaya Komissiya po Elektrifikatsiyi Rossiyi, State Commission for Russia's Electrification) plan of 6. In chapters 14 and 16, we return to the question of models, with respect to planning techniques.

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electrification in Russia is an early example from the 1920s. The need for sectoral plans is mainly related to the divergent characteristics of the various sectors of the economy. The special characteristics of the main productive branches of the economy are easily perceived. Agriculture or mining, construction or manufacturing, and foreign trade or banking are clearly rather different activities, demanding the establishment of specific planning procedures. But even within the main branches there are important differences among the sectors belonging to that branch. In agriculture the characteristics of crop production and animal husbandry are quite different. The construction of buildings and the building of roads or canals are also rather different activities. In manufacturing the production of apparel has little similarity to the production of television sets or automobiles. In view of the many technological and other divergencies, overall approaches to the development of the economy need to be supplemented by sectoral plans. Typically the sectoral plans have two major points of departure: the provisions of the overall national plan and the summary of the enterprise forecasts of the given sector. Sectoral plans usually rely on estimates collected regarding the income elasticities of demand relevant to the products of the sector. Sectoral data on the resources available are also heavily used. A central concern of sectoral planning is the evaluation of technical possibilities. In no other type of plan (with the exception of plans of major projects) do technological considerations play a similarly central role. At the level of sectoral plans the measures of capacity and its utilization can be also very realistic indicators—much more so than in the case of the economy as a whole. While sectoral planning serves to translate the overall, macroeconomic targets of the nation into sectoral targets, through the confrontation of the sectoral supply-and-demand estimates and forecasts it also provides highly important feedback for the overall national plan and offers findings of macroeconomic importance. The planning procedures of the various sectors may differ considerably. For certain sectors, accounting for seasonal influences is essential. In other cases, provisions regarding exports (or import supplies) are crucial. Plans of capital-intensive and labor-intensive industries may differ according to their emphasis on recruitment and training measures

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or on capital renewal programs. Industries based on highly polluting technologies or on the heavy use of electricity may need different plans than other sectors. c. Functional plans

In addition to overall and sectoral plans, the need may arise for special plans concerning certain crucial major functions of society such as education, health care, or welfare. In many developing countries special plans or programs exist to eradicate illiteracy. But long-term or medium-term plans of education may be equally useful for developing and developed countries. The needs for the formulation of educational plans are usually related to the needs estimated in the overall plans for skilled manpower in the various developing branches and sectors of the economy. Since the expansion of educational activities usually involves considerable expenses for capital formation (for the construction and equipment of schools and universities, etc.), the significance of embodying the plans of education in the system of plans of the country should not be overlooked. The need for health-care planning is also evident. Provision of appropriate health care is a major goal of many societies. The resulting improved health of the population is not only gratifying in itself, but can also contribute to high productivity of labor. However, like education, health programs can be rather costly undertakings in terms of both the capital needed for the establishment of proper health facilities and the current expenditures necessary to maintain the health programs introduced. Both the significance of the inputs needed for the health programs and their possible effect on the society and production may make the formulation of medium- and long-term health plans desirable. What was mentioned regarding education and health, mutatis mutandis, applies to welfare measures as well. Special plans for handicapped persons, for families with many children, and for certain social strata may be necessary in particular situations and may have national significance in a given period. d. Plans of key projects

In many cases countries initiate certain key projects of overall national significance. In the present study we do not deal with the planning or programing problems of microeconomic units. Therefore the plans of individual enterprises and public or private corporations are not

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reviewed. However, in the review of plans of national significance it is important to mention the plans of those big undertakings that technically may constitute a single project but that have considerable national implications. An early example of such a project in the United States was the Tennessee Valley Authority (TVA). In Egypt an even greater national impact for development is expected from the Aswan Dam project. Still in the field of hydroelectric plants, the work on the huge Bratsk project in Siberia should be mentioned. Although each of these is a single undertaking, the scope and impact of these projects is so large that they deserve separate notice. On the American scene the Apollo space program could also be mentioned. One of the interesting characteristics of this program was its very accurate timing, which was announced in advance and was very successfully adhered to. 3. Plans according to geographical

coverage

From the point of view of geographical coverage, plans can be classified under the following categories: local, regional, national, for groups of countries, and worldwide. a. Local plans Local plans may pertain to the activities of municipalities, of various minor civil divisions, of counties or prefectures, and so on. In keeping with the objectives of the present study, which do not extend to the planning or programing of microeconomic units (e.g., individual enterprises), a discussion of local plans is not envisaged. However, some municipalities may encompass major agglomerations of population (e.g., London, Tokyo, or New York) and economic activities that are far greater than the total population or the GDP of smaller countries. Also, sometimes the plans of such local authorities may have considerable impact due to the high share of the given municipality in national employment and economic activities. b. Regional plans Although countries differ in size and geographical diversity, most consist of regions of somewhat distinct character. To cope with the special problems of the regions and to incorporate their plans in the

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overall national development scheme is the central concern of regional planning. Frequently there are marked differences among the regions regarding the level of industrialization, separating the advanced industrial regions from the often more backward agricultural ones. In other cases the differences are mainly related to topography—as in the case of lowland versus mountainous regions. Climatic impacts may be the cause of regional differences among tropical or semitropical and temperate regions, rainy and dry regions in a country, and so on. The characteristics of the soil or the regional abundance (or lack) of mineral resources can lead to other important regional discrepancies. An important aspect of regional differences is social discrepancies. While they are generally related to the abovementioned factors, they often require special provisions in the regional planning efforts for given regions. The "incorporation" of regional plans in the "overall" plan may raise difficult issues of consistency among these plans. While it may be very hard to achieve such consistency for political reasons, but also for technical and theoretical reasons, very few planners can avoid tackling in some manner the regional development problems and their relationships to national priorities. c. National (overall) plans

The geographical scope of national plans is the country as a whole. Since their general characteristics were already discussed within the framework of national, sectoral, and functional plans, only the synthesizing spatial effect of the national plans is mentioned here. One usually critical spatial aspect of the national plan is the provisions it contains regarding transportation. Another key element is the distribution of investments among the regions. The policies adopted regarding internal migration are of great consequence as well. d. Plans for groups of countries

The development problems of most countries transcend national boundaries. Modern technologies usually make it more advantageous to link countries with one another than to develop them in parallel manner in all fields. Especially, smaller countries cannot design their plans without certain assumptions regarding their imports, exports, and other flows significant to their international payments situation.

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However, even the relatively large industrial nations of Western Europe have found it advantageous to link their economies more closely in the framework of the European Economic Community. In Eastern Europe there has been a longstanding attempt to harmonize development efforts and even annual economic targets. The countries of the Andean Group in Latin America aim at the development and application of a commonly accepted development strategy. It is generally hoped that the scarce resources of the affected countries can be pooled, the relatively narrow domestic markets can be enlarged and thus important obstacles impeding faster economic growth can be overcome. The better possibilities for capitalizing on economies of scale are among the many attractions of such international arrangements. However, there can be little doubt about the special difficulties involved in planning for groups of countries. The existence of a single authority to shape the economic policies for the group may be a necessary, but usually lacking, condition for the more serious planning efforts for groups of countries. e. World plans The first attempt at establishment of a somewhat coordinated world-level economic program is the International Development Strategy adopted by the General Assembly of the United Nations on the occasion of the 25th Anniversary of the organization in 1970. While this program is a relatively loose set of indicative targets, its significance as the first symbolic step toward the planning of a planetary economy should not be overlooked, even if its immediate practical impact is considered rather limited. In any event it is clear that solutions to the major economic and social problems of the world would require concerted action by most, if not all, nations. This is true not only regarding the problems of energy or food, but also concerning a wide range of issues from population through income distribution to disarmament.

4. Plans according to institutional character Plans can differ according to the institutional characteristics of the economic units involved. Since in chapters 4 - 6 we deal separately with the institutional requirements of planning, here only a simple listing of

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some important plan categories is given from an institutional point of view. Among the social sectors usually requiring different planning procedures are the following: state-, public-, and nationally owned corporations; private corporations; small-scale private economic production units in agriculture and elsewhere; and foreign enterprises. If one considers annual national budgets as a tool of planning, the work on the federal budgets should also be mentioned as an important element in planning of the public sector. 5. Plans according to degree of detail Finally, a different classification of the various plans is related to the degree of detail shown in them. Although it is attractive to think of the national plans as having a global character and of the various sectoral or regional plans as containing more detail, the actual situation may turn out to be somewhat different. For one thing, the quantitative information available about the country as a whole may be more plentiful and more reliable than that regarding regions or sectors. Therefore for a given region or sector the available data—and consequently the apparent detail of the relevant plans—may be actually less than at the national level. Of course the details contained in the regional or sectoral plans taken together can easily surpass the details shown in the national plans alone. However, the level of detail shown in the various plans is not only a function of the quantitative measures available on socioeconomic activities. It is also a matter of decision that depends largely on the overall character of the planning pursued. Plans can be very detailed, even if they pertain to long-term or medium-term periods. Conversely, plans can be relatively aggregated even if they contain annual targets. More often than not, the extent of the details incorporated in the plans is a reflection of the general philosophy adopted toward the plan and the market, toward the direct administrative direction of economic units versus reliance on the regulation of their behavior by more indirect methods. As the French planning experience has shown, relatively detailed planning concerning those sectors of the economy in which there is, for example, pronounced government interest through ownership can be coupled with the setting of only

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general objectives and overall guidelines for the other sectors of the economy. Naturally the broad indicators are comprehensive, that is, they extend to both the sectors planned in more detail and to those involved in planning only in a broad manner. 6. Possible systems of plans There are no general prescriptions valid for all situations concerning the necessary combination of plans for a country. At a given time, depending on the actual situation, past and present developments and future prospects, the use of various combinations of plans may be feasible. Political and institutional factors may be important determinants of the type of plan actually utilized. But whatever combination is selected, an important consideration should be to provide plans pertaining to both the global process and the main elements constituting it. Similarly, neither long-term nor short-term plans alone can properly chart the course of development. Whatever system of plans is applied, important issues of coordination and timing arise. The resolution of these issues may determine the internal consistency of the plans adopted. However, here again only little general advice can be offered. The tasks of coordination and timing depend very much on the institutional framework for planning, always different for each country—even in the case of basically similar societies and economies. One generally recognized problem is whether the planning process should start at the level of the central authorities with the issuance of their overall guidelines first, or with collection of the plan proposals of the lower economic units, which then can serve as the basis for issuance of central guidelines. As a practical matter, issuance of the central guidelines first appears to be the more effective method. On the basis of past experience and performance, the central authorities usually can envisage the probable upper and lower limits of the expansion that may be proposed by the various sectors or regions of the economy. In the preparation of their first estimate of overall national targets they can take these limits into account. However, the opposite of this statement is not true. Sectoral and regional authorities generally do not have the necessary global

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information at hand to judge the feasibility of their own estimates in the context of national development based on the performance of all regions and sectors. Therefore, based on the analysis of preceding periods, the issuance of tentative central directives may be the desirable first step in the plan— iterations of an economy. The results of the elaboration of sectoral and regional plans based on the first tentative directives of course may lead to changes in the global targets and induce some further adjustments in the plans of regions and sectors.

Ill A Sampling of Historical Experience with Planning and analysis of the historical experience with planning is not feasible within the framework of this study. Therefore this chapter can deal only with some aspects of the overall planning experience gained in the last fifty or sixty years. Regarding the planning efforts of individual countries a sampling is shown from different social, political, cultural, and economic backgrounds of various continents. A SYSTEMATIC DESCRIPTION

1. Some general aspects of the experience with planning As mentioned earlier, national economic planning is a characteristically twentieth-century development, nowadays widely practiced in Eurasia, the Americas, and Africa. In some countries the terms "programing" or "projections" were initially preferred to "planning," but today the terms "development planning" or "economic planning" are generally used. "Development planning" has the apparent advantage of referring to the socioeconomic process as a whole. "Economic planning" appears to have narrower connotations by focusing on the economic aspect. Since in the present work there is heavy emphasis on the noneconomic aspects of planning, it would have been logical to use the term that offered a "wider" coverage. Unfortunately the term "development planning" also has narrowing connotations inasmuch as it is usually understood to cover the planning of development efforts in the Third World (i.e., in the developing countries). Neither the planning efforts of the developed Western economies nor those of the socialist countries in the East are usually referred to as "development plans." This is a considerable terminological drawback for a study devoted to

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the application of planning in developed as well as developing economies. Therefore the terms "planning" and "economic planning" are used throughout the present work without any intent of neglecting the sociopolitical aspects of the planning process. The first attempt at national economic planning—aside from the planning of war efforts in countries involved in the First World War—was undertaken after the 1917 October Revolution in Russia. The impact of Soviet planning on the rest of the world is often over- or underestimated according to the ideological leanings of the evaluators. To be able to draw a balanced judgment regarding this matter, planners must know the most important historical facts regarding Soviet planning. Therefore the sampling of national experiences with planning, offered in the second part of the present chapter, includes a description of these. However, it is also very important to underline the specific characteristics of the Russian circumstances if one reviews economic planning in a world perspective. These specific characteristics often prevent meaningful relating of past or present Soviet planning developments to the requirements of other countries striving to accelerate their development under differing socioeconomic conditions. Therefore our brief review of Soviet planning will mention, in addition to its achievements and problems, some specific Russian characteristics pertinent to their understanding. Whereas in the Soviet Union the introduction of planning was related to the sudden, revolutionary changes that occurred in October 1917 and thereafter, in the rest of the world the acceptance of various forms of planning took a different path in most cases. Outside the Soviet Union the turn to economic planning was initiated in the 1930s and became pronounced in the 1940s and 1950s. This turn was not abrupt; in many countries the process, over a period of twenty or thirty years, has been slow, gradual, and still somewhat rudimentary in character. While the planning developments in these countries were different from those observed in the Soviet Union, Eastern Europe, and China, they nonetheless constituted a movement of considerable importance. World attention to planning became widespread during the Great Depression of 1929-1932. The governmental measures taken by a number of countries during and after that crisis are usually considered as steps in the direction of planning. Some examples of such measures adopted during the New Deal by the Roosevelt administration are

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mentioned in the description of American developments in the second part of this chapter. The war effort required far-reaching planning and government management of the allocation and utilization of economic resources during the Second World War. The concentration of economic activities for purposes of the war required careful governmental planning and the complete mobilization of all available resources with the war needs in mind. The war also left a marked need for planning in its wake. The severe destruction of transportation, mining, manufacturing, and the services that had been considerably damaged in many countries during the war years called for carefully planned reconstruction measures by governments. The widespread shortages of fuels, raw materials, and capital necessitated central allocation measures. The postwar reconstruction assistance made available by the United States in the form of the Marshall plan (its official name was the European Recovery Program) also had an effect in this direction.1 During the postwar decades in Western Europe, the planning efforts of Norway, the Netherlands, and France became particularly well known. A brief description of the French experience is given in the second part of this chapter. In Eastern Europe the postwar introduction of planning followed the Soviet pattern. In these countries reconstruction plans of two to three years duration were generally adopted and then five-year plans were introduced in the 1950s. After the break with the Cominform, Yugoslavia changed its economic management and planning practices considerably. In fact, today there is considerable heterogeneity in the practices of the other Eastern European socialist countries as well. As an interesting case, the Hungarian situation is described in the second part of this chapter. The countries in the so-called Third World also showed greatly increased interest in planning. Both the newly independent nations of 1. On June 5, 1947, in an address at Harvard University, George C. Marshall, then U.S. Secretary of State, advanced the idea of a program for European self-help supported by U.S. assistance. On the basis of a unified plan for Western European economic reconstruction presented by a committee representing various European countries, the U.S. Congress in December 1947 authorized establishment of the program, to be carried out with the help of a European coordinating body, the Organization for European Economic Cooperation (OEEC).

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Asia and Africa and the countries of Latin America increasingly became involved in planning exercises. An important example, the introduction of planning in Asia by India, is described later. Regarding Latin America, instead of the experience of a single country, some overall remarks are offered. The analysis of planning efforts would not be complete without reference to American developments in this area. Although the various measures taken in the United States were often not explicitly under the slogans of planning, it is clear that many of the New Deal innovations and also the adoption of the Employment Act of 1946 were introduced with a view to the need for national economic planning. While the historical experience with planning is convincing regarding its feasibility under a great variety of circumstances, the experience is not necessarily proof of its usefulness. Nevertheless, it is important to note that the general feasibility of economic planning is no longer questioned except by the most doctrinaire laissez-faire thinkers. In the first third of the twentieth century there was considerable doubt among economists whether planning was feasible at all, but events during the second third dissipated these overall doubts. Hanson's summary may be considered as typical of the average Western attitude regarding planning: "After a controversial and spectacular beginning in the Russia of the 1920s and a rather checquered history, the idea of economic planning has become generally accepted. It now excites comparatively little enthusiasm and provokes intransigent opposition only from a few diehards." 2 Max Milliken noted that whereas earlier "the term economic planning frequently carried . . . unfavorable connotations of centralization and autocratic control, it is now widely regarded as a good thing which should be practiced in one form or another by all governments." 3 Economists now appear to agree not only about the overall feasibility of economic planning but also with the proposition that it can be fairly successful. However, the views regarding its success are divergent. For example, Hanson underlines that "the popularity of planning . . . proves neither its desirability nor its necessity, particularly as there is no general 2. Albert H. Hanson, The Process of Planning (New York: Oxford University Press. 1966), p. 1. 3. Max F. Millikan, ed.. National Economic Planning (New York: N.B.E.R., Columbia University Press, 1967). p. 3.

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correlation, either positive or negative, between the extent of economic planning and the rate of economic growth." 4 This leads to the difficult problem of selecting the best methods to evaluate the results of planning and determining how the balance sheet of planning efforts can be drawn. Three frequently applied methods of evaluation compare the results of economic growth achieved in the plan period, say five years: against past periods in the same country (before the introduction of planning); against the growth evident in other countries (which do not plan); and against the targets of the plan itself (i.e., the "fulfillment of the plan"). The results of the first type of comparison are usually given in terms of the acceleration of growth rates against past periods. For example, in Eastern Europe postwar growth rates achieved in the newly planned economies of the countries of this region were often compared with growth rates of the prewar period. A typical comparison of the second type was that frequently made for 1929-1932, which was the period of simultaneously the first five-year plan of the Soviet Union and the Great Depression in the West. In the case of the third type of comparison, the targets of the plan are compared with their fulfillment, that is, the ex ante expectations with the ex post statistical facts. All three methods may produce conclusions of some validity but none is free of limitations. Starting with the last one, the fact that a plan was fulfilled or "over-fulfilled" may be very satisfactory to the planner but does not itself vouch for the soundness or desirability of the targets selected in it. The fulfillment of various plan indicators of course may prove the "feasibility" of the given plan. This fact, however, is not an adequate basis in itself forjudging whether the given plan was an optimal one or rather an inferior set of targets compared with other possible plan variants. Comparisons with growth rates of other countries involve other difficulties. No two countries' circumstances are sufficiently similar to permit isolation of the planning factor as the key determinant in the superior (or inferior) performance of the country adhering to a planned development course relative to that of the unplanned economy of another country. Similar difficulties arise even in the same country when planned periods are compared with earlier unplanned ones. The circumstances 4. Hanson, The Process of Planning, p. 1.

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pertinent to the comparison of the two periods usually change in a number of respects, and the introduction of planning may be only one of many changes. Besides planning, changes in technology, differences in the international environment, and transformations regarding capital, labor, and managerial circumstances can all be important contributors to the changes experienced along the path from the unplanned economy to the planned one. Examples with the types of comparison mentioned abound and are used to both prove and disprove the utility of planning. The relatively fast growth rate of Eastern European countries is often cited as evidence of the superiority of planning. On the other hand, the high growth rate of Japan is compared with that of the Soviet Union to show the insufficiency of Eastern planning. In Western Europe French indicative planning is praised, but often the equally good, if not better, performance of the "unplanned" economy of the Federal Republic of Germany is contrasted with it. Anyone familiar with Edward Denison's study, "Why Growth Rates Differ," will recognize that comparisons of growth rates are very complex undertakings which are often inconclusive, even as to the magnitudes that are statistically comparable and more so concerning the causes that explain the divergencies characterized by the statistical measures. The statistical and analytical difficulties involved in comparisons between different countries (or different periods of the same country) are magnified by the somewhat unrealistic nature of the basic question posed in these comparisons. It is clear that a certain "what would have happened if . . ." type of questioning is involved in such investigations. For instance, a comparison of the postwar French and German growth record in this context raises the question of what would have happened if each had adhered to the view and practices of the other country regarding planning. An unavoidable futility is associated with investigative attempts to pursue such questions. Since usually there are pronounced historical reasons for a country to follow a certain economic policy or form of planning, the study of assumptions regarding other possible courses for that country may not be realistic. However, it would also be unjustified to assume that all "historically developed" situations are always "historically justified" and therefore the only possible ones at the given stage. The recognition

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of powerful economic, political, and social forces that influence the feasible range of development objectives and methods should not lead to a fatalistic negation of the possibilities for a society to chart new courses. No planner is ever "free" to choose just any of the development variants that may appeal to him. While his choices are clearly not infinite, seldom is he locked into a situation from which there is only one direction to go. Given all of the uncertainties and reservations mentioned concerning the various comparisons aimed at evaluating planning, is it at all feasible to draw up the balance sheet of planning? In a strictly formalistic sense the answer would have to be " n o . " It is not feasible to prove in an exact manner the utility of planning by comparing planned and unplanned economic situations or by analyzing ex ante and ex post facto indicators. However, the feasibility of economic planning, if not its superiority, has been proven by the historical record. If, in addition, it is recognized that most planned economies are planned rather than "unplanned" for unavoidable reasons, the question of superiority or inferiority remains a somewhat academic one. The socialist countries exemplify this point. With the transition to socialist property relations, a change to some form of planning is unavoidable. There can be room for disagreement as to the necessary degree of central planning in socialism, but without some form of planning at the national level socialism would be impossible. The choice of the developing countries is also limited. In most cases, without carefully planned governmental efforts sustained over a long period their rise to higher levels of socioeconomic well-being would be inconceivable. Many situations in developed countries have also been considered compelling regarding the introduction of various sorts of planning. If unavoidable, comparisons of planning with unplanned situations are rather irrelevant exercises. If planning is the only viable alternative for an economy, it is also the superior one compared to the nonviable unplanned situations. Even though the overall balance of planning appears to be favorable and many of its results impressive, and although the process toward planning seems inevitable, the need for considerable improvements in planning must also be recognized. As will be indicated during the discussion of various national experiences, the shortcomings of planning endeavors are numerous. There are ill-conceived plans along with wellprepared ones. There are unfulfilled ones along with successful ones.

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There are unexpected side effects of planned measures along with beneficial impacts that result from their implementation. Not all of the negative effects can be avoided with improved planning. However, with an increased understanding of the socioeconomic processes affected by it, planning can become an increasingly efficient tool of growth and change. A major deficiency of the national planning efforts is related to the lack of international aspects in many plans. In many regards the international aspects are treated as exogenous factors. At present this may be the only realistic assumption regarding these aspects of a plan. However, with the increases in the international division of labor and the expansion of production and distribution links at the international scale, the planning of national development separately from its international aspects will be even more difficult and hazardous. Therefore the international coordination of national planning efforts and ultimately certain forms of international economic planning will become inevitable. The planetary economy will call, in due course, for planetary economic planning. 2. A sampling of national planning

efforts

In this section a sampling of national planning efforts is offered for France, Hungary, India, Latin America, the Soviet Union, and the United States. Even for this selection, no exhaustive description is feasible, and only some characteristic features of the national planning efforts are mentioned. a. France Less than two months after the German attack on May 10, 1940 through Belgium, the Netherlands, and Luxembourg, a collapse of the French armies took place and on June 22, 1940 an armistice was signed. However, parts of the French nation continued to fight. The resistance movement inside the country and the Free French in both London and colonial French territories struggled for the liberation of the country and also made preparation for the postwar period. The origins of French planning thus lie partly in wartime preparations for French emergency needs for overseas assistance after liberation.

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After liberation a special department was set up in the Ministry of National Economy to deal with the needs for the assistance program. Kindleberger describes how further steps were taken in the direction of planning: The requirements of the French mission in Washington for a more systematic statement of governmental intentions and requirements resulted in the consolidation of scattered agencies into a central General Planning Commissariat, in January 1946, under the direction of the chief Washington negotiator, Jean Monnet. The first publication of the Commissariat was written in English as well as French with the Congress in mind: Statistical Review of the Economic and Social Situation in France at the Beginning of 1946. A year later, the first fouryear plan, covering 1947-50, was adopted. With the change in United States aid from piecemeal to systematic under the European Recovery Program, the First Plan was extended to 1952 to coincide with the coverage of the Marshall Plan.5

Following the postwar nationalization in France of the coal, gas, and electricity industries (together with certain banks and insurance corporations), both the need for planning and the feasibility of its introduction were influenced by these institutional changes. The slogan of the first plan was "modernization or decadence," concentrating on the expansion of the sectors of coal, steel, electricity, cement, agricultural machinery, and transportation. In order to achieve reconstruction as soon as possible, modernization of equipment, the improvement of transport, and the development of material resources by massive capital investment in factories and public works were fostered. These activities included construction of power stations, irrigation works, roads and bridges, and the electrification of railways. The second plan (1954-1957) concentrated on achieving a more balanced economy and increasing productivity. The third plan (1958-1961) placed emphasis on the balance of French trade with the rest of the world, combating inflation, filling gaps left by the earlier development plans, and correcting the disequilibrium between the metropolis and the provinces. The fourth plan covered the years 1962-1965 and the fifth, the five-year period between 1966 and 1970. The sixth plan is currently nearing completion and the seventh plan is now under preparation. 5. Charles P. Kindleberger. "French Planning," in National F. Millikan, ed., pp. 279-80.

Economic

Planning,

Max

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Before we turn to a few characteristic features of the French system of planning, among the many postwar factors that influenced the economic situation, four may be mentioned. The first was the war in Indochina, waged from the end of 1945 until 1954, which put constant strain on the resources of the country and contributed to financial instability, inflation, and unrest. Second was the war in Algeria, where military operations against the forces of independence tied down more than half a million French soldiers after 1954 and where peace was restored in July 1962 when France recognized the independence of Algeria. The third is the fact that—under different circumstances—almost all the other colonies of France also became independent in the late 1950s and the early 1960s. The loss of the colonies—which constituted more or less captive markets for French business—strengthened the significance of the fourth factor. This fourth factor is the postwar concern of France for achieving greater economic unity and cooperation in Western Europe. The Schuman plan for integration of the coal and steel production of Western Europe came into operation with the establishment of the European Coal and Steel Community, which became fully effective in 1953. This proved to be a decisive step toward the establishment of the Common Market (officially termed the European Economic Community) by the treaty of Rome, which was signed by France on March 25, 1957. Over the postwar decades certain shifts occurred in French planning practices. Partly due to the fact that there were no national accounts available, but also because of the preoccupation of the planners with basic reconstruction needs, their work stressed the physical aspects of the economy regarding output, investment, and consumption. Later, in the preparation of the Fifth Plan (1965-1970) the fact emerged that, in an economy henceforth exposed to international competition, growth, full employment and external equilibrium depended on the trend of French prices in relation to foreign prices. . . . The planners tried to institute an incomes policy based on a programming in value terms setting norms of average changes in prices and money incomes. Hence in addition to the volume projections, 6 there were value projections which defined these norms. 7 6. That is, in addition to the projections related to physical quantities. 7. Paul Dubois, "The Use of Projections for Indicative Planning in Developed Countries: The French Experience." Journal of Development Planning, no. 4 (1972): 5.

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In the preparatory stages of the sixth plan extensive use was made of a complex model, FIFI, while previous French planning efforts generally avoided the use of models. The approach adopted for the sixth plan was considered one of simulation, "The purpose of the model was thus to study the consequences of a given set of measures, taking into account the interrelationships and the economic forces." 8 In the work for the sixth plan a large number of variables was studied, evaluated through planning calculations and reviewed by planning bodies. The calculations that related to the FIFI model involved 1,500 equations and 5,000 program instructions with tables resulting in 4,000 key figures and were carried out by the use of an IBM 360-75 computer. 9 The projections made with the FIFI model on the basis of earlier trends highlighted that in the absence of adjustments the French economy would show considerable tension during the five years to be covered by the sixth plan (1970-1975). It showed, among other things, that growth would be insufficient to absorb the increase in the labor force and that an unacceptable balance-of-payments disequilibrium would emerge. These projections, also called "initial accounts," were then used to examine various solutions of the problems with the use of economic policy variants. This process of examination and detailed reviewing of the targets, which became one of the hallmarks of French planning, is also called "concertation." It includes government officials, business and labor representatives, experts from various professions, and social organizations. Since the observation of the plan targets by the private sector is largely voluntary, no attempt is made by French planners to lay down detailed and obligatory plans of operation for individual private firms. The need for extensive consultations is enhanced by this circumstance. French planning is usually called "indicative planning," which is a reflection on the arrangements just mentioned. The French planning authority 10 participates in discussions concerning the plans within an extensive network of commissions." It is 8. Ibid., p. 11. 9. Ibid., p. 12. 10. Commissariat general du Plan. 11. Commissions du Plan.

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stressed that for all economic decision centers, private and public, the opportunity to refer to a national forecast (projection) made on the basis of a much wider set of variables than available individually to these centers is of considerable value and that the feedback of the detailed discussions in shaping the overall targets is equally important. In Pierre Masse's formulation: I believe that the very existence of a coherent set of targets and forecasts, aggregate as they be, at the level of the whole economy, is good for anyone who has to make decisions in the economy: investment decisions, production decisions, purchasing decisions, hiring and training decisions, decisions in the realm of government as well as that of the business firm. . . . The guiding idea of our planning system consists in providing all those who have to make their own forecasts with a single set of references, and in integrating all the interdependent effects of the national economy into a single prospective economic table. . . . Firms are not dispensed from working out their valuations of their share in their branch, nor from choosing their own attitude concerning risks. But they can do so much better informed. 12

The generally impressive postwar economic performance in France is often quoted as evidence of the efficiency of the French planning system. While its positive record is usually not questioned, and the favorable results of growth-rate comparisons (for example, with England) are accepted by many economists, three main lines of criticism are advocated. The first consists in suggesting comparisons with the German Federal Republic, rather than with England, and in pointing out the equally satisfactory, if not better, performance of the "unplanned" German economy. The second essentially questions the role of planning in the favorable postwar growth of France. The thorough study of McArthur and Scott is usually quoted in this context. 13 Thirdly, the apparent lack of harmony with the workers is criticized as a weakness that could lead to disturbances. However, the workers—through the labor unions—are involved in the consultations concerning the plans and are represented in all of the commissions and committees that work on the plan. 12. Lecture delivered in November 1962 to the Detroit Edison C o m p a n y , Detroit, Michigan. Quoted in Economic Planning in Europe (Geneva: United Nations. 1965), chapter V, p. 4. 13. J. H. McArthur and B. R. Scott, Industrial Planning in France (Boston: Division of Research, Graduate School of Business Administration, Harvard University, 1969).

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Concerning the first type of criticism, in line with the thoughts expressed in the first part of the present chapter one is inclined not to give too m u c h weight either to the results of F r a n c e - U n i t e d Kingdom or F r a n c e - F e d e r a l Republic of G e r m a n y growth-rate comparisons in the evaluation of F r e n c h planning. As to the third major criticism, the past social disturbances in France a p p e a r to justify it. Regarding the second line of criticism—which is of course a typical case of the " w h a t would h a v e happened i f " a p p r o a c h — o n e tends to believe that M c A r t h u r and Scott, while probably right in most of their detailed observations, m a y have missed the vision of the forest during their detailed and admirable studies of the trees in it. Because of the importance of this question—beyond the scope of F r e n c h planning efforts—it is useful t o quote from the " I n t r o d u c t o r y C o m m e n t s " of Pierre Masse in the work of Mc Arthur and Scott: The genera] conclusion to which they have come is that the influence of French planning has been less important than other commentators have supposed. . . . First of all certain observers have wrongly implied that the plan is a growth model of the economy, a model that has emerged fully fledged from the head of the planners and that it constitutes a blueprint to which Administration, business, and households are invited to conform. Such a conception is regarded as admirable by the advocates of a planned economy (Soviet style), but it is viewed as indefensible by advocates of a free market system. The French plan calls neither for such excessive respect nor for such self-abasement. It is not the product of experts or, as one says these days, of technocrats who, like a computer, would design a program without consideration for opposing points of view or feeling. Rather it is the culmination of a complex procedure in the course of which a large number of interested parties are consulted. In the course of this process, the planners play many roles: they are by turns listeners to and interpreters of society's wishes; they are cross-examiners bringing to light the incompatibility of certain objectives or the gap between the desirable and the possible; they are lookouts examining the clouds on the horizon to take precautions without causing alarm. They are data collectors who are struggling against the centrifugal forces which affect all modem society; tacticians who are bound to take account of the consequences flowing from their assessments . . . ; advocates who wish to persuade government, businessmen, and unions. Finally, the planners are politicians who work toward a compromise which public opinion can understand and Parliament can ratify. In this way the development of the plan results from a complex interpreting of action and reaction, in the course of which the planners both give and seek advice. The way to their influence is here. The process of planning is more meaningful than the plan itself (p. xvii).

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b. Hungary In Hungary, as in France, the first national economic planning efforts were related to the needs of reconstruction after the destruction of the Second World War. Ravaged by war and despoiled by the retreating German army, the country faced extraordinary economic difficulties coupled with a severe inflation in which the currency devaluation set a world record. An obligation to pay reparations to the Soviet Union, Czechoslovakia, and Yugoslavia equivalent to 300 million dollars also added to the postwar burdens of the country. Stabilization of the currency was achieved by August 1946. The first economic plan of the country, designed chiefly to repair the damages of the war, was introduced a year later to span from 1947 to 1949. Concerning property relations, the first serious change was the radical land reform carried out immediately after the war, in 1945. During subsequent years, especially during the years of the first three-year plan, all banking and finance, mining and manufacturing, wholesale and foreign trade, and most retail trade were nationalized. At the beginning of the first plan period, private ownership was still widespread and therefore the planned course of development was mainly fostered by the credit policy of the Hungarian National Bank. However, this reliance of the planners on monetary and credit instruments was abandoned later and Soviet-type direct administrative planning and control arrangements were introduced. The first five-year plan (1950-1954) reflected these changes. Actually two variants of this plan were designed—first a more realistic one, superseded in 1951 by an unrealistically ambitious one. Both the targets of the five-year plan and the methodology of its construction had serious problems. As to the economic policy imbedded in the plan, its Leitmotif was that of turning Hungary "into a country of iron and steel." Considering that Hungary did not possess the basic raw materials (either iron ore or coke-oven coal) required for this kind of metallurgy, the plan targets in this field and the preponderance given to heavy industry in general were doomed either to fail or at least to cause severe economic hardships. Agriculture and the production of consumer goods by light industry suffered and so did the standard of living of the population. The wrong economic policy objectives of this plan were coupled with introduction of the wrong kind of planning and management measures.

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Planning in terms of physical quantities replaced the earlier targeting methods. An approach that elevated the practice of the "shortage economy" to the status of a theory became prevalent. The primitive ideas of fostering "quantitative growth" without regard to quality (and indeed to the mix of output achieved), cost, or prices were accepted. The results of this growth were measured at artificial prices in terms of gross output without regard to the serious duplications that can characterize this measure (especially in times of organizational changes, as here). 14 The events of October 1956 in Hungary cannot be explained without reference to the serious mistakes committed in the economic planning and management of the country in the late 1940s and early 1950s. As Bognar summarized: Seen from a purely economic point of view the main problem was that, in the given climate, there was practically no incentive to be efficient. . . . As a result, investments exceeded planned costs and were carried out with a considerable time lag, producing not only higher costs but also technical obsolescence, and the stock of uncompleted investments rose from year to year. Accordingly, disequilibria were produced in the international balance of payments and on the market of consumer goods. . . . Last but not least. . . agricultural production 15 in the absence of incentives grew at a slow rate only. 16

However, the bureaucratic-political aspects of the system that was introduced deserved equal attention. Regarding these, Bognar's analysis is the following: In the case of a system of central plan directives 17 a powerful bureaucracy develops which generally identifies the movements and regularities of economic life with the internal norms of the state apparatus, considering itself the vehicle and most competent representative of the transformation process. This bureaucracy generally tries—regardless of its intentions—to perpetuate and consolidate its position. Every system of guidance has its internal logic; in the case of the central system of directives this means that deficiencies, difficulties and disorders are due to the fact that enterprises are not given full enough directives. 14. O. Gado, "The Development of Planning and Management Methods in Hungary," Acia Oeconomica, nos. 3/4 (1972). 15. Concentrated in that period in the collectivized farms (agricultural production cooperatives). 16. J. Bognar, "Reform, Development and Stability," New Hungarian Quarterly 12 (spring 1971): 31. 17. Under centralized administrative-type planning systems.

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(There is some sort of minimal freedom of action even in the most centralized system.) It is therefore obvious that the system of directives must be developed into a totalitarian one. That it did not do so can only be ascribed to the impossibility of guiding an increasingly complex and interdependent economy on a directive and totalitarian basis without running the risk of serious economic and political troubles."

The problems of the entire system of planning and management led in 1954 (after Stalin's death) to a discussion of the basic issues involved. The pioneer in this rethinking was G. Peter, 19 who strongly attacked the prevailing system of economic management, first in an article published in the August/September 1954 issue of the party's ideological monthly, 20 followed by another in December 1954 in the Hungarian journal of economics. 21 In his diagnosis Peter emphasized that the number of different directives and instructions issued by the authorities was so great that it was impossible to control their implementation. The result was an "ocean of paper," as costly as it was useless. In his recommendations for change he stressed the need for economic efficiency, which necessitated the elimination of shortages, the lowering of production costs, and the orientation of production in accordance with market demand. He suggested that the producers' units be controlled by their customers. In this way a competitive situation could develop among the producers and the balance between supply and demand could be reestablished. To achieve these goals, managers and workers should be materially stimulated depending on the economic efficiency of their enterprise, since in producing goods that are needed at the market level the profitability of the production mattered, not the fulfillment of quantitative norms. All of the proposed measures should be carried out within the framework of centrally provided overall guidelines for the economic development of the country, which should be implemented in a consistent manner. 22 18. Bognar, "Reform, Development and Stability." 19. President of the Hungarian Central Statistical Office from 1949 and professor of statistics at Karl Marx University of Economic Science from 1954 until his tragic death in 1969. 20. Tarsadalmi Szemle. 21. Kozgazdasagi Szemle. 22. For the analysis of Peter's reform ideas, see W. F. Robinson, The Pattern of Economic Reform in Hungary: A Political, Economic and Cultural Analysis (New York: Praeger. 1973).

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However, the time for implementing such ideas of economic reform did not come until the mid 1960s. After more than two years of careful preparation, a profound reform of economic planning and management was introduced on January 1, 1968. The second three-year plan (1957— 1959) and the second five-year plan (1961-1965) were not yet influenced by this reform. In the case of the third five-year plan (1966-1970), although it was elaborated before the formal introduction of the reform, the discussions surrounding the preparation for the reform already had an impact on both the objectives of the plan and the methods envisaged for its implementation. The fourth five-year plan (1971-1975) was of course prepared under the conditions of the reform. Among the many effects of the reform on planning the following may be mentioned: 1. In the system of plans the five-year plan became the fundamental one. 2. Compulsory indicators (targets) for the enterprises regarding their outputs (etc.) were abandoned. 3. Instead of direct (administrative) controls, indirect methods of central regulation gained preponderance. 4. An increased role was assigned to the market. Fixed prices were maintained for basic foodstuffs, raw materials, rents (etc.) covering about one-third of all prices. For another third of the prices upper and lower limits were prescribed, with free movement between these two. One-third of the prices were left entirely to the market to be determined by the prevailing forces of supply and demand. 5. The raising of efficiency level and the improvement of productivity, rational management, and resource utilization were declared major objectives. 6. Investment decisions became more decentralized. The need for establishment of a long-term development plan was also recognized. Extensive work on a fifteen-year plan was started to cover the years 1975-1990. It was suggested that an average annual growth rate of 5-5.5 percent should be envisaged for this period. 23 Despite certain attempts at changes Hungary is, except for Yugo23. R. Nyers, Nepgazdasagunk a Szocializmus Epitesenek Utjan [Our national economy on the path of building socialism] (Budapest: Kossuth, 1973).

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slavia, the only Eastern European socialist country that has made truly significant changes in planning. As Robinson points out, all the other countries "still rely on detailed, centralized planning, the issuance of compulsory indexes of performance down to the smallest organs and agencies, the organizational interlocking of the various sectors of society (i.e., the duplication and overlapping of functions), the multiplication and intervening of offices, particularly Party, state, and economic. . . . All countries do so, that is, except Hungary." 2 4 The effects of the reform in Hungary were very beneficial. The overall national planning targets were fulfilled in a much better manner than earlier. A period of balanced growth and increased efficiency and standard of living ensued. A great improvement in the supply of goods and in foreign economic relations occurred. The most frequently discussed side effect concerned income distribution. The relative position of collective farmers became close to that of industrial workers and the distance between high and low incomes increased. In this book it would be impossible to deal more fully with these changes and other, equally important, sociocultural changes in Hungary, which were all related to the gradual reforms introduced over a period of almost two decades. Even though carefully executed and gradual in nature, the cumulative changes became so substantial as to make the Hungarian experiments, in the eyes of conservatives in Hungary and abroad, menacing ones that should be halted and possibly reversed. Certain changes in the political leadership, such as the dismissal in 1974 of R. Nyers from his post as the Secretary of the Central Committee of the Party in charge of economic affairs and the removal in 1975 of J. Fock as Prime Minister, appear to be consecutive elements in a series of events affecting first a stronger proponent of the reform (e.g., Peter), then a more flexible executor of it (e.g., Nyers), and finally a relatively milder supporter (e.g., Fock). c. India Among the planning efforts of the developing nations, India's is perhaps the most sustained and the best researched one—and probably also the one of greatest complexity. In view of the country's size, 24. Robinson, Pattern of Economic Reform in Hungary, p. 371.

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population, and economic development level, the Indian experience has been widely studied. One of the historically interesting features of Indian planning is its roots in the 1930s. As to the early commitment of the future political leaders of the nation, Jawaharlal Nehru had close relations with the Congress Socialist Party,25 for which a major objective was "development of economic life of the country to be planned and controlled by the State." 26 There can be no doubt that throughout the next thirty years Nehru remained faithful to his convictions regarding the usefulness of economic planning. He not only lent his great prestige to the idea of planning but actually stimulated and generally guided the planning process between 1950 and 1964 as prime minister and chairman of the National Banning Commission of India. Concerning the early efforts, we may mention Visvesvaraya's "Planned Economy for India" and the establishment of the Congress Party's "National Planning Committee" in 1938 under the chairmanship of Nehru. While Nehru was in prison, this committee existed only formally between 1940 and September 1945. However, in 1944 three planning documents were drawn up by various circles, one by Indian industrialists including J. D. Tata, another by the Indian Federation of Labour, and a third called the "Gandhian Plan" by Aganval.27 Official attempts were also made before Independence; for example, two governmental advisory bodies on planning had been established in the United Provinces during the 1930s, one of which made the recommendation "to draw up a five-years' plan of economic development." 28 The planned war effort was followed by the official "Second Report on Reconstruction Planning" which in 1945 proposed a fifteen-year perspective plan with a more detailed plan for the first five years. The early efforts were of a certain significance, especially by influencing the minds of those who were to decide these matters after Independence. However, the modern planning effort of India dates from March 25. Founded in 1934. 26. Saul Rose, Socialism in Southern Asia (London: Macmillan, 1959), p. 16. 27. These three plans, also called the "Bombay," "People's," and "Gandhian" plans, together with other precursors of modern Indian planning, are described by Albert H. Hanson in his excellent book The Process of Planning. 28. See Hanson, The Process of Planning, p. 35.

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15, 1950, when the National Planning Commission was established. The first five-year plan (1951-1955), the second (1956-1960), and the third (1961-1965) were milestones in the development of Indian planning.29 It would be impossible to describe briefly the various issues of Indian planning and to try to convey the complexity of its ways and problems. While many studies of Indian planning criticize it, few of them deny the effort or its significance. Lipton and Streeten, who edited The Crisis of Indian Planning, based on the Falmer Conference held in April 1967 at Sussex University (U.K.), with about forty Indian and British economists, planners, and administrators in attendance, offer the following summary critique: A fundamental line of criticism emerges from this book. It avers that Indian planners rely too much on bad data; that consequently they over-emphasize the big aggregates of heterogeneous items, and neglect detailed and concrete analysis of social and economic microcosms; that such deficiencies have probably meant too much outlay on the more easily measurable sectors, and too little (and too wasteful) outlay in education and agriculture . . . and that. . . planners know too little about the rates of return on many of their most important proposed schemes. 3 0

Nevertheless, they also consider that despite its ills, "Indian planning is better than it seems . . . because it must be compared with achievements elsewhere and possibilities in India." 31 Hanson's penetrating study concludes with a similar view, " N o one who has followed this lengthy account of the planning process can be under any illusion about the depth of the crisis in which Indian planning has become involved." However, while urging " a genuine diagnosis of this crisis," he also stresses that "one is not justified as yet in talking of the 'failure' of Indian planning. After all, the period of the three plans has three very important accomplishments to its credit, viz. (1) it has effected a break with economic stagnation; (2) it has significantly raised the national income per head; and (3) it has strengthened the infrastructure of the economy and thereby created some of the preconditions for self-sustaining economic growth." 32 29. The references are to the fiscal years beginning in the years shown in parentheses. 30. New York: Oxford University Press. 1968, p. 7. 31. Ibid., p. 6. 32. Hanson, The Process of Planning,

pp. 525, 526.

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Aside from the somewhat value-laden "crisis" terminology of both evaluations above, the problems of Indian planning appear to be threefold: the limitations of the process of planning (both those inherent in any planning activity and those particular to present-day India); economic backwardness; and the related issues of the sociopolitical structure. Not disregarding the limitations of Indian planning, most studies stress its high intellectual qualities. For example, Malenbaum said that India "has articulated its development programmes at greater length and with greater care and skill than has any other country." 33 In Hanson's view the leading economists, econometricians, and statisticians on the staff of the National Planning Commission and of the associated Central Statistical Organization "are men of high ability and exemplary devotion to duty, well acquainted with all the most up-to-date planning techniques." 34 Turning from the "subjective" to the "objective" limitations of the planning process, the Indian planners can cite a host of significant external or chance factors, which made planning and plan implementation very difficult. Such adverse factors as poor harvests, hostilities with China, wars with Pakistan, negative terms of trade developments, and difficult turns in world politics, are some ingredients of the problems referred to as "objective difficulties." There can be little doubt that these factors were largely external to the planning process and could not be controlled by it. As to the constraints of economic backwardness, there is hardly a need to elaborate on its elements. The poverty of the Indian masses, the weight of "underdevelopment" on this subcontinent, are too well known. The tasks of developing, or indeed just somehow of managing, an economy with more than half a billion population, which consists, for the greater part, of peasants and artisans largely outside the monetized sector, are on an unprecedented scale, except for those of China. In view of the great institutional and sociopolitical differences between these two countries, and also because of lack of Chinese data, no valid inferences can be offered regarding the relative impact of economic backwardness on planning in India and China except for stressing the obvious importance of this factor in both countries. 33. Wilfred Malenbaum, Prospects for Indian Development 34. Hanson, The Process of Planning, p. 528.

(New York: Norton, 1962).

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Concerning the third and probably most critical problem of Indian planning, the limitations imposed by the social structure, the following points may be relevant: 1. The basic inner social structure of India remained undisturbed after Independence, except for the obvious significance of withdrawal of the governing British element. This lack of substantial change has far-reaching impact with manifest economic effects from the existence of the caste system through the various religious traditions to the inadequacy of managerial and entrepreneurial talent. 2. The multiplicity of languages and cultures, and indeed the existence of considerable state authority (inasmuch as it is related to the maintenance of particularly backward social or institutional traditions) is a concomitant and complicating factor. 3. The maintenance of democratic form of government (up to 1975), which gave the "manifold interest groups, both old and new, a degree of political influence which would have been denied to them under a more authoritarian regime." 35 Hanson, who mentions this, of course does not conclude that a more authoritarian regime would have been desirable, but laments the lack of break with the most backward traditions at the outset: "Experience suggests that in many countries a significant acceleration in the rate of development requires a dramatic break with the old social and political order, and India may well be one of these. So far, she has experienced no such break." 3 6 d. Latin America

In the three preceding cases a country was selected from Western Europe, Eastern Europe, and Asia for discussion of the national planning efforts pertaining to those areas. In the case of Latin America, however, an overall view is offered, based largely on the studies carried out by the U.N. Economic Commission for Latin America. 37 Chile (1939), Colombia (1951), and Bolivia (1953) were the first Latin 35. Ibid., p. 526. 36. Ibid. 37. In particular, see "Planning in Latin America," Economic Bulletin for Latin ica 12, no. 2 (October 1967): 1-17.

Amer-

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American countries to establish governmental planning organs and national development plans. After the 1961 Punta del Este conference, 38 practically all countries of the region started to experiment with planning and established planning authorities. This movement toward planning was largely due to recognition that "the Latin American countries lacked the necessary dynamism to maintain moderately satisfactory rates of growth, to remedy critical imbalances in their foreign trade and external financing, to contain inflationary pressures, to provide sufficient employment for a rapidly increasing labour force, and to improve living conditions and at the same time fulfill rising expectations created by a knowledge of the tremendous possibilities brought about by technological advances." 39 The more important plans were medium- to long-term development plans, with a time horizon of four to ten years. The plans usually described the main problems and a set of targets to deal with them and contained certain projections and calculations concerning particular social issues, the investment objectives, the foreign assistance requirements, and so on. Without going into detail it can be said that the national planning efforts were particularly important in the following regards: 1. With the establishment of national planning authorities—usually in the executive offices of the presidents—governmental focal points were created for the shaping of economic policy and for innovations in the economic and social spheres. 2. The application of more rational criteria in the allocation of resources was fostered, particularly in the public sector. 3. Great progress was made concerning important technical requirements of planning, such as the development of national planning offices and the recruitment of trained personnel needed for them. 4. The general ideas of planning became embedded in the national thinking of the countries and contributed to the intellectual ferment concerning the analysis of socioeconomic problems and to the work aimed at finding solutions to these. 38. Special meeting of the Latin American Economic and Social Council at the ministerial level, held at Punta del Este, Uruguay, August 5-17, 1961. 39. "Planning in Latin America," p. 1.

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This assessment is shared by many analysts of the Latin American scene, but there is much less agreement about the impact of planning on the growth of the economies of the region. Some of the high growth rates, like that of Brazil, are not unrelated to strong governmental economic initiatives and to planning on a certain scale, but greater effects on the growth rates are generally questioned. In any event Latin American planning efforts have shown, together with the advances mentioned above, some striking weaknesses. Certain weaknesses are more or less of a technical nature. Others are of a more serious structural or institutional character. As a major technical problem, the generally weak statistical underpinnings of the national planning efforts should be mentioned. It has been pointed out that striking deficiencies are observable in the quantity, quality and timeliness of fundamental planning data; in particular, one common feature of the relations between planning and statistical offices is the sporadic demand for data, which the latter compile at the time the plan is being prepared. . . . Other shortcomings are attributable to the fact that indicators (danger signals, etc.) that would make it possible to follow short-term economic trends are not prepared systematically or on a continuing basis, and to the delay usually encountered in the collection, tabulation and analysis of data. 40

A partly technical problem is the relatively wide gap between the targets of the economic plans and the actual economic trends, which is often characteristic for the countries in the region. However, this is due to technical factors (e.g., the weaknesses in projection) only to a certain degree. Unrealistic political decisions often lead to the adoption of targets that are in sharp contrast with the underlying trends of these economies. In any case, although the technical weaknesses in statistics and planning are not unimportant, the difficulties that stem from deeper causes are of far greater consequence. The two most important causes of the latter sort are probably the lack of clarity (or the lack of agreement) regarding the basic objectives of the national plans and the inadequacy of the institutional circumstances necessary for planning. The two matters are interrelated, but we shall try to indicate their seriousness consecutively without emphasis on their mutual impact. 40. "Planning and Plan Implementation in Latin A m e r i c a , " Economic America 12, no. 2 (October 1967): 27.

Bulletin for Latin

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Concerning basic objectives, while plans often contain broad references to the social aims and the basic priorities to be served by them, "specific objectives for income redistribution and measures of policies for unemployment and underemployment are seldom stated." 4 1 Moreover, there has been a wide range of attitudes toward the role of planning itself. Some people have considered planning primarily as a vehicle to assure aid flows from abroad. 42 Others have viewed planning as a more rational way of administration and budgeting. In other circles the plan has been conceived rather as a theoretical model to be utilized as an overall instrument for promoting socioeconomic changes. It appears that over the last five years a closer concensus has been developing regarding the basic aims that plans should serve in Latin America in economic development and management. As to the inadequacy of institutional circumstances for planning, the issue lies not in the narrower institutional arrangements (e.g., the creation of planning authorities). Of course, even the establishment of planning authorities aroused opposition on the part of groups or sectors who feared that the introduction of planning would endanger their interests. Nevertheless, under the given conditions it was feasible to overcome this obstacle with relative ease. However, this was not the case regarding the institutional measures needed to create more efficient exchange, monetary, fiscal, agrarian, or similar economic policy instruments. There are many institutional problems regarding the external economic relations of these countries as well. There is a wide range of attitudes by the governments concerning foreign investments and nationalization, and these have an effect on their planning attitudes. The general problem of export-import relations and balance-of-payment difficulties is also a structural issue of great impact on planning. The study of the issues of economic cooperation among the various countries of Latin America has made considerable progress over the last decade, but despite the arrangements already made (e.g., by the Andean Group), there are still many obstacles before a higher degree of integration can be achieved. 41. "Planning in Latin America," p. 2. 42. Particularly in view of the United States interest in the context of the "Alliance for Progress" in the 1960s in broader development planning by recipient countries in Latin America.

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Although the problems of planning in Latin America are manifold, few economists believe that acceleration of the development of countries in this region will be feasible without vigorous governmental leadership and modern economic planning aimed at structural changes and socioeconomic progress of the widest masses. e. Soviet Union Historically the introduction of economic planning in the twentieth century on a large scale is of course related to the revolution in Russia in October 1917. Shortly after the revolution, in December 1917 a Supreme Economic Council (VSNKh) was set up in the Soviet Union, with the task of formulating the general principles and a plan for regulating the country's economic life. 43 In 1920 the State Commission for the Electrification of Russia (GOELRO) drew up the first long-term economic plan in the Soviet Union. The State Planning Commission (GOSPLAN) was set up in 1921. The first five-year plan was prepared at the end of the 1920s, and the preparation of detailed annual plans began in 1930. Th first five-year plan spanned 1929-1932, the second covered 1933-1937, and the third was envisaged for 1938-1942 but was cut short by the German invasion of 1941. In all these plans the overwhelming emphasis was given to heavy industry. The production of consumer goods received little investment, and in agriculture (which was collectivized during the first fiveyear plan) there were serious setbacks, particularly in livestock, which decreased considerably. The sacrifices of the Soviet people were very large. However, the emphasis given to heavy industry was of great importance in providing the armament and equipment needed for the Soviet Army during the war. For example, Soviet steel production in 1940 was four times as large as in 1913 and surpassed that of Germany. The task of the fourth five-year plan (1946-1950) was primarily one of reconstruction, and the bulk of investment was directed into the area devastated by the German occupation and the war. The fifth plan covered 1951-1955 and the sixth, 1956-1960. During the latter the production of consumer goods was also stepped up. In 1958 a seven-year 43. A short Soviet account in English on the introduction of planning in the Soviet Union is given by N. A. Lubimtsev, Basic Principles and Experience of Industrial Development Planning in the Soviet Union (New York: United Nations. 1966), pp. 4 - 9 .

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plan was introduced to span 1959-1965. In 1961, goals for a twenty-year plan (1960-1980) were also adopted. The eighth five-year plan referred to 1966-1970 and the ninth, to 1971-1975. In 1971, on the occasion of the fiftieth anniversary of the establishment of GOSPLAN, A. Birman, a prominent Soviet professor of economics offered in the New York Times the following appraisal of the results achieved, "It will soon be half a century since the establishment of the U.S.S.R. State Planning Committee and the beginning of a planned economy on a countrywide scale. . . . It seems to me that mankind ought to mark this date, just as it would the first round-the-world trip or Copernicus's discovery, as a historical event, signifying man's attainment of a basically new stage in human development." 44 There can be no doubt that over a period of fifty years the Soviet economy achieved a high growth rate, and notwithstanding the destruction during the war (which did not damage the productive capacities of the United States), its level of production is now second only to that of the United States. Within the framework of the present study it is not feasible to give a quantitative appraisal of Soviet economic growth. Therefore among the results only shorthand references are made to the spectaculars of the Soviet space effort (e.g., the first Sputnik), to the development of weapons systems (including nuclear weapons and their intercontinental carrier missiles), to the achievements in health care and education, and to the housing efforts. Birman, in the article quoted above, mentions that Western critics state "that in each five year period important decisions had been adopted not contemplated by the plan." 45 Birman recognizes this but points out that "half a century of experience shows us that the most important, decisive and determining features are included in the plan and are implemented." 46 In the context of the Soviet results cited in our preceding paragraph, Birman's statement is justified. However, this general evaluation of the Soviet planning efforts has to be supplemented by other facts and considerations. The Soviet efforts must also be viewed in the context of the domestic development of the Soviet Union, and from a wider, international standpoint. Regarding 44. Alexander Birman, "Half a Century of Planning," New YorkTimes, p. 43. 45. Ibid. 46. Ibid.

March 10, 1971,

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the balance sheet of economic development of the Soviet Union, the following critical points are often made: Soviet agriculture lags far behind industry; the supply of consumer goods, of both agricultural and nonagricultural origin, is not commensurate with the economic development level of the country; the overall efficiency of the economic activities leaves much to be desired, as witnessed, for example, by the capital/ output ratios characteristic for the Soviet Union; technological change is slow in many sectors; and the bureaucratic and highly centralized nature of the system of planning and management, coupled with the lack of price flexibility and other features, stifles initiative and makes quick actions required by changing circumstances very difficult. These problems are related to wider sociopolitical and cultural characteristics of the Soviet system, the discussion of which is outside the framework of the present study. In any event they influence the lack of fulfillment of various plan indicators in agriculture and elsewhere and the individual's standing and possibilities in the Soviet Union. This influence is exercised directly as well as indirectly through the relative level of efficiency of the U.S.S.R.'s economic activities and the ensuing possibilities and limitations of raising the standard of living of the population. With respect to the international aspects of the balance sheet of Soviet planning efforts, again a number of points can be made. First, as was implied at the beginning of this section, it is desirable to avoid either an underestimation of the worldwide impact of Soviet planning or its overestimation. Realistic assessments would probably agree on: the great, direct, and deep impact of Soviet planning in Eastern Europe (and initially also in China) after the Second World War; the more indirect, but still considerable general impact that Soviet-type planning had in the mind of politicians and economists of many developing countries after their independence was gained; and the influence exercised by Soviet experiences on the spread of the ideas of planning in the developed market economies of the West. It would be erroneous, however, to ascribe the spread of planning ideas simply to Soviet influence. The ideas of planning are inherent in the large-scale production, distribution, and consumption of goods and services in the twentieth century and are the unavoidable answers to many of the socioeconomic and cultural challenges of our century. Modern technology and modern society, in the longer run, cannot function

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efficiently except in a planned manner. This situation and the particular, let us say Russian, characteristics of Soviet planning have to be borne in mind when reviewing the actual and desirable impact of Soviet planning on the rest of the world. Clearly both the internationally important aspects of this long-range national planning effort and its national limitations deserve attention. The historical circumstance that economic planning was first introduced in the Soviet Union should not becloud the fact that Russia was far from being the best testing ground for economic planning or for socialism in general. 47 Many of the characteristics of Soviet planning appear to be related to the particular kind of backwardness that was left behind by czarist Russia and to the national objectives adopted by the leaders of the Soviet Union over the last fifty years. In view of these specific characteristics, past and present Soviet planning development cannot necessarily be related to the needs of other countries in the field of planning. f. United States Some authors trace the origins of planning efforts in the United States to Alexander Hamilton and Thomas Jefferson. For example, Hamilton's first two reports to Congress, the first dated December 31, 1789, entitled "Report on the National Bank," and the second dated January 9, 1790, entitled "Report on the Public Credit," are considered "as a plan for providing money for the use of the economy" 48 by Soule. Concerning Jefferson, in the opinion of Soule, "His contribution to the planning of the nation's economy consisted largely of promoting ownership of family farms in the still unsettled regions." 49 This evaluation is obviously one that stretches the term "planning" in a way that would permit it to cover the economic schemes of Peter the Great of Russia or the financial pursuits of Colbert in France equally well. 47. In 1913 the per capita output in the United States was thirteen to fourteen times higher than in Russia (N. A. Lubimtsev, Basic Principles and Experience of Industrial Development Planning, p. 1). In the same year, Russian industrial production was about 12.5 per cent of the U.S. output (Narodnoe Khoziaistvo SSR v 1968 g., Moscow, p. 143). 48. G. Soule, "Early Planning in the U . S . A . . " in Planning U.S.A., Bantam Books, 1968, chapter 2, p. 19. 49. Ibid., p. 23.

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There exists considerably more justification for considering the warplanning efforts during the First World War as the forerunners of modern planning in the United States. In June 1916 Congress passed a National Defense Act which contained clauses giving the President power to order war materiel, to commandeer manufacturing plants, and to appoint an industrial mobilization board. In July 1917 the War Industries Board was established. It was reorganized by President Woodrow Wilson in the spring of 1918 and placed under the chairmanship of Bernard Baruch. The board was empowered to create new facilities and find new sources of supply, to conserve resources by economies in their use, to determine priorities in production and delivery, to allocate among the various purchasing agencies the available supplies whenever a shortage appeared, and to be purchasing agent for the Allies. The postwar era was not notable for planning experiments. One potentially powerful instrument of government intervention, the Federal Reserve System, established in 1913 under President Wilson, remained in existence during the Harding-Coolidge years and was helpful in dealing with the milder recessions of 1924 and 1927. However, those policies were inadequate to cope with the Great Depression, although in the spring of 1929 the Federal Reserve warned the banks—and the public— of the dangers in stock speculation on margin accounts. 50 Among President Herbert Hoover's attempts to abate the depression, the creation in 1932 of the Reconstruction Finance Corporation was probably the most important. It is considered that this corporation, in effect a federal loan agency, did much to keep the depression from becoming worse and later served as the principal lending agency during the New Deal and the Second World War. At the time of Franklin Roosevelt's inauguration there was an acute banking crisis, which he resolved through the Emergency Banking Relief Act in March 1933. In addition to various emergency measures of this sort, in 1933 under the first Roosevelt administration three new agencies were created to deal with the prevailing problems on a longer-term basis. These were the Agricultural Adjustment Administration (AAA), the Tennessee Valley Authority (TVA), and the National Recovery Admin50. At that time the board did not have regulatory power concerning the permissible percentages of borrowing on margin accounts.

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istration (NRA). The act establishing the AAA was in effect a major farm-relief bill. The National Industrial Recovery Act (NIRA), which created the NRA, was a complex scheme that included provisions for minimum wages, for maximum hours of work, for the prohibition of child labor, and for the establishment of collective bargaining procedures. In many regards the TVA proved to be the most spectacular of these early planning efforts. It built many dams, generated cheap electricity, produced inexpensive fertilizer, and aided the rehabilitation of a poverty-stricken area. The TVA also introduced conservation methods and brought light industry to the seven-state region it served. In 1936 the Supreme Court held that parts of the AAA were unconstitutional and in 1935 it demolished most of the NIRA. President Roosevelt considered that the justices were taking a "horse-and-buggy-age view" of federal regulatory power. By its narrow interpretation of the commerce clause and the tax clause of the Constitution, the Court was indeed preventing the federal government from engaging in various areas of economic regulation and planning. However, in the 1930s the ideas contained in Keynes' general theory (1936) became widely discussed among economists and also among the members of Roosevelt's "brain trust," and the ideas of governmental economic intervention became part of the public thinking, at least among most Democrats. On January 13, 1942 a War Production Board was again established with similar powers to those of its predecessor during the First World War. The second board was able to utilize the experience of the first and to act more promptly to make an inventory of capacities and materials. It was empowered not only to deal with war production, but also to hold final authority "over all American production." The preparatory work for the wartime planning activities actually started earlier. As Jones describes: Early in 1940, Secretary of Commerce Harry Hopkins showed Franklin Roosevelt a brief outline of fiscal policies for defense as seen by economists on his staff. The first step was "prompt expansion to the lead of full employment" by means of federal deficits. Then "once full employment is attained, the task of fiscal policy is twofold: (1) to maintain full employment: (2) to secure as rapidly as possible that orientation of production which our defense demands." 51 51. Byrd L. Jones, "The Role of Keynesians in Wartime Policy and Postwar Planning, 1940-1946," American Economic Review 42 (May 1972): 125-33.

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The policies which were then adopted were indeed highly successful regarding both of these objectives. An unprecedented level of war production was ensured at full employment (and of course in parallel to the military utilization of millions of young people in the Army, Navy, and Air Force.) In preparing for postwar reconversion, Roosevelt's 1945 State of the Union message asked that planning and government agencies assure sixty million jobs, which would give every American the right " t o [a] useful and remunerative job." In Congress a full employment bill was sponsored in January 1945. After lengthy debate it was adopted as the Employment Act of 1946, which established the Council of Economic Advisers to the president and the annual economic reports of the president to Congress. According to L. Keyserling, who played an active role in the preparation of the bill, which was sponsored by Senators Wagner, Murray, O'Mahoney, and Thomas and in the House by Wright Patman, the aim of the bill was to advocate at the highest levels of the federal government, a long-range performance budget for the American e c o n o m y in action, setting quantitative goals for resource use and income allocation, toward maintaining equilibrium at full resource use; that all of the basically important national economic and related social policies be blended into a single policy; that equal emphasis be placed upon distributive justice; and that the effort be undertaken jointly by the President and Congress, thus seeking to provide some of the bridge for common action which the parliamentary system offers. 5 2

Keyserling disagrees with those who believe that the Employment Act of 1946 was a "watered-down" version of the original ideas planned for this bill. He is, however, critical and disappointed regarding the lack of its implementation, "Then came, at least after the Korean war, the evolving debacle of the Act's administration, with a real planning process not set in motion, with long-range and unified goals not set; and with no one unified program and policy substituted for a congeries of scattered and ad hoc short range efforts. And above all, the distributional aspects of Keynes' dealing were neglected." 53 It would be too lengthy a process to try to analyze the postwar implementation of the Employment Act of 1946 by various administra52. American Economic Review, May 1972, p. 135 (Keyserling's italics). 53. Ibid., p. 136.

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tions. There were certain differences, particularly between the practice of the Republican and Democratic administrations in this regard. However, Keyserling's basic criticism appears to be right and holds for the entire postwar period. With the great growth of the federal guidelines concerning many, if not most, areas of the socioeconomic processes, and the great refinements in quantitative measurements of the relevant indicators and their analysis, there was no parallel increase in overall planning efforts. This is most regrettable because interventionist governmental policies—whether carried out in formal planning frames or not— are likely to be more successful if they are better coordinated and more broadly conceived. Despite the proliferation of long-range studies, from environmental issues through labor matters to technological projections, planning of the decisive actions of Congress and the presidential administration is still undertaken without due regard for an overall planning picture and the general planning requirements over time. The lack of a national plan is a significant obstacle to progress in many areas.

Basic Readings for Part 1 Jones, B. L. "The Role of Keynesians in Wartime Policy and Postwar Planning, 1940-1946." American Economic Review 42 (May 1972): 125-33. Koopmans, T. C. "Objectives, Constraints and Outcomes in Optimal Growth Models." Econometrica 35 (January 1967): 1-15. Kuznets, S. "Modern Economic Growth: Findings and Reflections." American Economic Review 43 (June 1973): 227-58. Leontief, W. " F o r a National Economic Planning Board." New York Times, March 14, 1974, p. 37. Tinbergen, J. Central Planning. New Haven and London: Yale University Press, 1964. United Nations, Economic Commission for Africa. "Development Planning and Economic Integration in Africa." Journal of Development Planning, no. 1 (1969): 107-41. United Nations, Economic Commission for Europe. Economic Planning in Europe. Geneva: 1965, chapters I—III and the first 31 pages of chapter IV (this separate volume was issued as part 2 of the Economic Survey of Europe in 1962). United Nations, Economic Commission for Latin America. "Planning and Plan Implementation in Latin America." Economic Bulletin for Latin America 12 (October 1967): 18-32.

2

Planning: The Institutional Aspects

IV Legal Provisions for Planning: Planning Organs of planning are manifold. In the present chapter we deal with the following: the overall legal arrangements for planning; the status and role of the planning machinery; the major instruments of government regulation; and the property relations and their impact on planning. T H E I N S T I T U T I O N A L ASPECTS

1. Overall legal provisions for planning In view of the diversity of institutional conditions among countries, the legal requirements that permit introduction of an efficient planning system may vary considerably from one situation to another. Depending on the historical accumulation of the results of earlier legislative efforts (which were usually carried out without considering overall planning requirements), a government's legal ability to institute planning and to influence economic processes may range from a very limited to a fairly extensive authority. Rarely is a government completely powerless, from the legal point of view, to introduce planning measures. The lack of general legal provisions may be detrimental to longer-range efforts, but important government powers relating to sectors such as taxation, government budgeting, labor conditions, the capital markets, accounting, health, education, welfare, transportation, agriculture, and mining, are almost always in existence prior to the introduction of planning. A concerted use of such powers for purposes of overall economic intervention by government in order to achieve planned targets of growth is very often a feasible path toward a planned economy. The strength of government authority in dealing with monetary and fiscal matters is of great consequence. In most countries the government

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has a decisive role in the guidance of central (national) banking operations, including the circulation of money and the supervision of credit arrangements for the banking system as a whole. Determined government intervention relying on monetary instruments may have a very widespread effect on the behavior of the economy. The use of fiscal instruments can be of equal importance. The modes and magnitudes of both governmental revenue-raising activities and expenditures can profoundly affect the national economy. Various other regulatory and administrative goverment powers are often commensurate with the monetary and fiscal authorities vested in the government. For example, the licensing of certain businesses, the ability to supervise the labor and health regulations in effect, the powers to grant import and export licenses, and the right to regulate commerce and transportation can all be powerful governmental instruments for stimulating desirable development goals. And such governmental powers of varying degrees have been in existence for many years in most countries. Of course the existence of such regulatory authority, while permitting the introduction of some sort of planning without an extensive overhaul of the legal system is in itself not a sufficient precondition for planning. A broad political mandate is the major and truly indispensable requirement for launching a national planning system. In the third part of this chapter a description is given of the various aspects of the broad political preconditions of planning. If a government obtains a general political mandate for the initiation of national planning, the modifications in the legal arrangements may be introduced only gradually, as need arises for a particular change, as an expansion of the existing regulatory powers. Both from the standpoint of longer-range planning efforts and for reasons pertaining to the law, however, a broader, more fundamental settlement of the overall legal provisions necessary for planning may be advantageous. National planning is not a process that can be easily introduced (or be easily stopped when once introduced) and therefore its legal foundations should preferably be stated in a clear manner, with the long-range goals of the system in mind. The legal reasons for introducing satisfactory general legislation about planning can be equally important. Although the various forms of governmental regulatory powers may have perfectly firm legal bases in the acts that had established them, there may be a lack of legal authority to attempt their concerted use by

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government to foster the overall system of planning. It is probable that no law of the land prohibits their concerted use for planning purposes. Nevertheless, it is likely that the earlier legislators, who voted for the establishment of the various regulatory authorities of government, did not have in mind the complex use of their measures for national planning purposes. Therefore the concerted use of regulatory powers for planning may be a stretching of those arrangements or even a step beyond the limits of strict legality. Certainly, after the initial stages of the national planning efforts, some broader legal foundation of planning may be helpful to avoid any legal problems and to aid the achievement of the long-range goals of planning. In some cases special laws regarding the planning function of government will be preferable. In others constitutional provisions will be the appropriate measures. The choice of the most useful legal formulations largely depends on the legal system of the given country and on its political circumstances. Whatever form is adopted, the obligation and the power of government to initiate and implement overall planning measures should be clearly prescribed within the framework of the legislative and executive arrangements of the country. The maintenance and, if necessary, the expansion of various regulatory powers of the government should also be related to the overall planning goals.1 The basic legal arrangements for planning should also provide clauses regarding the establishment and functioning of the planning machinery of the country. 2. Planning

machinery

Without the institutionalization of planning arrangements, sustained planning activities cannot be maintained. There are also inherent dangers in this step. The threat of a growing planning bureaucracy is foremost among them. There is a need to provide safeguards against such excesses, 2 but the establishment of national planning organs is an unavoidable feature of planning. Usually two basic planning organs are provided for: a planning commission, and a planning office. The roles and relationship of the two may 1. In the third part of the present chapter we return to the use of these regulatory powers for planning. 2. In chapter 5 we return to the relevant relationship of the market and planning.

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vary, but in most cases the role of the planning commission is concentrated on reaching final recommendations regarding plan variants and other major issues of planning. The central responsibilities of the planning offices usually are the preparation of the plans and activities related to their implementation. The need for creation of special planning organs is especially great because traditional governmental administrative units are usually unsuitable to deal with the problems raised by the introduction of this new national activity. At the same time the planning organs must become part of the central governmental system. This integration is important in order to achieve sustained communication between the planning organ and the rest of the governmental machinery. In certain situations, if the plan is not endorsed by the government as its official programme, the main planning agency may still be a public body, but one which enjoys a semiindependent status and presents projections and recommendations on its own responsibility. The absence of official endorsement does not imply that such an agency has no influence on the government's policies; indeed it has been argued that by protecting the plan against the pressures of political life, it will serve more efficiently as a guide for all economic decision makers. 3

Although this arrangement undoubtedly has attractive features, in most countries such semi-independent planning is presently impractical and in the overwhelming majority of countries the planning organs are parts of the governmental machinery. It is often pointed out that in the case of planning, there will be . . . possibilities of conflict and hostile relations with other organizations for the following reasons: (a) Planning is a relatively new activity and, as such, provokes reticence and suspicion on the part of older organizations: (b) By its nature, planning tends towards changes and innovations and, as may be expected, is incompatible with the traditional and conservative tendencies of the administration; (c) Planning organizations must intervene in the business of other organizations to obtain information, coordinate programmes and, many times, to supervise the execution of projects. Such intervention provokes hostility. 4 3. Economic Planning in Europe (Geneva: ECE, United Nations, 1965), chapter III, p. 4. 4. A. Attir, The Central Machinery of Planning and its Relationships with Decisionmaking Centers in Administrative Aspects of Planning, (New York: United Nations, 1969), p. 62.

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To counteract such hostility it is helpful not only to have the planning functions of the government clearly established by laws but also to place the planning organs at a high central place in the government. In Latin America, for example, the planning organs were established in such a way as to make them directly responsible to the office of the president of the republic. In certain cases an intermediary advisory body (commission) acts in a liaison capacity between the planning office and the president and his cabinet, in which the major decisions are reviewed. As a rule the planning organs are advisory to the highest political authorities. In Latin American countries the planning bodies are often intimately involved in the annual preparation of the national budget and in the coordination of technical assistance from abroad. The arrangements that developed in Latin America reflect the existence of the presidential system characteristic for all the countries of the region (except the former British colonies). It is also interesting to note that some of the countries of the region incorporated the ideas of planning in their constitutions before the 1961 Punta del Este conference. For example, the Colombian Constitution of 1886, with its several revisions (the most recent one in 1957) empowered Congress to determine the plans and programs that should govern the development of the national economy. Haiti and the Honduras, in the constitutions adopted in 1957, laid down more detailed planning regulations than Colombia, including an institutional framework for the principal bodies responsible for plan formulation. As the already quoted ECLA study pointed out: Brazil's 1967 Constitution authorizes the Federal Union to establish the national road communication plan, and to draw up and implement national education and health plans, regional development plans (article 8, X, XII, XIII and XIV) and land reform plans (article 46, III), although no specific reference is made to overall medium- or long-term plans.5 However, the powers of the Federal authorities, especially the Executive are greatly strengthened in all fields relating to the control of short-term economic policy.6

At the ECLA Seminar held in 1968 regarding the administrative aspects of planning, four main functions were recognized for a central planning agency: to submit alternative economic and social objectives 5. However, the government has introduced national medium-term planning in Brazil. 6. Administrative Aspects of Planning, ECLA, papers of a seminar (New York: United Nations, 1969). pp. 48-49.

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and policies, together with a statement of their respective costs and benefits; to prepare long- and medium-term development plans and annual operational plans; to supervise (without executive authority) the implementation of the plans; and to promote planning in public and private agencies and the modernization of public administration needed for planning. 7 In Asia, where almost all countries now have central planning agencies, the planning process involves practically all government agencies at the national level and often those at the local level as well. Accordingly, within the government organization, the planning machinery normally consists of five components: the chief executive and the cabinet or its equivalent; the central planning body, divided into a policymaking board and a servicing secretariat; central operational agencies; local planning bodies; and local operations agencies. However, a review carried out by ECAFE 8 showed great differences among the countries regarding the distribution of roles among these main elements of the planning system. Most often the central planning body is attached to the chief executive's office and in some instances, as in India, is headed by the chief executive (i.e., the prime minister). Usually, the planning body advises the cabinet directly regarding matters of planning. However, the execution of the plans and their projects is performed by the central and local operational agencies. The role of the operational agencies extends to participation in plan formulation as well, principally by submitting their proposals for development policies, programs, and projects and by participating in the internal review of plans under preparation. The responsibility of the central planning authorities for implementation of the plans is a general one, concentrated on reviewing, evaluating, and reporting on the progress made. There appears to be, however, in the last decade an increase in operational-type activities by planning authorities. In both name and function the planning authorities tend to be economic rather than social agencies of change. 9 However, the recogni7. Ibid., p. 11. 8. "The Planning and Financing of Social Development in the ECAFE Region," ECAFE Bulletin, June 1969. 9. This was illustrated by the ECAFE study mentioned, with references to designations such as the "National Economic Planning Board" (Thailand), the "National Economic Council" (Philippines), and the "Economic Planning Agency" (Japan).

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tion of the interrelated nature of economic and social processes and the need to deal with various pressing social issues in the framework of the plans is attracting greater attention to the social aspects of planning. In the late 1960s, one sign of these changes was the creation of a Social Affairs Bureau in the Economic Planning Agency of Japan. Even earlier, the 1955 terms of reference of the Philippines National Economic Council included some references to social development as well, as can be seen under (b) below. Its tasks were: (a) to advise the president on matters concerning the economy, (b) to formulate definite and consistent national economic policies and prepare comprehensive economic and social development programs, (c) to review all existing programs, public or private, that have a bearing on economic development and make modifications thereof at least once a year, and (d) to submit periodic reports to Congress and to the president indicating, among other things, the state of progress in economic planning, the progress made by other entities in the implementation of approved economic plans, programs, and projects, and current needs for legislation and changes in administrative policy, objectives, and practices. 10 The complexity of planning arrangements can be considerable, especially in the case of annual planning and in countries with a federal system. In such countries and also in those like Indonesia, where regional diversity required high priority in planning, the application of a common approach or broad perspective to the problems to be resolved by the plans is especially important. Among the numerous central and local organizations to be involved in the various planning exercises are the treasury, the functional ministries, the central bank, the representatives of other major financial institutions, the larger public enterprises, the trade unions, and the socioeconomic research institutions. An ECAFE study stressed coordination as "particularly important" in respect to the following: budgets and fiscal policy (ministry of finance and/or budget agency and the central bank); balance of payments, exports, and imports (ministries of trade and finance and central bank); monetary and credit policy (ministry of finance and central bank); prices, wages, and incomes (ministry of finance, chambers of industry and commerce, trade unions); agricultural targets (ministry of agriculture, 10. ECAFE Bulletin,

June 1969. p. 12.

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regional governments, fanners' associations, and trade organizations); and industrial targets (industrial ministries, ministry of finance, development banks, and chambers of industry and commerce). Naturally the organizations listed were meant to be illustrative rather than exhaustive." A recent ECA review of mostly English-speaking African countries showed that, with few exceptions, the central planning organization was either a division in the office of the head of government or his deputy, or was a separate department. In Swaziland, Mauritius, and Ethiopia, it was in the prime minister's office; in Botswana, in the vice-president's office; in Tanzania and Kenya, under the charge of a senior minister; and in nearly all other English-speaking countries, other than Lesotho, Ghana, and Gambia, there was a separate Department of Economic Planning or of Development. The main functions of the planning organizations were summarized by the ECA review in the following: One is to appraise the existing and potential resources for development in terms of the various factors of production—manpower, natural resources and capital— which are likely to be available to the country during the proposed plan period. In the light of this information, the organization is expected to collate and coordinate the development programme proposals of the various levels of administration, for the preparation of short, medium or long-term national plans. The Organization is also expected to offer guidance and assistance to the different departments and agencies in the preparation of their programmes, in order to ensure that these programmes are aligned with the national plan objectives. After the plan has been approved, it is the responsibility of the Organization to obtain periodic reports on plan implementation from the substantive departments and agencies for use in appraising and reporting to the government on the progress of implementation. As and when necessary, the Organization has to arrange for the revision of the plan. 12 In many African countries the need for decentralization of planning efforts is stressed. With about 80 percent of the population living in rural areas, in most African countries it would be difficult for any central government to assume that it appreciates fully the varying needs of the scattered population, to be able to plan for them 11. York: 12. nomic

Techniques of Annual Planning: With Special Reference to Asian Countries (New E C A F E , United Nations, 1970), p. 29. Administration for Development (New York: Public Administration Section, EcoCommission for Africa, United Nations, 1971), p. 3.

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satisfactorily, without any support from below. If the majority of the young people from these rural areas, particularly the school leavers, are to be encouraged to remain there instead of migrating to the town in search of the limited amount of wage employment, their parents should be given an opportunity to put up well planned proposals for the development of such agricultural, agri-industrial and small-scale industrial projects which would afford a reasonable amount of rural employment. 13

The multiethnic nature of the population of most African countries also makes decentralized planning efforts desirable. In Western Europe the status and role of the planning authorities have differed from country to country. Perhaps one common characteristic is the rather extensive reliance on more or less formal consultations between the planning authority and other bodies. As the ECE study emphasizes, "the institutional arrangements actually made in each country reflect not only the nature of the plan and the existing administrative system, but also the prevailing political conditions." 14 In the Netherlands the consultative machinery provides for regular contacts with both labor and business. In France it permits consultations with all kinds of governmental agencies and business and also with labor. On the other hand, in Norway business is not a participant in the formal consultations. As to the specific organs dealing with planning in France, the "Commissariat General du Plan" plays the central role. Other organs, including the "Institut National de la Statistique et des Études Economiques" (INSEE), participate in the preparation of the plan. The planning work is directed and coordinated by the "Conseil Central de Planification" (Central Planning Board), which meets at least once a month. This board includes the president of France, the prime minister, the minister of economy and finance, the minister of labor, and the commissaire du plan. Other ministers may also be invited to its sessions, in accordance with the specific agenda. It has to be stressed that the members of the board attend its sessions personally. The meetings are always chaired by the president himself. All decisions of the cabinet regarding long- and medium-term economic policies are made by the Conseil Central de Planification. The Conseil instructs the commissaire du plan regarding the framework and the main orientation of the plan. 13. Ibid., p. 29. 14. Economic Planning in Europe,

chapter III, p. 4.

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The plan alternatives selected are circulated for consideration by the "Commissions du Plan" (earlier called Commissions de Modernisation) which were originally established in 1946, at the time when planning was introduced in France. In the period of the current seventh plan, thirteen commissions and six committees existed, with about thirty members each. They were attached to the following areas: Commissions Development (with four committees) External relations Regional and quality of life (with one committee) Education, training Health Social life Research Agriculture Industry (with one committee) Transportation and communication Trade, services, crafts Overseas departments Energy

Committees Finance Employment Consumption Income distribution Housing

Construction

The sectoral studies and the views of the commissions are synthesized by the planning authority into the national plan. Final approval for the overall directions of the plan is given by Parliament. In most other countries of Western Europe the planning machinery has a less elaborate formal consultative arrangement. Nevertheless, widespread consultations are common. In the Netherlands the Central Planning Bureau, which is in charge of drawing up the annual Central Economic Plans, submits its draft to the Central Planning Commission, from which it goes to the Council for Economic Affairs, composed of those ministers dealing with social and economic matters. The plan is then published but is neither formally declared the action program of the government nor voted on by Parliament. The basic arrangements in Eastern European countries are not too dissimilar from one another but many national variations exist regarding details. The general provisions for planning are usually laid down in the national constitutions. The legislatures in these countries elect the Council of Ministers, which supervises the activities of the planning organs.

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The plans drawn up by these organs are submitted for approval by the legislature. Often a planning commission is in existence as well as a planning office, but sometimes the planning "commission" is the planning office itself and a commission only in name, since its main functions are executive. The complexity of the planning machinery is greatest in the Soviet Union. This is due partly to the size of the Soviet economy but also to the vast territory of the country and the existence of the fifteen member republics of the Union, as well as the numerous administrative subdivisions within the republics (particularly the Russian Federal Soviet Socialist Republic). The central role in the planning machinery is played by the central planning office of the Soviet Union, the GOSPLAN of the U.S.S.R. Many organizations assist or cooperate in the work of GOSPLAN. The member republics also have their planning offices (GOSPLANs). In the smaller socialist countries similar planning organs exist, but usually without the regional arrangements that are related to the federal character of the Soviet Union. The central role is assigned to the state planning office. Often an important role has been played by the "economic committee" of the government, composed of the ministers responsible for economic matters and chaired by one of the deputy chairmen of the Council of Ministers. The head of the planning authority usually has a status equivalent to that of a senior minister or a deputy prime minister. The planning authority is generally not in charge of prices, which are dealt with by separate National Price Boards. Many other bodies participate in the development of national plans, including committees on science and technology and the Academies of Sciences. 3. Some instruments of government

regulation

Among the important facets of the economic process that are often subject to government control and regulation are: prices, wages, taxes, credit, tariffs, and foreign financial relations. Depending on the degree of public ownership, the government may also have direct control over important segments of the economy. These often include transportation (particularly rail, air, and sea), telecommunications (post, telegraph, radio, and television), various natural resources (mineral deposits, forests, oil, etc.), basic metal industries and other important projects, especially in the field of electricity generation. Of course widespread government activities (and ownership) character-

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ize the fields of education, health, welfare, and defense in almost all countries of the world. The large and expanding field of public ownership or control of socioeconomic units of activities, coupled with the powers acquired over time to regulate prices, wages, taxes, and other important facets of the economic process, permit government intervention in the economic life of countries on a rather extensive scale. Last but not least, governments may effectively use for regulation of the economy the national budgetary outlays and the expenditures of government-owned companies by channeling them into prescribed directions. Government investments—which, for example, in France are about half of the country's gross capital formation—are particularly strong instruments for achieving long-term national objectives. The government's control of prices, most extensive during the war, is again in the foreground in many countries. One of the two main causes cited for this is the frequent irritation of the public at price control by seemingly powerful corporations or various cartels. The strong inflationary tendencies experienced in most countries are the other basic reason for price control. Various kinds of national price authorities are established to deal with the regulation of prices. Although in practice these activities are often little more than cursory screenings of requests for price increases, their potential use for planning is often recommended. Regulation of wages is often related to price control. However, government regulation of wages usually has other facets, particularly those related to control of the conditions of labor in general. In many countries laws dealing with hours worked, minimum wages, employee safety, and other labor matters have a longer history and are largely unrelated to the issues of inflation or planning. Nevertheless, planning can rely on the control instruments in this area as well. The potential power of government regulation of taxes, credits, tariffs, and foreign financial relations is of no less importance for planning and is frequently used for short-term planning purposes. The carrying out of economic policies embodied in national plans may be greatly fostered by tax, credit, tariff, and currency regulation measures and by encouraging desirable and discouraging undesirable economic behavior as seen from the standpoint of the plan. A detailed analysis of the workings of the regulatory activities relevant to the above fields in the context of national planning cannot be attempted within the framework of the present study.

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The reason is not a simple limitation of time and space. It is true that, to be of practical help, the abovementioned instruments of government regulation would need to be analyzed in the context of concrete institutional frameworks that are too numerous and diverse to be tackled within a study on planning. A generalized and wholly abstract treatment of these topics would be hardly more helpful in our context. It would also lead to lengthy intrusions into areas such as labor economics, price theory, public finance, monetary theory, and the economics of international trade, all of which are properly the subjects of other fields. Therefore only their general importance and role for planning are outlined here.

4. Property institutions and planning In the preceding sections reference was made to the scope of public ownership and its relation to planning. It should now be mentioned that in the extreme view of some Soviet economists, planning was impossible unless public ownership was very extensive and socialist in nature. Consequently, planning efforts by developing countries and developed market economies were not considered as "real" planning endeavors by these Soviet analysts. Their views are considered largely outmoded, but certain notions and implied value judgments based on the distinctions between socialist and nonsocialist planning have not disappeared. Outside the socialist countries there are also differences of opinion regarding the feasibility and the limitations of planning in countries with predominant or large private sectors. It is clear that the character of the prevailing property institutions of a country has a marked influence on the system of planning that can develop in it. The issue of the "unfeasibility" of planning efforts disappeared on all continents under greatly varied institutional conditions. However, the resolution of this "issue" (or, rather, nonissue) does not imply that planners can be indifferent to the institutional aspects of planning in general and to the significance of property institutions for planning in particular. As Pryor points out, "property relations offer a rich field for exploration by comparative economists, but, unfortunately, analysis of property is usually left to the historian, jurist, or political scientist. Of course,

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certain aspects of property do have political or social elements, but this should not blind us to the important economic aspects of the institution as well." 15 It happens all too often that in the design of planning systems insufficient care is exercised regarding these matters. Therefore a few remarks on the relations of property and planning are necessary in the present work, including some on the broader scope of property relations, such as the various social and legal regulations concerning the exercise and transfer of property rights. Property as such is considered a set of relations between people, involving rights and limitations, claims and obligations, regarding goods and services having an economic value. No attempt can be made in the present work to deal with all of the various property forms and institutions that characterize our presentday world and that have bearing on the planning efforts on various continents. A mere reminder that presently planning is carried out by countries in Africa with significant tribal and nonmonetary sectors as well as by nations in Asia, Latin America, and Europe, often under very different economic and cultural circumstances, will make it clear that only a selective approach can be adopted for our brief review. In fact, only a few questions will be mentioned in respect of the following: planning and the private sector; foreign investments; and problems in agriculture. The handling of the private sector usually does not involve major problems in the socialist countries because of its small size. As a rule this sector is not planned directly and only general control is exercised by tax measures, the regulation of material allocations, and by other means of administrative control (licensing, etc.). In other countries the size of the private sector, which may vary from industry to industry, is also an important determinant of the planners' attitude toward it. Another key determinant is the overall policy of the government toward private industry. This policy is usually influenced by both ideological and practical considerations. While the ideological views may be reflected in a benign or hostile attitude toward the private sector, the practical considerations are usually related to the actual and potential strength of the private industry in a given field. It is frequently the case 15. F. L. Pryor, "Property Institutions and Economic Development: Some Empirical Tests," Economic Development and Cultural Change 20, no. 3 (April 1972): 406.

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that planners in developing countries would not mind adopting benign attitudes toward private initiative in given fields if there were hope for any. However, the lack of entrepreneurial ability and capital may force the planners to adopt policies that lead to the development of public enterprises to fill existing gaps. In situations where private industries are strong, governments often do not wish (or even cannot) adopt a stronger interventionist approach toward them. The elaborate consultation mechanism that characterizes the French "indicative" planning system is a good example of the reactions to such a situation. However, the French system may not be applicable in other countries, where the development level and administrative experience are markedly different, as is the case in many developing countries.16 In many developing economies, even if the productive activities are carried out by the private sector, there is hardly any organized modern sector of the economy capable of developing under its own momentum within the general guidelines laid down by a plan. This is one of the findings of an ECAFE survey, which also points out the following: It appears from the plans of major ECAFE developing countries that planning is essentially for the public sector, where investment targets are backed by firm proposals for financing, budgetary procedures, an institutional framework for the formulation of projects along lines indicated by the Plan, and attempts at maintaining consistency between physical and financial targets. The private sector is mentioned in some of the plans merely to complete the picture regarding over-all national accounts. In some cases it acts as a convenient residual balancing item in both planning and implementation. 17

These difficulties could be overcome by introduction of more detailed and comprehensive sectoral plans by the countries in question. There is little to be gained from overall national statements regarding the role and tasks of the private sector. However, in the framework of sectoral programs much wider opportunities exist for the delineation of public 16. J. Ripert, "The Implementation of French Plans," in Planning and Plan Implementation: Papers Submitted to the Committee for Development Planning, 2nd Session (New York: United Nations, 1967). pp. 81-82. 17. "Problems of Integrating the Private Sector into the National Economic Plan," Economic Bulletin for Asia and the Far East, December 1970, p. 2.

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and private tasks and for formulation of action programs for each task in a coordinated manner. The planning problems related to foreign investments are also manifold, ranging from overall positive, negative, or neutral policy attitudes by the governments to foreign investment to detailed matters of regulation and control. Special problems arise in the handling of so-called multinational corporations. Typically the planner has to cope with the planning implications of the following forms of foreign investment and assistance: bilateral aid programs; multilateral aid programs (especially by the United Nations Development Program and the International Finance Corporation in the World Bank Group); direct private foreign investment; and loan investment. In most planning situations a great deal of attention must be paid to the balance-of-payments problems of the country and to the pertinent issues of foreign investment. Both short- and long-range factors have to be taken into account in reviewing such problems. In the former, the advantages of the inflow of foreign funds and the policies regarding repatriation outflows are the usual balance-of-payments items reviewed. In the longer range the net import savings or export gains expected from the planned investments are evaluated, together with their impact on employment, production, and technological progress in the country. Special problems arise in connection with multinational corporations and their incorporation in planning efforts. In weighing the advantages and disadvantages of various new projects, the planner must also perform such tasks as taking a stand regarding the policy on exchange controls (which may affect potential foreign investors), considering the programs feasible for training counterpart personnel in connection with foreign-assisted projects, reviewing the tax policies pertaining to foreign investments, and evaluating the most efficient ways to transfer modern technology from abroad. Finally, the problems of planning agricultural development, particularly the limitations on land ownership, may be mentioned. Since underdevelopment is usually characterized by the lack of industrialization and by the preponderance of a backward agriculture in the economy, for most development planning efforts agricultural matters are of central importance. Even in countries characterized by successful industrial progress, the modernized, usually export-oriented industrial sector may

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not generate development throughout the economy. This situation, sometimes called "structural dualism," is particularly worrisome regarding agriculture, which generally has remained in the traditionally structured society of the countries (especially in Asia). In many countries significant agricultural progress is not feasible without a concentrated effort regarding at least the following key aspects of this sector's development: the property arrangements (especially land ownership); the technological level; and the credit and marketing arrangements for agriculture. Absentee ownership of land and, particularly, the farmers' lack of opportunities to acquire land for themselves are recognized as major obstacles to agricultural development in many countries. As a rule this problem cannot be solved without far-reaching land reforms opposed by the landowners. Land reform alone, of course, is not a sufficient condition for the progress required. It has to be accompanied by fast and vigorous adoption of new technology as well. If the planner can have various political difficulties concerning the land reforms that may be required, the investment needs of the technological innovations in agriculture can pose formidable economic problems for the plan. The tasks related to the creation of credit facilities and appropriate marketing arrangements for agriculture may also involve very complex institution-building tasks for the planning system.

V The Plan and the Market institutional aspect of planning is its relation to the market. In this chapter some aspects of this relationship are reviewed, including: the possibilities of the market; the limitations of the market without planning; the promises of planning; the limitations of planning without utilization of the market; and the fallacy of the antagonistic interpretation of the market-plan relationship. A PARTICULARLY IMPORTANT

1. The possibilities of the market The role of the market in modern economies has been very extensive. Societies that are characterized by monetary economies, the mobility of the factors of production, and private ownership of the means of production invariably have strong market characteristics. Socialist revolutions did not eliminate the markets, 1 although their role was heavily curtailed.2 The role played by the market is of course related to its numerous advantages for society in helping to resolve its production and distribution problems. For this the motive of self-interest is utilized by channeling the factors of production, through the impulses of the market, to uses offering the relatively highest rewards to them. Profits, rents, and wages (the "rewards" to capital, land, and labor), with their increases and decreases determined by the market, are the allocational incentives producing the most efficient utilization of their services. Competition in the markets does not permit the existence of unrealisti1. Except for relatively brief periods such as the "war communism" in Russia during the civil war after the October Revolution. 2. There has been increased reliance on market forces by several socialist countries during the last decade or so.

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cally high prices for any length of time and also provides for sectoral equilibrium in terms of resource use and returns. The market society is ultimately in the hands of the customer, who with his "votes" (i.e., his purchases) determines the availability to him of the mix of goods providing most satisfaction. These are some of the theoretical characteristics of the market. Naturally in practice markets do not function exactly in this manner, the idealistic picture painted above does not quite hold, and some very important limitations need to be recognized. Therefore in the following section a description is given of the market's limitations. Nevertheless, the market system does tend to have the basic features attributed to it in the outline of its functions given above. It is undoubtedly one of the extremely important mechanisms of social control available to modern man. It has profound significance for economic, social, and political organization as a whole, and for the institutions and the characteristic legal arrangements of modern societies as well as the ideas prevalent in them. Heilbronner, comparing capitalism and its reliance on market relations with feudalism, gives the following summary: A market society could not coexist with a form of legal organization which, for example, did not recognize the freedom of the individual to contract for employment as he wished. Nor could it exist under a code of law which barely recognized "private property" as we know it. Neither could it flourish under a political system in which privilege accrued to birth rather than to achievement, or in which the landed nobility by law and usage possessed the main power to regulate society's affairs. Feudalism as a legal, political, and social organization had to give way to another form of society with a very different set of laws, customs, and political institutions. 3

Since this is a study in planning and not in economic history or price theory, we cannot deal with the development of market conditions at any length. Therefore only brief reference is made to these and other bodies of thought relevant to the better understanding of the role of markets in the socioeconomic conditions of man. However, a thought or two has to be offered regarding two aspects of understanding the market: the existence of the market in noncapitalist situations, and the technical advantages of money and the market. These two aspects have a particular bearing on planning. 3. R. L. Heilbronner, The Making of Economic Society (Englewood Cliffs, N.J.: Prentice-Hall, 1963), p. 69.

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Regarding the first aspect the long prehistory of exchange, money, and the market is relevant. While they assumed unprecedented roles in capitalism and its much accelerated economic growth, exchange, money, and market relations are much earlier social inventions. They were known in antiquity, were important concomitants of trade within and among lands particularly in the Mediterranean region and elsewhere, and continued to exist throughout the Middle Ages. It should also be remembered that, without exception, all socialist countries, including the Soviet Union, China, and Cuba, maintained some exchange relationships in their economies, money did not disappear, and weaker or stronger markets continued to exist in them. 4 These facts of history— spanning the Roman to the Mao eras—appear to give evidence in two regards: the wide fluctuations in the role of the market, which apparently peaked in capitalism; and the rather remarkable continuity in the existence of exchange, money, and market relations. The durability of monetary and market exchanges is particularly interesting in light of the various—and serious—limitations of these arrangements. For example, alienation is properly considered as being closely related to the impersonal character of market relations among producers, consumers, and members of society in general. Notwithstanding this characteristic, negative from the point of view of various social values, no modern society has yet been able to eliminate the market and money. The existence of the market also can be the cause of undesirable repercussions of a political nature, clearly realized by politicians so affected. Nevertheless, no politician has been able to completely eliminate the play of certain market forces and the use of money, no matter how strong his hold on power. Unless one wants to assume that money and the market have some mythical characteristics that keep them in existence, their durability points to their underlying usefulness to society. Their long history also warns that a simple equation of money and market relations with a given type of society (usually capitalism) is a doubtful approach. Therefore in the present work a different attitude is advocated, one that assumes the usefulness of some basic characteristics of the market under greatly 4. The "war communism" during the civil war after the October Revolution in Russia abolished these relations for only a short period. It soon became untenable and was replaced by the New Economic Policy (NEP).

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different sociopolitical conditions and considers them as important potential assets for the wise planner. The technical usefulness of market and money is underlined by Brunner and Meltzer in their theoretical analysis of this question. 5 As they point out, potential transactors in the economy have only limited information about the identity and location of other transactors who can become potential partners for them. Similarly there is only incomplete knowledge about the quality of goods offered or demanded or about the price ranges relevant to transactions involving them. The dispersion of prices, among others, reflects the uncertainty regarding quality and the uneven distribution of the pertinent information. Naturally the uncertainty and lack of information can be reduced by acquiring more information, but this involves costs, which can be considerable. As Brunner and Meltzer state: For individuals, money is a substitute for investment in information and labor allocated to search. By using money, individuals reduce the amount of information they must acquire, process, and store, and they reduce the number of transactions in which they engage to exchange their initial endowments for optimal baskets of goods. The use of money increases the welfare of each money user by reducing uncertainty, the length of transaction chains, and the variance of price ratios and by increasing expected wealth and time available for leisure. 6

This is of course only one of the technical features of the market, money, and exchange arrangements. There are many others, most of them better known, which appear to have qualities of a certain validity under various socioeconomic-political systems. The planner cannot disregard, except at his own risk, all these important qualities of the market, of money, and of indirect exchange in general. 2. The limitations of the market The limitations of the market are manifold. They are of central importance to the planner who has to "step in" to perform functions for society that the market cannot perform at all or cannot exercise effi5. K. Brunner and A. H. Meltzer, "The Uses of Money: Money in the Theory of an Exchange Economy," American Economic Review 61, no. 5 (December 1971): 784-805. 6. Brunner and Meltzer, "The Uses of Money," p. 799. Their formulation also stated that "the use of money as a medium of exchange reduces the resource cost of exchanging."

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ciently or in an adequate manner. An extensive literature exists regarding each of these limiting factors, and a detailed study of their nature should be based on it. In the context of planning, the following problems of the market are particularly important: the possibility of a disequilibrium between aggregate demand and aggregate supply; the possibility of nonoptimal allocations of investments in the economy by the market; difficulties regarding public goods; the problem of externalities; monopoly and oligopoly; distributional inequalities; market relations as sources of alienation; and the issue of "consumer sovereignty." The possibility of discrepancies between aggregate demand and supply has been recognized for a long time, and such discrepancies have been observed during depressions, with particular severity during the Great Depression of 1929-1932. An "invisible hand" attributed to the market could not avoid prolonged suffering from mass unemployment and the existence of idle capacities among the multitude of unmet needs. While purely market forces should be able to generate a recovery from depressions, they do not guarantee restoration of the equilibrium at full employment levels. Since the depression of the 1930s and also under the influence of Keynes's work regarding the importance of government intervention in economic processes, pure laissez-faire approaches to the market have lost their appeal in practically all countries. The weaknesses observed in purely market-oriented investment, which leads to nonoptimal decisions in this vital process for growth, are related to several factors. The first is that the individual private investor maximizes his own net marginal product, not that of society. The second is that owing to the long lifetime of the equipment invested in, which can be ten years or more, the limited information that can be available to any individual investor curtails his vision and increases his risk of making erroneous decisions. As Rosenstein-Rodan formulated, "The individual investor's risk may be higher than that confronting an over-all investment program." 7 Finally, because of the large chunks of capital needed for modern investment projects, the price mechanism, which works best under the assumption of small changes, cannot work smoothly in many investment cases. The difficulties regarding public goods (education, health, welfare 7. P. N. Rosenstein-Rodan, "Programming in Theory and in Italian Practice," in Investment Criteria and Economic Growth, O. Eckstein, ed. (Cambridge, Mass.: M.I.T. Press, 1955).

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services, and goods in such areas as transportation and defense) are related both to the ways the decisions are made to arrange for their provision—typically through the political process and not through market decisions—and to the ways in which they are utilized by society. Both technical and welfare considerations supply convincing reasons for a limited role of the market in these areas. The limitations of the market are evident regarding externalities. The existence of situations in which external economies or diseconomies arise is proof of this. The solutions proposed to "internalize" them (e.g., requiring a polluting firm to pay for cleaning of the wastes it causes—or subsidizing firms for incurred and socially useful costs that cannot be realized in the prices) are typically solutions outside the scope of market mechanisms, because the latter cannot cope with the difficulties stemming from externalities. Turning to another form of market imperfection, the existence of monopolies and oligopolies, a well-recognized limitation of the so-called unregulated market may be mentioned. In oligopolistic markets the normal downward pull on prices of excess supply may not be realized due to a silent agreement among the few controlling units of supply. There are other forms of monopolistic or oligopolistic actions that, in essence, countermand the forces of the market by the use of the collusive power available to the strong participants. The distributional difficulties associated with the market are of a different nature. In the cases of imperfect competition there is a net loss to society, a decrease in the efficiency of the economic process (compared to the ideal potentials). Distributional difficulties may exist also under Pareto-optimal conditions in which there appears to be no other feasible allocation that will make everyone at least as well off, and at least one member of society, better off. While it can be argued that competitive equilibrium yields Pareto-efficient allocations of resources, Bergson showed that this does not imply distributive justice. 8 As Arrow put it, "An allocation of resources could be efficient in a Pareto sense and yet yield enormous riches to some and dire poverty to others." 9 8. A. Bergson, "A Reformulation of Certain Aspects of Welfare Economics," Quarterly Journal of Economics 52 (February 1939): 310-34. 9. K. J. Arrow, "General Equilibrium: Purpose, Analytical Techniques, Collective Choice." Nobel Prize Lecture, Stockholm, December 1972; American Economic Review 69 (June 1974): 255.

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Two market issues related to the individual may also be mentioned: alienation and consumer sovereignty. Today it is widely acknowledged that the division of labor, the exchange of goods through the market, and the existence of the monetary economy are root causes of alienation of modern man. In the market the relationships between people are replaced by relationships between "things" and, through his entering into the labor market, in a sense man himself becomes one of these "things." 10 The effects of alienation are very harmful and lead to certain degradations of the individual. As to the so-called sovereignty of the customer, the individual's severe limitations in the market economy stem from various sources. One is the fact that "he can choose only from what is presented to him on the market. . . . When new kinds of goods or new models of goods appear on the market the older goods or models are not always simultaneously available. They are withdrawn from production at the discretion of industry."" There are technical reasons as well as economic ones for this state of affairs. Obviously the want-creating function of the producers is partly related to technological progress. Nobody had a demand for ballpoint pens before their invention and appearance on the market. However, as is well known, producers also create "wants" that are wasteful and irrational, and diminish wants as well—if that is preferable for their profits. In both cases the consumer choice is limited and/or manipulated. Finally, the lack of market arrangements in many developing parts of the world has to be remembered by the planner. A good portion of the world's population still lives under subsistence conditions, with few exchange activities involved. The introduction of money relations, market conditions, and wider exchange may often encounter insuperable difficulties in these areas. 3. The promises of planning If one wanted to be extremely brief, the promises of planning could be seen as an attempt to eliminate, or greatly reduce, the limitations of 10. Karl Marx was the first to show this effect in detail. 11. E. J. Mishan. "The Costs of Economic Growth," in The Goals of Growth, E. S. Phelps, ed. (New York: Norton, 1969), p. 23.

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the market system mentioned above. In a planned economy the allocation of resources is based on a number of major factors, or evidences, as we will call them. The most important of these evidences for planning are the following: (a) the desires of the population, (b) the evidence furnished by science (including technology and all branches of knowledge, such as economics and other social sciences), (c) the quantitative knowledge (statistics) regarding the economic and social processes, and (d) the political preferences adopted by the government. 12 A major difference between a purely market economy and a planned one lies in the direct consideration of all of these factors by the planner, while the market may reflect the evidence regarding these factors only in an indirect manner, if at all. In a planned economy the planners also utilize indirect evidence available through the market (e.g., regarding the preference of consumers in relation of various goods). This does not annul the fact that in the planned economy the basic decisions in resource allocation are based on consciously determined social preferences. The pure market economy is characterized by a much more spontaneous aggregation of individual preferences into a set of social preferences, which are heavily influenced by the preferences of the producers (especially the large ones). The planned economy ideally can have a longerterm view regarding the future, since its decisions are based on a wider collection of ideas (evidences) than is feasible through the market-wide aggregation of individual preferences, often characterized by very limited vision. If properly managed, the planned economy holds a number of promises for: a more efficient resource allocation from the overall social point of view; a more satisfactory situation regarding the welfare of all members of society; accelerated growth or the better fulfillment of other societal goals; and full employment under balanced development conditions (elimination of cycles). These are of course ideals, and the planning practice may fall short of reaching them all. Nevertheless, planning tends to be useful to achieve these broad goals. Earlier the market was characterized as a tool that tends to have the characteristics ascribed to it in the textbooks, while in practice having numerous limitations. Similarly, planning also tends to have the positive features attributed to 12. Later in the book a more detailed review is given of these four types of "evidence" for planning.

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it but in practice may not fully exhibit them. Therefore in the next section the limitations of planning are considered, particularly in relation to its lack of reliance on the market.

4. The limitations of planning without reliance on market forces. A major problem of entering the phase of large-scale and conscious management of socioeconomic processes is the emergence of a feeling of omnipotence in the planners and other decisionmakers. Given the power of central authority, those holding it are tempted to use it for issuing commands that are not feasible to execute. Recognition of the true limits of power is a most difficult task; history is full of examples of unutilized authority and also of attempts to use it for purposes ultimately not under the control of the power-holder. The underlying basic laws of economics are not amenable to changes that are simply commanded by even the most powerful of politicians. In a socially controlled economy both unutilized, missed opportunities to influence the interplay of the underlying economic laws and thoughtless interventions and futile attempts to "eliminate" basic laws that appear to be contrary to momentary political considerations, may lead to gross inefficiencies and undesirable socioeconomic and political consequences. One of the typical temptations for the new planner—and for the politicians, introducing planning—is to try to eliminate or severely curtail the influence of the market. Since this vice is a rather common one, we need to look at the limitations of planning, historically exhibited in countries where the market (including money relations, exchange, and the movement of prices according to supply and demand) was very seriously curtailed and planning proceeded on the basis of administered prices, bureaucratic control, and a great deal of direct command from the center to the producing units. Some examples of the great disadvantages of this approach were reviewed earlier, in the context of the planning efforts of the Soviet Union and Hungary. Here only the following general points are made: 1. The lack of a price system that is responsive to the complex interplay of supply-and-demand conditions, which can be revealed only

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through a reasonably developed market, leads to grave difficulties for the planner regarding his basic calculations. In complex economies these calculations have to be carried out in value terms. If the underlying price information is not responding to the real resource allocation patterns as they exist in the economy, the structure of the economy and the importance of its various segments will be reflected in a distorted manner and will lead to numerous mistaken decisions in planning. Prolonged and profound manipulation of prices, such as the maintenance of artificially low agricultural prices over lengthy periods in order to supply cheap food and curtail farm income, will show up in the national accounts calculations and generate policies on false bases. In the case of the above agricultural example 13 the share of agriculture (due to its artificially low prices) will be shown low in the production scale of the national product. This in turn will "justify" less investment in agriculture and other facets. Similarly, artificially low prices for machinery and equipment 14 distort the national accounts aggregates for capital formation, showing their share lower and that of household consumption higher than justified. Economic calculations based on distorted national accounts are of course vulnerable and a handicap to the planner. 2. If economic units (producers, etc.) are oriented almost exclusively toward "fulfillment of the plan" and have no incentives to consider market forces, numerous undesirable traits develop in their behavior. First of all they cease to carry out economic calculations on a daily, continuous basis. With prices fixed for both inputs and outputs, they cannot receive signals from the market regarding the supply-and-demand situation concerning them. The administrative apparatus of the planning system is unable to replace the myriad signals that a well-functioning market can transmit to thousands of transactors with high speed. The ceasing of daily economic calculations is of course to the great detriment of any economic unit and of society as a whole. In addition, if fulfillment of the plan is what is stimulated (morally and materially), the economic units considerably reduce their interest in the ultimate result of their activities as long as the plan is "fulfilled." Whether this fullfillment is optimal in some economic sense or whether the needs to be met by the 13. This has been an actual problem in Soviet agriculture. 14. Also applied in the Soviet Union to "stimulate investment."

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production of the given unit are satisfied or not becomes secondary. The pursuance of the "targets of the plan"—instead of "profits"—on the surface appears as a socially responsible, progressive attitude by the agents of the economy. Actually, neglect of real needs is often camouflaged by this attitude with its sad socioeconomic consequences. 3. The lack of market control over the behavior of the economic units and their excessive orientation toward commands of the higher authorities and fulfillment of targets set by them leads to other undesirable social attitudes. One is decreased initiative at the level of the firm. There are few market impulses to ignite managers' initiative, they are not much stimulated to show such initiative, and the bureaucratic procedures required to approve whatever initiative is shown act as a deterrent. These difficulties do not relate only to economic decisions in the narrower sense; technological innovations suffer equally under these conditions. 4. Another undesirable social effect is related to target setting by the higher authorities. Since the activity of the economic units is only loosely related to market needs and the predominant way of determining the tasks of a unit is through the targets established for it by the ministry or other supervising organ, the firms try to negotiate targets as low as is feasible for themselves. This way the fulfillment of the plan is easier and the receipt of their material and other benefits is better assured. The principal way to secure low targets is to withhold expansion of production and to conceal the true capacity of the firm. The building up of such "reserve cushions" naturally makes the fulfillment of the targets more certain. 15 5. Among the undesirable properties characterizing planning systems that exist without sufficient market arrangements—which act without reliance on supply-and-demand interaction, do not have an effective price system, and are not oriented toward economic calculation (and profit), and in which money and exchange have severely limited roles— many others could be mentioned. Usual characteristics are a high level of inventories, underutilization of equipment, irrational approaches to savings of inputs (due to distorted prices for them), shortages of goods and services, and other problems. 15. The risks for the managers of not fulfilling plans can be considerable, both from the material standpoint and otherwise.

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6. It is important to stress that these characteristics are not "socialistic" in character. While the overall political approach (for example, the general reliance on administrative directives or other totalitarian attitudes) can have a great deal to do with their existence, they are primarily rooted not in the form of ownership but in the lack of market arrangements and the lack of economic calculations. The heavy orientation toward target-fulfilling instead of profits has to lead to such consequences under various forms of ownership. 5. The fallacy of the antagonistic interpretation of the planmarket relationship It is increasingly realized that planning and the utilization of market forces are not mutually exclusive. Historically the antagonistic interpretation of their relationship was based on the following two simplistic notions: 1. Planning = socialism = elimination of the market. 2. Market economy = capitalism - unacceptability of planning.

Interestingly, ideologues of both socialist and capitalist leanings advocated the validity of these two sets of equations. For both groups, the term "planning" made sense only in a socialist setting and the "market" was simply a part of capitalism. If we compared a fully fledged communist society (not yet claimed to be attained anywhere) with a classical pure capitalist society (also not in existence anywhere), the above attitudes would make some theoretical sense. However, in analyzing the actual socioeconomic systems of the twentieth century they are invalid and misleading. As discussed earlier, no socialist economy is known that does not have money, exchange, and certain other market features. As to the capitalist economies, many have significant planning efforts and all of them show some planning features. Therefore for practical analysis in general and for the practical planner in particular the antagonistic interpretation of the planning-market relationship is untenable. In fact, further socioeconomic progress currently depends on the constructive resolution of this problem. Simply stated, the task is to have both "more planning" and "more market." Or in a little more elegant formulation, the elimination of the imperfections of the market

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demands more planning and the required increases in the efficiency of planning demand a heavier reliance on market arrangements. These goals are attainable only if the complementary relationships between planning and market are stressed. Naturally, planning has a tendency to try to operate without the "interference" of the market. Market forces often operate in a way that is contrary to the preferences of the planners, who "interfere" in their interplay. These are true contradictions: planning and the market do have significant contradictory tendencies. The question is whether these are sharply antagonistic. If they are, an amalgam of the two is not feasible and the complementary interpretation of planning and market cannot hold. The actual experience of capitalist and socialist countries tends to prove that the antagonistic interpretation is not valid and that "coexistence" of these two social tools is possible. The viewpoint that looks at both planning and the market as social tools or mechanisms reveals that the complementary interpretation is not a half-baked compromise but has solid foundations in reality as it can be perceived today. One element in such a viewpoint is the position that the perfecting of social tools in general and the plan and the market in particular is a justifiable aim. An important way to achieve this is to eliminate their imperfections, especially their socially undesirable aspects. The following general proposition may serve as a point of departure: the aspects of planning and of the market process that are most suitable for elimination are those that serve particular interests to such an extent that they evidently cause greater immediate harm to society (or hinder the achievement of its long-term central objectives) than their contribution to society through fostering of special interests. Clearly the existence and pursuit of special interests is not per se harmful to society. So far as the pursuit of special interests—on a net basis—is neutral or positive from the societal viewpoint, they are not a cause for concern by the planner. The "special interests" of individuals and groups are not only legitimate, but without their existence the notion of overall or national interests would hardly be meaningful. In fact, what social good can emanate from the pursuit of "national" (or "state") interests that do not benefit the constituent parts of the whole to which the overall objectives pertain?

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There is of course a point—and this is often the difficult, complex, and painful crux of the matter—where "special interests" become antagonistic. The interests of individuals may conflict regarding one particular economic matter (e.g., the division of an inheritance and the tax burden relevant to it), the interests of regions may differ as to the acceptability of a new tax burden (which could affect them to different degrees), the interest of social groups and classes may again clash regarding both the burdens and benefits of various economic actions—and so on. The burning issue is then what mix of special interests will be declared (or will be informally evolving) as the overall or national interest. In a purely formalistic political sense perhaps any combination of special interests may be acceptable (in some sense) and considered either democratic or just or both. However, not all possible combinations of special interests serve society as a whole equally well. While society and the planner may not be able to identify the optimal variant, it is usually possible to identify combinations of special interests that are less desirable than other possible ones. Returning to the roles of the planning process and the market circumstances, a certain relative neutrality or insensitivity of both of these instruments becomes apparent. It is quite possible to conceive of situations in which planning is the vehicle of fostering special interests, even if the given priorities may not have a net positive effect 16 within any reasonable time span. The same applies to the market. Particular market situations, or market circumstances created by forces able to do so, may serve special interests to the greater detriment of society as a whole than the benefit that accrues to those pursuing the special interest. Since special interests are sensitive to the increased benefits that may accrue to them if a certain policy is pursued and may remain insensitive to (or ignorant of) the detriment it causes to others (and perhaps on a net basis to society as a whole), there is an indispensable need for both planning and the releasing of market forces just to prevent the acceptance and/or implementation of such socially undesirable policies. Although planning and the market may be misused, their general social usefulness should not be questioned on that basis. The essence of 16. It is important to think of these matters in net terms, that is, in terms of the social balance of their positive and negative effects. Clearly almost any human action has both effects.

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both planning and the market lies in their "overall nature." The previously mentioned relative neutrality or insensitivity of both to special interests is not a central characteristic of either of them. Their central characteristic is their global character as tools. While the planning process or the market may be conceived of as being neutral or insensitive to the particular combination of special interests that were adopted as the national ones, they are both tools of combining interests.17 The fact that they are such tools justifies characterizing them as "overall" instruments, as tools that are immensely useful not only to "combine" the special interests, but also to evaluate competing variants of combined interests from an overall social point of view. Whether such an overall social point of view will prevail or is even discernible by the planner is of course dependent on a great many factors. The summation of possible net benefits to accrue to special interests under certain circumstances over a given period of time is a most complex technical problem. Contributing to the complexity of the technical problems are the difficulties of measuring both costs and benefits to individuals, groups, regions, enterprises, and so on. The period of time that is relevant to the summation is a thorny problem itself. Still on the technical side, the stochastic aspect of the process that is dealt with must also be recognized. Clearly, not all possible factors can or need be accounted for to enable human action in general or planning in particular. However, unknown factors that are not at all negligible will also exert their influence in due course. There will be bad harvests due to unexpected weather conditions—and millions of other "chance" events, which are all parts of life. Therefore calculations to sum up net benefits that should occur in the future are subject to error. Sometimes the margin of error—particularly concerning given special interests— may be large. While this is a technical problem, it also leads to a group of problems even larger than the technical ones. Obviously the planning process, the market, and most importantly the human agents participating and interacting in the socioeconomic process constantly react to new developments. The bad harvest caused by adverse weather conditions will lead 17. They may " c o m b i n e interests" at local, regional, national, and international levels.

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to a chain reaction in prices, new plans, corrective actions, and other events. But even if nothing unexpected happens, human beings themselves change. They give birth, they age, and they die. Of course this can be forecast with some accuracy. But people undergo other changes as well. Their attitudes change; such changes in attitudes may throw off even very sophisticated demographic forecasts based on excellent statistical evidence pertaining to the past. This has happened in the United States with population projections made by the most skilled experts with the use of the best computers. While the errors in such forecasts may not be unduly large by measures of the "state of the art" in their area, policies and activities based on them (e.g., school building) may be significantly affected. This aspect should again be considered in the context of the task of summing up net benefits that will occur in the future. Calculations of cost and benefits—whether evaluated by the market or in the plan or by both—are considerably affected by changes in human attitudes. Prices that were expected to prevail may be resisted later. Wages that were considered as adequate stimuli may not have that effect in the future. In short, what may today be a quite acceptable cost-benefit relationship could turn into what will be judged later a calculation containing elements of undue burden, inadequate benefits, or both. Whether society relies purely on market forces or on the planning process—or a combination of the two—there is no safeguard against the problems that arise out of changing human attitudes. Clinging to either planning or the market in order to prevent changes in attitudes is erroneous and hopeless. To serve particular (and usually partial) political goals, some may declare their exclusive faith in "state planning" or in "free markets." Even if they will be right in the narrower context of their own preferences (or in terms of some selected objectives), their antagonistic view of the role of the other alternative— whether it is the market or planning—is misplaced in the global social context. Mankind can hardly cope with the rapidly accelerating socioeconomic and technological processes facing us. In this situation we cannot afford the luxury of overlooking the social value of both planning and the market. As mentioned earlier they are both, in an ultimate sense, powerful means to combine the interests of individuals, groups, and

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enterprises, means to sum up the net benefit expected to accrue to them as a result of actions under given circumstances. Since both the planning process and the market are clearly able to help in assessing the overall social impact of various alternative choices, neglect of either by any particular society is akin to trying to cope with a task with one hand, even though it is a most challenging one when both hands can be used. The final summing up of the net benefits that will be pursued at a particular time is of course ultimately not determined by either the market, the plan, or their combinations. It is finally decided by the political process. Perhaps one could say that it is the political process. We return to some aspects of the relationship between planning and the political process later in the present work.

6. Conclusion: the practical implications The questions discussed in this chapter are not esoteric academic issues. Their conceptual complexity should not deter planners from carefully considering them and acting upon them. The practical actions will be based on incomplete knowledge, and that will limit their efficiency. However, knowledge has been expanded sufficiently for us to consider the following important propositions valid from the point of view of planning: 1. Planning systems without a serious effort at utilization of market arrangements within the overall planning framework are undesirable for reasons of efficiency, among others. 2. Market economies without a serious effort at national planning are subject—in addition to the disadvantages of cycles—to other socioeconomic and political dangers not directly related to the cycle. 3. Planners have to aid institutional reforms that can bring about the increased utilization of market forces in planning systems that lack appropriate arrangements in this respect; they also have to promote the increased application of overall national planning procedures to replace piecemeal, uncoordinated governmental interventions in the economy (where this is still the case). 4. Even if in a planned economy there is an adequate reliance on market forces, planning institutions and procedures have to be

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updated—an increased reliance on the market should not be accompanied by a more casual approach to planning arrangements—in fact, their sophistication needs a parallel increase. 5. Even if in a market economy there is a growing reliance on planning, the institutions of the market and the provision for free interplay of market forces (even in the overall societal framework of planning) need special care—the elimination of various market imperfections and other factors cannot be neglected. In short, a complementary approach to the plan and the market makes the seeking of improvements in their functioning a long-term duty of the planner. Such improvements usually cannot be achieved except through the political process. Therefore in the following chapter some questions of the broader political-institutional environment of planning are discussed.

VI Some Broader Institutional-Political Issues to the review of institutional aspects of planning, in this chapter several related issues are examined. They are of a broader institutional-political character than the questions outlined previously, and some are related to ideology. The planner's task would be easier if such issues did not complicate planning. However, they do, and it is of no avail to pretend that they do not exist. The selected problems reviewed here are the following: the rules of social choice; the need for nontotalitarian planning; holistic economics; problems in developing countries; material and moral incentives; and institutional changes for planning (i.e., study, experiments and politics). AS A C O N C L U S I O N

1. The rules for social choice Kenneth Arrow, in the last part of his lecture delivered in Stockholm, where he received the 1972 Nobel Prize in economic science, 1 dealt with the theory of social choice. Among other things, he suggested that "the formation of welfare judgments is logically equivalent to what I will call a constitution. Specifically, a constitution is a rule which associates to each possible set of individual preference ordering a social choice rule. A social choice rule, in turn, is a rule for selecting a socially preferred action out of any set of alternatives which may be feasible." 2 The following four conditions are imposed on this constitution: 3 1. K. J. Arrow, "General Economic Equilibrium: Purpose, Analytic Techniques, Collective Choice," American Economic Review 44, no. 3 (June 1974): 253-72. 2. Ibid., p. 270 (Arrow's italics). 3. The first three are from Bergson's 1938 study. "A Reformulation of Certain Aspects of Welfare Economics," Quarterly Journal of Economics 52 (February 1938): 310—34; the fourth condition was suggested by Arrow.

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1. The social choice from any particular set of alternatives should be the most preferred alternative in the available set (which should be capable of ranking). 2. The process should not select an alternative if there is another feasible one preferred by the choosers. 3. Nondictatorship should be assured; the constitution should be such that no individual's preferences could be declared "social preferences" disregarding the preferences of others. 4. The social choice should depend only on the ordering among alternatives that are relevant at the time (excluding the irrelevant alternatives). It is easy to see that the conditions mentioned above are related to the institutional aspects of planning. The term "constitution" used by Arrow already hints at such relations. But more importantly, both the condition of nondictatorship and the parallel conditions that involve a selection process in which the preferences of individuals are aggregated in some democratic manner have clear institutional implications. Unfortunately the stipulation that the process has to be nondictatorial, which is of paramount importance, is not without technical difficulties. 4 As has been known for almost 200 years, voting regarding alternatives may bring about paradoxical, inconclusive results. The "voting paradox," which can make the selection of preferred planning alternatives problematic through this democratic means, can be illustrated in the example of three alternatives (x, y, and z) ranked by each third of the electorate differently in their votes. The two accompanying tables illustrate the point. In the example, paradoxically each alternative is ranked by the voters in such a manner that the majority appear to be preferring each one of them over the other with equal number of votes. While the likelihood of the planner being confronted with exactly such a situation is not great, the paradox is indicative of the limitations of voting procedures which can. and indeed do, exist in real-life situations as well. However, none of 4. In fact the problem is more general. As Arrow points out, the four conditions are contradictory. "It is always possible to find a set of individual orderings which will cause the constitution to violate one of these conditions." Arrow, "General Economic Equilibrium." p. 270.

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Ranking of Three Alternatives (x, y, and z) by Voters Order of Ranking

First Third

Second Third

1 2 3

X

V

z

y z

z

X

X

y

Third Third

Majority Preferences in Ranking of Pairs of Alternatives Preference Expressed by Parts of Electorate x to >• y to z z to i

First and third third First and second third Second and third third

these difficulties justifies the abandonment of democratic procedures. The next section offers a few thoughts regarding this matter. 2. The need for nontotalitarian

planning

In the next chapter we deal with the basic ends for social actions and with the instrumental goals related to their achievement. Many economists and planners believe that their professional role is confined to the efficient implementation of social goals that are "exogenous factors" in their calculations. It is true that social priorities are ultimately determined in the political process and the final decisions do not rest with the planner, but both his social responsibility and his influence can be considerable in these areas. In any event the planner cannot avoid adopting (consciously or unconsciously) some attitudes toward basic ethical issues. A major unavoidable alternative concerns authoritarian or humanistic ethics. The two can be distinguished by formal and substantive criteria: Formally, authoritarian ethics denies man's capacity to know what is good or bad; the norm giver is always an authority transcending the individual . . . ; its decisions can not and must not be questioned. . . . Authoritarian ethics answers

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the question of what is good or bad in terms of the interests of the authority, not the interests of the subject; it is exploitative, although the subject may derive considerable benefits, psychic or material, from it.5 In humanistic ethics the central value criterion is man's welfare. This anthropocentric attitude is of course the opposite of the authoritarian approach described above. "The humanistic position is that there is nothing higher and nothing more dignified than human existence." 6 To avoid the risk of being found incompetent, the "authority" discourages criticism and rational judgment and promotes self-denial and obedience. The humanistic approach aims at the fullest realization of the individual's potential, which should be promoted in the context of his relatedness to and solidarity with his fellow man. In the terms of humanistic ethics, the individual should not be at the mercy of the authority. Whether economists or planners like to ponder ethical matters or prefer to "act solely in their technical capacity," their actual activities will reflect a leaning toward one of these two ethical alternatives. In this study it is maintained that planning efforts should be pursued with a view to humanistic and not authoritarian principles. In relation to the institutional matters discussed in the last three chapters of the present work, this calls for a nontotalitarian approach to planning and, more specifically, for the creation and maintenance of procedures and institutions favorable to this kind of planning. Aside from ethical convictions, it is useful to remember that history shows ample evidence regarding the detrimental effects of authoritarian and totalitarian ways on social development. On the other hand, as Edward Livingston put it in the early years of the United States, " N o nation ever yet found any inconvenience from too close an inspection into the conduct of its officers, but many have been brought to ruin and . . . slavery . . . only because the means of publicity had not been secured." 7 A frequently mentioned problem that authoritarian ways bring about is the corruption they often bestow on the holders of power. 5. E. Fromm, Man for Himself: an Inquiry into the Psychology of Ethics (New York: Fawcett. 1976), p. 20. 6. Ibid., p. 23. 7. Edward Livingston (1764-1836), American lawyer, legislator, and statesman, quoted by Roul Berger (Harvard Law School) in the New York Times. July 8, 1974, p. 29.

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Lord Acton's 8 famous maxim, "power tends to corrupt and absolute power corrupts absolutely," is much quoted in this context. Planners should not disregard Lord Acton's advice, quoted recently by Sidney E. Ahlstrom 9 at some length: If there is any presumption, it is . . . against holders of power, increasing as the power increases. Historic responsibility has to make up for want of legal responsibility. Power tends to corrupt and absolute power corrupts absolutely. Great men are almost always bad men, even when they exercise influence and not authority; still more when you superadd the tendency or the certainty of corruption by authority. . . . The inflexible integrity of the moral code is to me the secret of the authority, the dignity, the utility of history. If we may debase it for the sake of a man's influence, of his religion, of his party, of the good cause which prospers by his credit and suffers by his disgrace, then History ceases to be a science, an arbiter of controversy, a guide to the wanderer. . . . It serves where it ought to reign, and it serves the worst cause better than the purest. 10

Mutatis mutandis, Lord Acton's warning is valid advice to the planner— lest he be trapped into serving "the worst cause better than the purest." It is also important to avoid a gradual turn from initially broader-based practices to totalitarian planning. In this regard, what James Madison said to the Virginia Convention on June 16, 1788 should be kept in mind, "I believe there are more instances of the abridgement of the freedom of people by gradual and silent encroachments of those in power than by violent and sudden usurpation." 11 A liberal attitude concerning these broad issues is summarized by M. R. Cohen in the following way, "In view of the inherent uncertainty of all human arrangements, can we afford the risk of putting all our eggs into one basket and depending on one central government to exercise unlimited power? History does not show any example of genuine intellectual progress under a regime of absolute power. We must allow for variation and research, so that the existing good may not prevent the better from coming into being." 12 8. John E. E. D. Acton (1834-1902), English historian and philosopher of freedom, professor at Cambridge from 1895. 9. Professor of American history and modem religious history at Yale University. 10. S. Ahlstrom, "Lord Acton's Famous Remark," New York Times, March 13, 1974, p. 33. 11. Quoted by G. Seldes, The Great Quotations (New York: Pocket Books, 1967), p. 378. 12. Morris R. Cohen, Faith of a Liberal (New York: Holt, 1946), p. 106.

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Adherence to Marxist views is no excuse for condoning totalitarian approaches to planning. Advocates of paternalistic, authoritarian models of socialist planning conveniently overlook the contradictions between their approach and the ideals set by Marx. This is not the place to discuss the various relevant matters, but it is useful to remember that Marx aimed at the withering away of the state in communism (and by that, at the withering away of central powers over members of society). As Garaudy formulated: Socialism is the advent of a society that destroys all material obstacles, and especially those which are economic and social, to the integration of all humanity into each man. Freedom without illusion is the potentiality for all men to have access to the sum-total of human culture, to participate fully in the consciously organized, common tasks of all men and in the wealth and power so produced— and then to develop their full creative powers with no limitation other than their own capacities or talents. 13

In Marx's words, communism is a "community of free individuals, carrying on their work with the means of production in common." 14 The contrasting paternalistic approach is found in the second edition of the Great Soviet Encyclopedia, which defines "planning" and "economic plans" in the following way: "Planning is one of the economic-organizational functions of the socialist state. . . . Economic plans are the concrete expressions of the economic policy of the Communist Party and the socialist state, based on the recognition and implementation of the objective economic laws of socialism under the given historical conditions." 15 The paternalistic approach is, of course, questioned by socialists of various persuasions. As Laski put it, in any state where there is a body of men who possess unlimited political power, those over whom they rule can never be free because the "leaders" are always tempted to impose their canon of good upon others, and, in the end, they assume that the good of the community depends on the continuance of their power. There can never be liberty in any state where there is an excessive concentration of power at the center. 16 13. Roger Garaudy, Karl Marx: The Evolution of His Thought (New York: International Publishers, 1967), p. 106. 14. K. Marx, Das Capital, first English translation by S. Moore and E. Aveling, ed. by F. Engels, 1886, vol. 1, p. 78. 15. Great Soviet Encyclopedia, 2nd ed., 1955, vol. 33, p. 180 (my translation). 16. Harold Laski, Liberty in the Modern State (London: Pelican, 1937).

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Erich Fromm answered the requirement of nontotalitarian planning in terms of his anthropocentric ethics: Obviously, one of the greatest difficulties in the establishment of the conditions for the realization of democracy lies in the contradiction between a planned economy and the active cooperation of each individual. A planned economy of the scope of any big industrial system requires a great deal of centralization and, as a consequence, a bureaucracy to administer this centralized machine. On the other hand, the active control and co-operation by each individual and by the smallest units of the whole system requires a great amount of decentralization. Unless planning from the top is blended with active participation from below, unless the social life continuously flows from below upwards, a planned economy will lead to renewed manipulation of the people. To solve this problem of combining centralization with decentralization is one of the major tasks of society. 17 A writer of a different persuasion, Eugene V. Rostow offered the following observations on this matter: From much that is written and said, one would think the American people faced an impossible choice between two equally unattractive alternatives. On the one hand, they could vote for complete laissez-faire . . . or they could opt for a program of complete totalitarianism. . . . This black-and-white stereotype of the planning question is utterly false. . . . The issue is not whether to plan, but what to plan and how to plan. The conclusion of the argument which will be developed in this essay is that the legal machinery for controlling the American economy can and should be used effectively to keep economic activity in high gear. . . . If a label is necessary for the concept of planning outlined here, it might be identified as Planning for Freedom or Capitalist Planning." Let us conclude this brief review of the requirement of nontotalitarianism of planning with a reference to Lundberg's formulation of the problem and one of the aspects of its resolution, the maintenance of the market: The problem is to find such forms for our economic system that we do not become heavily dependent on having a small number of very outstanding people—politicians, administrators and economic experts—at the top. . . . The system should . . . be such that bad politicians, bad administrators, bad economists and bad businessmen, all of whom are among us, have the least possible chance of doing harm. An economy based largely on a highly decentralized 17. E. Fromm, Escape from Freedom (New York: Avon Books, 1972), p. 301. 18. Eugene V. Rostow, Planning for Freedom: The Public Law of American Capitalism (New Haven: Yale University Press, 1969), pp. 23. 24, 28.

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market economy with a fairly freely functioning price system meets these requirements to a greater extent than any other system. . . . The anonymity of the market, the automatic workings of the price system and the driving force of competition are means of achieving not only a rational use of productive resources and rapid economic progress but also a minute subdivision of economic decisions and a decentralization of power such as we wish to have in a true democracy.19

3. Holistic economists: an American school relevant to planning Our discussion of the broader institutional-political aspects of planning should include the so-called holistic school of American economics, brilliantly described by Allan G. Gruchy in his book, Modern Economic Thought: The American Contribution.20 The term "holistic" was selected to describe this school to call attention to its central characteristic—its interest in studying the economic system as a "unified whole or synthesis, in the light of which the system's parts take on their full meaning." Gruchy's book contains an analysis of the work of T. Veblen, J. R. Commons, W. C. Mitchell, J. M. Clark, R. G. Tugwell, and G. C. Means. In the present context only a few of the interesting features and some common characteristics of this school analyzed by Gruchy are mentioned: 1. Tugwell, Commons, Clark, Hamilton, and others became interested during and after the First World War in the larger and more comprehensive control of economic activity and development. Some of them were actually involved in the wartime economic planning efforts in 1917 and 1918. 2. In 1924 Mitchell, Clark, Tugwell, Wolfe, Copeland, and Schichter called for the construction of economics oriented toward the theory of production rather than that of the pure price system. 3. In 1921 Veblen outlined issues of a planned economy and in 1926 Clark in his Social Control of Business proposed more federal intervention in the economic process. Tugwell in 1927 mentioned 19. Erik Lundberg, Business Cycles and Economic Policy (Cambridge: Harvard University Press, 1957), pp. 336-37. 20. Reprints of Economic Classics (1947; reprint ed., New York: Augustus M. Kelley, 1967).

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the need for more centralized control of the economy. These suggestions and those mentioned under (1) and (2) above are particularly noteworthy because they preceded Keynes's general theory. They also preceded the Great Depression of 1929-1932 and thus were promulgated before the prolonged breakdown of economic processes during that crisis. The holistic economists emphasized the "cultural" rather than the "formal" aspects of economics, in order to avoid paying "too much attention to the shape or form of its theorizing, and not enough consideration to the content of that theorizing and its relation to the real facts of economic life." 21 The important role of institutions was stressed by these American economists (hence the term "institutionalism"). They were also concerned with income and wealth distribution and considered that disequilibrium was the normal state of the economy, rather than the equilibrium conditions discussed by neoclassical theory. The historical approach and careful attention to facts were important elements of this school. In particular, the interest of Wesley C. Mitchell in the statistical method of analysis (for example, his quantitative research on business cycles and his efforts at the helm of the National Bureau of Economic Research) should be mentioned in this regard. As early as 1913 Mitchell had proposed "the development of government spending policies designed to concentrate public spending in depressions rather than in periods of prosperity." 22 In 1921 at a roundtable discussion he surveyed the possibilities of controlling the business cycle. By 1933 Mitchell became convinced that the introduction of some general economic plan was essential in the United States, devoted considerable energies to a "plan for planning," 23 and suggested the creation of a national planning board. An important point made by Clark—in the context of his criticism of the marginal utility theory—was that purely economic calculations have important limits regarding choices among alternatives.

21. W. H. Hamilton, "The Place of Value Theory in Economics," Journal of Political Economy 26 (March 1918): 345-407. 22. Gruchy, Modern Economic Thought, p. 2. 23. Gruchy, Modern Economic Thought, p. 303.

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"Calculation may tell a man just what it is he must sacrifice if he does a certain thing, but it cannot tell him whether he wants the thing badly enough to accept the sacrifice. . . . Calculation is necessary, but not final."24 10. Various schemes were proposed, notably by Tugwell, to change the institutional setup in order to provide for the national planning functions found desirable. In Tugwell's proposals the establishment of industrial associations and their linking with the government and each other played an important role. The central planning board would act "as a mediating and integrating body, for the coordination of the several industries' plans and policies respecting production, prices, division of markets, working conditions and the like." 25 It is an interesting and somewhat puzzling fact that the institutionalholistic approach, one of America's original contributions to economic thought, did not have a larger theoretical or practical impact after the Second World War in the United States. Indeed, with the major exception of John Kenneth Galbraith, few of the leading economists appear to be exponents of this type of approach, although undoubtedly many facets of the institutionalist approach have been incorporated in the general economic thinking. A contributing factor to the changed postwar attitudes may have been the sharpened ideological conflicts of the Cold War. Under these conditions the well-known relationships between central planning and Marxist ideology in the Soviet Union may have inhibited the movement toward planning in the United States. It appears that a wide segment of public opinion and important political circles regarded planning (and other matters known to be related to socialism) from a rather narrow angle, only in the context of the conflicts between the United States and the Soviet Union. However, it is misleading to attach relevance to planning and some other arrangements existing in the socialist countries solely in the context of that rivalry. Disregarding someone's beliefs concerning socialism 24. J. M. Clark, "Economics and Modern Psychology," Journal of Political Economy 26(1918): 100-101. 25. Rexford G. Tugwell, The Industrial Discipline and the Governmental Arts (New York: Columbia University Press, 1933), p. 212.

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and Marxism, it is important to recognize that socialism and planning are far from being Russian phenomena. It is worth remembering that Karl Marx and Friedrich Engels were not Russians. The emergence of social democratic and labor parties in nineteenth-century Europe cannot be explained in terms of twentieth-century American-Soviet conflicts. The same applies to the continuing existence of such parties throughout the twentieth century in Scandinavia, Britain, France, or the Federal Republic of Germany. It is both extremely simplistic and misleading to try to view socialism and socialist planning as merely factors of the conflict of the superpowers. A particularly damaging notion is that socialism (and planning) are simply Soviet tools and that the international role of the United States is at stake should they "conquer America." Socialism and planning may be rejected for various reasons. But to fear planning on the basis of the possible loss of America's power does not appear to be a convincing reason. In terms of military power or nationalist pride, both the Soviet Union and China gained considerably in their socialist status compared to their earlier influence internationally. Actually there is little reason to believe that a "socialist America" would be "militarily weaker," "less glorious," or "less important" on the international scale than a "capitalist America." In any event, while economic planning or socialism may be opposed on other grounds, one cannot rationally base his dislike on fears of the particular nature mentioned above.

4. Problems in developing countries Among the numerous institutional issues affecting planning in the developing countries, only the differences related to the prevailing political systems are mentioned here. The scope and character of planning are greatly influenced by these factors. To illustrate the nature of the problem, we refer to Apter's threefold classification of political systems in the developing countries. 26 The systems identified by him27 are the following: the mobilization system; the reconciliation system; and the 26. David E. Apter, "System, Process and Politics in Economic Development," in Industrialization and Society. B. F. Hoselitz and W. E. Moore, eds. (the Hague: Bedrijfen, 1963). 27. Other classifications are also possible but Apter's serves as an illustration.

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modernizing autocracy. The first is characterized by hierarchical authority, strong ideological orientation, and tactical flexibility. The second shows pyramidal authority, ideological diffuseness, and a strong necessity for compromise. The third has again hierarchical authority, demands strong loyalty to the ruler, and has neotraditionalist features. Algeria may be mentioned as an example of the first, India as an example of the second, and Iran as an example of the third type of system. Clearly the planner's role is greatly influenced by the differences characteristic of the various systems. The attitudes toward planning may be favorable under any of the three systems mentioned. "Many of the governing elites of the underdeveloped countries have little affection for capitalism or fear of authoritarianism. . . . Usually the elite is drawn from social strata which lack sympathy with the individual entrepreneur. For them, small free enterprise is identified with petty trade and money lending, while big free enterprise is tarred with the brush of colonialism." 28 The application of planning procedures of various sorts therefore is not against the overall inclinations of the ruling elites of most developing countries. This circumstance is favorable regarding both the broader and the narrower institutional political requirements of planning, the establishment of planning bodies, and governmental regulation of the economy in general. However, the aversion toward private commercial activities may lead to negative attitudes concerning market forces. From the point of view of a planning system that utilizes market forces as much as possible, the negative feelings against the market may affect the overall planning effort as well. Finally, one should not forget that the elites of the developing countries, to a smaller or larger degree, when striving for modernization are also moving against the traditions of their countries. This applies as much to the application of planning as to the utilization of market forces, both of which involve the recognition of "Western" 29 values. Therefore in many cases there is a "relative social isolation of the decision-makers, who form a would-be modern elite, more than half-committed to 'westem' values and hence more than half-alienated from the majority of their fellow countrymen." 30 28. 1966), 29. 30.

Albert H. Hanson, The Process of Planning (New York: Oxford University Press, p. 9. Including "socialist" values, as parts of the Western heritage. Hanson, The Process of Planning, p. 10.

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5. Material and moral incentives for planning Usually planners and politicians alike recognize the need for a system of incentives to accompany the planning effort. Our discussion of the broader institutional aspects of planning is an appropriate place to refer to this matter. Naturally the issues of incentives in general and those applicable to planning systems are manifold and, as with other matters related to the institutional setting, differ widely from one country to another. However, one of the basic issues, the problem of the reliance on material versus moral incentives, is fairly common. In the early stages of the national planning effort, one often sees a preponderance of moral incentives. Two major factors contribute to their application. First, in postrevolution and postindependence times, a significant pool of enthusiasm usually exists among wide circles of the population, which can be mobilized for the introduction of planning. The second factor is the seemingly inexpensive character of moral stimulation, which can be effected through speeches and the media at much less cost than a massive application of material incentives. A third factor is the character of the existing political system. In this regard the usual assumption is that moral stimulation is possible and effective in authoritarian regimes and difficult if not impossible under democratic institutions. In Hanson's formulation: Public enthusiasm for—or rather satisfaction with—a plan is post hoc, proportionate to successful accomplishment. In a multi-party democracy, where criticism of the government is rampant and contradictory purposes find free expression it cannot become a significant means of accomplishment. If people are to be induced to work "for" the plan, they must be provided with individual and group incentives of the most material and specific kind.3'

As to the physical possibility of using moral stimulation, authoritarian situations are indeed easier for the plan. However, there can be questions about the real influence of officially manufactured and centrally distributed sentiments regarding matters ultimately of an economic nature. People everywhere are rather mature judges of the economic impact of government measures. Whether they have access to the 31. A. H. H a n s o n , " P o w e r Shifts and Regional Balances," in The Crisis of Indian Planning: Economic Policy in the I960's, P. Streeten and M. Lipton, eds., Royal Institute of International Affairs Series (New York: Oxford University Press, 1968), p. 43.

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relevant statistics or not, their evaluation of the immediate costs and benefits of planning efforts is seldom naive. In shorter periods of revolutionary and national enthusiasm narrower economic considerations may be pushed aside by broad segments of the population. However, in the longer run this is neither feasible nor desirable, and people act accordingly even under authoritarian rulers. The applicability of moral incentives need not be confined to authoritarian societies. Actually the agreement of social forces in a democratic manner and the ensuing common struggle for national objectives may be a much more powerful incentive to meet the targets of a development plan than even the most eloquent and best orchestrated calls for harder work by small circles of leaders. It is of course recognized that the application of moral incentives can be useful for planning, provided it is done with moderation and in a realistic manner, with a long-term time horizon in mind. However, much too often the aim is not to supplement material incentives with moral ones—which may be not only a legitimate but also a very desirable objective—but to replace the economic stimuli with exhortation. In view of the historical strength of economic stimuli, their abandonment by the planner is doomed to failure. The planner certainly cannot put his complete faith in the effectiveness of moral incentives provided by charismatic national leaders or by national, religious, or social ideologies. Many planners and also many politicians fail to recognize a particularly important aspect of this problem, namely, the inherent weakness of political authorities (governmental organs, political parties, etc.) in advocating moral postures for the population. People often instinctively recognize that moral authority and high power do not mix well. The power orientation (and often the misuse of power) by political authorities is usually so pronounced that people develop doubts about the moral exhortations of the holders of high power. In this context it should be remembered that churches have a long experience with the exercise of influence on moral matters, much more so than secular authorities. However, the planner of today seldom can or wishes to rely on churches to promulgate the moral incentives pertaining to planning efforts. One of the numerous and obvious reasons for this is the worldwide decline in the everyday influence of churches. In connection with the maintenance of religious beliefs, the sanction-

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ing of the existing social order, and so on, and in the context of the present discussion, the role of the churches as guardians of social morals (in the general sense) has to be mentioned. Apparently in many countries various parties and national leaders try to assume the execution of this latter function. In view of the strongly power-related character of political authorities there can be doubts about the long-term outcome of their attempts. On the other hand, in today's world highly structured and powerful churches cannot be very efficient in advocating social morality for the masses. 6. The activist institutional role of the planner A turn to planning is an activist step regarding institutions. It involves the establishment of new institutions, changes in existing ones, and modifications in the procedures earlier applied for the regulation of economic and social processes. The institutional implications of planning are obvious in the context of the various issues discussed earlier. However, it is important to call attention to the need for continued searching for better institutional arrangements for planning. The suggestions of Leonid Hurwicz are relevant: The idea of searching for a better system is at least as ancient as Plato's Republic, but it is only recently that tools have become available for a systematic, analytical approach to such search procedures. This new approach refuses to accept the institutional status quo of a particular time and place as the only legitimate object of interest and yet recognizes constraints that disqualify naive Utopias. . . . A wealth of ideas, originating in disciplines as diverse as computer theory, public administration, games, and control services, has, in my view, opened up an exciting new frontier of economic analysis. 32

In the present study it is not feasible to elaborate on the many theoretical and practical problems involved in searches for more advanced institutional environments for planning. The quoted study of Hurwicz can be well utilized as an introduction to the theoretical (and certain practical) aspects of the problem. Concerning the highly relevant economic theory of information, Marschak's work and, regarding orga32. Leonid Hurwicz, "The Design of Mechanisms for Resource Allocation," RichardT. Ely lecture, American Economic Review 43 (May 1973): 1. Contains a very useful bibliography on the subject.

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nization and economic behavior, Herbert Simon's studies should be consulted. As a practical matter special attention has to be paid to reform of existing environments. In their daily work planners rarely have the opportunity to deal with institutional matters de novo. 33 However, work on partial or larger-scale reforms of already existing planning situations is frequently possible as well as necessary. To illustrate this point we refer to the reforms introduced in the New Deal in the 1930s in the United States and in Hungary in the 1960s. While very different in aims and scope, both of these reforms were carried out without fundamental changes in the social environment of the two countries and both were significant in their effect on planning efforts. In chapter 3 we gave a short description of the relevant changes introduced by the Roosevelt administration under the New Deal and also of the reform of the Hungarian economic mechanism introduced on January 1, 1968. For further reading on these subjects, the books by W. E. Leuchtenburg and Arthur M. Schlesinger, Jr. on the former34-35 and Bela Balassa's study36 on the latter are particularly recommended. Leuchtenburg's excellent book on the New Deal describes how Franklin Roosevelt re-created the modern Presidency. He took an office which had lost much of its prestige and power in the previous twelve years and gave it an importance which went well beyond what even Theodore Roosevelt and Woodrow Wilson had done. . . . Under Roosevelt the White House became the focus of all government—the fountainhead of ideas, the initiator of action, the representative of the national interest. . . . By the end of Roosevelt's tenure in the White House, Congress looked automatically to the Executive for guidance; it expected the administration to have a "program" to present for consideration. . . . Yet . . . this was a period in which Congress had great influence. . . . The expansion of the Presidency resulted in a reinvigoration of the whole political system. . . . Roosevelt's most important formal contribution was his creation of the Executive Office of the President on September 8, 1939.37 33. Revolutionary situations are the exceptions in this regard. 34. William E. Leuchtenburg, Franklin D. Roosevelt and the New Deal, 1932-1940 (New York: Harper and Row, Harper Torchbooks, 1965). 35. Arthur M. Schlesinger, Jr., The Crisis of the Old Order: The Age of Roosevelt 19191933 (Boston: Houghton Mifflin, 1957). 36. Bela Balassa, "The Economic Reform in Hungary," Economica (February 1970): 1 22.

37. Leuchtenburg, Roosevelt and the New Deal, p. 327.

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A certain knowledge of the period that preceded the new era of the Roosevelt administration, vividly described by Schlesinger, is essential for the analysis of the changes: "The events of 1933-1945 climaxed half a century of American life. The nation, in responding to the bitter challenges of depression and war, summoned up the resources, moral and intellectual, of an earlier progressivism, an earlier war effort, and a decade of business leadership. Roosevelt's administration must be understood against this background of a generation's ideas, hopes, and experience." 38 It seems appropriate to conclude these brief references to the New Deal with the evaluation given by Henry Steele Commager and Richard Brandon Morris to it: "The New Deal was in fact pretty much what the phrase implied: not a new game with new rules, but a reshuffle of cards that had too long been stacked against the workingman and the farmer and the small shopkeeper." 3 9 Such political aspects can be crucial to major reforms and the planners must be aware of their profound significance. Whether the political significance of an economic reform is highlighted depends on the circumstances surrounding it. For example, the political element in the reform of the economic mechanism in Hungary (our example concerning such changes in a socialist setting) was generally not highlighted. This can be largely understood in terms of the foreign economic relations of the country with the other members of the Council for Mutual Economic Assistance (CMEA) and the overall political setting in Eastern Europe. Nevertheless, the tasks of the reform, as stated in the resolution of the Central Committee of the Party of May 7, 1966, implied changes of considerable importance, such as "the development of an active role for the market that requires that the laborious and bureaucratic system of the centralized allocation of materials and products . . . should give place to commercial relations" and "the replacement of administrative directives by market discipline." 40 It is not difficult to realize that such changes were against the interests and political beliefs of many former administrators and did not lack political significance. The introduction of profitability as the sole measure of the 38. Schlesinger, Crisis of the Old Order, p. ix. 39. Editor's Introduction to Leuchtenburg, Roosevelt and the New Deal, p. ix. 40. Balassa, "The Economic Reform in Hungary," p. 4.

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firm's success, the new relationships between buyers and sellers, and the limitations of governmental price intervention all had profound impact on both the economic and the political situation of various strata of the population. Planners must have great interest in reforms of this sort, in institutional reforms and in changes related to planning. Their interest has to extend to a conscious study of their possibilities and expected impact, to experiments with new measures when such trial runs are feasible, and to the promotion of research aimed at the creation of improved institutional settings for planning activities.

Basic Readings for Part 2 Arrow, K. J. "General Economic Equilibrium: Purpose, Analytical Techniques, Collective Choice." American Economic Review 44, no. 3 (June 1974): 25372. Bagai, M. "Problems of Integrating the Private Sector into the National Economic Plan." Economic Bulletin for Asia and The Far Elast 21, no. 3 (December 1970): 1-10. Balassa, B. "The Economic Reform in Hungary." Economica (February 1970): 1-22.

Dubois, P. "The Use of Projections for Indicative Planning in Developed Countries: The French Experience." Journal of Development Planning 4 (1972): 1-35. Galbraith, J. K. "Power and the Useful Economist." American Economic Review 43, no. 1 (March 1973): 1-11. Hurwicz, L. "The Design of Mechanisms for Resource Allocation." American Economic Review 43, no. 2 (May 1973): 1-30. Levine, H. S. "The Effects of Foreign Trade on Soviet Planning Practices," in International Trade and Central Planning, A. A. Brown and E. Neuberger, eds. Berkeley and Los Angeles: University of California Press, 1968, pp. 257-79. Pryor, F. L. "Property Institutions and Economic Development: Some Empirical Tests." Economic Development and Cultural Change 20 (April 1972): 406-437. Rostow, E. V. "The Economic Order as a System of Law," in Planning for Freedom. New Haven and London: Yale University Press, 1963, pp. 10-29. Schumpeter, J. Capitalism, Socialism and Democracy, 3rd ed. New York: Harper and Row, Harper Torchbooks, pp. 172-86. Tesekhov, V. F., and Yevstigneyev, R. N. "Economic Reforms in Socialist Countries." Economic Bulletin for Asia and the Far East 21, no. 3 (December 1970): 31-40. United Nations, Economic Commission for Latin America. "Planning in Latin America." Economic Bulletin for Latin America 12, no. 2 (October 1967): 1-18.

U.S. Congress, Joint Economic Committee. Employment Act of 1946, as amended, with selected laws. Washington, D.C.: U.S. Government Printing Office, June 1967, pp. 1-10. U.S. Congress, Joint Economic Committee. Twentieth Anniversary of the Employment Act of 1946, An Economic Symposium, Comments on Directions for the Future. Washington, D.C., U.S. Government Printing Office, 1966, pp. 3-13.

3

Aims, Strategies, and Policies of Development Planning

IN T H E FIRST few chapters we dealt with the possibilities and limitations of planning, the systematization of plans, and the historical experience with planning. We then examined the various institutional aspects of planning, including the legal provisions for planning, the planning organs, and the relationship of the market to the plan. In part 3 the issue of national objectives for planning is reviewed. These objectives have to be studied in the light of the basic ends for social action and the socioeconomic aspects of development strategies. Their study should include the assessment of various internal and external factors that may influence the selection of aims, strategies, and policies for a given development plan. However, before we turn to the general question of the overall national objectives, a reminder is in order concerning the basic sources to be utilized for the construction of a set of social preferences for the development plan of a country. In the scheme of planning proposed in the present study, the system of social preferences should be based on four major sources: the preferences of the population; theoretical considerations and scientific-technological motives; socioeconomic conditions (at home and abroad); and priorities adopted by the political leadership. Naturally these sources, which should be utilized for the construction of the system of national objectives, are interrelated. The preferences of the population have an effect on research or on the political priorities that emerge. Scientific and technological developments may have an important impact on the population and the leadership as well. The leadership itself may influence the course of technological changes and

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choices as well as the desires of the population. Nevertheless, the four sources identified above deserve careful separate analysis by the planner, as each has certain characteristic components that are much less important in the case of the other three. Therefore we will deal with them in some detail in consecutive order. However, at this stage only the general significance of these varied sources is emphasized from the viewpoint of selecting a set of national objectives for a given development plan. The overall objectives of a nation cannot be based on any single source mentioned above. The preferences of the population, however important, may need to be coupled with the scientific evidence regarding future technologies and possibilities, not yet in the public's mind. The socioeconomic conditions of the country—and its place in the world development scale—will need to be carefully analyzed and taken into account as well. The wishes of the political leadership also have to be reviewed, partly as the political expressions of the other three sources of evidence mentioned, and also as possible manifestations of the selfinterest of the leaders themselves. In the present work we call the considerations emanating from the four abovementioned sources the four main sources of evidence for planning. They are all utilized in the construction of the development plans of the nation and are synthesized in the development strategies embodied in them. The determination of an appropriate development strategy is one of the most crucial ingredients in any planning effort. Unfortunately, the preparatory work needed for this momentous step of planning is often quite inadequate. Casual determinations, purely ideological or political decisions concerning development strategies are not rare at all. Since one of the major weaknesses of planning is caused by the lack of careful selection of national objectives and the neglect of certain crucial preparatory steps in planning, we need to emphasize here the significance of the selection of social preferences for the plan. Similarly, the importance of the preparatory steps for planning has to be stressed and especially the screening of the major sources of evidence for the construction of a development strategy.

VII Basic Ends: Domestic Economic Aspects 1. Basic ends for social action SELECTION of appropriate development strategies first requires a period of reflection regarding the ultimate aims to be served by the strategy and the plan that will embody it. Unless some clarity is reached concerning these aims, the direction and success of the plan will remain equally hazy. One of the difficulties associated with such reflections is that they invariably go beyond the scope of economics. Furthermore, the training of the planner is usually not in areas directly useful for these reflections. Nevertheless, the planner has to realize that the basic ends for social actions are outside the realms of economics and are closely related to the human values adopted in his society. In various cultural environments the emphasis may be on different basic ends. The plans of different countries may reflect (directly or indirectly) the cultural characteristics of the given country and/or its political leadership. Therefore the list given below serves only as an example to illustrate the nature of the various basic ends for social action. The list is given as two sets of basic objectives, prime and instrumental goals.1 Among the prime goals are: existence or survival, physiological gratifications (through food, sleep, comfort, sex, etc.), love and affection, respect, self-respect, power or control, skill, enlightenment, prestige, esthetic satisfaction, excitement, and novelty. The instrumental goals include: freedom, rationality, democracy, equality, security, and progress. THE

1. The list is an adaptation by R. A. Dahl and C. E. Lindblom of the list from H. D. Laswell, Power and Personality (New York: Norton, 1948).

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The goals listed above are not exhaustive and serve here only as a reminder to the planner regarding the broader purpose of his activity. The planner should not and cannot disregard the ultimate aims that will be served by the plans in the elaboration of which he participates. Particularly dangerous are possible effects of the plan that may violate— for smaller or larger segments of the population—the achievement of certain prime goals of life. It is easy to recall that economic planning usually does not deal directly with categories listed above. However, such noneconomic notions serve as the unavoidable and ultimate measures and directions of economic activities. Economic performance cannot be evaluated solely by economic criteria. It also has to be measured against the goals of society outside the domain of narrowly economic considerations. The criticism is often made that quantitative measurement of progress in the gradual achievement of the prime goals and instrumental goals may be exceedingly difficult. While this is true, the wise planner will remember that the quantification of overall economic achievement on other grounds is also not without difficulties. Slogans concerning "maximum possible growth," "optimal development paths," or "planned and proportional socialist development" do not lend themselves to better quantitative evaluations. Purely statistical calculations regarding the growth achieved in terms of the GDP and other measures are also not devoid of certain assumptions regarding social values. The noneconomic element simply cannot be disregarded by the planner, either during the setting of goals of the plan or at the time of evaluating its success. Inasmuch as the plan is not a self-serving instrument, it has to be evaluated both ex ante and ex post against the general objectives of society. The ultimate measure of the plan is whether and to what degree it fosters the global preferences of society. Obviously there are some major difficulties involved in this evaluation process: the desires and objectives of society may not be clear enough; even if the social preferences achieved substantial clarification, they may remain stated in qualitative terms and defy attempts at their quantification; and the effects of economic planning on the achievement of social preferences may not be easily measurable. Although the difficulties mentioned are all too real, there can be some consolation in the fact that an ex post set of social preferences always

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emerges. The objectives set may or may not coincide with the hopes and aspirations of the people and/or their leaders. In this connection it should be remembered that even if no changes were decided on (and executed) during a given period and no initiatives were taken on new projects, this lack of action could also be considered a decision of great importance. After all, no change in resource allocations is also a significant decision that may permit maintenance of the pattern of allocations that existed before. In this sense in every country there exists at all times a set of social preferences revealed in the budget. Whether or not they are the results of conscious formulation of preferences regarding health, education, or defense, the budget of each country is itself a documented statement about the social preferences adopted for the given period. It appears appropriate to conclude this discussion of the basic ends for social action by quoting some of the thoughts of U Thant, the late Secretary General of the United Nations, in 1962 at the beginning of the United Nations Development Decade. "We are beginning to understand the real aims of development and the nature of the development process. We are learning that the development concerns not only man's material needs, but also the improvements of the social conditions of his life and his broad human aspirations. Development is not just economic growth, it is growth plus change." A. Heertje summed up similar considerations in Econometrica: The whole problem of the optimum rate of growth is a welfare problem in the broad sense of the word. Welfare is influenced by all actions based on the preference scales of individuals, pressure groups, and government, and that consists of the choice of scarce means in order to reach certain ends. In this sense every solution of the problem is a pseudo-solution as the problem concerned is essentially of a political character. 2

2. Development strategies: some domestic economic

aspects

After a discussion of the basic ends and instrumental goals for planning, the question to be considered is how to translate the desire to foster gradual achievement of those basic goals through the planning of 2. Econometrica,

July/October 1967.

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socioeconomic activities. The adoption of appropriate development strategies is a requirement for successful action in that direction. In the present section a few key domestic strategic problems of economic development are reviewed and in subsequent sections the international economic aspects and the social aspects of development strategies are discussed. As in other regards, the discussion is selective and illustrative of the nature of the problems reviewed. Actual situations under different circumstances may require attention to other economic aspects of the development strategy appropriate to the given country. a. Balanced versus unbalanced growth

One of the key questions in development policies pertains to the desirable degree of concentration in the development effort. In the economic literature this question is usually discussed under the heading "balanced versus unbalanced growth." Since the more theoretical aspects of growth models will be taken up later in the book, we limit ourselves here to references to the strategy implications of this issue (as well as of the other issues discussed subsequently). We prefer the expression "degree of concentration of development effort" over the terms "balanced" and "unbalanced." growth because of the lack of precision of the notion of "balance." It resembles the "law of planned proportional development" declared by Stalin as one of the basic economic laws of socialism. The difficulty with notions like balance or proportionality is the lack of objective criteria regarding their nature and measurement. The notion of concentration of effort is somewhat more applicable. While admittedly a narrower concept, it highlights the key issues of resource allocation and offers better opportunities for quantification. The degree of concentration of the development effort is determined by two basic factors: the feasibility of the various degrees of concentration, and their relative advantages. The two factors are related but nevertheless deserve separate consideration. Their discussion must start against the background of underdevelopment as experienced in most countries of Asia, the Americas, and Africa. Among the features of underdevelopment, two are of special importance in relation to concentration of development effort. One feature is the general economic underdevelopment of these countries, affecting practically all their economic activities, sectors, and regions. In an important sense the whole

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economic process needs an overhaul and promotion to higher levels of development. The second feature is the unevenness of this general backwardness, some sectors, processes, and regions being more backward than others. In a sense the urgency of balanced growth is stressed in the light of the first feature. The notions of unbalanced growth are related to, among others, the unevenness of underdevelopment. Both features of underdevelopment have an impact on the optimal degree of concentration of the development effort. The feasibility of various degrees of concentration and their relative advantages depend strongly on the prevalence and character of these two features of underdevelopment. Broadly speaking, the development strategy applicable to a given plan should make a choice between the promotion of development in a larger number of sectors and regions of the economy and the stressing of development in more selected economic branches and areas of the country. The need for a choice is related to the scarcity of resources. Generally the more dispersed effort, owing to resource limitations, involves a slower development on a broader front, covering many sectors and regions in the country. The more concentrated development efforts usually lead to faster development on a narrower front, since the same resource limitations do not permit the effort to cover all sectors and regions in the country. In an abstract sense, the relative advantages of these two types of effort should be evaluated in terms of the overall growth rate achieved through these two policies over a certain period of time. Truly balanced growth, that is, one that would affect all sectors and regions of a developing country more or less similarly through the attainment of reasonably equal growth rates for each of them, is neither feasible nor desirable. The impracticability of such an approach is related to the severe limitations of the resources available for development. If literally all sectors and regions would need to share the scarce capital, managerial and labor skills, and so on, the impact on any one of them may well be negligible. The practical choices lie within the range from a very strong concentration of the development effort to a somewhat wider spread of the same. The discussions in the economic literature concerning balanced or unbalanced growth should really be interpreted within this range and not beyond it. Hence our preference for the term "degree of concentration of the development effort."

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Within the indicated range the issues discussed by the various studies are not only relevant but may point to major dilemmas. For example, Rosenstein-Rodan studied the difficulties involved in selective/balanced growth approaches and pointed out the problem of "indivisibilities." 3 Particularly important for planning is the indivisibility of social overhead capital. Investments in infrastructure (power production and transmission, transportation facilities, means of communication, housing, etc.)— as is true of many other investments in our time—require large minimum amounts of resources for any single project. The "lumpiness of capital" unavoidably calls for both heavy outlays and the creation of unused capacity in the initial period of utilization of the new projects of infrastructure. The importance of investments in infrastructure is especially related to the investment opportunities they create for the various productive sectors of the economy that could not exist without their services. Usually the infrastructural type of services cannot be imported, and countries cannot avoid the heavy outlays and long gestation periods required for their local establishment. Ragnar Nurkse, in his advocacy of balanced growth, suggested that a frontal attack . . . a wave of capital investments in a number of different industries . . . more or less synchronized application of capital is needed to a wide range of different industries. Here is an escape from the deadlock; here the result is an over-all enlargement of the market. . . . Most industries catering for mass consumption are complementary in the sense that they provide a market for, and thus support, each other. . . . The case for "balanced growth" rests on the need for a "balanced diet." 1

Critics of the balanced-growth approach, such as Hans Singer, stress that "the resources required for carrying out the policy of balanced growth . . . are of such an order of magnitude that a country disposing of such resources would in fact not be underdeveloped." 5 Thus the concept of balanced growth is premature rather than wrong. 3. P. N. Rosenstein-Rodan, "Notes on the Theory of 'Big Push'," M.I.T., Cambridge, Mass., March 1957. See also his article, "Industrialization of Eastern and Southeastern Europe," Economic Journal, June/September 1943. 4. R. Nurkse, Problems of Capital Formation in Underdeveloped Countries (New York: Oxford University Press, 1953), chapter I and p. 5. 5. H. Singer, "The Concept of Balanced Growth and Economic Development: Theory and Facts," paper delivered at the University of Texas Conference on Economic Development. April 1958.

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Hirschman's recommendation in view of this dilemma is to undertake a "big push" in strategically selected sectors of the economy. The development path of the currently developed countries also involved ' 'growth being communicated from the leading sectors of the economy to the followers, from one industry to another, from one firm to another." 6 As to the kind of imbalance that may have the optimal impact, one can advocate the selection of investment projects that have substantial "forward" and "backward" linkage in terms of interindustry relations and thus may encourage investment in most subsequent and earlier stages of production. In practice the concept of unbalanced growth is the usual notion embodied in the development plans of countries. Often no clear recognition is given to this fact, and the impression is created that progress will be rather universal. The early five-year plans of the Soviet Union were based clearly on strategies that heavily concentrated the development effort on key segments of the basic (heavy) industries, including the production of machinery. In the terminology used the emphasis was on the "key links" in the economic process. Various noneconomic circumstances, the danger of attack by Hitler's Germany, among others, clearly influenced the selection of the key sectors in the plan. It would appear that the overall results of Soviet economic growth were rendered feasible and were considerably fostered by the "unbalanced" approach adopted in the 1930s. On the other hand, the neglect of many sectors, while difficult to measure in terms of the overall impact on growth, is still a source of numerous unresolved problems of the Soviet economy. The question as to whether a somewhat less concentrated development effort would have resulted in equally good or better overall performance certainly deserves attention but is a most difficult one to answer. In light of the present study, an important issue to be decided for the elaboration of a development strategy to be used in planning might be the degree of concentration of the development effort. In most situations, fully balanced growth is not feasible. A somewhat diversified approach to development is advantageous since it fosters the enlargement of domestic markets and avoids the pitfalls often related to the 6. Albert Hirschman, The Strategy of Economic University Press. 1958). pp. 62-63.

Development

(New Haven: Yale

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concentration on a very few large-scale projects, which may be difficult to manage under the local circumstances. Diversification on a large scale may offer management difficulties of another sort (related to the shortage of managers, difficulties of communications, etc.). If numerous small projects are favored, potential economics of scale may be sacrificed. b. The desirability and limits of growth Development strategies are always constructed with an implicit or explicit view regarding the desirability of growth. Growth is considered desirable and any worldwide limits to it remote. Neither planners in the developing countries nor economists in the more developed ones (whether of socialist or nonsocialist orientation) have been much impressed by studies like The Limits to Growth,1 sponsored by the Club of Rome. In a review of that study, P. Passel, M. Roberts, and L. Ross (from Columbia and Harvard Universities) considered it " a n empty and misleading work. Its imposing apparatus of computer terminology and systems jargon conceals a kind of Rube Goldberg device—one which takes arbitrary assumptions, shakes them up and comes out with arbitrary conclusions that have the ring of science. Limits pretends to a degree of certainty so exaggerated as to obscure the few modest (and unoriginal) insights that it genuinely contains." 8 The Limits to Growth and several other studies (beginning with Malthus) explore the relationship between population growth and the food situation. This study also deals with various shortages of raw materials and other resources, and the effects of pollution. These concerns are of course of direct relevance to planners, and in a more direct sense than in the Club of Rome study, which is concentrated mainly on the expected halt in economic growth in eighty or one hundred years. While the problems of food production and importation are in the foreground for many planners (as is population policy), the issue of ill effects o r ' 'limits'' of economic growth is viewed as an academic one for the developing countries, even if the underlying assumptions might be correct. In view of the great differences in the level of production and 7. A report for the Club of Rome's Project on the Predicament of Mankind, by Donella H. Meadows, Dennis L. Meadows, Jorgen Randers, and William B. Behrems, III (New York: Universe Books, 1972). 8. New York Times Book Review, April 2, 1972.

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consumption between developed and developing nations, this attitude is completely understandable. For planners in the developed economies the ill effects of spontaneous and unregulated economic growth are of more immediate concern. There are, of course, significant differences among economists in the developed economies regarding growth. For example, Henry C. Wallich said that "to stop growing now would be to commit suicide for fear of remote death." 9 On the other hand, H. V. Hodson maintains that ' 'economic growth which brings increasing material consumption brings other consequences which counterbalance any positive effect on welfare. The familiar bogeys of the environmentalists—atmospheric and water pollution, conundrums of waste disposal—are only a fraction of the adverse aspect. The rest includes excessive urbanization, city blight, street and highway congestion, commuterization, noise, ugliness, alienation, loss of moral values." 10 In the formulation of Walter A. Weisskopf: There are human potentialities and needs which are not related to the procurement of goods and services and cannot be satisfied by producing and buying and selling. Love, friendship, primary, warm, affectionate human relations; the experience of beauty, worship, the pursuit of truth and of the good are of this nature. These non-economic needs which cannot be satisfied by more production for the market are the real costs of economic growth and of the striving for more and more goods and services. A society which allocates most of the activity of its members to the production of goods will prevent the fulfillment of other needs and aspirations."

Whether or not the planner subscribes to all facets of such analyses, it is one of his duties to consider during the elaboration of the development strategy underlying his plan both the benefits and the costs of the envisaged growth. His assessment should not be confined to narrowly economic calculations. Hence feasible considerations concerning the "quality of life" that will be promoted by the plan should influence the selection of strategies for the development plan. Since backwardness can be a massive destroyer of the quality of life, the planner needs to have an open mind and considerable flexibility in this matter. He also needs a facility for balancing the expected costs and 9. New York Times, February 12, 1972. p, 29. 10. Ibid., March 8, 1972, p. 31. 11. W. A. Weisskopf, Alienation and Economics

(New York: Dutton, 1971). p. 192.

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returns of economic growth, intangible as they may be. Finally he needs to remember that economic growth may be the best and perhaps the only way to cure ills of a socioeconomic or environmental nature. In the view of Passel and Ross this holds even for the United States. 12 In any event the planner has to have some basic strategy approach regarding the desirability of growth and its promotion through planning with a view to its costs, benefits, and desirable rates. c. Capital formation and consumption

Thus far the following considerations have been mentioned in connection with the elaboration of the development strategies required for planning: the basic ends for social actions to be promoted through planning; the issue of balanced versus unbalanced growth; and the problems of the desirability and limits of economic growth. We now consider the relationship between capital formation and consumption in the context of development strategies for planning. In the discussion of this matter again we mention only certain strategic implications. Some theoretical problems related to investment are left to a later chapter of the study dealing with the evidence offered by economic theory for planning. Again, similar to the treatment of the other aspects of development strategy, the emphasis of the discussion is not on particular recommendations. The aim is rather to call attention to some problems related to the establishment of a sound strategy in this respect. Specific strategies will always depend mainly on the specific circumstances prevailing at the time and place of the given planning exercise. In most analyses, capital formation is treated separately from consumption. Here we try to consider it in relation to consumption because of the complementarity that exists between them. Aside from transactions with the rest of the world—which we shall treat later—the sources of capital formation are the same as those of consumption (including household and government consumption), namely, the product of the nation. An increased share for capital formation entails a lower share for one or both forms of consumption, specifically, in the households and by government. This points to a central sociopolitical-economic problem of 12. P. Passell and L. Ross, The Retreat from Riches (New York: Viking Press, 1973), p. 203.

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any development strategy, where higher levels and shares of consumption and higher levels and shares of capital formation usually have to compete for the allocation of resources of the nation, unless a very massive inflow of foreign assistance should permit their parallel movement—an unlikely possibility. The mention of consumption is all the more justified because in the past too many development strategies "postponed" present consumption in favor of future consumption. Even if an increase in capital formation is unavoidable and is feasible only at the expense of current consumption levels, the planner has to be mindful of the effects of this decision. He has to remember that the sacrifice in consumption is immediate and real, while the expected benefits in consumption through the effects of enhanced capital formation and increased production will materialize only in the long term and even then are subject to some uncertainty. The postponement of consumption also has certain inherent inequalities. Depending on the time horizon involved, various cohorts of the population that will feel the burden of the sacrifice will not live long enough to enjoy its benefits. Also, from the viewpoint of the various strata of the population, those with low incomes are usually not in a position to endure much postponement of their consumption if it is at about subsistence level to begin with. Very often those who decide the matter of postponement do not feel and comprehend its effect on the masses in general and on the aged and disadvantaged in particular. Nevertheless, shortage of capital is usually such a serious impediment to development that the planner has to consider all possible ways to alleviate this shortage, including an increase in domestic savings. The concepts to be considered in the context of a given development strategy include the following: the estimated practical maximum rate of investment, taking into account the population's ability and willingness to save; and the maximum rate of investment that is consistent with the absorptive capacity of the economy, depending on a multitude of factors such as the natural resources available, the managerial capacity in the country, and the efficiency of the public administration. The development strategy of a country has to put the capital/output ratios in a prominent place. Captial/output ratios or capital coefficients for each sector of the economy and for the national economy as a whole are of great consequence for the development strategy. While the "aver-

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age" capital/output ratio is often estimated (i.e., the relation of total capital to total output), the planner is particularly interested in the incremental capital/output ratio, which estimates the additional capital needed to increase the national product by a given amount. The acceleration of growth that is the central objective of many development strategies usually requires an increase in the share of capital formation within the expenditure on the national product. A lucid exposition by W. Arthur Lewis of the overall problem is as follows: If the ambition is to grow as rapidly as the countries of Europe and North America have grown during the past century, the desired growth rate is about 2 per cent per head per annum. Allowing for population growth, this in most of the poorer countries means that national output should grow by about 4 per cent per annum. Higher rates than this are stated as objectives in some development plans, but 4 per cent is so difficult to attain that it is really quite an ambitious target. Economic growth at about 4 per cent per annum requires that a country withhold from personal consumption about a quarter of the national output. One half of this or about 12 per cent of the national output, is needed to provide an adequate framework of public services, the other half is required for capital formation. . . . Nowadays in most underdeveloped countries people know what economic growth requires; the difficulty is to make available the quarter of the national income which it costs. 13

A reading of this lucid but brief exposition of the problem should not lead to adoption of an oversimplified approach regarding capital formation in the development strategy considered by the planner. At least two qualifications should be borne in mind: the limited comparability of the numerical estimates involved, and limitations of the overall role of capital in the development process. The limitations on the comparability of national estimates of gross product, capital formation, and household and government consumption and their elements relate to the differences in the prices used in accounting for them. These estimates are elaborated, quite naturally, by the national authorities in terms of the prices prevailing in the country. Therefore the estimates reflect the national situation regarding relative prices. For example, if the existing price level for agricultural products is low, it will affect the estimated agricultural contribution to total output. 13. W. Arthur Lewis, "Some Reflections on Economic Development," Economic Digest, Institute of Development Economics, Karachi, 3, no. 4 (Winter 1960): 3, 4.

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If prices for machinery and equipment are high, there will be an impact on the share of capital formation in the national expenditure. Experience has shown that the national differences in relative prices can be significant. Therefore the percentage shares calculated for capital formation and consumption will reflect not only the quantities involved, but the influence of prices as well. It is possible that two countries with equal quantities allocated to consumption and capital formation will show estimates in terms of their own relative prices that indicate different shares in the value aggregates of national accounting than the shares would be if based on quantity relationships alone. The direct measurement of quantity relationships between aggregates is of course not feasible since quantities of different goods and services cannot be added together. The solution for international comparisons is to use the same set of prices for the countries involved.14 As an example of the effects of accounting in different prices than those of the country involved, the shares of consumption in GDP in India, Colombia, and Kenya in 1970 were respectively 75, 75, and 69 percent in national prices and 73, 73, and 70 percent if measured at international prices. For the same year, capital formation valued at national prices was 17 percent in India, 20 percent in Colombia, and 20 percent in Kenya, while at international prices the shares were 14, 22, and 16 percent for these three countries. Similarly, the share of government consumption in India was 8 percent at national and 13 percent at international prices; in Colombia the estimates were 5 versus 5 percent and in Kenya, 11 versus 14 percent (the first figure being the one based on national relative prices.)15 A second qualification is also needed concerning the international experience regarding the role of capital. Whether it is properly measured or not, to attribute growth exclusively to capital may be very misleading for the planner. The development strategy has to provide for explicit estimates concerning the effect of other variables on growth; for example, the supply of managerial talent, the availability of skilled labor, the existence of appropriate institutional arrangements for credit, and so on. "To ignore these other variables or simply to assume that accomodating 14. I. B. Kravis, Z. Kenessey, A. Heston, and R. Summers, A System of International Comparisons of Gross Product and Purchasing Power (Baltimore: Johns Hopkins University Press, 1975). 15. Ibid., pp. 7, 8.

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changes occur, and then to attribute all of the output-increment to investment is to take a too mechanical—and too easy—view of the changes that are necessary for an increase in output." 16 In his famous study Edward Denison has shown on the basis of data pertaining to the United States and northwest Europe that important portions of growth can be related to other factors than capital formation. Denison estimated17 the percentage shares of various factors in the total contribution to the growth experienced between 1950 and 1962 by the United States and northwest Europe, as shown in the accompanying table. Sources of Economic Growth United States Growth in capital stock Growth in labor employment Education Technology enhancement Improved resource allocation Economies of scale Others (hours of work, infrastructure, etc.) Total growth per year"

13 27 15 23 9 11

Northwestern Europe 13 15 5 27 14 19

3

6

100

100

"In the given period the average annual rate of growth was 3.32 percent in the United States and 4.78 percent in northwestern Europe.

Analyzing the implications of the Denison study for the present, and urging that "an updating and expansion of Denison's classic work should be among the research topics of highest priority," Hang-Sheng Cheng believes that " a fuller understanding of the factors involved should help to reduce the level of unrealistic expectations by growth enthusiasts." 18 The interrelated nature of the demand for the various factors of production is shown in the complex model developed by Nadiri and Rosen. As a result of their research Nadiri and Rosen were able to 16. G. M. Meier, Leading Issues in Development Economies (New York: Oxford University Press, 1964), p. 102. 17. Edward F. Denison, Why Growth Rates Differ (Washington, D C.: Brookings Institution, 1967). 18. H. S. Cheng, "Investment Ratios and Economic Growth Rates," Business Review, Federal Reserve Bank of San Francisco (Spring 1974): 19.

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construct a fully integrated model of the demand for these factors and presented a generalized framework for a time-series study of production, employment, investment, and utilization behavior.19 Whatever assumption is accorded in the development strategy to the share of capital formation among the sources of growth, an important aspect of the investment strategy is related to the time horizon in which the planner attempts to maximize output and consumption. Other things being equal, it is possible to imagine a strategy of a faster overall growth rate over a period of twenty years that first has a decline or stagnation in consumption but ultimately, toward the end of the period, leads to higher consumption levels than those provided by a gradual and parallel increase in all three aggregates (capital formation, consumption, and total output). As indicated earlier, skepticism by the planner regarding rewards that appear in the distant future may be rather healthy. Schemes of accelerated growth also frequently involve a neglect of the role of consumption as a factor of growth; for example, as an incentive to labor, as a market for production, and as a testing ground for future export industries of the country. d. Sources of capital formation

Determination of the major sources of capital formation is an essential element of the development strategy, ftartly because it is convenient to distinguish between domestic and foreign sources of capital, our review of this subject follows this dichotomy. In the present section several matters concerning domestic savings will be mentioned, while issues of foreign resources will be treated later. The major problems of development are nowadays often considered in terms of the "two gaps" that characterize many developing economies, the gap in their savings and the gap in their foreign economic transactions. The mobilization of savings in various economies depends a great deal on the institutional characteristics of the countries involved. The size and share of the public sector, the availability or lack of financial institutions, and other institutional aspects play an important role in the 19. M. I. Nadiri and S. Rosen, A Disequilibrium Model of Demand for Factors of Production (New York: N.B.E.R., Columbia University Press, 1973).

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determination of saving strategies. This also renders generalized statements on the subject more difficult. However, in most situations the planner may rely on voluntary, induced (semivoluntary), and compulsory savings. Usually the voluntary savings are inadequate for the development program of the country. Therefore an important role is accorded to the tax system regarding both induced and compulsory savings. Sometimes the difference between the two is not completely clear. Nevertheless, in the first case the tax system works through incentives that encourage or discourage certain types of economic behavior in order to achieve a higher saving and investment rate. In the second case the element of incentives is secondary or nonexistent and the central consideration is to raise funds through various levies. Inflation may also be utilized as a possible source of capital formation. Changes in any of the three types of taxes always have a multiple effect, including influencing the effectiveness of the two other types of taxes as well. For example, forced savings may result in a reduction of savings that can be induced. Increased forced and induced savings may affect voluntary savings, and so on. Regarding the appropriate tax strategy for development, no better summary can be provided than the general advice of Walter Heller: As regards taxation, one of the key factors is whether additional taxes can be so levied as to tap funds that otherwise would have gone into such channels as luxury consumption or socially unproductive investment or foreign exchange hoarding, or whether they would simply displace private productive investment and essential consumption. N o categorical answer can be given then, to this question: How far and how fast can taxes be raised? Only through a careful enquiry into economic characteristics, social and cultural institutions, and prevailing standards of tax administration and compliance can an intelligent approximation be given for any given country. 20

The development strategy of a country also has to clarify the emphasis in taxation regarding the various strata of the population, the different sectors of the economy as sources of savings, and the regions in the country. These three aspects may be highly interrelated. For example, increased taxation of farmers will most affect the agricultural sector of 20. Walter H. Heller, "Fiscal Policies for Underdeveloped Economies," in Conference on Agricultural Taxation and Economic Development, H. P. Wald, ed. (Cambridge: Harvard Law School. 1954).

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the economy and the agricultural regions of the country. The sociopolitical effects of the taxation policies implied by the development strategy may be very large. The decisions concerning these matters are of a political nature, even if of greatest economic significance. As Samuelson stated, "economic science is not only neutral as to the question of the desired rate of capital accumulation—it is also neutral as to the ability of the economy to realize any decided-on rate of capital formation. . . . Hence it is . . . public policies that determine to an important degree how fast society builds up its capital." 21 e. The structure of production

The changes required in the structure of a nation's production are another major issue to be handled in the development strategy for the economy. The problem is often viewed as that of industrialization, and indeed developing countries are usually characterized by the predominance of an agriculture that employs 70 or 80 percent of the population and is backward in its production methods, social structure, and productivity. Hence the frequent distinction between "industrialized" and "nonindustrialized" nations. The reference to the existence of "technological dualism" in the developing economies also contrasts the small, often export-oriented, modem industrial sector with the large underdeveloped agriculture of the same countries. On the other hand, modern economies are highly industrialized. Whether one looks at the economies of North America, Western Europe, Eastern Europe, or Japan, the industrial sectors are invariably very large contributors to growth. As shown by various studies,22 industrialization and economic development are highly correlated. As a rule, the more developed an economy is, the more developed it is industrially, and vice versa. What is sometimes overlooked is the fact that high development levels are also correlated with highly efficient agricultural activities. The latter are often viewed as an effect of industrialization, and agricultural development is often called the "industrialization of agriculture." It is true that the great increases in agricultural efficiency 21. Paul A. Samuelson, "Public Responsibility for Growth and Stability," in The Goal of Economic Growth, E. S. Phelps, ed. (New York: Norton, 1969), p. 73. 22. For example, see A. S. Banks, "Industrialization and Development: A Longitudinal Analysis," Economic Development and Cultural Change 22 (January 1974): 320-37.

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are closely related to the availability of modern industrial inputs to agriculture (use of electricity, modern transportation services, chemicals, machinery, and equipment), but it cannot be forgotten that a highly efficient agriculture was the precondition for releasing the labor force from this primary sector to the other sectors of the economy of the developed countries. Therefore Meier's conclusion appears to be justified: Experience . . . has shown the limitations of an overemphasis on industrialization, and it is increasingly recognized that agricultural progress is a strategic element in the development process. Industrial development versus agriculture has become a false issue, and the concern now is rather with the interrelationships between industry and agriculture and the contribution that each can make to the other. It has also become apparent that the relative emphasis to be given to industry and agriculture must vary according to the country and its phase of development. 2 3

In view of agriculture's high share in population and employment and as the source of food for the whole population, a sound agricultural policy is a must for any successful development strategy. Its neglect is a cardinal sin to be avoided by all planners. Close attention to agricultural matters does not imply the necessity of following similar policies of modernization in industry and agriculture. Nevertheless, efforts to modernize agriculture and increase its output and efficiency have to be extremely important aspects of any development strategy. Naturally it is very difficult to discuss the problems of agricultural development without thinking of various groups of countries, each having different problems in this sector. For some, expensive capital goods are lacking, and others may mostly need effective training programs for farmers. Many developing countries—perhaps most of them—need a better market organization to improve their agriculture. In order to refer to the issues of agricultural development at a manageable length, within the framework of the present study only a few general points can be made. The differences in respect to modernization of agriculture and industry are related to many factors. In agriculture the task is mostly to reform and improve a sector that has been in existence for long periods in most countries. In industry, for the most part, the task is to create industries 23. Meier, Leading Issues in Development Economies, p. 285.

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that are new to the developing country. The need for and feasibility of introducing entirely new processes in industry are markedly different than in agriculture. Considering the technology available to mankind at this stage, the modernization process of the agricultural sector may be less dramatic than the industrial changes that accompany the establishment of new industries. Technological changes signified by the replacement of wooden plows with steel plows may not seem feats as impressive as the institution of car production in a country; however, their importance on the path of modernization may be great. The recognition of this fact, however, should not becloud the significance of the industrial processes of modern technology for the whole of the development strategy. In this regard the 1970 report of the Committee for Development Planning of the United Nations suggested the following: For accelerated development during the 1970s, the industrial, construction, transport, communication, commercial and other productive activities will have to expand at a rate substantially faster than the rate of increase in agricultural output, for it is the growing momentum of non-agricultural activities that will help boost the over-all average annual rate of growth to suggested levels during the 1970's and also help spread the fruits of modernization. Industry and construction, in particular, will have to serve as the sheet-anchor of the modernization process. 24

Naturally the strategic aim with structural changes in the output is to increase the efficiency of the entire system to be planned. The fostering of such aims is interrelated with the position taken regarding the prime and instrumental goals adopted for the given society, as well as with the interpretation of various resource-efficiency concepts. In this regard Kenneth Boulding's views are relevant: When per capita income is used to measure the economic efficiency of the system, the whole population is regarded an an input productive of the whole output. As a rough measure of performance this makes sense; if per capita income with a given price structure is $100 in country A and $1,000 in country B, it is likely that A is much poorer than B. However, per capita income is not the only test of economic efficiency and a rise in per capita income achieved by undesirably hard work and sacrificed leisure might represent a worsening of 24. Toward Accelerated Development: Proposals for the Second United Nations Development Decade (New York: United Nations, 1970), p. 10.

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economic welfare. Furthermore, population efficiency is not the only significant resource-efficiency concept, although it is the most important. Land-efficiency (output per acre) is also of interest in certain cases; with a given population on a given land area an increase in per capita income implies an increase in per acre income, whether stemming from increased yield per acre of crops or a shift to more productive industrial employment. The concept of capital-efficiency is more difficult, but not meaningless: if the same income can be obtained with a smaller capital stock this is a clear gain. Here, capital efficiency is measured by the reciprocal of the average period of production, and a capital-saving improvement is one which shortens the production period, or enhances the capitalincome ratio, for a given income.25 The development strategy has to specify those structural shifts that are preferable within the given time period. The determination of such shifts may be difficult owing to several factors, including the insufficiency of theoretical knowledge and the lack of data concerning the actual situation. For example, there may not be enough statistical data available to analyze the land/labor ratio, the capital/land ratio, and other ratios. Since a major concomitant of structural changes is shifts in employment, the lack of basic information may hamper evaluation of the likely size of employment flows from one sector to another, Decisions regarding changing the structure of output are much complicated by various factors of underdevelopment. To illustrate this we offer two comments by Higgins and another by Mellor. Higgins, analyzing the relationship between capital and land in agriculture, points to the surplus agricultural labor as a complicating factor: The only way to overcome the redundancy of labor in the rural sector is to increase the supply of the scarce factor. But the immediately scarce factor is land. The only way to raise the marginal productivity of capital is to increase the ratio of land to labor a great deal. . . . The size must be raised to 20 or 200 acres so that modernization becomes profitable. . . . For this kind of progress, however, capital becomes the scarce factor again. It requires heavy investment in both the industrial and agricultural sectors. Neither agricultural improvements on the present holdings nor industrialization will, by itself, break through this particular vicious circle. Industrialization without an agricultural revolution brought the underdeveloped countries [to] where they are.26 25. Kenneth E . Boulding, " S o m e Difficulties in the Concept of Economic Input," in Output, Input and Productivity Measurement, Studies in Income and Wealth, vol. 25 (Princeton, N.J.: N.B.E.R., Princeton University Press, 1961), p. 334. 26. Benjamin Higgins, Economic Development, Principles, Problems and Policies, rev. ed. (New York: Norton. 1968). p. 304.

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While there can be some quarrel regarding his diagnosis and doubts about the practicability of this therapeutic suggestion, it is clear that the long-range solutions to development have to advance both agriculture and industry, no matter how difficult a task that is. Another point raised by Higgins, again used here to indicate the complexity of the requirements regarding any development strategy, is the relationship between labor-intensive methods and capital/output ratios, "A good many small-scale and labor-intensive activities have high capital-output ratios," and one cannot assume "that if the capitallabor ratio is reduced the capital-output ratio will be reduced as well. . . . One of the many 'vicious circles' [with which] the road to development is paved" is this one: underdeveloped economies cannot afford "labor intensive techniques, in the sense of low capital-labor ratios, because they are too expensive in terms of capital—they have high capital-output ratios." 27 The point raised by Mellor deals with the relations of urban employment to food requirements and with their efforts. As he formulates it, growth of the nonagriculture sector increases the demand for food. Relative agricultural prices will then rise in the face of the inelastic aggregate supply characteristic of technologically stagnant agriculture. As a result resources will be transferred back to the agricultural sector. . . . In these circumstances, the greater the increase in employment of low-income laborers, the greater the increase in demand for food, the greater the increase in agricultural prices, and the greater the resource transfer to agriculture. 28

A longer list of these sorts of dilemmas for development strategy could be furnished. The structure of production is clearly one of the most difficult areas in which to make progress. Nevertheless, unless the strategy involves attempts to break out from the various vicious circles, stagnation and collapse would remain the alternative.

27. Ibid., p. 315. 28. John W. Mellor, "Accelerated Growth in Agricultural Production and the Intersectoral Transfer of Resources," Economic Development and Cultural Change 22 (October 1973): 10.

VIII Development Strategies: International and Social Aspects I N T H I S C H A P T E R certain international economic aspects relevant to the formulation of development strategies are discussed: matters pertaining to international trade; matters related to international financial flows; and transfer of technology from abroad. The subsequent discussion concentrates on some important social aspects to be considered during the elaboration of development strategies: income and wealth distribution; minimum levels of consumption; full employment; equalization of opportunities; welfare policies; population policies; popular participation; and other social aspects.

1. International

economic

aspects

a. Policies regarding international trade Development strategies cannot serve their purpose unless the trading policies suggested for the given nations are incorporated in them. Today hardly any country can aim at autarchy, but at each development stage a development strategy may foster increased, unchanged, or decreased participation in the international division of labor. Some very large countries like the United States, the Soviet Union, or China may have a relatively low export/national product ratio although their share in world trade may be significant. In the case of the Soviet Union, during the first five-year plans the export/national income ratio actually declined from 3.5 percent in 1930 to 0.5 percent in 1937. In Levine's analysis, "given the large, diverse resource base of a continent-size country, the Soviet Union might be expected to experience a low and decreasing level of foreign trade as it industrialized. In the United States,

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the ratio of exports to national income fell from 7.5 percent in 1913 to 4 percent in 1958, despite attempts of the government, during much of this time, to increase the role of trade." 1 As a practical matter, the volume of trade of these large economies increases at a significant rate. The declines experienced in their export/ national income ratio were caused by more rapid increases obtained in the growth of their national income compared to their exports. In absolute terms, foreign trade is an activity of increased significance and one that deserves great attention even in the planning of the largest economies. In the case of smaller countries the usual pattern is an increased reliance on the international division of labor, and the existence of higher export/national income ratios is common. Whether the nation is small or large, appropriate export and import policies are key ingredients in a strategy for further development. Export policies most often aim at export promotion through measures like the following: prevention of excessive domestic demand for exportable goods; granting of tax advantages to export industries; government help in market research and sales promotion abroad; choice of technologies (and investments in general) with export potentials in mind; imposition of export commitments on industries; and direct subsidies to exporting industries. In the field of imports, the national policies frequently pursued involve the restriction of imports and the promotion of import substitution by domestic production. Measures to achieve these goals include: high tariffs on many imported goods; quotas or other licensing procedures regarding imports; regulation of the availability of foreign exchange to importers; investments in import-substitutive technologies and production; and high taxes on imported goods (especially luxury consumer goods). Needless to say, the above listings of possible export/import policy measures are illustrative, and no stand is taken concerning their general applicability in development strategies. The determination of the usefulness of any of these measures is feasible only on the basis of a concrete 1. H. S. Levine, "The Effects of Foreign Trade on Soviet Planning Practices," in International Trade and Central Planning, A. A. Brown and E. Neuberger, eds. (Berkeley: University of California Press, 1968), p. 258. The percentages of exports to national income were 4.1 percent for the Soviet Union and 4.7 percent for the U.S. in 1972.

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analysis of the particular situation in question. Only from a thorough evaluation of the comparative advantages and the effects of the existing or planned protection can useful trade policies be developed for the national plan. The required studies should extend to an in-depth analysis of comparative advantages. As Bela Balassa has suggested: Instead of considering the comparative advantage of a country in, for example, clothing, we have to separately indicate its advantages and disadvantages in cotton growing, spinning, weaving, and clothing manufacturing. Comparative advantage will then be defined with reference to the costs of processing at a given stage of fabrication rather than in terms of the sum of processing costs at all stages; thus, a country may import cotton cloth but export raw cotton and clothing.2

Similarly, the degree of protection has to be analyzed in detail, particularly regarding the nominal and the effective protection by the country. The former is the percentage excess of the domestic price over the world market price—owing to the protective increases regarding the given product. The effective rate of protection is the percentage excess of the value added over a similar value added abroad—owing to protective measures regarding the given product and its input. In Balassa's formulation, "the nominal rate of protection pertains to the product and affects decisions taken by consumers, the effective rate of protection indicates the joint effects on the processing activity of tariffs on the product itself and on its inputs, and it influences the producer's choice". 3 b. International financial aspects

A development strategy also has to incorporate policies pertaining to international financial flows and related matters. For example, positions have to be elaborated concerning the following: foreign bilateral governmental assistance; foreign private investment in the country (including investment by multinational corporations); utilization of international multilateral assistance; measures affecting the terms of trade of the country; and participation in regional groupings of countries. 2. Bela Balassa, The Structure of Protection in Developing Countries (Baltimore: Internationa] Bank for Reconstruction and Development, Johns Hopkins University Press, 1971), p. 3. 3. Ibid., p. 4.

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It is evident that here again the positions to be taken will depend on the circumstances of the country for whose plan the strategy is being elaborated. Therefore only a few remarks are in order on these items. In respect to foreign bilateral assistance, merely its significance and the problem of attached conditions are mentioned. In many cases, foreign bilateral assistance has a much smaller effect than it is convenient for donor and recipient alike to admit. This is partly related to the large needs for assistance and the comparatively low share that foreign aid will cover. Other factors include difficulties in aid administration, inefficiencies in utilization of the assistance, and problems related to the conditions of aid as determined by the donor. Policies toward foreign investment are often determined solely on a narrow political basis, frequently with the main emphasis on the country's aspiration for independence. Depending on the country's size, economic power, and other factors, the existence of a large foreignowned segment of the economy may cause various problems for the planner and therefore the development strategy may aim at curtailing the scope of these foreign-based activities. No country is immune from apprehensions in this regard. The recent referendum in Switzerland (rejected by the Swiss voters) dealt with the influx of foreign workers to that country and its influence on the country's "Swiss" character. The studies authorized in the United States concerning foreign investment in the country are another example. However, the solely "political" or "independence-seeking" approach to this matter seldom gives adequate consideration to all factors involved. One factor often neglected is the significance of not being cut off from the technological innovations characteristic of certain big international corporations. Therefore during the elaboration of a development strategy it is necessary to consider the long-term nature of the capital and technological needs of the country. Since in this area short-term fluctuations in governmental approaches can be very harmful, the policies have to be long-term and gradual, consistent, and firm in character. Reversals of policies may be feasible, but "improvisations" for the sake of momentary political benefit are highly undesirable. The use of international multilateral assistance is generally much less problematic. Most importantly there is a lack of political problems related to its acceptance, because problematic conditions are usually not associated with these schemes. Very complex issues may be involved in determining a country's

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policy on measures affecting its terms of trade. One is the relations to commodity agreements, either as a producer or as a consumer nation. Another pertains to the seeking of favorable treatment abroad for the exported goods of the country, including manufacturing goods. A third is the policy to be adopted regarding imports from various regions, trading blocs, and currency spheres. Policies regarding shipping, insurance, and so on are also required in the context of the development strategy of the country. The participation or the attitude of the country vis-à-vis groupings of countries is also a vital consideration when the strategy is elaborated. Groups such as the European Economic Community (Common Market), the Andean Group, and the CMEA in Eastern Europe are usually to be reckoned with when planners are adopting an overall national strategy for the plan. In any event, harmonization of effort may be desirable. In Asia the Asian Highway, the Asian Development Bank, and other projects and bodies helped to foster regional cooperation among countries. The first working group of Asian planning experts on the regional harmonization of development plans in 1967 summarized its findings in the following manner, ' 'The strategy of plan harmonization was considered in the context of the obstacles faced by the developing countries in the ECAFE region in accelerating their growth within the national frontiers. The Working Group noted . . . that plan harmonization . . . could form an important element in the strategy of accelerated economic growth." 4 c. Transfer of technology from abroad

Among the internationally related strategy issues, prominent place must be given to the country's policy on the transfer of technology. Identification of the domestic gaps in knowledge may lead to a set of major target areas in which the infusion of foreign technology may be particularly helpful. Then recognition may need to be given to the fact that "technology is an essential input to production, and as such it is bought and sold in the world market as a commodity in one of the following forms: (a) In the form of human labor, usually skilled and sometimes highly skilled and specialized manpower, with the capacity to 4. Economic Bulletin for Asia and the Far East (June 1967): 3.

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make correct use of equipment and techniques, [and] (b) in the form of information, whether of technical or of a commercial nature, which is either readily available in markets or subject to proprietary rights and sold under restrictive conditions." 5 Economic development levels and technological maturity are highly correlated. The United Nations' advisory committee on the application of science and technology to development concluded that "the growing gap between the amount of research and application in developed and developing countries, and between their levels of technology is one of the major factors in the growing gap in living standards . . . the overwhelming proportion of the world's intellectual capital, as well as its physical capital, is applied towards meeting the needs of the highly developed countries." 6 In view of its importance, policies regarding technology transfer from abroad need to take into account the indigenous capacity for science and technology in the country, including an evaluation of the existing gaps and the absorptive capacity available. As is often pointed out, there are many problems in the transfer of technology. For example, the United Nations Advisory Committee felt that "the transfer of technology, though necessary, is not an alternative to the development of local science. It is difficult for a developing country without a science and technology capacity of its own, and particularly without the trained people involved, to know what useful technology exists elsewhere, to understand it, to select it, to adopt, to absorb, to repair and maintain, and to operate." 7 In addition to this the scientific institutions of the less developed countries are often unable to absorb and properly use the scientists in the country, who frequently have to direct their energies into the study of problems little related to their countries' development ("internal brain drain"). Also there is the problem of the emigration of scientists to more developed countries ("external brain drain"). The applicability of the achievements of science and technology may be curtailed by the following factors: 5. Guidelines for the Study of the Transfer of Technology to Developing Countries (New York: United Nations. U N C T A D , 1972). p. 5. 6. Official Records of the Economic and Social Council, 41st session, suppl. no. 12, para. 7. 7. Science and Technology for Development (New York: United Nations, 1970), p. 22.

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1. Current modern technologies emphasize capital-intensive rather than labor-intensive processes. 2. Available technology is geared toward large-scale production, while markets in the developing countries are more limited. 3. Product design (both regarding machinery and equipment and consumer goods) is applicable to developed rather than developing environments. 4. World technological and scientific efforts are oriented toward industries (computers, etc.) of little immediate future in less developed countries. In addition to the need to develop appropriate overall policies regarding the transfer of technology, countries also have to establish policies concerning the selection of techniques for given projects. Project evaluation poses complex technological and economic problems. Even if capital-intensive technologies are not the only ones available, there are many difficulties involved: such techniques m u s t . . . be made accessible, but the present organization of the technological market in Latin America makes this exceedingly difficult. It is a highly imperfect seller's market dominated by dealers in equipment, and foreign consultants, and subject to pressures from powerful vested interests which in their advertising and propaganda skillfully play up such arguments as the need of catching up with the most up-to-date solutions abroad and becoming competitive. 8

These and other problems make necessary a systematic approach and therefore the establishment of national policies regarding the transfer of technology as part of the overall development strategy of the nation. 2. Some social aspects of development

strategies

There can be an almost infinite range of social aspects relevant to development strategies. A few are selected here and discussed briefly. The Biblical origins of the saying "Man does not live by bread alone" remind us of the ancient understanding that economic aspects are not the only important facets of the human condition and progress. Today the social aspects of our existence are often characterized by the catch8. Ignacy Sachs. "Selection of Techniques: Problems and Policies for Latin America." Economic Bulletin for Latin America 15, no. 1 (1970): 20.

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phrase "quality of life." In the present section, policies regarding various social issues are mentioned in the context of overall strategies for planning. Naturally it is realized that such issues cannot be tackled without serious attention to crucial economic problems. As John D. Rockefeller, III put it, "Certainly . . . there can be little hope for the higher values that give life quality unless the basic physical necessities are provided for. Without the minimum needs of food, clothing, and shelter, any discussion of the quality of life is essentially irrelevant. Many centuries ago, the Roman statesman Cato made the point very simply: 'It is a hard matter, my fellow citizens to argue with the belly, since it has no ears.'" 9 On the other hand, unless development strategies place adequate emphasis on the issues of social ramifications, they will have to fail in their purely economic aspects as well. The significance of and the problems with the social aspects were stressed by an ECLA study concerning Latin America: It is disconcerting to find that the high levels of development attained by the countries implicitly accepted as models in the "closing the gap" slogans do not exempt them from social crises that may in their way be as serious as those of the low-income countries. It sometimes seems that the low-income countries of Latin America are prematurely acquiring the social problems of the affluent societies, along with their patterns of consumption and urbanization, while the high-income countries are rediscovering that they have not yet extricated themselves from the problems of marginality and disfunctional reactions to social change supposed to be associated with under-development. 10 a. Distribution of income and wealth

Although there are significant differences among countries in the distribution of income 1112 and wealth, 13 the striving for "better" or 9. John D. Rockefeller, III, The Second American Revolution (New York: Harper and Row, Perennial Library, 1974), p. 200. 10. Social Change and Social Development Policy in Latin America (New York: United Nations, ECLA, 1970), p. 6. 11. W. Beckerman and R. Bacon, "The International Distribution of Incomes," in Unfashionable Economics: Essays in Honour of Lord Balogh, P. Streeten, ed. (London: Weidenfeld and Nicholson, 1970). 12. I. B. Kravis, "A World of Unequal Incomes." Annals of the American Academy of Political and Social Science, 8 (September 1973): 26. 13. Review of Income and Wealth, June 1973 special issue on the distribution of wealth (articles on Britain, the United States, Ireland, and Canada).

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"more equal" distributions is fairly common. Regarding the developing countries the Committee for Development Planning of the United Nations suggested that on grounds of both social justice and efficiency, due attention should be paid to the consequences of a continued high degree of concentration of economic power. . . . It is a fallacy that more rapid growth and reduction of inequalities in income and wealth are necessarily competing elements. . . . Through an appropriate combination of measures . . . a better distibution of income and wealth can be attained without endangering efficiency and growth incentives; in fact it can energize the whole nation and speed up the growth process. 14

On the American scene Paul Samuelson recently voiced the following view, "I belong to the middle group who think that improving minimum standards of living for those at the bottom is a desirable goal. And who think that a gradual reduction in inequality and expansion of equality of opportunity is both desirable and feasible." 15 Hollis Chenery and his associates from the World Bank and the University of Sussex also came to the conclusion that the nature of poverty in developing countries and the inadequacy of social progress so far should lead to a povertyoriented development strategy for these nations. 16 b. Minimum levels of consumption

Jan Tinbergen summarized eloquently the central social problem of the greatest masses on earth: We must realize that most of the people in Asia and Africa and many in Latin America are living at a starvation level. Their consumption is some 10 per cent of that in developed countries and they are in a constant fight against hunger and illness. Everything in their budget—food, clothing, housing, education, amusement—is far below adequate standards as we see them . . . It is because such basic human issues are involved for such a large number of people that this problem is so important. It deserves to be our main preoccupation. 17 14. United Nations, Committee for Development Planning, Towards Accelerated Development: Proposals for the Second United Nations Development Decade (New York: United Nations. 1970). p. 11. 15. Paul A. Samuelson. "Inequality." Newsweek. December 17. 1973. p. 84. 16. H. Chenery, J. Duboy, and R. Jolly, eds., "Redistribution with Growth: An Approach to Policy," manuscript, August 1973. 17. Jan Tinbergen, Shaping the World Economy (New York: Twentieth Century Fund, 1962), p. 10.

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In keeping with this idea in development strategies, central importance should be attached to fostering food consumption, housing, and health. In food strategies the significance of protein needs often has to be stressed because of widespread protein deficiencies, especially among children. Regarding housing, the setting of basic minimum standards for dwellings may be important. These standards have to take into account factors such as the country's climate, customs, health and sanitation requirements, space, density, and costs. The role of housing policies also has to be stressed in connection with their indirect effects. "Improvement in housing and community facilities is not only valuable by itself but is also a means for raising standards of health, education and productivity as well as for eliminating the most glaring inequities. . . . Priorities with regard to better housing and community facilities for low-income groups and to remedy the ills of rapid, unplanned and uncontrolled urbanization are higher therefore than has been thought in the past on basis of purely economic criteria." 18 Actually the indirect economic effects of housing construction are also considerable (through the stimulation to the building-materials industry, etc.). The major problem, however, is to balance the investment needs for housing against other requirements for investments. It is often suggested that realistic hopes for housing improvements can release energies in the population otherwise not available for development, "The very act of producing housing and related facilities, to whatever extent it utilizes labor and materials that would be otherwise not mobilized for production or generates savings which would not otherwise be withheld from consumption, adds to the gross national product, increases the level of investment, and raises the people's real incomes and levels of living." 19 c. Full employment

Employment strategies are extremely important both socially and economically. From the social point of view it is hardly necessary to 18. Towards Accelerated Development, p. 14. 19. Methods for Establishing Targets and Standards for Housing and Environment Development (New York: United Nations. Department of Economic and Social Affairs, 1968), p. 14.

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emphasize the significance of eliminating unemployment and underemployment, with all their debilitating consequences. It is inconceivable for the broadest masses to achieve self-realization and self-respect without progress in this respect. From the economic point of view the availability of great manpower reserves for development can be an important source for increasing production, consumption, and investment. The employment absorptive capacity of the economy may depend on many factors, including the level of investments, the overall growth rate, the population situtation, and others. Particularly important is the absorptive ability of agriculture, since often much of the structural unemployment is found in this sector. In this context land reforms may be part of the strategic thinking about employment opportunities. d. Opportunities and social and educational mobility

Equalization of opportunities and fostering of social and educational mobility are important in order to achieve increased social justice, to utilize the talents and resources of the population, and to mobilize support for the development effort. Education is a principal means in helping to achieve the goals in this area; the establishment of legal safeguards against discrimination by reason of race, color, sex, or religion is another important instrument. An ECLA study in 1969 stressed the need for " a radical expansion of the opportunity system and, hence, greater possibilities for social mobility, especially vertical mobility in the sense of upward movements in jobs and functions. This involves, in addition to changes in the general framework, much more intensive effort and, in particular, selective action to improve access and lengthen attendance at education institutions." 20 Among the difficulties involved are the costliness and the length of the educational process, which yields results only over time. However, education is also recognized as " a powerful instrument for economic growth" 21 that can contribute to the development process very significantly. 20. Economic Survey of Latin America, 1969 (New York: United Nations. Economic Commission for Latin America, 1970), p. 30. 21. Towards Accelerated Development, p. 12.

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e. Policies pertaining to the family, women, children and youth, the aged, and the handicapped

Welfare of children and youth, promotion of the development of women, and strengthening of the family are all major aspects of social policies and thus important ingredients of overall development strategies. The needs in these areas are both material and psychological. Policies in these areas affect the vast majority of mankind. About half of the earth's population consists of women, yet there are few societal situations in which their role even approximates that of the men. True progress is inconceivable without fundamental changes in this regard, and hence development strategies cannot be oblivious to the situation of women. The significance of children and youth of both sexes is exemplified by the population in 1965 in Latin America, where 30.3 percent of the entire continent's population was between 10 and 24 years old (i.e., not counting children below the age of 10). However, it would be erroneous to restrict our thinking regarding the problems of women, children and youth, the aged, and the handicapped to the less developed parts of the world. Large-scale tasks confront most societies in these respects, including the more developed ones of the East and West alike. Planners have particular responsibility for adequate programs in these areas, because the automatic forces of the market do not lead to their spontaneous resolution in the West, and in the East the preoccupation with economic growth often deflects attention from problems in these spheres. The range of possible policy measures is very wide. From educational efforts regarding the status of woman through legislative action to eliminate discrimination against them, it extends to family support measures, including family allowances, welfare services, and the like. f. Population policies

Assessment of future population growth is one of the basic steps in establishing a development strategy. The establishment of a population policy consistent with the overall thrust of the strategy is clearly of greatest import. Or, stated in reverse, a development strategy cannot be realistic unless it is based on the right premises regarding population and is consistent with the national objectives concerning population growth.

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In many situations the high growth rates of the population are of concern as impediments to rapid per capita economic growth. Therefore the United Nations Committee for Development Planning, in its work on the proposals for the Second United Nation's Development Decade, assumed that in such situations "measures would be taken to reduce the average birthrate, as a minimum, at an equal pace with the declining average mortality rate so that population growth is prevented from accelerating. In fact the consequences of continuing with rates of population growth of anything like the present levels for more than a decade or two would in many countries be very serious." 22 In addition to taking a stand on overall population growth, development strategies must also take into account problems relating to the urban/rural distribution of the population, the issues of large urban centers versus the smaller towns, and so on. The measures possibly envisaged may range from family planning to urban planning. g. Popular participation in development

The needs for securing popular participation in the development process are manifold. To a considerable degree the success of the development effort may depend on the active participation of the masses and thus the promotion of the goals selected for this effort will become "more efficient" through involvement of the people. But, at least equally importandy, the nature of man and the realization of his potential call for active participation in the formulation of his own destiny. Judicious policies that provide for wide participation may be helpful both for defending societies from excessive individualism and for safeguarding the individual from engulfment by society. Popular participation is also important for avoiding the development of totalitarian situations regarding strategy formulation and implementation. The strengthening of the relevant democratic processes may therefore be an important ingredient of the development strategy itself. The following comment on the Latin American scene is relevant to the points in question, where the states sometimes tried "to assume responsibilities for detailed regulation of the societies and economies that would strain the capacities of even the most highly developed planning and administrative machinery. This situation is notoriously stifling to popular initia22. Ibid., p. 7.

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tive and conducive to the diversion of an excessive share of national resources into the support of a central bureaucracy." 2 3 h. Environmental and resource policies In view of the general familiarity with the environmental issues of the day, there appears to be little need to elaborate on the usefulness of incorporating environmental policies in the general framework of a development strategy. These policies should attempt to give guidelines regarding the bearing of costs associated with protection of the environment, the ways these costs should be assessed, and the manner in which damages to the environment should be avoided. Another question posed in Europe and in need of some sort of answer regarding the development strategies of many nations is that " a general demand for high quality environment does not seem to exist yet. Can, therefore, some limits be imposed on production and transport for some reason whose general validity has not yet been recognized?" 24 Although in some countries the problems of environmental ills appear to be matters of the more distant future, Reed's warning may apply to their situations as well; "Given the staggering growth rates of technological" and population-based problems, I suspect that within a decade all will realize that the main problems of the environment do not arise from temporary and accidental malfunctions of existing economic and social systems." 2 5 Together with its human resources, the natural resources of a country are a principal asset of an economy. At present "the economic life of developing countries . . . revolves largely around the exploitation and use of their natural resources, in agriculture, mining, industry and transport, and natural resources policy is of all-pervading importance" in these countries. 26 The role of natural resources can be very important in industrialized countries as well, whether the use of domestic 23. Social Change and Social Development in Latin America (New York: United Nations, Economic Commission for Latin America, 1970), p. 9. 24. Symposium on Problems Relating to Environment (New York: United Nations, Economic Commission for Europe, 1971), p. 30. 25. N. P. Reed, "Kilroy is Everywhere; Everywhere is Here," New York Times, August 5, 1974. p. 31. 26. Natural Resources of Developing Countries: Investigation, Development and National Utilization (New York: United Nations, Department of Economic and Social Affairs. 1970), p. 3.

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resources or the importing of resources from abroad is characteristic for them. In a sense, owing to the greater capital accumulation in these countries and the larger store of established technology, the role of resources in developed economies may be deemed "quantitatively less," 27 especially since *'a much larger proportion of employment and economic activity . . . is concerned with distribution, finance and the provision of public and consumer services that make relatively little call on natural resources." 28 Nevertheless the vulnerability of the industrialized countries to problems related to resources is very considerable, as has been demonstrated by the problems related to oil in recent years. The development strategy of a nation must deal with natural resources as embodied in products (minerals, coal, oil, gas, water, forests, fish, agricultural products, livestock, etc.), as well as with natural resources existing in the form of amenities or situations (harbors, waterways, waterfalls, fertile soils, beaches, etc.). The important difference between these types of resources lies in the transportability and the feasibility of buying and selling the former and the lack of these possibilities for the latter. Accordingly, the nation's development strategy may deal with these two categories of resources in different manners. Whatever treatment is accorded to them, the policies in this area have to be considered in the framework of the overall development strategy of the country. As was recommended by the advisory committee of the United Nations on the application of science and technology to development, "the development of natural resources is only one aspect of a planning programme and it must ultimately become part of the broader planning effort and be coordinated with other aspects of planning, to ensure that they all fall within the framework of the established programme." 29 i. Other social aspects

Among the numerous other social aspects that a development strategy needs to consider is the approach to be taken regarding military expenditures and the risks of war. The orders of magnitude involved are very large. In 1961 the countries of the world spent an estimated $120 billion annually for military purposes (calculated at 1970 prices, about 27. Ibid. 28. Ibid. 29. Ibid., p. 4.

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$150 billion). By 1970 the annual military expenditures in the world exceeded $200 billion. Experts believe that by 1980 these expenditures may reach the level of $300-350 billion annually (calculated at 1970 prices). Between 1961 and 1970 about $1,870 billion went to military expenditures throughout the world. The expected outlay between 1971 and 1980 is around $2,650 billion.30 The socioeconomic and security aspects of these vast outlays are equally important. From an economic point of view, the lost opportunities in civilian fields come to mind. In the social context, the various aspects of militarization of life, research, government, and production can be mentioned. Finally, concerning international security the warning of the late U Thant in 1970 should be remembered: While progress in disarmament has been slow, science and technology—in particular nuclear technology—have advanced at a formidable pace. Tremendous material resources and human creativeness have been applied to destructive rather than constructive purposes; and despite repeated assurances to the contrary the world becomes less secure with every new generation of more sophisticated weapons. This situation not only poses a continual threat to international peace, but also has a deep unsettling effect on human society, because of the dangers, anxieties and burdens it generates. 31

The consultative group of the United Nations on nuclear weapons called attention to the following estimate: In the case of an air-burst of a twenty-megaton bomb, the heat which would result would be intense enough to start fires as far as thirty kilometres from a point of detonation, depending on how clear the atmosphere was at the time, and could endanger the lives of people in an area with a radius of nearly 60 kilometres. It has been estimated that such a device, if exploded over Manhattan, would, in the absence of shelter or evacuation problems, probably kill 6 million out of New York City's 8 million inhabitants, and lead to an additional one million deaths beyond the city limits.32 30. Economic and Social Consequences of the Arms Race and of Military Expenditures (New York: United Nations, 1972). 31. The United Nations and Disarmament, 1945-1970 (New York: United Nations, 1973), p. v. 32. Effects of the Possible Use of Nuclear Weapons and the Security and Economic Implications for States of the Acquisition and Further Development of these Weapons (New York: United Nations. 1968). p. 12.

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National development strategies that disregard the socioeconomic and security implications of the arms race are certainly less than balanced. While a large share of the arms race is financed by the military expenditures of the United States and the Soviet Union, the burdens on other countries are not inconsequential. It is sufficient to refer to the military expenses of the countries in the Middle East to emphasize this problem. For many other countries on all continents, the stand taken on military expenditures is of similarly great consequence for their development possibilities. 3. Summary As must be clear from the discussion of the various issues in the preceding and the present chapters, the elaboration of an appropriate development strategy is a most complex undertaking. If it appears to be an almost impossible task, the impression is not entirely misleading. However, the complexity of the task does not relieve the planner from his obligation to participate in the formulation of the development strategy. It can be firmly stated that without a set of interrelated national objectives, here called "development strategy," no planning effort can hope for substantial success. In fact, without the existence of such a strategy it is difficult to evaluate the success or failure of the whole planning effort. Naturally the various economic aspects (domestic and international) as well as the different social aspects reviewed above were meant only as illustrations of the kinds of issues to be dealt with in a development strategy. The actual framework and its constituting elements will differ from country to country and from one phase of development to another. It is interesting to note that even though no overall planning machinery exists in the United States, in 1960 President Eisenhower's Commission on National Goals submitted a report published under the title, Goals for Americans.33 The report was structured in the following manner: part I dealt with "goals at home," part II dealt with "goals abroad," and part III was referred to as "a financial accounting." The 33. Englewood Cliffs, N.J.: Prentice-Hall, 1960.

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goals at home were discussed under the following headings: the individual, equality, the democratic process, education, the arts and sciences, the democratic economy, economic growth, technological change, agriculture, living conditions, and health and welfare. In July 1970 another report entitled Toward Balanced Growth: Quantity with Quality was published, which was prepared by the National Goals Research Staff established in the White House in July 1969.34 This document grouped the problems discussed in the following manner: the emerging debates, population growth and distribution, environment, education, basic natural science, technology assessment, consumerism, economic choice and balanced growth, and toward balanced growth. Following are some of the points contained in the statement by President Nixon, upon announcing the establishment of the National Goals Research Staff within the White House on July 13, 1969, "The functions of the National Goals Research Staff will include . . . forecasting future developments . . . measuring the probable future impact of alternative courses of action . . . estimating the actual range of social choice." The statement also emphasized that "we can no longer afford to approach . . . the longer-range future haphazardly" and that " w e have reached a state of technological and social development at which the future nature of our society can increasingly be shaped by our own conscious choices." 35 One should add that not only the feasibility of making socioeconomic choices exists in today's world but that, more importantly, the making of such decisions is increasingly unavoidable in all countries of the world. "Automatic" socioeconomic processes are becoming inadequate for coping with the problems and the alternatives to handle them. Hence the need for national goals, development strategies, and planning in general.

34. Washington, D.C.: U.S. Government Printing Office, July 4, 1970. 35. Ibid.

Basic Readings for Part 3

Fromm, E. " T h e Nature of Man and Alienation." In Marx's Concept of Man. New York: Frederick Ungar, 1968, pp. 24-59. Mellor, J. W. "Accelerated Growth in Agricultural Production and the Intersectoral Transfer of Resources." Economic Development and Cultural Change 22 (October 1973): 1-16. National Goals Research Staff. Toward Balanced Growth: Quantity with Quality. Washington, D.C.: U.S. Government Printing Office, 1970, pp. 1-167. Sachs, I. "Selection of Techniques: Problems and Policies for Latin America." Economic Bulletin for Latin America 15 (1970): 1-34. Scitovsky, T. Papers on Welfare and Growth. London: George Allen & Unwin, 1964, pp. 209-231, Scitovsky, T. The Joyless Economy. New York; Oxford University Press, 1976. United Nations. Effects of the Possible Use of Nuclear Weapons and Economic Implications of the Acquisition and Further Development of Nuclear Weapons, in the Report of the Secretary General transmitting the Study of his Consultative Group. New York: United Nations, 1968: 1-30. United Nations, Committee for Development Planning. Towards Accelerated Development: Proposals for the Second United Nations Development Decade. New York: United Nations, 1970, pp. 4-15. United Nations, Economic Commission For Latin America. "Basic Aspects of Latin American Development Strategy." In Economic Survey of Latin America, 1969. New York: United Nations, 1970, pp. 5-39.

The Elaboration of Development Plans we dealt with the possibilities and limitations of planning. Part 2 contained a discussion of the institutional aspects of planning, and part 3 reviewed the aims, strategies, and policies of development planning, Thus first the usefulness and indeed the inevitability of planning was established. This was followed by setting up the institutional framework of planning. The third step involved the selection of overall national objectives in the framework of development strategy. The elaboration of the development plan is the phase discussed in the present part of the study. After the willingness to plan is demonstrated, the institutional framework is established, and the overall national objectives are reasonably clarified, the elaboration of the plan can start in earnest. In our interpretation of his role, the planner is already an active participant in the phases preceding the work on the elaboration of the plan. His contributions to the understanding by the public and the leadership of the potentials and limitations of planning can be significant. The changes in the institutional arrangements might also benefit from his advice. His involvement in the formulation of the overall development strategy can be equally important. Nevertheless, in all of these phases he will be one of many actors on the scene and probably one overshadowed by the politicians playing the main roles. In the phase to be discussed now, elaboration of the plan, the planner himself plays the central role. The elaboration of the plan is a complicated technical task. In our rendering of the process, the planner is first involved in the screening of all evidence relevant to the elaboration of the plan. After assembling the evidence he must consider selection of the best techniques for putting together his plan and must then actually construct the plan. In terms of IN PART 1

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the conceptual sequencing of the task—the willingness to plan, the appropriate institutional setting, and the overall development strategy already taken for granted—the detailed screening of the evidence amounts to the collection of the "building materials" for the plan. It appears to be useful and convenient to think of the building materials of the plan as emanating from four main sources: (a) the population (directly voicing its needs and indirectly—for example, through the market—expressing its wishes regarding the future), (b) science (natural and social sciences, of course including economics), (c) statistics (offering quantitative measures of the processes to be planned, bringing in both historical and international evidence to be reckoned with), and (d) the political leadership (basing its desires regarding the future on the three previous sources but also on considerations peculiar to it, such as power). Chapter 9 deals primarily with the systematic analysis of the aspirations of the population. Chapter 10 deals with the use of one element of the evidence that science can furnish to the planner—the uses of economic theory and models of growth in planning. The other forms of scientific evidence and the use of statistics are reviewed in part 5. Matters pertaining to political priorities are taken up in part 7.

IX Systematic Analysis of the Aspirations of the Population for Planning Purposes analysis of the desires and aspirations of the population is a large-scale task of great importance to the planner. Unfortunately, this work is rarely purposefully organized. Often even the available information is inadequately utilized in the planning process. Still more often there is a profound lack of basic information and a profound neglect of the task of studying popular desires as a whole. This can be only partly explained by the complexity of systematic studies of this sort. It is true that a systematic evaluation of the aspirations of the population would need to involve all major aspects of the strategy underlying the plan. If one recalls only the number of factors described in earlier chapters of this book under the headings "domestic economic aspects," "international economic aspects," and "social and other aspects" (regarding each of which the population may cling to certain beliefs and wishes) the magnitude of the task already can be visualized. An additional complicating fact is that the "desires of the population" are far from uniform. Various strata of the population have different views, values, and desires, and therefore their attitudes toward the necessary changes and the tasks to be included in national plans may vary considerably. On many subjects a multiplicity of views may need to be explored, analyzed, and evaluated by the planner. This is, of course, one reason why planners may shy away from the task. Another, politically related reason is that decisions already taken by the political leadership may make it meaningless for the planner to try to ascertain the population's view on the given strategy issue. The planner can utilize direct and indirect means to study the desires T H E SYSTEMATIC

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of the population. Surveying representative samples of households or individuals regarding their preferences is a direct means of study, and the results of such surveys can be of great help, especially regarding questions on consumption. Indirect means include use of the results of various areas of research and statistics concerning past and expected trends. Whether direct or indirect means are used, the planner must have a very good understanding of the structure of the population to which the findings refer. In the area of preferences, the planner cannot rely on "average" values for the population as a whole. To be able to make informed judgments about the preferences of the people, the planner has to understand the structure of the population in terms of criteria such as the following: income and wealth distribution, regional distribution, occupational groups, socioeconomic groups, ethnic groups (where relevant), educational characteristics, age structure, and cultural (e.g., religious) characteristics. In a later chapter, in the context of the statistical evidence required for elaboration of the plan, we return to the types of demographic, social, and economic statistics that have to be utilized in planning in general and are also useful for understanding the stratification of the population. At this stage we only wish to stress the general impact that differences in the characteristics of various strata may have on their preferences. Starting with differences emanating from the position of a given stratum of the population regarding the distribution of income and wealth, one can easily show that, for example, low- and high-income groups may have profoundly different preferences in such factors as education, health, taxation, housing, and transportation. Accordingly a planned measure concerning social security, for example, may elicit enthusiastic response from one stratum (with a strong preference for it) and a cool response from another. Regional coloration of the preferences may come about in numerous ways. The division of preferences not infrequently follows urban-rural lines. Programs of rural electrification or irrigation will appeal to different segments of the population than slum-clearance projects or urban employment measures. Similarly, occupational groups or socioeconomic groups may differ in their preferences. As any practicing politician knows, one cannot expect the same response from doctors and farmers or from bankers and civil servants on many policy issues. Well-known differences exist due to

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ethnic composition in some countries. Groups of the population of varying cultural and religious backgrounds may also react in specific ways concerning planning alternatives. Populations that are otherwise relatively homogeneous may differ regarding important preferences in accordance with the age-structure criterion, and indeed the interests of old and young may be dissimilar regarding nursery schools or nursing homes. Even within the same age groups, households with many children can have different preferences than those with few. Of course educational characteristics also have an important bearing on preferences. Families within the same age group and with similar numbers of children may vary in their views and wishes depending on their educational level, even if there are no great differences regarding income level. It is important to understand the context in which the issue of stratification is discussed in this chapter. Obviously the characteristics regarding the structure of the population listed above and discussed subsequently may have their impact on various matters, phases, and activities of planning. For example, these characteristics, which are mainly demographic ones, may have a serious bearing on the population policies of a country and are therefore relevant for the development strategy adopted by it. As will be remembered, one of the social aspects discussed in an earlier chapter that was devoted to development strategies was, indeed, population policy. The structural characteristics of the population and its various strata are also among the basic sets of economic and social statistics to be utilized in the planning calculations (discussed in a later chapter). In the present chapter the emphasis is again on a different utilization of the knowledge pertaining to the stratification of the population. Here, the evidence is evaluated in terms of the aspirations of the population as a whole and its constituting groups regarding desires in the field of consumption and other areas. Clearly, whether direct polling is undertaken or indirect studies are utilized, the planner must well understand to which groups the results can be applied. After stressing the need for analyzing the aspirations of the population in a duly differentiated manner, we now turn to a brief review of some of the tools of analysis. A few comments on the difficulties related to studies in this area are also made. The order of the discussion is as follows: surveys and microdata sets, consumer economics, manpower studies, and consumer limitations.

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1. Surveys and microdata sets Psychological tests were introduced in the second half of the nineteenth century. Sir Francis Galton called them "mental tests" and aimed at their study and their procedural standardization particularly in the context of personality and temperament investigations. Galton was also one of the first to use the questionnaire method for these purposes. Among the various psychological tests and measurements that exist, the planner may be particularly interested in attitude measurement. An attitude may be measured as the degree of positive or negative feeling associated with a given object or event (a good or service, a government policy, an idea, an institution, etc.). Consumer preference measurement is a field of special importance for planning. While it is closely related to attitude measurement, there are important differences between the two. In attitude measurement, individual persons are usually placed along a psychological continuum. In consumer-preference measurements, the reactions of groups (of consumers) are measured, usually regarding the degree of acceptance of given products. In various countries the availability of survey results differs widely. If available, the following may be of particular utility for planning: market research surveys, public-opinion polls, and consumer anticipatory surveys. If they are not available, the planner may consider setting up such surveys for studying the attitudes of the population regarding certain key issues. It is not feasible to describe these analytical tools here, but a few comments on each of them are necessary. These are followed by brief discussions of microdata sets and of comparisons between opinions and underlying facts. a. Market-research surveys The study of consumer preferences may proceed by various means. One is the testing of goods in terms of their sensory characteristics. Foods and beverages, perfumes, and many other goods are judged by customers on such characteristics, and by the method of paired comparison or other methods it becomes possible to evaluate quantitatively the relative preferences of groups of consumers. Models for customer-preference measurement allow prediction of consumer choice of alternative products. Predictions of relative purchase frequencies for

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several alternative products offered at various prices to the consumer are also feasible. In addition, market-research techniques involving surveying of consumers can be used for the development of new or improved consumer goods. Whereas presently these surveys aim mainly at the selection of new characteristics that offer useful points for sales campaigns, there is no reason why planners could not use the results of such surveys to make planning recommendations. b. Public-opinion surveys

Public-opinion polls emerged in the mid 1930s. The first pollers came from the ranks of market-research people. The successes with commercial advertising, which became a specialized branch of knowledge and art, highlighted the importance of a thorough knowledge of consumers and their tastes and the utility of conducting special surveys among the people to acquire such knowledge. In applying this experience to politics, it was considered that the study of voter preferences, and generally the political attitudes of the public, would give powerful new tools to managers of political campaigns. From the planner's point of view, the possibilities of using general public opinion polls to assess the aspirations of the population are obvious. For example, support for or opposition to certain policies may be important considerations regarding the feasibility of various planned measures. c. Consumer anticipatory surveys

Consumer anticipatory surveys are more specifically designed as tools of economic analysis. If undertaken in the framework of carefully designed sample surveys, they can offer important information about the general sentiment of the public concerning the prevailing economic climate of the country, as well as planned purchases of homes, cars, appliances, and other goods.' The Survey Research Center of the University of Michigan has been foremost in this field in the United States. As George Katona put it, this center "conducted surveys on the American people's attitudes and expectations as well as hopes and fears for 1. Other types of anticipatory surveys carried out among businessman may provide useful information about general cyclical expectations and particularly investment plans.

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more than 25 years." 2 A widely followed indicator prepared by the center is the index of consumer sentiment. This index fell from 88.4 in the fourth quarter of 1972 to 75.7 in the fourth quarter of 1973 and to 58.4 in the fourth quarter of 1974. As Katona evaluated it, this decline indicated an unprecedented erosion of people's willingness to buy. Therefore the survey directors concluded as early as December 1973 that a general recession was imminent. 3 d. Microdata sets Since microdata sets usually emerge as samples taken out of comprehensive files of tax information or social-security records, a certain amount of similarity exists between them and results obtained from direct sample surveys. In view of the utility of microdata sets for analyzing the behavior and also the needs of various strata of the population, it is appropriate here to call the planner's attention to them. As Nancy and Richard Ruggles pointed out, "in the past ten years sets of data which are samples of information about individual households and persons have emerged as a major tool of economic analysis. These microdata sets can be thought of as alternative and supplementary to the national accounts." 4 Many purposes can be served by the data obtained this way. The Bureau of Economic Analysis in the U.S. Department of Commerce 5 used microdata for studying the distribution of income in the household sector and applied them as information supplemental to the relevant national accounts aggregates. 6 At the Brookings Institute, Okner studied tax models with the use of microdata. 7 Microdata sets were also utilized at the Urban Institute and elsewhere. Income maintenance schemes and the distribution of income among recipients of social-security payments 2. George Katona, "Disputing Galbraith," New York Times. Business and Finance Section, p. 13, December 22, 1974. 3. Ibid. 4. Nancy Ruggles and Richard Ruggles, " A Strategy for Merging and Matching Microdata Sets," Annals of Economic and Social Measurement 3, no. 2 (April 1974): 353. 5. Director: George Jaszi. 6. E. C. Budd, "The Creation of a Microdata File for Estimating the Size Distribution of Income," Review of Income and Wealth, ser. 17, no. 4 (December 1971): 317-33. 7. Benjamin Okner, "Constructing a New Data Base from Existing Microdata Sets: The 1966 Merge File," Annals ofEconomic and Social Measurement 1, no. 3 (July 1972): 325 -42.

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were also studied with their help. Microanalytic simulations of the demographic and social characteristics of households are also based on microdata sets.8 One of the problems related to the use of various sets of microdata lies in the difficulty of interrelating the sets. This can be done with more ease if computers are used for larger sets of data. In the case of information obtained through sample surveys, exact matching may be impossible because of the slight probability that the same persons or households would show up in two small random samples. Ruggles and Ruggles, who dealt with these problems in an extensive manner,9 therefore suggested that: In order to develop a well matched data set it may be desirable to use large samples even when this sample size is not required for the end purpose. . . . When one of the two data sets to be matched is small, it is still true that a high quality match may be obtained if the second data set is large. But where both data sets are small, it is quite possible that the resulting match will not be highly significant when done by any method and under such circumstances other multivariate techniques may be preferable. 10

e. Consumer sentiments and underlying facts

It may be advantageous for the planner to develop a feeling for the relationship between the underlying economic facts and the reactions of people to them. As in studying attitudes in general, it is important that the changes of sentiments be carefully analyzed in their relationships to objective statistical measures pertaining to the economic or social process under review. In this analysis particular attention should be paid to possible underreactions and overreactions regarding various phenomena measured statistically. Based on data for 1964, an interesting study of the Hungarian Central Statistical Office11 demonstrated the possibility of significant differences 8. H. W. Guthrie, G. H. Orcutt, S. Caldwell, G. E. Peabody, and G. Sadowsky, "Microanalytic Simulation of Household Behavior," Annals of Economic and Social Measurement 1, no. 2 (April 1972): 141-69. 9. Including the relevant computer tabulations and applications. 10. Ruggles and Ruggles, A Strategy for Merging and Matching Data Sets, p. 371. 11. Kozponti Statisztikai Hivatal, Velemenyek es tenyek [Views and facts] (Budapest: Central Statistical Office, 1966), p. 38.

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between sentiments and underlying data. The study was undertaken by surveying 4000 households—participating in the regular and continuous family budget enquiry—about their impressions of changes in their levels of living and comparing the answers with the data furnished by them in the regular enquiries. The two basic questions regarding the opinions of the households concerned their view of whether there was a change in their standards of living between 1963 and 1964 and, if yes, what were the direction and the magnitude of the change. The same questions were asked concerning the preceding five years as well. A comparison of the opinions expressed by the households in the survey with independent statistical information regarding their incomes and outlays and the relevant price changes revealed that, with the exception of the highest income group, households generally underreacted to favorable changes and overreacted to unfavorable changes in their standard of living. For example, most households affected by 3 - 5 percent increases over a year felt "no change" in their standard of living. On the other hand, households experiencing similar decreases in their standard of living expressed the view that "considerable lowering" of their standard occured. Obviously the patterns of reaction to such changes may differ from country to country, according to the stage of development, and by population stratum. Nevertheless, a better understanding of these reactions may be rather helpful to the planner. For example, if it is true that most people in a society do not feel smaller improvements in their levels of living as " a change," the planner may recommend that improvements occur in more infrequent but at the same time more noticeable "chunks." 2. Consumer

economics

To interpret the results of sample surveys, opinion polls, or microdata sets, the planner needs to utilize knowledge accumulated in consumer economics. Within the framework of this study it is not feasible to review the expanding body of literature in this field and therefore we refer the reader to Robert Ferber's excellent review article on the subject. 12 In Ferber's discussion the emphasis, very usefully from the 12. Robert Ferber, "Consumer Economics: A Survey," Journal of Economic 11, no. 4 (December 1973): 1303-42.

Literature

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point of view of the planner, "is on the macro-aspects of consumer economics, but with attention to micro aspects insofar as they interrelate with the former or involve relevant topics from other social sciences or branches of economics that have received little attention by consumer economists." 13 Without going into the characteristics of the different advances made in consumer economics, I wish to indicate the various topics of possible relevance to the planner. The first is the theory of consumer functions. The aggregate consumer function, as a macroeconomic concept, is generally considered to be a Keynesian result, since the earlier studies generally emphasized the microrelations among utilities, prices, and quantities. Estimates for consumption functions, which principally show the relationship between aggregate consumption and aggregate income (holding other relevant variables constant) are of course very useful tools in planning exercises. The values that can be estimated for the variability of consumption due to changes in such variables as current and past income, prices, and expectations may provide helpful guidelines in planning activities. Similarly, results of research regarding the propensity to consume depending on the absolute and relative levels of income can be well utilized in planning. Other facets of knowledge useful for the evaluation of consumption functions include statistical findings related to long-term or lifetime income expectations of consumers. To mention another aspect, the positive autocorrelation found in some purchases of consumers (e.g., tobacco) can be explained in the development of tastes and habits, "hence, the link between current and past purchases is habit formation." 14 Consumer purchases of many durable goods (e.g., refrigerators) show an opposite picture—a negative autocorrelation since a purchase in the current period is unlikely to be followed by another purchase in the next one. A second important field of consumer economics of great utility for the planner pertains to consumer behavior and the various factors having a bearing on it. One such factor is wealth and its positive components such as liquid assets and capital gains, and also credit (a negative component of wealth), all of which influence consumer behavior in a significant manner. The influence of interest rates on consumer 13. I b i d . , p. 1303. 14. I b i d . , p. 1310.

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behavior is a related matter. Studies also show that regional differences may exist in consumption behavior—also of profound interest to the planner. A third and rather new field of consumer economics relevant to planning is the study of asset functions. " I n these functions wealth or one of its components is the dependent variable and the objective is to explain its fluctuations either over time or among consumer units in terms of a set of determining variables." 1 5 The significance of studies pertaining to wealth lies partly in the distributional differences that exist: for example, in the United States the 1962-1963 Federal Reserve Study of Family Financial Characteristics showed that the highest 20 percent of wealth holders owned about 60 percent of the wealth and less than 10 percent owned over two-thirds of all marketable securities. 16 A fourth field of consumer economics dealing with welfare aspects should also be mentioned. The issues here range from human capital and returns estimated from education through time-allocation studies (covering both leisure and work hours) to questions of utility maximization by consumers. Studies in these fields, as well as in others such as those dealing with the demand for public goods or consumer-decision processes, may offer valuable information to the planner intent on studying the preferences of the population. The task of overall assessment of the available evidence is a very difficult one, whether the planner tries to derive inferences from direct studies ( e.g., consumer research or anticipatory surveys) or indirect sources (e.g., results of studies in consumer economics). The difficulty is basically related to the complexity of the factors affecting the behavior of people as consumers. The economic aspects of this behavior constitute a most complicated set of relationships, very aptly described by Ferber in the following summary manner: In general form, the consumer is faced with a fund of resources, which include assets, current and expected future incomes as well as credit, and has to allocate this fund among expenditures, savings and asset forms in both the current period (an immediate decision) and in all future periods of his lifetime. The formulation becomes even more general if human capital is added to the fund of resources 15. Ibid., p. 1319. 16. D. S. Projector, Sun-ey of Changes in Family Finances (Washington, D. C.: Federal Reserve Board, 1968).

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and use of time to the allocation alternatives. . . . The problem is to develop models to explain consumer behavior in such a simultaneous manner taking into account the numerous alternatives (asset and spending possibilities) and the many uncertainties involved. 17

The sociocultural aspects not mentioned also influence the behavior of the consumer, and if possible the planner should take into account all the major factors relevant to his calculations. 3. Manpower

studies

The study of consumer preferences cannot be limited to the various aspects of consumption alone. The population may have important preferences in other regards as well, including the production of goods and services, environmental matters, and questions of esthetics. One of the important areas is occupational choice. Owing to the costs and difficulties of retraining, the preferences and decisions made by the members of society regarding their careers have a long-term effect both on the future of the persons directly involved and on society as a whole. Therefore planners have a particular interest in studies concerning human resources and manpower planning. Such studies usually deal first with the determinants of labor supply over a considerable length of time, like two or three decades. For such purposes trends in total population are assessed on the basis of estimates for birth and death rates. Levels of fertility are studied and projected ahead, and trends in migration are evaluated. The age structure of the population for the base period and for selected future years is estimated. Sex ratios for the total and the working-age population are also determined, together with expected ratios of female employment. Ruralurban transfers of the population are also assessed. The study of the basic demographic factors as determinants of the future labor supply is followed up by structural studies of current (and future) employment distributions by sectors and industries of the economy. Expected growth rates in these industries are also taken into account, together with the probable effects of productivity changes. Related studies dealing with the occupational mix of the industries and the educational needs involved are also utilized. 17. Ferber, "Consumer Economics," p. 1321.

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The aspirations of the population regarding occupational choice and educational opportunities are of great importance for planning. Even very centralized planning systems shy away from usurping the formal decision power of parents and children in these fields, although the existing employment and educational opportunities may effectively function as centrally overseen determinants of personal decisions regarding these matters. The planner's task is not made easier by the rapid changes in technology in our times. These changes make informed suggestions regarding future needs for certain skills very difficult. One apparent way to cope with this problem is the introduction of modifications in the educational system. These modifications may aim at provision of a better general education at the initial stages of learning, along with establishing ways to reeducate people with obsolete skills. The rapid changes in technology may necessitate the reeducation of people in their "old" professions as well, leading to the concept of lifelong education. This concept is related not only to the need for changes in skills and occupational structures but also to broader humanistic aspirations and to the role of education in fulfilling them: "The use of the term 'lifelong education' is intended to embrace a much broader concept: the continuation of the educational process without interruption to fulfill the aspirations and develop the potentialities of each individual human being, and to meet the ever more pressing demands of a world in transformation." 18 In the preceding brief paragraphs regarding occupational and educational choice the indirect approach (through studies of demographic factors, industrial structure, etc.) was emphasized. Under appropriate conditions the direct approach can also be utilized to survey the wishes of the population in these important aspects of life.

4. Consumer

limitations

In chapter 5, during the discussion of the relationships between the plan and the market, brief reference was made to the problems of 18. Investment in Human Resources and Manpower Planning, Nations. Department of Economic and Social Affairs. 1971), p. 75.

N e w York: United

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consumer sovereignty. In the context of studying the aspirations of the population it appears useful to return to this subject in order to indicate the limitations of the consumer both within and outside the realms of the market. The consumer's limitations regarding the goods available at the market—and, in a broader sense, potentially obtainable in markets—stem basically from limitations of the consumer's knowledge, and limitations due to the consumer's lack of power. The two limitations can be interrelated; knowledge may be withheld from the consumer through the power of the producers and thus his lack of knowledge essentially may be caused by deliberate acts of the producers, usually unknown to the consumer. However, even if such covert acts are not committed by the producers, the limitations of the consumer's knowledge may be significant factors. Many products of modern industry are of such technological sophistication that the average consumer cannot properly evaluate them, even if the knowledge for such evaluation is obtainable from books in libraries and other sources. A related circumstance is the difficulty of evaluating various consumer products by individuals. Since individuals generally cannot afford the thorough testing of products owing to the costs involved and also because of lack of appropriate equipment under usual household circumstances, in an increasing number of countries specialized consumer testing bodies became engaged in such activities. The results of their tests are published in specialized consumer review magazines that are increasingly followed by the more sophisticated consumers. However, such evaluations pertain only to the relative advantages of those items which happen to be offered by the producers. Commercial advertising can have an important influence on the taste and preferences of consumers. This is another reason why the planner may not want to be unduly influenced by the desires of consumers without further evaluation of the needs expressed by them. Galbraith calls particular attention to the ability of large corporations to influence the market and the consumer: "The firm being large, it has power or control over its prices—as the firm in the market system does not. It has similar influence over its major costs. It actively seeks to influence consumer behavior in its own behalf—and to this task it brings the vast resources and talent of modern advertising and salesmanship. And it

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shapes public attitudes and the policy of the state in accordance with its needs." 1 9 The manipulation of the consumer is usually more sophisticated in advanced stages of development and in "unplanned" market economies, but the power of producers over consumers can be significant under conditions of central planning as well. In fact, it appears to be generally true that if there is an increasing centralization of planning and management of the economy which is also accompanied by a weakening of the influence that market forces can exercise on economic behavior, the producer's potentials for manipulating the consumer vastly increase as well. In principle it is irrelevant whether the manipulation takes place through television commercials and other methods utilized by large private corporations or through the "offering" of a reduced assortment of goods of rather shoddy quality by large "public" enterprise. It is worth remembering that whether the consumer is manipulated by "private" or "public" entities, the end result is that his needs are not met. In this sense the analysis offered by Galbraith has wider validity than usually understood: "It is held that many consumers' goods are without serious function or do not perform their function. . . . The technostructure is concerned with growth. . . . What counts is not whether the innovation serves a perceived need. What counts is whether it promotes sales and therewith the growth of the firm. . . . Functionless innovation, if it lends itself to persuasion, may be as good for the growth of the firm as that which has function." 2 0 Mutatis mutandis, the analysis holds also for those socialist enterprises that aim at the formal fulfillment of plan quotas in order to "grow" without due regard for the role their products can play in satisfying the needs of the consumers. What Galbraith said about the activities of certain big private corporations could also be applied to some large state enterprises: "outdated, lowquality production, if its products can be distributed in a sellers' market, may be as good for the growth of the enterprise as that which is of high quality." 21 Regarding public goods, most analysts agree that the satisfaction of needs for such goods requires public analysis and intervention. The 19. J. K. Galbraith, "Contemporary Capitalism and the Problem of Unequal Growth," Acta Oeconomica 9, no. 2 (1972): 121. 20. Ibid., p. 123. 21. Ibid.

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individual consumer cannot obtain such goods under usual market conditions, and there has to be a "community supply" of them. As Abba Lemer summarized,' 'public goods are goods which cannot be provided for some without being provided for others. The normal market mechanism for achieving consumer sovereignty is therefore inapplicable." 22 One way to solve the problems in this area is to create or enlarge the scope of appropriate market mechanisms to satisfy the needs for certain types of public goods amenable to such treatment. Lerner believes that much more could be done in this direction (e.g., increasing the share of road use against fees). Nevertheless, there are limits to the possibilities in this respect: "not all public goods can be privatized. There will still be services which, if provided for some, are inevitably made available to all. The market mechanism cannot work. . . . Where this is the case, agreement is necessary for combined action. This is what government is for." 2 3 Even in areas of public goods that can be treated through increased reliance on appropriate market mechanisms, direct governmental intervention and distribution may be preferred by the population. Scitovsky concisely formulated this problem, "We are entering a new world in which many of the good things in life we now take for granted and regard as part of nature will become carefully husbanded commodities whose use or consumption must be rationed. The only question is whether rationing them by price would not create problems of equity and whether it would not be preferable therefore to develop other means of rationing free from this objection." 24 Lerner warns against the downgrading of the notion of consumer sovereignty. Undoubtedly a denial of its existence is laden with grave ultimate philosophical difficulties regarding man's ability to handle his own affairs. Therefore his cautioning words should not be taken lightly: Most economists . . . have conducted their studies on the assumption that individual human beings . . . but not races, classes, nations or other social groups have the sense organs, the nerves and the brain mechanisms which are capable of feeling pain and pleasure or gratification and frustration—that races, 22. A. P. Lerner. " T h e Economics and Politics of Consumer Sovereignty." American Economic Review 62 (May 1972): 264. 23. Ibid., p. 265. 24. Tibor Scitovsky, Papers on Welfare and Growth (London: George Allen & Unwin, 1964). p. 260.

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classes, nations, and other social groups are only collections or combinations of individuals for particular purposes. These may be of the highest importance for the individuals who can experience welfare or the lack of it. Economists, therefore, generally disregard the philosophical downplaying of the importance of consumer sovereignty. 25

While Lerner rightly stresses the importance to be attached to the individual—and indeed planners thinking in terms of macromeasures are often tempted to forget about the significance of the individual's needs— he appears to overlook the range of possible mechanisms to assess the needs and views of individuals regarding public goods. Government is one of the applicable mechanisms and is mentioned in Lerner's study. However, other possibilities may exist and their exploration could be very useful. As Scitovsky said, "It would be desirable to develop some machinery for ascertaining what the public's preferences are concerning collective goods, machinery for making these preferences known to those who decide on public expenditures, machinery to assure efficiency, adequate resource allocation, and the minimization of costs in the public sector. I believe that some of the most urgent and most important work of the economists lies in this field."26

25. Lerner. " T h e Economics and Politics of C o n s u m e r Sovereignty." p. 263. 26. Scitovsky, Papers on Welfare and Growth, p. 251.

X Utilization of Economic Theory and Models of Growth in Planning includes an overall review regarding the possible relevance of knowledge accumulated in the various branches of economics and a brief discussion of some features and uses of models of growth. THE PRESENT CHAPTER

1. Branches of economics of particular interest to the planner Since the subject of planning comprises the whole socioeconomic process, all branches of economics can be utilized to some extent in the elaboration of the plan. To substantiate this point (following the classification scheme for articles and abstracts in the Journal of Economic Literature of the American Economic Association), we list thirty-six branches of economics based on the medium level of aggregation in this classification:1 010 020 030 040 050 110

General economics General economic theory History of thought; methodology Economic history Economic systems Economic growth; development and planning theory and policy 120 Economic development studies 130 Economic fluctuations, forecasting, and inflation

I. The highest level of aggregation subdivides economics into ten major groups. At the most disaggregated level, 115 sections are shown. Journal of Economic Literature 9, no. 3 (September 1971): 987-89.

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Econometric, statistical, and mathematical methods and models Economic and social statistics Domestic monetary and financial theory and institutions Domestic fiscal policy and public finance International trade theory Trade relations; commercial policy; economic integration Balance of payments; international finance International investment and foreign aid Administration (including decision theory) Business finance and investment Marketing Accounting Industrial organization and public policy Economics of technological change Industry studies Economic capacity Agriculture Natural resources Economic geography Manpower training Labor markets; public policy Trade unions; collective bargaining; labor-management relations Demographic economics Human capital Welfare programs Consumer economics Urban economics Regional economics

The knowledge accumulated in any of these branches of economics can be useful in the work on the plan. Naturally some of them are apt to be used more frequently than others. Since the knowledge in the areas listed is already quite voluminous and specialized, no single planner can hope for a mastery of all of them. The rational utilization of economic knowledge during the elaboration of the plan requires collaboration of teams of planners sufficiently specialized to be able to draw on the

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lessons available in the various fields. Generally they are not expected to be so knowledgeable of the various areas as to make original contributions to the given branches of economics, but mainly to intelligently and creatively utilize the results of the work of others. While this chapter deals only with the use of knowledge in economics for the elaboration of the plan, similar requirements arise regarding all other branches of science. A planning office should ideally be composed of personnel capable of absorbing new ideas, insights, and evidence from all areas of the natural and social sciences. Naturally the planning organs can rely on the advice of outside research institutions and universities, but even for such reliance there is a need for considerable expertise within the planning body that permits asking the "right questions" (not a small feat) and evaluating the advice received. In-house expertise in various fields is also needed for the organization of adequate communications concerning the various bits of scientific evidence in terms of the plan under elaboration. Only personnel versant in the overall sociopolitical and economic framework of the plan under elaboration are able to carry out the necessary iterative consultations regarding the various alternatives, implications, and consequences related to the measures proposed by the representatives of different scientific disciplines. Neither purely planning knowledge nor exclusively subject-matter-oriented expertise permits the exchanges of views required during the elaboration of the plan. In chapter 9 we mentioned the utility of consumer economics (branch 920 in the list above) in the analysis of the wants of the population. A later chapter is devoted to the use of socioeconomic statistics (branch 220 in the list) in the elaboration of the plan. Regarding some other branches of economics, for example, the earlier discussion of national experiences in planning indicated the possible usefulness of economic history (branch 040) for the planner. Our discussion of the holistic economists of the United States is a similar reminder concerning the history of economic thought (branch 030). Our earlier discussion of development strategies points to the uses of knowledge accumulated in development studies (branch 120). We could continue these references and show that even within the framework of the present study, we have had to refer to knowledge emanating from most of the branches of economics listed. Central planners need to rely particularly on the fields of economics

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with foremost relevance to the macroeconomic process. Ultimately all branches of economics have a bearing on the overall process. However, some branches deal with the macroprocesses very directly (e.g., branches 010, 110, 120, 130, 310, 420, 430, 440, 720, and 820). The following examples are given, on the basis of more recent books or articles, to illustrate the potential usefulness of knowledge in these areas for the elaboration of plans. Regarding branch 010 (general economics), Nicholas GeorgescuRoegen has written a book titled The Entropy Law and the Economic Process.2 One of the major propositions of this book is that the physical law of entropy has various economic consequences. While this is an interesting point, the planner may find another of the author's proposition of more immediate significance for his work; this concerns the distinction between "flow of goods" and "funds of services" to be associated with goods. The distinction is conceptualized in terms of the flow of time. Certain goods can be consumed either at once or over a period of time (e.g., a bag of rice). Other "funds of services" will be utilized over a period of time (e.g., a telephone installed in a private residence or hotel room) and can be consumed only in discrete intervals over a certain period of time. Naturally there is a relationship with the concept of durable and nondurable goods, but a reading of the book would show planners some new ideas concerning important economic processes. Kenneth E. Boulding's book Economics as a Science3 is another illustration of branch 010. His evaluation of the advances made by the profession and the problems not yet resolved may be helpful to the planner. In the field of branch 110 (economic growth, development and planning theory and policy), a book by J. G. Abert entitled Economic Policy and Planning in the Netherlands: 1950-19654 is an appropriate illustration. Because economic planning and quantitative models have been used in the Netherlands for more than a quarter of a century, the procedures used in choosing economic policies and the institutions involved in the process may be of considerable interest to planners elsewhere. On a more theoretical plane, G. M. Heal's The Theory of 2. Cambridge: Harvard University Press, 1971. 3. New York: McGraw-Hill, 1970. 4. New Haven: Yale University Press, 1969.

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Economic Planning5 treats, among others, the algorithms applicable to short-term planning and surveys problems related to the theory of growth in the context of long-term planning. Also concerning this topic is Michio Morishima's Theory of Economic Growth,6 a book of great complexity and considered by some to be too remote from reality. Regarding branch 120 (economic development studies), we refer to Denis Goulet's excellent and moving book The Cruel Choice: A New Concept in the Theory of Development,1 which covers, among other topics, the need for philosophers or ethicists to join development teams to analyze the ethical problems posed by underdevelopment and planning and to help design appropriate answers to these questions. One important position taken by the author is that planners and technical experts have no right to decide on behalf of less knowledgeable persons and that their proposals should be subject to widespread criticism by the population. This may be an impractical suggestion in most situations, but the warning deserves attention. On the other hand, no plan could be designed by merely "listening to the people"—the planner has the duty to both listen and talk, to be attentive to popular desires, but also to transmit to a wider audience perspectives derived from science, technology, and economics regarding the desirable and feasible paths of growth. Among useful readings in branch 130 (economic fluctuations, forecasting, stabilization and inflation), R. S. Preston's Wharton Annual and Industry Forecasting Model8 (a relative of the older Wharton quarterly model) is intended for use in evaluation of long-term (five to ten years) projections for the United States economy. A publication of the Brookings Institution, Setting National Priorities: The 1974 Budget, using the federal budget as a point of departure, reviews various controversial policy questions in the fields of domestic and foreign policies and emphasizes "the major consequences of the choices made in the budget which will show up in later years." 9 Possible alternatives are also analyzed. 5. Amsterdam: North Holland, 1973. 6. London: Oxford University Press, 1969. 7. New York: Atheneum, 1971. 8. Philadelphia: Wharton School, University of Pennsylvania, 1972. 9. By E. R. Fried, A. M. Rivlin, C. L. Schultze, N. H. Teeters, et al., Washington, D.C., 1973, fourth in a series of annual reviews of national priorities in the United States, p. viii.

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Our illustrative reference regarding branch 310 (domestic monetary and financial theory and institutions) is Keynes and the Monetarists and Other Essays, which includes discussion of the important aspects of inflation control.10 In the area of branch 420 (trade relations; commercial policy; economic integration), the study of C. Duprez and E. S. Kirschen, Megistos: A World Income and Trade Model for 1975,11 includes an income and trade estimate on an international scale but with a considerable degree of disaggregation (twelve geographical zones, six developed and six underdeveloped ones). Finally, regarding branch 430 (balance of payments; international finance) R. M. Stern's book, The Balance of Payments: Theory and Economic Policy,12 reviews the recent literature on the balance of payments and related matters, all of obvious interest in planning exercises. It should be stressed that, in view of the potential usefulness of the fast-growing economic literature, planners should organize their study of relevant new developments in the various branches of economics on a regular basis. As mentioned in the next section, the serious attention to be devoted to the well-known and new findings of economic research should not becloud the fact that various areas of economics of direct concern to the planner may not give sufficient (or reliable) guidance for the planner's actions. Therefore the planner has to be not only an ardent user of economic discoveries but also a persistent critic and a prodder for new efforts in this area of human knowledge. The identification of areas is a simpler task. The greater difficulties arise in the selection, absorption, and evaluation of the relevant literature by the planner. One common method of selection follows geographical lines. The economic knowledge accumulated concerning his own country and certain other countries may be of central interest to a planner. Foreign sources may be selected on the basis of similar levels of development and climatic, cultural, institutional, or other conditions. Some planners tend to select evidence on an ideological basis. Thus they may want to rely on knowledge available within "socialist" or "liberal," 10. S. Weintraub, H. Habibagahi, H. Wallich, and E. R. Weintraub, New Brunswick, N.J.: Rutgers University Press, 1972. 11. Amsterdam: North Holland, 1970. 12. Chicago: Aldine, 1973.

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"Maoist" or "nationalist," or "Western" or "Third World" ideological frameworks. The planner's freedom to rely on the findings of economics presented in the framework of officially unacceptable ideologies may be limited, sometimes severely so. It is the planner's duty to evaluate these situations in terms of his ability to function effectively. Should the ideological limitations endanger the successful elaboration and implementation of the plan, his efforts may be in vain. Assuming a reasonable degree of freedom for the planner, his reliance on the evidence offered by the various branches of economics will depend on the validity of the findings and their relevance to the processes to be planned. Problems arise when contradictory evidence-is available (which is far from rare) and there is no time for follow-up research. Similarly, in some cases the evidence may be weak or nonexistent and still a decision has to be made. In situations of this sort the planner may be guided by his general inclinations in matters of economics. However, not every planner develops such a general view—for example, an approach largely based on propositions of welfare economics or a generally Keynesian, Marxist, or conservative attitude. The planner's lack of a general viewpoint in economics may have significance in the situations discussed above and may also be evident in a certain lack of inner consistency in his work. The advantages of eclectic inclinations should also be recognized. Planners with eclectic views, since they do not feel particular allegiance to competing lines of thought, may be more willing to rely on findings of economists of various persuasions as long as their results appear to be valid. Ideologically more involved planners often have a low level of tolerance for findings produced by "wrong" schools of economics. Probably the most useful viewpoint for a planner is adherence to a particular major line of thought in economics (e.g., welfare economics) coupled with a great tolerance for results obtained under the flag of any other school. This way a necessary degree of consistency in his thinking may be aligned with the flexibility required in his complex work. 2. Selected problem areas of economics In this section, again as a matter of illustration, several problem areas are mentioned among the many of direct relevance to the planner.

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Whereas in the preceding section the need for systematic and wellorganized reviews of the various branches of economic knowledge was emphasized, here attention is focused on problems that cut across the different branches of economics: knowledge related to the sources of growth and productivity (relating to economic theory, economic statistics, productivity analysis, etc.), and the use of sophisticated mathematical tools of analysis (touching upon most fields of economic investigation). a. Sources of growth and productivity

Studies regarding the sources of growth are of great importance to the planner. In the formulation of Simon Kuznets, "A country's economic growth may be defined as a long-term rise in capacity to supply increasingly diverse economic goods to its population, this growing capacity based on advancing technology and the institutional and ideological adjustments that it demands. All three components of the definition are important." 13 To indicate the interrelations, Kuznets cites the example that "steam and electric power and the large-scale plants needed to exploit them are not compatible with family enterprise, illiteracy or slavery." 14 As the six basic characteristics of economic growth Kuznets lists the following: high growth of per capita product and population; high rate of rise in productivity (output per unit of inputs); high rate of structural change in the economy; modernization, secularization, urbanization (etc.) of the social scene; outward expansion (both peaceful and warlike) to the other parts of the world; and the existence of great discrepancies between the developed and underdeveloped parts of the world. In Kuznets's view, his "summary of two quantitative characteristics of modern economic growth that relate to aggregate rates, two that relate to structural transformation, and two that relate to international spread supports our working assumption that modern economic growth marks a distinct economic epoch . . . and . . . some new epochal innovation must have generated these radically different patterns." 15 Kuznets sug13. Simon Kuznets, "Modem Economic Growth: Findings and Reflections," lecture delivered in Stockholm, Sweden, December 1971 on receipt of the Nobel Prize in Economic Science; American Economic Review 63, no. 3 (June 1973): 247. 14. Ibid. 15. Ibid., p. 249.

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gests that modem science and technology—far superior to any previous levels attained in these areas—are the "epochal innovation" in the broad sense of the word. "Mass application of technological innovations . . . constitutes much of the distinctive substance of modern economic growth." 16 Kuznets naturally realized that his six "characteristics of modern economic growth are interrelated, in that one induces another in a cause and effect sequence or all are concurrent effects of a common set of underlying factors." 17 Edward Denison—whose book Why Growth Rates Differ we referred to earlier—also places considerable emphasis on technological change as a source of growth but attempts in general to measure and analyze carefully all possible sources of growth. A precondition of further progress in this area is the elaboration of a systematic clarification of sources of growth. Denison, in his article "Classification of Sources of Growth," 18 made a set of proposals in which he suggested that " a desirable classification will so specify determinants that (1) they both unite cause with effect and correspond to the economist's method of analysis so that his set of tools can be brought to bear; (2) they do not contribute to growth if they do not change; and (3) they conform as well as possible to practical possibilities of estimation" 19 In his proposed classification, fourteen major sources of growth are identified and certain subdivisions and/or explanations are furnished for them. In an abbreviated form the sources are changes in the following: labor input (employment and hours worked), capital input, circumstances related to land and its use, allocation of employed human and property resources, economies of scale,20 state of knowledge (technical, managerial, and organizational), obstacles imposed against efficient utilization of resources, extent to which existing knowledge is available to users, time lag between installation and actual use of structures and equipment, cost of business obligations to government, human and legal environment affecting business costs, intensity of resource utilization, irregular factors (weather, strikes, etc.), multiple labor shifts, and any other determinants of productive efficiency, including the quality of management. 16. 17. 18. 19. 20.

Ibid., p. 250. Ibid. Review afincóme and Wealth, ser. 18. no. 1 (March 1972). Ibid., p. 1. Denison distinguishes two sources related to economies of scale.

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The emphasis is on the changes that may affect the contribution of the particular source to growth and, in order to promote growth, the changes should reduce inputs (costs) and/or increase outputs. For the analysis of changes of this sort, studies concerning total factor productivity are highly relevant. A particularly useful review of this subject is offered by M. Ishaq Nadiri, "International Studies of Factor Inputs and Total Factor Productivity: A Brief Survey." 2 1 Nadiri's study discusses three major questions: the impact of the quality and quantity of inputs on growth of output; the reasons for acceleration (or retardation) of growth in various countries; and the importance of resource reallocation in the growth process. An important feature of the review is the inclusion and study of data for several developing countries (in addition to those of the economically developed nations). Nadiri's conclusions also contain important references to the situation in developing countries: "(a) . . . [the] contribution of factor productivity is small in developing economies as compared to its critical importance in industrialized countries. . . . (b) . . . Capital stock plays an important role in LDC's and in rapidly growing economies, but its contribution to growth is relatively low in the advanced economies of the West. . . . (c). . . countries with high rates of growth experience wider dispersion of growth rates." 2 2 It is self-evident why planners need to utilize in their work the knowledge accumulated in economics, as shown here regarding the sources of growth and productivity. b. Theories of growth and development

Theories of growth and development form an area closely related to that discussed above but also connected to other areas of economics and other social-science disciplines. During the discussion of development strategies several theoretical aspects of the development process were discussed (e.g., the issues of balanced versus unbalanced growth and the role of capital), and our brief review here is restricted to questions concerning the relationships between theories of economic growth and of economic development. It appears useful to follow the advice on terminology offered by Sherman Robinson in his article "Theories of 21. Review of Income and Wealth, ser. 18. no. 2 (June 1972): 129-54. 22. Ibid., pp. 151-52.

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Economic Growth and Development: Methodology and Content." 2 3 Robinson defines "economic growth" as "increases in aggregate product either total or per capita, without reference to changes in the structure of the economy or in the social and cultural value systems." 2 4 On the other hand, the concept of "economic development" includes "not only growth but also social and cultural changes which occur in the development process." 2 5 Robinson accepts the term "modern economic growth" as defined by Kuznets, which includes changes in the economic structure. In an overall sense, theories of growth refer to theories "which deal only with economic changes" 2 6 and theories of development refer to those which "include cultural, social and political changes as well." 2 7 It is not feasible here to follow through Robinson's attempt to show two schemata, one for growth and one for development, and to indicate ways for including noneconomic factors in the theories of development. However, the importance of utilizing work in this area for planning purposes is clear. c. Mathematical tools of analysis The possibilities of utilizing mathematical tools of analysis are very important for the planner. Most of the modern planning techniques rely considerably on such tools. The usefulness of several such tools is discussed in a later chapter, and the next section of this chapter deals with models of growth. Nevertheless, the planner may be severely misguided if an attitude of unqualified enthusiasm toward mathematical tools prevails in his work. This is partly related to the need to view and plan development in a broader sense, taking into account many sociopolitical and cultural factors that are presently difficult to quantify. Therefore in this section a brief warning is in order regarding the two main dangers related to mathematical tools of analysis: underestimation of their potentials and/or a neglect of their utilization in planning, and a naive belief in their all-pervasive usefulness. It is important to realize that these two extreme viewpoints often reinforce each other. Unjustifia23. 24. 25. 26. 27.

Economic Development and Cultural Change 21, no. 1 (October 1972): 54-67. Ibid., p. 54. Ibid. Ibid. Ibid.

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ble claims regarding the superiority of the mathematical tools of analysis strengthen the case of those who don't believe in their use in planning in the first place. On the other hand, primitive attitudes and ignorance of the utility of these tools as shown by some planners can strengthen the convictions of those who believe that the tools are a panacea for all the problems of planning. Opposition to the application of mathematical tools of analysis can also be a reflection of ideological considerations. In its widest manifestation, in the 1950s various Soviet economists maintained that such tools were simply misleading "bourgeois techniques" utilized in the "apology of capitalism" by Western economists. By now this view is largely discarded and Soviet planners have a greatly increased interest in various tools of analysis (e.g., input/output) that rely heavily on mathematical apparatus, but opposition to mathematical approaches on ideological grounds is still not rare. Similar aversions can be found among those in the West who somehow equate the application of certain mathematical tools with particular schools of economics now under attack for their formalistic approaches to economic problems. Naturally, mathematics is "indifferent" to the leanings of those applying it in economic research and can serve both the search for truth and intellectual games of little relevance to progress in economics. However, in this context the concluding sentences from Paul Samuelson's Stockholm lecture in 1970 are appropriate (citing H. J. Davenport), "There is no reason why theoretical economics should be a monopoly of the reactionaries.... All my life I have tried to take this warning to heart and I dare call it to your favourable attention." 28 This is an attitude worth remembering when someone equates the use of mathematical apparatus with any particular school of economics. There is no reason to assume that any school has exclusive claim on mathematical approaches, and aversion to the substance or the sociological character of certain schools of economics should not cause distaste for the mathematical tools applied by them. Of course there can be a real danger of endlessly refining esoteric propositions of little substance but of great complexity in presentation. Some people are tempted to apply mathematical techniques or laws of 28. Paul A. Samuelson, "Maximum Principles in Analytical Economics," Economic Review 62, no. 3 (June 1972): 261.

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physics uncritically to economic phenomena. In his famous works (including Foundations of Economic Analysis in 1947), Samuelson used mathematics extensively to support his position that the similarities among economic theories suggest the existence of more general concepts (such as equilibrium, maximum principles) that link the various areas of economics. He also has departed from his analysis of theorems pertaining to thermodynamic equilibrium systems to warn: "There is really nothing more pathetic than to have an economist or a retired engineer try to force analogies between the concepts of physics and the concepts of economics. . . . Nonsensical laws, such as the law of conservation of purchasing power, represent spurious social science imitations of the important physical law of the conservation of energy; and when an economist makes reference to a Heisenberg Principle of indeterminacy in the social world, at best this must be regarded as a figure of speech or a play on words, rather than a valid application of the relations of quantum mechanics." 29

Setting aside the examples used by Samuelson (particularly the one regarding Heisenberg), the essence of his message applies to the use in economics of knowledge derived from any other branch of science, including mathematics: inappropriate uses must lead to useless "results." Inappropriate and unnecessary applications of mathematical tools can also be misleading because the elegance and formal beauty of some mathematical treatments of economic issues appear to solve problems that are in fact unsolvable at present. Such elegance may harm otherwise useful studies as well. M. L. Weitzman, in his review of Heal's book, stated, "With such an excellent exposition as this book has, readers might gain the false impression that many or even most of the problems have already been solved." 3 0 F. H. Hahn's view regarding these matters is as follows: The achievements of economic theory in the last two decades are both impressive and in many ways beautiful. But it cannot be denied that there is something scandalous in the spectacle of so many people refining the analyses of economic states which they give no reason to suppose will ever, or have ever, come about.

29. Ibid., p. 254. 30. From Weitzman's review of the book of G. M. Heal, "Theory of Economic Planning," Journal of Economic Literature 12 (June 1974): 500.

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It probably is also dangerous. Equilibrium economics because of its well known welfare economics implications, is easily convertible into an apologia for existing economic arrangements and it is frequently so converted. On the other end of the scale, the recent, fairly elaborate analysis of the optimum plans for an economy which is always in equilibrium has, one suspects, misled people to believe that w e actually know how an economy is to be controlled. . . . It is an unsatisfactory and slighdy dishonest state of affairs." 31

The planner cannot disregard these warnings and must aim at the judicious application of mathematical tools of economic analysis; the planner has to avoid the dangers of both ignorant negativism and uncritical enchantment with them. 3. Models of growth for planning One of the important branches of economics of frequent use in planning is the knowledge pertaining to models of economic growth. These models are used to chart and evaluate various alternative patterns of economic growth. Some theoretical models do not allow statistical verification, but even these models may illuminate certain aspects of the problems faced by the planner. An important matter to remember is that, whether their nature is purely theoretical or statistically verifiable, models are tools of the planner in arriving at decisions that may also be influenced by many other factors. In this context Gunnar Myrdal's words are recalled, "There is in all planning, even if it were ever so earthly rooted in comprehensive studies of facts, an element of belief in reason as an independent force in history and in the freedom of choice by which man can change reality according to his design and so turn the course of future development." 32 Models, whether highly abstract or numerically detailed on a statistical basis and manipulated by computers, cannot "tell" the planner what to do but can aid his complex process of plan elaboration and decisionmaking. There is a multitude of models and variations on them, with differing properties. The aim of this section is to call attention to their general usefulness for planning and to mention a few better-known models 31. F. H. Hahn, "Some Adjustment Problems," Econometrica 38, no. 1 (1970): 16. 32. Gunnar Myrdal, Beyond the Welfare State (New Haven: Yale University Press, 1963). p. 7.

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usually considered for planning purposes. The approaches involved in these models often became part and parcel of modern economic thinking. One of the early examples of modeling is the Cobb-Douglas production function, still frequently used by planners for various approximations. The Harrod-Domar model has been important for formally relating a country's rate of growth to its savings/income ratio and marginal capital/output ratio in order to show how much growth in income would be required to induce adequate investments to maintain that rate of growth in income. Although the Harrod-Domar model is principally centered on the capital factor, it can also be used for employment estimates by using either a labor/capital or a labor/output ratio. Kalecki's growth model is supply oriented and expresses the rate of growth of the national product as a linear function of investment shares in GNP, the replacement ratio, and the parameter of independent technical progress. While for overall approximations aggregative one- or two-sector models can be very useful, Leontief's input/output model is particularly suitable for the study of more detailed planning problems. Leontief's system disaggregates the economy into sectors (depending on the statistical possibilities, up to or even exceeding 100 sectors) and establishes the interindustry relations of the economy in terms of both direct and indirect inputs from all sectors to all other production sectors and to final-demand sectors as well. Models by Richard Stone, Ragnar Frisch, L. Kantorovich, L. Johansen, and others are also well known. Mention should also be made of the potential use of econometric models of the Klein-Goldberger type for planning purposes. In later chapters, in the context of planning techniques, we discuss certain useful characteristics of these models. At this stage we stress their conceptual-theoretical significance for the elaboration of the plan; they furnish evidence and guidance regarding the alternatives available to the planner through evaluation of various growth possibilities and illumination of the central problem of growth. The application of models is an important and integral part of modern planning procedures. Their use is essential for computer studies of competing variants of overall choices and development strategies. They also help by involving systematic approaches to the problems studied, formalizing the procedures applied, and thereby increasing the precision of the discussion and bringing forward the various contradictions.

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Finally, they help to aim at optimal rather than merely feasible solutions. Nevertheless, they need to be used, in most cases, in conjunction with less formalized, traditional types of methods. As an ECE study pointed out: Informal or traditional methods . . . can cope better in areas where quantification problems arise, for example in the specification of social preferences. . . . They can, secondly, draw on a broader range of detailed practical experience and on the judgment of traditional planners. . . . Finally, and most important of all, they guard against the oversimplification of reality which is inherent in models and which becomes really dangerous when, as sometimes happens, models take over from modellists. . . . A degree of complementarity between formal and traditional method emerges. A need is apparent for . . . the optimal interlocking of the two approaches."

In conclusion the broad purpose of this chapter is recalled, namely, the need to indicate to the planner the relevance of knowledge of economics in general and certain branches of economics in particular. For students of economics this relevance may be self-evident. However, there are many planners whose training in economics may be rather superficial. Planning offices often have collaborators with engineering, legal, and other noneconomic backgrounds. While their specialties in these other areas may considerably help their planning work, their weaknesses in training in economics have to be eliminated, even if this requires considerable effort on their part. Successful planning is inconceivable without a thorough understanding of the problems of economics relevant to it.

33. Stacro-economic Models for Planning Nations, ECE, 1967), p. 9.

and Policy-making

(New York: United

Basic Readings for Part 4 Bama, T., Abraham, W., and Kenessey, Z. Structural Interdependence and Economic Development. London: MacmiUan, 1%3, pp. 11-28, 105-14. Canell, C., and Henson, R. "Incentives, Methods and Response Bias." Annals of Economic and Social Measurement 3 (April 1974): 307-17. Feiwel, G. F. Review of Michal Kalecki's "Introduction to the Theory of Growth in a Socialist Economy." Journal of Economic Literature 9 (September 1971): 814-18. Ferber, R. "Consumer Economics: A Survey." Journal of Economic Literature 9 (December 1973): 1303-42. Ferber, R. "Consumer Expenditure and Price Data: An Overview." Annals of Economic and Social Measurement 3 (April 1974): 299-305. Healey, D. T. "Development Policy: New Thinking about an Interpretation." Journal of Economic Literature 10 (September 1972): 757-97. Mishan, E. J. "The Postwar Literature on Externalities: An Interpretative Essay." Journal of Economic Literature 9 (March 1971): 1-28. Morgenstern, O. "Thirteen Critical Points in Contemporary Economic Theory: An Interpretation." Journal of Economic Literature 10 (December 1972): 1163-89. Nordhaus, W. D., and Tobin, J. " I s Growth Obsolete?" In The Measurement of Economic and Social Performance, M. Moss, ed., Studies in Income and Weahh 38. New York: NBER, 1973, pp. 509-32. Ozbekhan, H. "Toward a General Theory of Planning." In Perspectives of Planning, E. Jantoch, ed. Paris: OECD, 1969, pp. 47-155. Robinson, S. "Theories of Economic Growth and Development: Methodology and Comment." Economic Development and Cultural Change 21 (October 1972): 54-67.

Scientific and Quantitative Evidence and Planning the planner has to study carefully the directly expressed and indirectiy discernible preferences of the population. For a number of reasons, however, the plan cannot be based solely on popular preferences. Calculations of feasibility may show that the preferences of the population cannot all be met during the period in question. Political constraints related to domestic and international factors may also prevent incorporation of various aspirations of the population into the plan. Finally, even if they are technically feasible and politically unproblematic, the planner may have second thoughts about certain wishes of the people. In terms of a simplified example, the planner may be confronted with evidence directly available from surveys (and also from indirect studies) that the population has developed a strong preference for eggs and bacon at breakfast as often as possible. Checking the production potentials and other relevant economic factors, the planner may establish that provision of the needed eggs and bacon is a feasible alternative. He may also determine that this aspect of the plan would not create political difficulties in the country. However, the health advisors of the planning board may object to this goal on the grounds of studies that show the harmful effects of increased cholesterol intake by the population. Clearly the planner who would disregard this piece of scientific evidence could not be considered a socially responsible public servant. Naturally, I do not wish to suggest that the preferences of the population, even if doubtful, can be simply disregarded by the planner. However, what is known about the preferences of the population has to be supplemented by the knowledge available on the pertinent matters from various scientific disciplines. In chapter 10 we showed the potential utility in planning of AS M E N T I O N E D EARLIER,

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various fields of knowledge within economics. In part 5 the usefulness of other fields of knowledge will be emphasized. First we discuss the conditions and the problems of the help that planning can obtain from advances in science and technology. The need for and advantages of applying the quantitative knowledge available in statistical form is stressed thereafter.

XI Planning: The Evidence Furnished by Science and Technology which is an attempt at the purposeful organization of the economic process, has to rely on the knowledge accumulated by mankind. In determining the purposes to be served by planning, factors beyond the usually adopted limits of knowledge may play an important role—mainly in the form of value judgments regarding the relative desirability of development alternatives—but the usefulness of knowledge amassed by science and technology can hardly be overestimated by the planner. One major difficulty in the utilization of knowledge lies in its vastness. Another is related to its limits and the need to act (plan) on the basis of incomplete knowledge. Since planning aims to influence the total socioeconomic process, knowledge accumulated in any area may be relevant. With the era of polihistors1 gone (if it ever existed), the planner is obliged to act under circumstances where no man, however well educated, can grasp more than a fraction of the scientific and technological knowledge available. The planner must realize that today's scientific knowledge PLANNING,

is extremely diverse, extending from sub-atomic reactions to mental processes; from mathematical laws of thermodynamics to the economics of race relations; from the births and deaths of stars to the migration of birds; from the study of ultra-microscopic viruses to that of extra-galactic nebulas: from the rise and dissolution of cultures and of crystals to the rise and dissolution of atoms and universes. It includes both knowledge of the workings of living bodies and knowledge of the laws of thought, together with their disturbances. 2

At first sight, some of the advances in science may be of little concern to the planner. After all, the laws of thermodynamics, the migrations of 1. Persons of universal, all-encompassing knowledge. 2. Encyclopaedia Britannica (1968 ed.), vol. 20, p. 7.

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birds, or the dissolutions of universes do not directly affect his activities. However, the indirect effects of the various branches of science, whether geophysics or zoology, may be considerable. These effects may be particularly important as conveyed by the different branches of technology. Throughout man's earlier history the relatively slow but nonetheless impressive advances in technology were products of a trial-and-error process and often were unrelated to various other elements of knowledge of a more abstract nature even if such was available. The holders of craft skills were usually acting on their own and had to base most of their technological innovations on their long experience and ingenuity. However, toward the end of the eighteenth century, technology evolved into applied science with the resulting "industrial societies" of the nineteenth and twentieth centuries. As a result of the accelerated scientific, technological, educational, and economic growth, the planner in the last quarter of the twentieth century is acting in an age in which 90 percent of all the scientists and engineers who ever lived are said to be still alive and practicing. The armies of scientists and engineers are involved in activities often termed "basic" or "applied." To some degree this is a matter of semantics: a given branch of knowledge may be a "basic" one for another branch that will "apply it" to its purposes. The first branch of knowledge may also be an "applied" one in terms of another "basic" branch, whose findings it utilizes. Nevertheless, for some purposes it may be useful to distinguish the various branches of science in the context of their closer or more remote practical utility at a given moment. For example, planners may find it helpful to differentiate scientific activities in the following manner: 1. "Pure" or "academic" research. Scientific activity of this sort is carried out as a pursuit of knowledge for its own sake. Considerations of practical utility are disregarded at this stage. 2. "Oriented" fundamental research, also an "academic" type of activity, inasmuch as it is not carried out with a view to direct application. However, it is assumed that the new knowledge generated by it will be important in a branch of science and in due course will have some (as yet unspecified) applications. 3. "Applied" research is aimed at the resolution of specific problems.

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Programed research projects of this sort are usually rather circumscribed in scope, and the accomplishment of the selected tasks is strongly expected by the sponsors. 4. "Development"—most often carried out under the label "research and development"—is essentially technology and involves the application of established scientific tenets to industrial use. Few countries can neglect any of the four types of activity listed. From the point of view of specific national development programs, the pursuance of some basic research (perhaps related to certain special resource endowments of the country) as well as a mixture of oriented fundamental research, applied research, and research and development, can be unavoidable. At the same time, even the largest and richest countries cannot completely cover all possible research areas entirely on the basis of their own efforts. International scientific cooperation is of great importance to all nations, including the most developed ones. For the developing nations the transfer of technology from abroad (discussed in chapter 8) can be of even greater significance. Policies pertaining to such transfers—and more generally to the development of various branches of science—need to be incorporated in the overall development program of the nation. But prior to the discussion of planning the expansion of knowledge, some issues related to the utilization of already existing knowledge need to be examined in terms of planning. 1. Planning and the relevant scientific evidence The dimensions of scientific knowledge are such that a systematic treatment of the relevance of scientific knowledge to planning is not feasible within the framework of the present book. Nevertheless, the nature of the tasks can be conveyed through references to some current socioeconomic concerns, selected as illustrations of matters concerning planners in most countries and unsolvable without thorough involvement of the scientific community. a. Environmental problems

The environment is of course currently one of the familiar concerns in industrial societies. There is little need here to describe the various problems related to water or air pollution, strip mining, and so

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on. It should also be clear that any planner involved in dealing with environmental matters has to rely on the results of several scientific disciplines, the activities of which are relevant to the environmental issues at hand. For instance, the evaluation and measurement of the degree of pollution itself requires the cooperation of several scientific disciplines, including meteorology, oceanography, and different branches of technology such as those dealing with the development of appropriate instruments of measurement. Evaluation of the harmful effects of pollution again requires cooperation from other fields of knowledge. Medicine will be involved in the analysis of the effects on humans, zoology (and its various branches) on animals, botany on plants, and so on. Biology (and more specifically, genetics) will help the study of effects on coming generations of the species affected by pollution. Once the degree of pollution and the extent of its harm are established, the planner may want to use feasibility studies regarding the abatement of pollution. The planner may then need to involve additional fields of science and technology to produce recommendations concerning the solution of the problems at hand. Depending on the nature and source of pollution, the planners will rely on different branches of science and technology to arrive at the plans to combat pollution in its various forms. The need for the contribution of many fields is evident if one thinks of the differences in pollution problems related to automobiles, paper mills, or nuclear power plants. The planner cannot disregard the sociopolitical or economic issues of pollution and therefore has to rely also on knowledge pertaining to these aspects of the problem. To remain in the field of economics, for example, use can be made of an "expanded input-output table that traces not only the intersectoral flows of ordinary commodities and services, but also the generation and elimination of pollution. The conventional classification of economic activities and goods is accordingly expanded to include the names of various pollutants and activities aimed at their elimination." 3 Leontief's study shows, among other things, that generally pollution is not eliminated but reduced in the process of fighting it through the introduction of less polluting techniques for the production 3. Wassily Leontief, "National Income, Economic Structure and Environmental Externalities," in The Measurement of Economic and Social Performance, M. Moss, ed. (New York: N.B.E.R., 1973), p. 567.

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of goods. The application of Leontief's method "means that factual information contained in an economy would permit us to compute in a rough and ready fashion the opportunity costs of an additional unit of any good and of an eliminated unit of the 'net output' of each pollutant." 4 As John R. Meyer stated: Economists also have become increasingly impressed with the importance of institutional arrangements, in particular the need of creating new and possibly very different kinds of governmental agencies, as part of the environmental solution. Regional planning agencies have come into particular favor. . . . In essence, this conversion of market-oriented economists to advocacy of planning was induced by a growing recognition that many environmental problems involved a remarkable number of interdependencies. . . . For example, a minimal cost solution to depolluting a river usually involves very complex decisions: about where to locate treatment plants; what kinds of relocation of industrial activity, if any, one should require; which communities and industries one should group together to achieve scale economies of treatment; and where and to what extent one might take advantage of natural assimilation. . . . In short, economists have taken what one could describe as more of a "systems approach" to environmental problems and increasingly find themselves collaborating with engineers and other disciplines. 5

b. Transportation tasks

Our second example illustrates the relevance of scientific and technological evidence for planning of transporation. A major issue here concerns the selection of appropriate technologies. Since most developing countries have relatively backward transportation systems, and the establishment of an efficient network of rail, road, water, and air links in these countries involves significant investment outlays, the choice of technologies has great importance. In respect to each main form of transportation (railroads, highways, inland waterways, and sea and air transport), at least the following three main issues will need thorough technological (and economic) evaluation: the vehicles to be used, the type of lines to be built, and the terminal facilities to be constructed. The evaluation of various vehicles such as electric and diesel locomotives, passenger and freight railroad cars, buses, trucks, and passenger cars, ships, tankers, and aircraft requires the cooperation of experts 4. Ibid., p. 571. 5. John R. Meyer, Selling Environmental Standards: An Economist's View, N.B.E.R. Report Supplement 12 (New York: N.B.E.R, May 1973), p. 4.

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skilled in different fields of transportation technology. The types of lines to be built, including railroads, limited access and other highways, inland canals and other waterways, can be determined only in closest cooperation with those experts who are thoroughly familiar with the relevant technologies. The decisions concerning the construction of transportation terminal facilities (railway depots, seaports, and airports) have to involve architects and other experts with special skills. The plans regarding the transport of people to and from work and in general the planning of passenger transportation require the study of population densities, migration patterns, the character of urbanization and housing, and other factors and involve the participation of experts from many areas. The studies required for the planning of freight transportation involve a similar number of fields in science and technology. Occasionally the relevance of a field of knowledge may not be immediately clear. For example, the importance of agricultural sciences for transportation planning may not be self-evident. However, the locations of milk-farms and vegetable-growing regions clearly have an impact on the tasks of transportation. Naturally the availability of transportation facilities will itself influence the location of such agricultural regions. Due to the energy requirements of transportation, the fields of knowledge pertaining to energy may also have considerable impact on the thinking about transportation planning. And to mention still another area, developments in safety engineering will also have an impact on transportation programs and projects. Last but not least is the evidence furnished by transportation economics. Clearly, the latest word in technology will not always be the most economical solution to the transportation problems at hand. In this context the prolonged debate in the United States regarding the construction of the SST (supersonic transport) is contrasted with the likely revival of the DC-3 plane. It is true that the abandonment of the SST project was related as much (and probably more) to environmental concerns as to economic considerations, but the experience and plans with the DC-3 plane can be explained on economic grounds alone. As reported lately6 for several current purposes (including transportation of workers and equipment for the Trans-Alaska oil pipeline) a revamped version of the forty-year-old Douglas DC-3 is being considered. "Con6. Business Week, May 18, 1974, p. 87.

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strutted from parts of the DC-3, the STT7 is designed to meet the special needs of transporting bulky materials. It can carry 7,500 lbs. of cargo or 30 passengers and can land on rough fields or short runways of up to 3,000 ft. . . . And its $500,000 to $600,000 price tag, although higher than the DC-3's original basic price of $115,000, is still far below the $1million-plus cost of medium sized business and commuter aircraft." 8 The contrasting stories—and economics—of the SST and the STT are good reminders of the ways economic calculations may influence choices of technologies for particular purposes. c. Energy issues

The third example of the need to use scientific and technological knowledge is the area of energy issues. In view of the wide recognition of energy-related problems, the general significance of this question in planning does not need elaboration. Therefore we refer here only to the application of various fields of knowledge to the planning of energy production and use. First, attention is called to those branches of science that deal with the reserves of various sources of energy (oil, gas, coal, uranium, water, and other sources). Geology and, in the case of offshore oil deposits, oceanography may be important sources of information. Technologies dealing with the transformation of the different forms of energy from their original sources into the form most efficient for the user provide another important source of information for planners. The issues of transportation and/or transmission of energy again require advice from other branches of science and technology. The relevant fields include expertise in high-voltage long-distance electric power lines, in oil pipelines, and shipbuilding (tankers). The planner may also be interested in the utilization of other forms of energy (solar or geothermal) and therefore seek the advice of specialists in these areas. Finally, he also needs to rely on the relevant social sciences including economics for the evaluation of alternative energy programs. 2. Planning and the application of new technology The term "technology" is used by the planner in its wider meaning. In this interpretation, the technology (especially industrial) includes 7. Its new name: Super Turbo Three (STT). 8. Business Week, May 18, 1974, p. 87.

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knowledge required for the appraisal and design of the project, for its construction and operation, and to prevent it from becoming obsolete as international technical expertise increases. The following elements of technology may be relevant to industrial projects: feasibility studies, market surveys, and other preinvestment services; determination of the possible range of technologies; the choice of technology; industrial processes; engineering design; detailed engineering; plant construction; equipment installation; training of technical and managerial personnel; management and operation of production facilities; marketing information; and improvements to processes and product designs. 9 The central planner is usually not involved in evaluation of the millions of detailed technical decisions required in the context of all projects implemented in a given plan period. However, he has to be aware of the various types of knowledge relevant to the detailed decisions. Also, in the case of nationally important projects, the discussion of some of the technological details will be of concern to the planner. Often the technological knowledge required for planning purposes may not be available locally within a country; in such cases foreign sources must be used. These sources of knowledge can be identified as: books, journals, and other information published abroad; universities and other training programs abroad; employment of foreign experts; foreign consultancy arrangements; importation of machinery and equipment; and licensing agreements (for production processes, use of trade marks and patents, etc.). 10 The utilization of foreign sources of technological knowledge is seldom an easy process. This is why the UNCTAD study stresses that "in order to master the process of technological transfer, a country must acquire the capacity to choose between alternative technologies, to adapt imported technologies to local conditions and ultimately to participate in the creation of new technology." 11 An important advance in technology that is gaining increased use by both developed and developing countries is automation. There are many arguments relating to the issue of capital-intensive technologies and their 9. This list is adapted from a list in the U N C T A D study, Guidelines for the Study of the Transfer of Technology to Developing Countries (New York: United Nations, 1972), p. 5. 10. Ibid., p. 8 (an adaptation). 11. Ibid., p. 6.

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relative merits in developing countries, particularly in the context of large-scale employment problems characteristic for most of these countries. This is not the place to discuss the relevant issues in detail. However, one argument used against the advocates of "small-scale" or "handicraft" technologies is that the impact of such labor-intensive technologies on employment would be small but their relative effect on the industrial processes would be quite significant. Based on the work and three meetings of rapporteurs of the Economic Commission for Europe in the 1960s, the very useful United Nations study on automation addressed itself to the "employment argument" in the following manner: "The choices made have only a fairly minor effect on the problems of employment in those developing countries with a high level of unemployment and under-employment; the solution of this problem lies primarily in agriculture and secondarily in the service sector; the construction and development of industry, irrespective of the technological solutions adopted, absorb only a fairly small proportion of the unemployed labour force in most of these countries." 12 Another circumstance is that, whether most advantageous or not in terms of conditions of developing countries, modern technological processes simply do not tend to be of the labor-intensive variety owing to the relatively high wage rates in the developed economies where technological innovations are usually first introduced. Thus in this respect there is relatively little choice regarding technologies to be adopted by developing countries. The same applies to automation. In many cases there is simply no other way except to adopt an automated production process for a new industry to be introduced in a country. This is also related to the fact that automation is a wider process than merely the installation of a series of interrelated machines and equipment: In fact, it is apparent that, from the standpoint of the technical processes, automation does not amount simply to the wholesale replacement of labour by capital—although this is clearly an important factor—but that it is characterized just as much by the continuity of the processes involved, by the range and complexity of the technical links, by the autonomy of controls and by other similar considerations. The technical changes resulting from the automation of a process do not relate to manpower alone but also to the use of materials, energy and land, as well as to raising standards of quality, the regrouping of various 12. Economic

A\/>cii\ t Amomtuion

(New York: United Nations, 1971), p. 54.

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processes, etc. They do not represent solely a new stage in the gradual mechanization of production but introduce a technical transition only partly reflected by straightforward replacement."

In light of the aforementioned factors, planners often cannot disregard the latest in technology. As mentioned earlier in the context of the SST and the STT, there may be sound economic reasons to hold onto technologies as much as forty years old and reasons to reject some of the latest developments. However, planners may not have such choices, and the establishment of particular industries may be feasible only on an automated basis. Naturally, if production in the developing countries reaches the world technical standard (regarding unit cost and quality), it has a better chance at the foreign—as well as domestic—markets against competing products of other countries. 3. The domestic science-and-technology

effort

Even the transfer of technology from abroad requires a significant domestic science-and-technology effort. The need to resolve numerous other tasks points to the same requirement. The needs of the national planning effort rank among the foremost of these tasks. As indicated earlier, the construction of national development plans requires a great variety of scientific and technological information and its evaluation from the standpoint of the development program: Every "model" of development implicitly presumes the application of science and technology to production in agriculture, industry, and services, in whatever other respects the models may differ. The increase of land and labour yields in the agricultural sector especially depends on higher levels of understanding about the environment and or the technological means to exploit it. Industrialization, by definition, means the wholesale introduction of new technology. The same applies to other sectors, such as transport, power, etc., and to social sectors such as health and education. In addition, scientific and technological knowledge in principle provides an escape from the limitations of poor natural resources to much larger increases in productive power than could otherwise be conceived. 1 4

One early task of the planner is to evaluate his country's science and technology effort, both in overall terms and in respect to key planning 13. Ibid., p. 51. 14. Science and Technology for Development (New York: United Nations, 1970), p. 21 (from the statement of the Sussex Group).

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targets. One usual estimate applied for evaluation purposes is the percentage of research and development (R&D) expenditures expressed against the country's GDP. In the second half of the 1960s the developing countries spent on the average about 0.2 percent of their GDP on R&D. The United Nations Advisory Committee on the Application of Science and Technology to Development recommended that the developing countries in the 1970s should reach "the R and D expenditure of developed countries expressed as a percentage of their GNP." 1 5 This would appear to be an overly optimistic goal, and the Sussex Group under the chairmanship of Hans Singer recommended a target of 0.5 percent for the developing countries. Considering the difficulties of measurement, the essential aspect of the recommendation is the suggested two- or threefold R&D increase in those countries. In addition to the R&D expenditures the so-called STS component (expenditures on scientific and technological services) should be mentioned. It is presumed that expenditures on STS in the developing countries might be perhaps twice as large as those on R&D, but statistical data in this regard are not yet plentiful. Scientific and technological activities—which are of course closely related to R&D—include the following: scientific library and information services; scientific testing and standards services; museums and zoological and botanical gardens; geological, geophysical, meteorological, and natural resources and survey work, including mapping; general purpose socioeconomic data collection; and technical and scientific advisory, consultancy, and extension services, including patent offices and related activities. 16 The existence and development of such services is a precondition for significant national research and technology efforts in general and the participation of science in the solution of national development problems in particular. The main directions of the national science effort—similar to the determination of the desirable technology transfers from abroad— should be evaluated within the framework of the overall aims, strategies, and policies of the national development plan (see chapters 7 and 8). The formulation of this necessity by the Sussex Group is as follows: Policy for science and technology in the narrowest sense is concerned primarily with decisions relating to research and experimental development. But it is our 15. Ibid., p. 12. 16. Ibid., p. 20.

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contention that this decisionmaking must be closely related to overall strategy for economic and social development. Policy for science and technology in this broader sense is concerned not merely with generation of new knowledge in the R and D system, but also with re-dissemination and application of existing and new knowledge throughout the economy, and with the reciprocal interaction between science, technology and the economy. 17

4. The relaying of scientific evidence to planning At the outset of this chapter—with the use of a health-related example—we referred to the need to utilize the results of scientific evidence for planning. In that example a strong preference by the population for egg consumption was assumed and the usefulness of relying on medical evidence regarding the high cholesterol content of eggs was suggested. The underlying issue is of course the relative incompetence of the consumer to make educated decisions in many cases even regarding his own consumption. While the decisionmaking power of the consumer usually should not be curtailed,18 for the information and education of the consumer special efforts may be needed. The consumer may be aware of his limitations and even willing to provide the means to obtain increased knowledge regarding the products and services he buys, 19 but his ability and willingness to become involved in similar efforts regarding public goods are less promising. In other words, the consumer may not only be relatively incompetent but also relatively uninterested in expressing particular desires regarding defense technologies, quality control, product testing, and so on. Naturally the public and its elected representatives should have full right to become involved in the decisionmaking process regarding such matters. Nevertheless, the planners—and the government in general—usually need to rely much more on evidence furnished by science concerning such issues and usually can utilize much less the preferences of the public regarding these complex technical matters. For instance, it is evident that the public may not yet be aware of important discoveries in medical science that have a profound impact on the possibilities in health 17. 18. States 19.

Ibid., p. 21. Although during Prohibition, for example, such an attempt was made in the United regarding liquor. Consumer Reports constitutes such a consumer-financed effort in the United States.

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planning and that the planner already may wish to take into account. Similarly, new technologies in the various fields of production may demand the close attention of the planner, although the public's interest and understanding of their possibilities may be very limited. Even if the public is quite interested in an issue and there is a reasonable level of understanding concerning the technical aspects of it, current preferences may be affected by the limitations of the time horizon of those expressing various preferences. For example, relatively few individuals will express preferences that take into account the needs of yet unbom generations whereas the planner must also somehow consider the interests of persons to be born within the next five, ten, or fifteen years. Unfortunately, the planner himself is not in an easy situation regarding the use of scientific and technological evidence relevant to the plan under elaboration. Assuming that the relevant evidence is already available in the country (or can be easily obtained from abroad), two major difficulties are involved in the use of this sort of evidence. The first is the limitations of the planning personnel. Unless the planning office has on its staff people capable of evaluating and using the variety of scientific and technological information pertinent to the given plan, efficient absorption of the relevant ideas may be seriously hampered. Due to the growing specialization in science and technology, no science or technology advisor can be in a position to handle all of the complex technical matters of importance to the plan. It should be added that only a relatively well-staffed department within the planning office can hope to cope with complex tasks of this sort. The second major difficulty—assuming that the relevant information is available somewhere in the country or abroad and that the planning office has a competent staff capable of absorbing the ideas relevant to planning—concerns the establishment of efficient channels of communication between the sources of such knowledge and the staff of the planning office meant to utilize it. The establishment of the necessary channels may prove to be more difficult than the creation of the competent staff group in the planning office. This is partly related to the nature of the task, since the channels of communication may be expected to relay information regarding a great variety of scientific and technological issues, from medicine through nuclear physics to off-shore oil-drilling technology.

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Sometimes these tasks are referred to as "technology assessment." Various governmental agencies, usually in the context of regulatory duties, are normally involved in such technology assessment. One of the simplest examples is the fire-safety examinations of buildings and structures undertaken by fire departments. More complex assessments involve the study of aircraft and airport-safety evaluations. In the United States the activities of the Food and Drug Administration and the Environmental Protection Agency involve frequent technology assessments. While most of the activities mentioned are parts of or directly related to concrete regulatory problems, a growing tendency can now be felt toward complex governmental assessment studies which—although related to regulation—potentially have very wide repercussions. The governmental study of no-fault insurance, off-shore oil-drilling, and cloud-seeding programs may affect the realm of several agencies. The potential usefulness of studies of this type for planning is quite evident. One could add that the full benefit of such large-scale studies is most likely to materialize under conditions of overall economic planning rather than under conditions of piecemeal regulatory activities. For successful use of the scientific evidence for planning, it is important to remember that: The fundamental problems of getting technologies applied very frequently lie in prevailing forms of economic organization. At the same time, however, successful application depends on an adequate system of institutions, like extension services, concerned with encouraging the application of technology and on adequate coupling between these institutions and all other STS activities. There must be firm connexions between every link in the technology application chain. Thus: (a) Technologists, able to understand the contributions of fundamental research, but familiar with industrial needs and problems, should provide liaison between fundamental and applied research functions: (b) As close a contact as possible should be encouraged between fundamental research scientists, technologists, applied scientists and potential industrial and agricultural users; (c) Liaison and extension officers are also needed to help potential industrial and agricultural users to recognize their technical needs and problems, and to relate applied scientific research to these needs and problems. 2 0

20. Science and Technology for Development, p. 31.

XII The Base Period of the Plan: The Statistical Evidence we conceptualize planning as relying on four major sources of evidence: the preferences of the population; knowledge encompassed in all branches of science and technology; quantitative information regarding the socioeconomic processes; and the priorities of the political leadership of the country. The third source of evidence—which is essentially economic and social statistics—should be acknowledged in principle as part of the second. In an abstract sense statistics, as one of the fields of knowledge, need not be considered different from the other branches of science discussed in the preceding chapter. In practice, however, statistical evidence plays a special role in the construction of development plans. One can characterize the figures contained in the economic plans of countries as ex ante values pertaining to the same phenomena as the ex post data shown for those categories in the statistical publications. The planner may rely heavily on evidence obtained from other sources, including various other branches of knowledge, but will carry out his planning activities largely in terms of statistical indicators; also, the fulfillment of the plan will be measured statistically. Thus for practical reasons the study and use of statistical evidence is a particularly important part of the work of constructing a development plan for a nation. Hence the special attention given in the present chapter to the statistical evidence for planning. AS EARLIER I N D I C A T E D ,

1. The base period of the plan The target indicators of economic plans are usually expressed in relation to a base year. The base year is most often the year preceding

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the first year included in the timespan of the plan. Thus for a five-year plan for the years 1976-1980 the base year could be 1975. While the selection of a specific base year is quite general for economic plans, in the following we call attention to the difference between the narrow and broad interpretation of the base period of the plan. We argue that in the process of constructing a plan a wider interpretation of the base period is unavoidable. a. The base period—narrowly interpreted The narrow interpretation of the base period—which confines it to the year immediately preceding the planned period—suffers from various deficiencies. The first deficiency is related to the possibility that the given year is untypical in important regards. For example, the economic analysis for the plan and the setting of the targets may be misleading if the base year to which all of the increases (etc.) are compared is a recession year. " H i g h " growth rates calculated on such a low basis may show artificially rapid increases in production (etc.) essentially possible only because of the existence of unused capacities and idle labor in the base year. An exceptionally successful year may not serve well as base year, either. The targets of the plan may look " m o d e s t " and may be termed "conservative," although in reality their achievment may require a considerably larger effort than the targets set on an artificially low basis. Even if a single year is unexceptional in most regards and its characteristics are "average" for the period of years preceding the planned period, it should not be considered a sufficient basis for the plan. Clearly the tendencies prevailing in an economy cannot be evaluated on the basis of one observation and therefore proper analysis must rest on longer time series. The expression of the targets of the plan in comparison to the levels of the year preceding the planned period also introduces technical complications for the planner. The data for the year preceding the planned period are naturally not yet available at the time the plan is being elaborated. If there is to be public discussion of the plan and the legislature has to act on it before its implementation is possible, the draft of the plan has to be issued at least five or six months before the end of the year that precedes the plan. If a prolonged discussion period is needed and room is to be left for incorporation of changes in the plan

Base Period of the Plan

219

based, on its public review, the draft of the plan may have to be issued ten to twelve months ahead of the period to which it refers. In light of this, the use of, say, 1975 statistics for a 1976-1980 plan is clearly not feasible. The draft of such a plan would presumably be issued early in 1975, at a time when neither data for 1975 nor perhaps even some key 1974 estimates (especially in the field of national accounts) are finalized. The planner who wants to express the targets of this plan compared to 1975 will need first to forecast practically all 1975 figures and also some for 1974. Depending on his luck with forecasting the base year of the plan, the target indicators for 1976-1980 may or may not be in the expected relationship to the final figures that will emerge for 1975. In other words, the inherent uncertainties of the planned growth indicators (etc.) will be augmented by the uncertainties stemming from any weakness in the forecasts for 1975 and (in the case of several aggregates) for 1974. b. The use of national time series

For the proper analysis of the situation preceding the period of the plan, the planner needs to utilize longer time series. Whether the planner wants to base the targeting on the assumption of continuing trends (which will extend from the past into the period of the plan) or intends to influence or modify the behavior of variables compared to the tendencies shown earlier, the need for time series of some length is quite evident. Agriculture is a prime example of the need for long-term evaluation in the process of plan elaboration. In agricultural planning, adherence to any single base year can lead to absurd results. Especially in countries where the influence of weather conditions on agricultural production is important (e.g., India) and where these conditions can differ significantly in various years, the selection of a single year is extremely difficult, even if that year can be considered as an average one for agriculture as a whole. Even in "average years" various crops are differently affected by the prevailing weather conditions. Therefore comparisons with any single base year could be misleading in many regards. To overcome this difficulty national plan documents often give the base period for the agricultural plan in terms of an average, for example, the average of the five years preceding the planned period. Similarly the agricultural targets of the plan—especially regarding crops—may be offered in terms of averages for the years of the plan.

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SCIENTIFIC AND QUANTITATIVE EVIDENCE

Agriculture is a vivid but not unique example of the need for longer time series for planning purposes. AU areas of the economy influenced by weather conditions (transportation, food processing, exports, imports, etc.) and subject to cyclical factors that lead to phases of economic prosperity and recession need, for the analytical work for the plan and its final elaboration, a considerable quantity of time-series data. c. Cross-sectional data and time series of other countries

Looking toward the future of their country, planners often use the evidence of data from other countries—at a higher stage of economic development—to draft their own blueprints. Sometimes this approach leads to immature imitation of more advanced nations. Such abuses of the foreign sources of data should not becloud their essential usefulness for the planner. Both regarding the levels attained by the country and concerning its growth rate, appropriate comparison with data from other countries may be very valuable in the work on the plan. Comparisons of structural differences likewise can be helpful in the elaboration of the plan. Among others, the following major statistical publications of the United Nations and its specialized agencies can be consulted by the planner:1 UNITED NATIONS Statistical Demographic

Yearbook Yearbook

Yearbook of National Accounts

Statistics

Vols. I and II. Individual Country Data Vol. III. International

Tables

World Energy Supplies The Growth of World Industry Vol. I. General Industrial

Statistics

Vol. II. Commodity Production Data Yearbook of International Trade Statistics 1. For more information on international statistical sources, see Directory of International Statistics (New York: United Nations, 1975).

Base Period of the Plan Commodity

221 Trade

Statistics

Monthly Bulletin of

Statistics

INTERNATIONAL LABOR OFFICE Yearbook of Labor

Statistics

FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS Production

Yearbook

Yearbook of Fishery Yearbook of Forest

Statistics Products

UNITED NATIONS EDUCATIONAL, SCIENTIFIC, AND CULTURAL ORGANIZATION Statistical

Yearbook

WORLD HEALTH ORGANIZATION World Health Statistics

Annual

INTERNATIONAL MONETARY FUND International Financial

Statistics

INTERNATIONAL CIVIL AVIATION ORGANIZATION Digest of Statistics—Airline

Traffic

2. Comparability problems In the utilization of time-series and cross-sectional data in the elaboration of the plan, the quality of the statistical information available must be considered. The limitations on the quality of the data may be related to several factors. The weakness of the national statistical organization may be one. 2 Lack of sufficient clarity regarding definitions, methods, and classifications may be another. Problems of index-number 2. In chapter 18, we return to some of the questions of statistical organization that have a particular bearing on planning and plan implementation.

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SCIENTIFIC AND QUANTITATIVE EVIDENCE

construction may also affect the usefulness of the data for planning purposes, even if reliable basic data can be secured for the indexes.

a. Statistical comparability issues Generally speaking, the planner is in no position to evaluate critically the statistical information that he uses. Certainly his concentration on the elaboration of the plan, his training and experience, and the time limitations in the period of the plan's construction do not permit his involvement in detailed reliability studies regarding the statistical data he uses in the process. Nevertheless, because the validity of his inferences based on statistical information will be influenced by the quality and the comparability of the figures utilized, he must proceed with care in his analysis and forecasting. The present study cannot offer a description of the statistical problems and the techniques useful to the planner for evaluating the basic information he is using. Here we can only emphasize the general need for the planner to be fairly familiar with statistical techniques and the sources and character of the data available to him. Since planners use time series for analysis and since their plans (except the annual ones) are also expressed in terms of time series, say, for the five years covered by the plan, particular importance should be attached to issues of comparability. The importance of comparability is heightened if cross-sectional data are also used referring to many countries concerning the variables of the plan under elaboration. Of the many issues of comparability of data over time and across countries, I wish to raise only two here. One is the well-known statistical problems of aggregation and the other is the questions of measuring changes over time with the use of Paasche, Laspeyres, Fischer, and other types of index numbers. ¡Depending on the statistical procedures followed, different types of index numbers usually provide somewhat different measures of the changes in production, consumption, and other aggregates. Comparisons across countries are beset with the same index-number problems. In addition, such comparisons have to solve more difficult problems of specification and valuation than do comparisons over time within a country. Generally speaking, comparisons among countries involve the juxtaposition of data depicting situations more dissimilar in respect to economic development level, social conditions, climate, and

Base Period of the Plan

223

geography than comparisons dealing with situations at different time periods within a single country. 3

b. Socioeconomic and political aspects of comparability

As suggested earlier, planners should interpret the notion of the base period in a broad rather than narrow manner. Consequently plans should be based on analysis of the mutual interrelationships and the movement of dominant factors characterizing the socioeconomic process of the country as well as on evaluation of the relevant evidence pertaining to other countries. The inclusion of evidence drawn from foreign sources is justified not only because of the scientific value of a larger number of observations concerning planned phenomena. Considering that every economy is connected with the world economy, the analysis of the situation in other countries—especially those connected through trade, financial links, or political ways to the country in question—has an important practical dimension as well, especially concerning policies related to foreign economic links. The importance of the international environment should not be underestimated by the planner. While it is true that the success or failure of national plans depends first of all on domestic efforts and conditions, more often than not international factors (through the movement of the terms of trade, investments from abroad, etc.) have tremendous impact as well. In this context the planner in developing countries is usually involved in considering the possibilities of increased economic links with both neighboring and distant countries. At present the most decisive economic links of the developing countries interconnect them with the developed market economies of the West (including Japan). However, the economic links among the developing nations are also important and several developing nations have established significant economic links with Eastern Europe and China as well. In evaluating the possible strengthening of economic links with other nations, the planner needs to study particularly the economic picture and outlook of those regions in which his country will have special interests in the period ahead. 3. In chapter 13 a special section is devoted to international comparisons of national accounts aggregates.

224

SCIENTIFIC AND QUANTITATIVE EVIDENCE

This task is not made easier by the somewhat contradictory tendencies evident in the world economy over the last fifty years or so. For the purposes of the planner working on the elaboration of his nation's development plan, for which he utilizes also the evidence drawn from statistics pertaining to other countries, it may be useful to think of these contradictory tendencies of the world economy as manifestations of synchronization and desynchronization of the socioeconomic development processes of the world. 4 The planner will notice that there exist some major factors that exercise a powerful importance in the direction of worldwide synchronization of socioeconomic processes. The foremost factors in this regard are science and technology. Both are international in orientation, in most instances actually cosmopolitan in character. Two achievments of modern science and technology, mass communications on a worldwide level and the greater and faster mobility of people (particularly through air and road transport), have been of special importance in the process of synchronization of socioeconomic processes. The fact that people can observe—in person or through the media of mass communication—the circumstances of other economies and societies has a deep and unifying impact on the aspirations of people concerning their living standards. The introduction of internationally similar technologies in the various phases of economic activities leads to a growing similarity in the conditions in which people work. This tendency toward synchronization often leads to standardization in housing, transportation, architecture, and other sectors and blurs the distinctive features among modern urban areas in the various parts of the world. With careful planning—and through the involvement of social thinkers, urbanologists, environmentalists, architects, artists, and others in the charting of the road toward a desirable future—probably many "standardization effects" of the synchronization process can be largely eliminated. However, the tendency of worldwide synchronization of socioeconomic processes is an extremely powerful one and at this stage in history there appears to be no major reason to doubt that it will prevail ultimately. In keeping with this, the planner may expect a large unifying effect on the world of the 4. The term "synchronize" or "synchronization" is used here in its dictionary meaning: "to be simultaneous," "to cause to happen at the same time," and "to show coincidence in time" (Webster).

Base Period of the Plan

225

future. Increasing similarities in the ways of living, the production and distribution processes and so on will characterize countries even more so than today. At earlier stages of mankind's development this process of synchronization was much less advanced. Not only in tribal times, but even in the times of the great ancient civilizations of Mesopotamia, India, China, Egypt, and Greece, or in the cultures of the Mayas and the Incas in America, the interconnections among these civilizations were rather weak (or nonexistent, as between Eurasia and America). It is reasonable to think of these cultures as parts of a fairly desynchronized process in terms of time and geography, even if ultimately all belong to the heritage of modern man. The first worldwide attempt at economic (and to a lesser degree, social) synchronization was brought about by the colonial empires. This process became most pronounced by the end of the nineteenth and the beginning of the twentieth century. The establishment of the capitalist world market was one essential feature in the development of synchronized socioeconomic processes. The British Empire contributed extensively to this synchronization, together with the influence of the French and Dutch colonial systems in the same direction. In the October 1917 Revolution, Russia introduced an important element of desynchronization. Marx apparently expected a rather synchronized socioeconomic change from capitalism to socialism on a worldwide scale. But with the establishment of the Soviet system in one (and only one) state—even if that extended to one-sixth of the earth—in the socioeconomic development of the world certain important elements of desynchronization were introduced. In the economic sphere the changes regarding property institutions, in the social and political fields the new forms of party and government intervention were of particular importance. These elements of desynchronization remained in existence after the Second World War and actually their significance became more pronounced with the socioeconomic changes in Eastern Europe and China. However, it would be a mistake to consider the establishment of the Soviet Union and the changes in Eastern Europe and China after the war as factors of desynchronization only. From a number of viewpoints, including technology and industrialization, the mentioned social

226

SCIENTIFIC AND QUANTITATIVE EVIDENCE

changes—while in themselves manifesting certain aspects of the desynchronization—actually contributed to the momentum of worldwide synchronization. Notwithstanding the sociopolitical differences, the economic production characteristics for the Soviet Union today are more synchronized with those of the United States than the economic production characteristics of the two countries prior to 1917. The dissolution of the great colonial empires also created certain elements of desynchronization in the world socioeconomic processes. Inasmuch as the newly independent nations embarked on policies of faster industrialization and modernization (similar to those of the Soviet Union), the tendencies of worldwide synchronization became more pronounced in the countries of the Third World. However, compared to the situation of colonial times—when synchronization was assured by the power of the metropolitan country—a great variety of political and social tendencies became stronger, which can be characterized as signs of increased desynchronization. Actually the strengthened nationalist tendencies evident in many countries are important contributors to the tendency toward desynchronization. It is noteworthy that the tendencies of desynchronization can be observed within the group of "centrally planned economies" as well, as amply demonstrated by the differences between the Soviet Union and China. Although it can be assumed that the tendency toward synchronization will ultimately prevail—and will bring about the decline of the nationstate—at present the planner must also take into account the tendencies of desynchronization, with their impact on planned measures regarding foreign economic links. The planner should recognize that proponents of convergence theories fail to consider the forces of desynchronization in today's world. Plans based on hopes for the smooth synchronization of the world socioeconomic processes cannot be considered as being on firm ground; on the other hand, the planner should be aware of the large forces of synchronization—particularly technology and science—which should make calculations for increased worldwide economic cooperation and exchanges quite realistic. It is true that the currently strengthened tendencies of desynchronization (felt with particular impact because they came after the first worldwide attempt at synchronization was nearly completed around the turn of the century) are reasons for caution in planning the economic future of countries. Nevertheless, in long

Base Period of the Plan

227

perspectives the unifying forces rather than the separating ones will prevail and a truly planetary economy will succeed. 3. The approach to the search for data The planner's search for relevant statistical data may proceed along several lines. In accordance with our emphasis on social preferences, the approach briefly described below suggests a review of the available statistics in terms of the main social preferences, selected for the planned period. Naturally other approaches to evaluation of the data regarding the base period are possible. The advantage of focusing in this process on the social preferences lies in the goal-oriented character of the ensuing analytical activity. Thus the reivew of the statistical indicators becomes an evaluation of the factors influencing the evolution of the various social preferences. To provide a simplified illustration to these perhaps abstract-sounding ideas, let us assume that in a given country the preliminary policy studies undertaken for its five-year plan suggest the emergence of four basic social preferences: a significant increase in the well-being of the population, a strengthening of the national defense effort, a heightened interest in population problems, and an intensified effort to maintain social order. The review of the available statistics in such a situation may be along the following lines. The analysis of the statistics concerning the well-being of the population may be approached on two broad avenues. First, it can proceed along the details of data available on the final use of the goods and services. Second, it can follow the details of the production and exchange processes regarding the supply of goods and services. Naturally the analysis would have to cover all components of the standard of living, including material consumption (food, clothing, shelter, etc.) and the consumption of services (health, education, cultural services, etc.). It has to extend not only to the flows influencing the welfare of the population but also to the stocks having an impact on it. For example, the stocks of housing, schools, hospitals, and roads have a direct influence on the living standards of the people, and therefore statistics on home construction need to be supplemented with census data regarding housing and other stocks. Study of the production process also has to

228

SCIENTIFIC AND QUANTITATIVE EVIDENCE

rely on data regarding the pertinent flows and stocks, the latter being especially important concerning the capital stock and the labor force available. As indicated earlier, the review of statistics should include both national and international data for a considerable period of time. On the basis of these data the variables studied will generally be evaluated regarding: their level attained in the country for which the plan is being elaborated, their domestic growth rate, the gaps concerning them (compared to countries in more advanced situations), and the comparative growth rates experienced for such variables in other countries. The review of statistics pertaining to the second overall preference (national defense) will proceed in a similar manner, with emphasis on the economic background (particularly defense production) pertinent to it. The analysis of manpower needs of the defense industries and of the armed forces of the country will lead to the field of demographic statistics, which can supply the necessary estimates by cohorts of the population and other variables. The use of demographic statistics will of course be of basic importance in studying the third social preference selected for our example (population problems). The analysis of fertility, mortality, life expectancy, morbidity, migration, agglomeration, and other factors may require a great amount of statistical information regarding the population of the country. The use of comparable international statistics will also be necessary for evaluation of national trends and expected future developments. In connection with the fourth illustrative social preference (the maintenance of social order), the review of statistics pertaining to the distribution of income and wealth may be useful, together with the evaluation of the country's situation with respect to housing, health, education, welfare, and cultural levels according to the various social strata in the population. 4. The planner as a user of statistics The planner, as a major user of data, usually has to maintain a close contact with their producer. It is in his interest to cultivate his link to the statisticians, not only to secure prompt statistical replies to his immediate queries, but also to enable him to influence the development of new statistical programs in line with the needs of his planning activities. Conversely, the planner also has to listen to the advice furnished by

Base Period of the Flan

229

the statisticians. In particular—to the fullest possible degree—the definitions, concepts, and classifications pertinent to the planned variables should be consistent throughout the documentation of the plan and the national statistics. Naturally the planner is only one of the users of statistics. His place can be seen by showing the classes of data-users. Various criteria can be utilized to classify users into meaningful groups. For example, users can be classified by institutional characteristics in the following manner (grouping A): governmental users and nongovernmental users (both organizations and individuals). There are numerous ways to subdivide the major groups of users in grouping A. Government users of statistics can be subdivided by the major branches of government (e.g., ministries) and nongovernmental organizations can be shown by subgroups of institutions engaged in economic activities in research, teaching, and so on. By their nature, institutional groupings depend heavily on the particular institutional setup of each country and the need for statistical data of the various groups shown. Another way to classify the users of statistics is to group them according to the level of the functions that they exercise in society. Depending on the level of decisions characteristically taken by members of these groups, they can be grouped in the following manner by level of authority (grouping B): users with central national authority, middlelevel users, and users at the primary level. Grouping B can be interpreted both in terms of the government hierarchy and outside it. Within the government the users with central national authority include governmental leaders (and their staffs), central planning staffs, and others. Middle-level users include those who are involved in decisions pertaining to particular segments of socioeconomic activities (e.g., regulation or management of different branches of industry) or pertaining to the territorial subdivisions of the governmental structure (e.g., decisions at the level of states as compared with decisions at the national or federal level). In the context of government, the users at the primary level include local authorities (of cities, counties, etc.). Outside the government the users may also have national authority (e.g., central staffs of large public or private corporations), or may be classified as middle-level users, or again as users at the primary level. Clearly, the level of the authority of the users—in terms of the impact

230

SCIENTIFIC AND QUANTITATIVE EVIDENCE

of their decisions at the national, intermediate, or local level—influences their needs for various types of data. Aggregated information regarding macroeconomic measures of production, income, and the like is essential at the national level but of limited use at the local scene. Small-area data, on the other hand, may be highly relevant to local matters but superfluous detail for central authorities. Users can also be classified according to their functions. Depending on their characteristic functions, the distinction of major groups of users of statistics by the chief function of the user (grouping C) may be useful: users involved mainly in legislative functions, in the development of socioeconomic policies, in management activities, and in research. Users of statistics who are involved mainly in legislative functions are of central importance at the national level (national legislatures and their members and staffs) but can be of significance also at the state or local level. The group of users mainly involved in the development of socioeconomic policies includes both governmental personalities and users in social organizations (party leaders and their staffs, representatives of trade unions, trade associations, etc.). The users involved mainly in management activities are both governmental and nongovernmental. Governmental users include managers of government programs, and nongovernmental users, industries or corporations. The users mainly involved in research include individuals at academic institutions, governmental bodies, and industries. The three groupings (A-C) offered above are not mutually exclusive classifications of users. Indeed, as shown in the following table, the interrelationships among the groupings are easily demonstrated. All classes of users may need to use national, regional, or local data. The statistical needs of the various classes of users are naturally different. These differences are not absolute, however, and a considerable amount of overlap exists. In terms of the shaping of national statistical programs, it is important to observe both the overlap and the special needs of various groups of users. The former are of great significance for the integration of the set of programs that include provisions for the latter. The table includes references to the scope of the data used from the point of view of geographical coverage. As indicated, all groups of users may need a certain amount of data at the national, regional, or local level. However, the mix is clearly related to the level of authority of the given group of users. For example, the need for national data is most

231

Base Period of the Plan Users of Statistics: a Schematic Grouping ^S.

Level of Authority Function^. National (Central) Exercised Level

Medium Level

Primary level

Legislative

G F R L

NG F R L

G F R L

NG F R L

G F R L

NG F R L

Policymaking

G F R L

NG F R L

G F R L

NG F R L

G F R L

NG F R L

Management

G F R L

NG F R L

G F R L

NG F R L

G F R L

NG F R L

Research

G F R L

NG F R L

G F R L

NG F R L

G F R L

NG F R L

Key.

G NG F R L

= = = = =

Governmental users Nongovernmental users Use of national (federal, etc.) data Use of regional (state, etc.) data Use of local (city, county, etc.) data

pronounced at the level of the central authorities, and the use of local data is most widespread at the primary level. When practical attempts are made in a country to classify the users of statistics there is no need to always arrive at complex cross-classifications or a consequent systematic treatment of the numerous possible groups, as shown in the table above. What is advisable, however, is to apply a systematic approach to the problem and to select the most important groups, the major users of statistics within the country at the given time. 5 For example, in the evaluation of the American statistical system issued in 1971,6 the following major groups of users were identified: policymakers, program managers, evaluators of government programs, exploratory research, industry and trade associations, state and local governments, and the public (including newspapers, radio, and television). Planners normally are among the most influential users of data, and their needs may shape the statistical programs to a considerable degree. 5. The preceding treatment of the major groupings of users is an adaptation of the relevant classifications and analysis given in Z. Kenessey's "Some Methodological Problems of Developing Statistical Systems." Statisztikai Szemle 45 (April 1967): 275-85. 6. Federal Statistics: Report of the President's Commission (Washington, D.C.: U.S. Government Printing Office, 1970), vol. 1, pp. 77-105.

Agriculture Statistical Series or Tabulation

Frequency

Geographic Area

Area and number of agricultural holdings classified according to (a) size (i.e., total area), (b) kind of tenure and size, and (c) whether irrigated. Number of agricultural holdings classified according to power used Area and number of agricultural holdings during crop year classified according to utilization of land (e.g., arable land, land with growing trees, vines or shrubs) and size Aggregate area of field crops during crop year and number of agricultural holdings reporting them according to kind of field crops Area under and number of productive and nonproductive trees and vines according to important kinds of crops Number of livestock and poultry kept at a specific date and number of agricultural holdings reporting them according to species, age, sex, and purpose Area sown and area harvested, yield and production during crop year for key field crops Number of trees and vines of productive age, yield, and production for key trees and vine crops Number of livestock and poultry kept on a specific date and number slaughtered during the year by major species, sex, and age group; number of animals slaughtered and average carcass weight by major species and age group Quantities of other important livestock and poultry products—milk, wool and eggs Index numbers of agricultural production Average prices received by farmers for each important agricultural product Average prices paid by farmers for each important item for farm consumption Index numbers of prices received and paid by farmers

Decennial

Whole country and major subdivisions

Decennial

Whole country and major subdivisions Whole country and major subdivisions

Decennial

Decennial

Whole country and major subdivisions

Decennial

Whole country and major subdivisions

Decennial

Whole country ind major subdivisions

Annual

Whole country

Annual

Whole country

Annual

Whole country

Annual

Whole country

Annual Monthly

Whole country Whole country

Monthly

Whole country

Monthly

Whole country

Agriculture (continued) Statistical

Series or Tabulation

Gross fixed capital formation by type of capital goods and major kind of economic activityValue of output, total value and major components of input and value added for major commodities produced Quantities of input items consumed and stocks of input items for major commodity produced

Frequency

Geographic

Area

Annual

Whole country

Annual

W h o l e country

Annual

Whole country

The analysis given above will of course convey the need for caution: the planner should not attempt to monopolize the production of data exclusively for his own purposes. The needs of hosts of other legitimate users need to be met as well. Fortunately the data requirements of the planning process are such that they may permeate most types of data shown in the chart above by "function exercised" and will manifest themselves in needs for national, regional, and local data as well.

5. The basic statistical series for planning It would not be feasible to describe in the framework of our study all of the basic statistical series useful for planning purposes. However, on the basis of a publication of the U.N. Economic Commission for Asia and the Far East 7 we list the branches of statistics involved and offer a table of basic indicators recommended in it for one of the branches (agriculture) as an illustration. The branches of statistics covered are the following: population and labor; agriculture, forestry, and fishing; mining, manufacturing, construction, production of gas, electricity, and water, and sanitary services; wholesale and retail trade and related services; transport and communications; education, health and other community services; external trade; money and banking, finance and balance of payments; government; and personal income and expenditure and housing. The basic series recommended in one of the fields (i.e., agriculture) were as shown in the accompanying table. 7. Basic Statistics for Formulating and Implementing Plans of Economic and Social Development in Countries of Asia and the Far East (New York: United Nations, ECAFE, 1965).

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SCIENTIFIC AND QUANTITATIVE EVIDENCE

6. Theoretical assumptions and non-observed facts This title of this concluding section is, as many readers will remember, a quotation from Leontief, whose 1971 article under this heading8 called attention to important anomalies in economics that have considerable significance to the planner. The reader is referred to Leontief s article for more detailed study and here only a few key directions of his criticism and advice are quoted: 1. The planner may wish to avoid the pitfalls of elaborate but nonsubstantive mathematical constructions in analyzing the base period for his plan. As Leontief warns, "uncritical enthusiasm for mathematical formulation tends often to conceal the ephemeral substantive content of the argument behind the formidable front of algebraic signs." 9 2. The planner has to pay particular attention to the basic assumptions underlying any complex analytical procedures applied to the problems of his economy. "What is really needed, in most cases, is a very difficult and seldom very neat assessment and verification of these assumptions in terms of observed facts. 10 3. The planner needs to be mindful that in the eyes of many economists (and some theoretical statisticans as well) "devising a new statistical procedure, however tenuous, that makes it possible to squeeze out one more unknown parameter from a given set of data, is judged a greater scientific achievement than the successful search for additional information that would permit us to measure the magnitude of the same parameter in a less ingenious, but more reliable way." 1 1 The planner's interest lies in following Leontief's advice and consequently he may need to lend his support to programs that increase the availability and reliability of basic data needed for planning rather than to projects of a more esoteric nature.

8. W. Leontief, "Theoretical Assumptions and Nonobserved Facts." American Economic Review 61 (March 1971): 1-7. 9. Ibid., pp. 1-2. 10. Ibid., p. 2. 11. Ibid., p. 3.

XIII The Overall Statistical Evidence: National and Social Accounts In the elaboration of the plan there also must be reliance on the overall statistical evidence embodied in the national and social accounts. Actually, these accounts serve as the statistical frameworks of the detailed statistics reviewed in the preceding chapter. It should be mentioned that the overall statistical frameworks such as the national economic accounts of a country are often utilized as global planning frameworks as well. In this sense the study of national economic accounts and the data of similar frameworks constitutes a transition from the review of evidence used for the elaboration of plans to the review of the actual planning techniques available to the planner. At the outset it is useful to refer to the global aim of the socioeconomic accounts of a nation, which is to provide a set of aggregate data for the analysis of the economic and social system as a whole. In these accounts the emphasis is not so much on the behavior of the individual components as on the movement of the system. The movement of the socioeconomic system naturally involves inseparably the movement of its components, but the main lessons that can be inferred from the socioeconomic accounts pertain to the interrelationships of all of the constituent components of the system. In the light of this objective, an overall accounting system can be judged, as Nancy and Richard Ruggles suggested, 1 for its adequacy "by (1) whether it can provide the basic information required for the major classes of economic models, and (2) whether it can avoid presenting information not required for any reasonable economic model." Today, comprehensive systems of national socioeconomic accounts 1. Nancy Ruggles and Richard Ruggles, The Design of Economic Accounts (New York: NBER. 1970), p. 2.

236

SCIENTIFIC AND QUANTITATIVE EVIDENCE

are not yet in use in most countries. The international guidelines of the United Nations also deal with economic accounts separately, even though the work on the system of social and demographic statistics is carried out on a closely coordinated conceptual basis with the concepts of the existing international recommendations on national accounts. In the present study mainly the international standards and comparisons are described. For practical reasons—despite our preference for a single System of National Economic and Social Accounts (SNESA)— the descriptions will deal consecutively with three aspects of the overall accounting of socioeconomic processes: the system of national accounts, the system of international comparisons of gross product and purchasing power, and the system of demographic and social statistics. 1. The system of national accounts The first set of international recommendations in the United Nations was formulated in 1952 and issued as a standardized System of National Accounts (SNA). In the 1960s an extensive revision and expansion of the system was undertaken. The present description pertains to the revised set of standards issued by the United Nations in 1968.2 As stated in the Preface of the relevant publication, "the new SNA provides a comprehensive and detailed framework for the systematic and integrated recording of flows and stocks of an economy. . . . The revised SNA grew out of the work in national accounting carried out during the last fifteen years and the uses made of the national accounting data in economic and social analysis, planning and decision-making." 3 As indicated earlier, national accounts that use double-entry bookkeeping methods as well as matrices serve as a framework for a wide body of detailed statistics. However, the main utility of the accounts for the planner lies in the comprehensive picture it provides regarding the processes to be affected by his plan. As George Jaszi formulated it, the function of the national accountant is "the drawing of pictures representing an economic process on whose major features there is general agreement. It is the task of the national accounting system to consolidate 2. A System of National Accounts 3. Ibid., p. iii.

(New York: United Nations, Statistical Office, 1968).

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237

the transactors and/or accounts so as to provide a meaningful summary picture of the economic process, i.e., the production, distribution, and use of output." 4 With the use of national accounting data the planner can review the economic process at various levels of aggregation. He can evaluate some processes in a highly consolidated manner, others in some detail, and still different ones in a considerably disaggregated way. To demonstrate these various possibilities we again quote Jaszi, who gave the following vivid description: To me, the view of the economy that is provided by a national accounting system is similar to the view of the earth one gains from an airplane. We see the mountains, hills, valleys, plains, lakes, and oceans in clear oudine, along with the rails, roads and waterways that connect them. We see, if we look more closely (but we do not have to look unless we want to) forests and trees, snow and sand. We see grazing cattle, houses, and factories, and boats, trains, and buses. The attraction of the work of a national accountant is that it allows one to try to paint a similar picture of the economy. 5

Our discussion of the SNA remains at the level of the most consolidated accounts of the nation. The planner may want to utilize the disaggregated accounts as well. In the framework of the present study, the discussion of all details is not feasible, regarding the detailed accounts the interested reader is referred to the United Nations volume on the revised SNA. Nevertheless, it is hoped that the discussion of the consolidated accounts will give a feeling for the usefulness of the system of accounts in planning. The consolidated accounts of a nation are reproduced in the accompanying table. The five consolidated accounts shown here "are designed to summarize the transactions which take place in an economy so that attention is focused on the main features of economic conditions and the strategic relationships between various facets of the economy." 6 The production accounts of the SNA (which include Account 1 shown on p. 238 and accounts at a lower level of consolidation not presented 4. G. Jaszi. " A n Economic Accountant's Ledger," in The Economic Accounts of the United States: Retrospect and Prospect. Survey of Current Business 51. no. 7, pt. II, anniversary issue (July 1971): 206. 5. Ibid. 6. A System of National Accounts, p. 139.

Consolidated Accounts for the Nation Account 1. Gross Domestic Product and 1.3.1

Compensation of employees (3.3.1)

2.2.20

1.3.2

Operating surplus (3.3.2)

2.2.30

1.3.3 1.3.4 1.3.5

Consumption of fixed capital (5.3.3) Indirect taxes (3.3.4) Less Subsidies (3.3.5)

4.2.5 4.2.6 1.2.10 1.1.10

Account 3. National Disposable

3.2.30 3.7.1

Government final consumption expenditure (3.2.20) Private final consumption expenditure (3.2.30) Increase in stocks (5.2.5) Gross fixed capital formation (5.2.6) Exports of goods and services (6.2.10) Less Imports of goods and services (6.1.10) Expenditure on the gross domestic product

Gross domestic product

3.2.20

Expenditure

income and Its

Appropriation

Government final consumption expenditure (2.2.20) Private final consumption expenditure (2.2.30)

3.3.1

Compensation of employees (1.3.1)

3.4.2

Saving (5.7.1)

3.3.2 3.4.10

Compensation of employees from the rest of the world, net (6.4.1 6.3.1) Operating surplus (1.3.2) Property and entrepreneurial income from the rest of the world, net (6.4.9 - 6.4.8) Indirect taxes (1.3.4) Less Subsidies (1.3.5) Other current transfers from the rest of the world, net (6.6.22 - 6.6.21)

3.3.4 3.3.5 3.6.23 Appropriation of disposable income

Disposable income

Account 5. Capital Finance 5.2.5 5.2.6 5.7.5 5.7.8

Increase in stocks (4.2.5) Gross fixed capital formation (4.2.6) Purchases of intangible assets n.e.c. from the rest of the world, net (6.7.5) Net lending to the rest of the world (5.7.9)

5.7.1 5.3.3 5.7.6

Gross accumulation 5.8.0

Net acquisition of financial assets (6.8.0 + 5.9.0 - 6.9.0)

Finance of gross accumulation 5.7.9 5.9.0

Net acquisition of financial assets

Saving (3.7.1) Consumption of fixed capital (1.3.3) Capital transfers from the rest of the world, net (6.7.6)

Net lending to the rest of the world (5.7.8) Net incurrence of liabilities (6.9.0 + 5.8.0 - 6.8.0) Net incurrence of liabilities plus net lending to the rest of the world

Consolidated Accounts (continued) Account 6. All Accounts—External 6.2.10 6.4.1 6.4.9 6.6.22

Current transactions Exports of goods and services (1.2.10) 6.1.10 Imports of goods and services Compensation of employees from the rest of the world (3.4.2 + 6.3.1) Property and entrepreneurial income from the rest of the world (3.4.10 + 6.4.8) Other current transfers from the rest of the world (3.6.23 + 6.6.21)

6.3.1 6.4.8 6.6.21 6.7.3

Current receipts Account 6. All Accounts—External 6.7.2 6.7.6 6.9.0

Transactions

(1.1.10)

Compensation of employees to the rest of the world (3.3.1) Property and entrepreneurial income to the rest of the world (6.4.9 3.4.10) Other current transfers to the rest of the world (6.6.22 - 3.6.23) Surplus of the nation on current transactions (6.7.2) Disposal of current receipts

Transactions (continued)

Capital transactions Surplus of the nation on current trans6.7.S Purchases of intangible assets n.e.c. actions (6.7.3) from the rest of the world, net (5.7.5) Capital transfers from the rest of the 6.8.0 Net acquisition of foreign financial world, net (5.7.6) assets (5.8.0 - 5.9.0 + 6.9.0) Net incurrence of foreign liabilities (5.9.0 - 5.8.0 + 6.8.0) Receipts

Disbursements

here) deal with the supply of goods and services. This supply comes from the gross output of the resident producers of the country (the industries, government, and producers of nonprofit services to households) and from imports. The supply of goods and services is utilized in intermediate and final uses. The final uses include final consumption (by households and government), gross capital formulation in stocks and fixed assets, and exports. The value of gross output includes the value of intermediate consumption, that is, it reflects not only the results of new production (the creation of values earlier not available) but also the transfer of results of earlier production activities among the transactors of the system. Traditionally the focus of national accounting has been on the creation of new values, hence the primary interest in measures of the production of new values free of the value of intermediate consumption. In the SNA the basic measure of production, which excludes these intermediate values, is the GDP, measured at purchasers' value, which

240

SCIENTIFIC AND QUANTITATIVE EVIDENCE

cover the cost of goods and services in the market to the point of delivery to the purchaser (i.e., the valuation is "at market prices"). The purchasers' values equal the producers' values plus the trade and transport margins appropriate to the purchaser in question. As indicated, measures of production best concentrate on the creation of new values, that is, on the value added by the producers. This can be principally estimated by decreasing the sum of the gross output of all producers with the value of their intermediate consumption. Turning to the final use of the goods and services produced (i.e., after elimination of the use for intermediate consumption by producers), household final consumption expenditure should first be considered. This is principally made up of outlays on new durable and nondurable goods. The SNA uses two concepts regarding these expenditures. The first is the final consumption expenditure in the domestic market, which covers the expenditures of both resident and nonresident households in the domestic territory of the country. The second concept is the final consumption expenditure of resident households which covers the following final consumption expenditures: those of the resident households at the domestic market and abroad, minus the expenditures of nonresident households in the domestic market of the country. The second element in the final consumption of the country consists of the final consumption expenditure of government (and private nonprofit bodies). After considering the use of gross output for intermediate and final consumption, its use for capital formation should be mentioned. Gross capital formation constitutes the increases in stocks and gross additions to fixed assets. The notion of capital formation is connected to producers only (i.e., capital formation by households is not recognized). For example, the purchase of durable goods by households (refrigerators, cars, etc.) is considered part of final consumption expenditure. Consequently, gross capital formation is made up of the outlays of producers on commodities which do not enter into the intermediate consumption of the period. Here the question is whether the commodities in question were used up during the period of account or were expected to yield benefits over a longer period of time. Of the two main components of gross capital formation (stocks and fixed assets), the increase in stocks pertains to materials, supplies, work in progress, finished products and goods in possession of industries,

National and Social Accounts

241

government stocks of strategic materials, and grains and other commodities. The second main component, gross fixed capital formation, includes the expenditures of industries and government on additions of commodities to their fixed assets. By convention, expenditures of this sort for military purposes (including both construction outlays and expenditures on other durable goods used primarily for military purposes) are excluded from gross fixed capital formation. As can be seen from the accounts reproduced above, the system of consolidated accounts is closed by the accounts on the external transactions of the nation, which include exports, imports, capital transfers, and other elements. It is evident that planners constantly have to deal with the kind of variables covered in the SNA. It is possible that in the country for which their plan is being elaborated somewhat different accounting conventions than those of the SNA are in effect. This can be the case even in countries which for purposes of international reporting utilize the SNA, framework. For example, in the United States the data furnished for the Yearbook of National Accounts of the United Nations follows the SNA concepts, but the domestically used measures are somewhat different. While these conceptual discrepancies are not too significant, the accounting systems used in the Sovient Union and Eastern Europe diverge from the SNA on more important points, in particular regarding the scope of production. With reference to this difference, the accounting framework used in these countries is referred to as the "material product system" (MPS). In order to perform his analytical task judiciously and to base the elaboration of the plan on solid methodological grounds, the planner must pay careful attention to the definitions, concepts, and classifications related to the national accounting data he uses. Finally, in addition to the consolidated accounts, attention should be called to the further detail provided for in the SNA. The comprehensive system of accounts covers accounts of three classes. Accounts I are the consolidated accounts for the nation, discussed already. Accounts II provide for the decomposition of Accounts I (showing the GDP and the expenditures on it) regarding both the available supply and the disposition of the relevant goods and services. Accounts II show not only the details relating to production and consumption expenditure, but also those relating to capital formation. In a similar manner, Accounts III

242

SCIENTIFIC AND QUANTITATIVE EVIDENCE

provide a deconsolidation of Accounts I on income, outlay, and capital finance by the institutional sectors of the system. For purposes of many planning exercises, the availability of such detail can be highly desirable. 2. The system of international gross product and power comparisons

purchasing-

The planner who, during the elaboration of a plan, intends to use international data regarding the key macroeconomic variables of production, expenditures, and income should be mindful of the two basic prerequisites for use of such data. The data regarding such national accounting aggregates should conform to comparable, standardized methodological principles, including the use of comparable definitions, concepts, and classifications. The aggregates should be made comparable regarding valuation as well. With respect to the first prerequisite, the widening international application of the SNA has contributed significantly to an increasing measure of international methodological comparability. Regarding the second prerequisite another undertaking (carried out by the United Nations in cooperation with the World Bank and the University of Pennsylvania) should be briefly described. This undertaking, formally known as the United Nations International Comparison Project, was started in 1968, and the results of its first phase were issued in a book devoted to the methodological as well as numerical results of this project. 7 Official exchange rates cannot be relied on to convert the national accounts data of various countries—estimated in value terms of national currencies—to a common, comparable basis of valuation. Actually even in the case of "realistic" official exchange rates or "floating rates" the comparability of the national accounts at an intermediate level of detail requires the special efforts characteristic of the system of international comparisons mentioned above. As a very simplified example, let us imagine the need to compare production and its structure in two countries, the economies of which produce only the same two goods. The 7. I. B. Kravis, Z. Kenessey, A. Heston, R. Summer, et al., A System of International Comparisons of Gross Product and Purchasing Power (Baltimore: John Hopkins University Press, 1975).

243

National and Social Accounts

exchange rate of the national currencies of the two countries is conveniently fixed at the relationship of one to one. The quantities and the prices of their production are the following: Country A Quantity Product A Product B Total

4 20

Country B

Price

Value

20 11

80 220 300

Quantity

10 10

Price

Value

10 20

200 200 300

As to the total value of the production in the two countries—measured at their own prices—the results of the comparison indicate equality, each production level of the two countries being 100 percent of the other. However, this simple answer may not satisfy the planner. Studying the quantities produced in the two countries, he may develop doubts regarding this equality. Since quantities of different products are not additive, he cannot be sure whether the sum of 4 units of product A and 20 units of product B (i.e., the production of country A) is equal to, more than, or less than the sum of 10 units of product A and 10 units of product B (i.e., the production of country B). In accordance with the tradition of measuring time-to-time quantity changes within a country, he may decide to use the same set of prices (first those of country A, then the prices of B) to eliminate the effect of the differences in prices between the two countries. The "repricing" of both countries' production at the prices of country B yields a value of production of 440 for country A and 300 for country B. If the prices of country A are utilized for both countries, the results show a value of 300 for country A and a total of 310 for country B. The results of the repricing are a warning to the planner that even regarding the total value of production of the two countries several relationships may be established between the two countries: 1. If their own prices are used, country A's product is 100 percent of B's. 2. If the prices of B are used for valuing the production of both countries, country A's product is 147 percent of B's.

244

SCIENTIFIC AND QUANTITATIVE EVIDENCE

3. If the prices of A are used for valuing the production of the two countries, country A's product is 97 percent of B's. 4. An average of the results over (2) and (3) would yield the result of 122 percent for country A compared to country B (as the arithmetic mean of the two) or 119 percent (the geometric mean). It should be emphasized that the various results—with the possible exception of that shown under (4)—can be given plausible economic interpretations and should not be considered as results of abstract statistical schemes. For example, a planner in country B may be interested in knowing what overall effects a modification of his country's production structure in the direction of the production structure of country A would show—expressed at the prices of his country. The planner may be even more interested in the assessment of the actual shares of products A and B in the production of the two countries: Again the shares will greatly depend on the relative prices used for the calculations: 1. In country A: (a) Calculated at its own prices, the share of product A will be 27 percent and that of product B, 73 percent. (b) Calculated at the prices of country B, the same shares will be 9 percent and 91 percent. 2. In country B: (a) Calculated at its own prices the share of product A will be 33 percent and that of product B, 67 percent. (b) Calculated at the prices of country A, the same shares will be 65 percent and 35 percent. The system of international comparisons of gross product and purchasing power developed in the U.N. project referred to earlier aimed at the study and resolution of the various unresolved comparability problems of national accounts aggregates valued in national currencies according to the relative prices of the respective countries. The first stage of the project had two main purposes: to work out suitable methods for international comparisons of this sort and to produce the first set of estimates according to the methodology developed. The initial comparisons for 1967 and 1970 were carried out for the

National and Social Accounts

245

following ten countries: Colombia, France, Germany (F.R.), Hungary, India, Italy, Japan, Kenya, the United Kingdom, and the United States. In this manner it was feasible to include countries from all of the major continents; developed and developing countries; market and centrally planned economies; and different climates, cultures (etc.). Some of the countries included were large and populous; others rather small. This system of comparison, which ultimately is intended to cover most countries of the world, primarily aims not at binary comparisons between pairs of countries but at the achievement of comparability of every country with all others. This is all the more important since "binary comparisons between each pair of countries quickly reach an astronomical number: even the ten countries produce forty-five possible pairs [i.e., N(n - l)/2 where n is the number of countries]. Therefore, it was important to design the binary comparisons so that they could be fit into a broader framework in which a large number of countries are compared simultaneously." 8 The multilateral quantity and price comparisons for GDP, consumption, capital formation, and government were basically achieved by adoption of a methodology based on a conception of the international price structure. In the system "the world price structure comprises a set of average international prices based on the price and quantity structures of the ten countries." 9 By using the international price structure it is possible to obtain a unique cardinal scaling of countries with respect to the GDP and its elements. As will be remembered from our simple example regarding countries A and B, the use of different prices led to two contradictory scalings of the two countries: at the prices of country B, the production of country A was 47 percent larger, while at the prices of country A the production of country B was 3 percent larger. In view of the usefulness of comparable international data on key economic variables for planning purposes, the planner should try to utilize estimates developed in this sytem in the analytical work for the elaboration of the plan. 10 Such use requires a degree of familiarity with the system, the characteristics of which are briefly outlined below. 8. Ibid., p. 3. 9. Ibid. 10. The system of these comparisions is currently being extended to cover thirty-five to forty countries.

246

SCIENTIFIC AND QUANTITATIVE EVIDENCE

The estimates developed within the system provide estimates for the GDP, for private and government final consumption expenditure, and for gross capital formation. In the system of comparisons these concepts closely conformed to the definitions of the SNA. 11 However, in respect to medical care and educational expenditures it was necessary to combine both government and private outlays, since "an international comparison of consumption categories that strictly followed SNA lines would not be especially informative for those categories in which the division of payments between households and governments varies from country to country. It would not allow a proper comparison, for example, of the total consumption of educational services by a society, but only of that part purchased by households in each country." 12 The shift of health and education expenditures from the government sector in the SNA to the households in the system of comparisons solves this particular difficulty. In the system of comparisons the three major elements of GDP expenditure are subdivided into a number of detailed categories—110 in consumption, 38 in capital formation, and 5 in government, with a total of 153 such detailed expenditure categories. For each of the categories a number of representative goods are selected in the participating countries for identical or equivalent specifications. On the basis of the prices of the representative goods, purchasing-power parities (the ratio of the price in local currency to the dollar price of the same) are computed. The purchasing-power parities in the binary comparisons are averaged within each detailed category by using the simple, or unweighted, geometric mean of the price relatives (ratios) of the individual representative items. This makes it possible to estimate category purchasing-power parities (PPPs) relative to the United States for each of the nine other countries in terms of the 153 detailed expenditure classes. To arrive at aggregate PPPs for private final consumption, government final consumption, and gross capital formation and the GDP itself, the PPPs for the appropriate detailed categories are aggregated, first using U.S. expenditure weights and then using the compared country's expenditure weights for each category. 11. A discussion of the interrelationship of the main SNA concepts is given in the preceding section. 12. Kravis, et at., a System of International Comparisons, p. 4.

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247

Comparative Levels of Per Capita GDP in 1970 (in percentages to the U.S. level) Country United States France Germany (F.R.) Japan United Kingdom Italy Hungary Colombia India Kenya

At International Prices 100.0 75.0 74.7 61.5 60.3 45.8 40.3 15.9 7.1 5.7

At Official Exchange

Rates

100.0 60.5 64.2 41.7 44.6 35.4 21.6 6.9 2.0 3.0

It would not be useful in the framework of the present study to attempt a description of the complex calculations required for the simultaneous (multilateral) estimates. The two basic steps involved in that process are the estimation of simultaneously satisfactory (transitive and base-invariant) PPPs at the level of the detailed categories, and aggregation by means of Geary-Khamis formulas. However, it may be interesting to list the overall result at the international prices thus calculated for 1970, as shown in the accompanying table. It is important that the planner remember the conceptual limitations of these international comparisons. We should like to call attention here to only two such factors: One related to welfare measurement, and the other to the incomparabilities of very dissimilar national situations. Regarding the first, in the concept of GDP many aspects of welfare are not measured. "Gross domestic product tells us nothing about such important aspects of welfare as the pleasantness or unpleasantness of working conditions, the net improvement or deterioration of the environment, or the equities or inequities of the economic and social organization." 13 Clearly the international comparison of GDP estimates of different countries should not be interpreted by the planner as international measurements. The figures shown in the accompanying table are obviously pertinent to welfare but could not purport to tell the planner the whole story regarding the welfare of the countries involved. 13. Irving B. Kravis and Zoltan Kenessey, "Output and Prices in the International Comparison Project," Review of Income and Wealth, ser. 19, no. 1 (March 1973): 49.

248

SCIENTIFIC AND QUANTITATIVE EVIDENCE

Concerning the inherent ^comparabilities of utterly dissimilar national economic situations, the limitations of the system of comparisons should also be realized by the planner. "On the other hand, it is possible to regard the basic needs and desires of man as fundamentally the same in different periods and different places . . . what differs is first the extent to which the economy is capable of satisfying the needs, and secondly the means by which they are satisfied—that is, the physical identity of the goods." 14 On this basis it is feasible to compare rather different situations. The peculiarities of such national circumstances are explained not so much with differences in taste but in the opportunity to aquire the various goods and services. It can be argued that people "typically pursue the same patterns of consumption that people with equivalent income levels pursue elsewhere in the rest of the world." 15 3. The system of demographic and social statistics Although the system of demographic and social statistics is considered not yet definitive, it is useful to call the attention of planners to this emerging tool of analysis. The new system is the result of an effort of the United Nations working in co-operation with its specialized agencies and the statistical offices of member countries.16 Planners who need to pay special attention to the demographic and social processes relevant to their activities even before the full completion of such a system may want to take advantage of this conceptual framework. Demographic and social statistics have been collected in most countries for a relatively long period of time, but in a rather piecemeal, uncoordinated manner. In the new System of Demographic and Social Statistics (SSDS) the interrelationships of these data are emphasized. For social and demographic statistics to form a system, these statistics must be of such a nature and so arranged that we can trace connections both within and between parts of the system. The data to be shown in terms of the SSDS are intended to help in improving the knowledge of social systems. In particular, they may help 14. Ibid., p. 51. 15. Ibid., p. 52. 16. Towards a System of Social and Demographic Statistical Office, 1975).

Statistics

(New York: United Nations.

National and Social Accounts

249

the planner to evaluate and chart social policies relevant to the plan. However, similar to the SNA, this system is expected to have many other users in government, industry, and research. It is recognized that the S S D S should in principle cover all areas of social life that are anywhere a matter of interest or concern and for which it is thought necessary to have a policy and attempt remedial action. In practice, however, the system must concentrate on those areas of greatest concern to the largest number of countries.^ Keeping in mind that the aim of the system is to give a systematic account of the social information needed in the study of social conditions and social change in their many aspects, the variety of topics to be covered by the SSDS is not surprising. The wealth of individual sequences and subsystems in the SSDS can be seen from the following listing: the size and structure of the population, births, deaths, and migration; learning activities and educational services; earning activities, employment, and the inactive; housing and its environment; free time: culture, sport, and other leisure activities; social mobility; family formation, families, and households; the distribution of income, consumption, accumulation, and net worth; social security and welfare services; health and health services; and public order and safety, offenders and their victims. For the construction of the SSDS the value expression of the different variables, pervasive in the SNA, is naturally not feasible. The S S D S deals with stocks and flows of human beings grouped, classified, and cross-classified in various ways. In a sense the measurements of value aggregates in terms of units of currencies in the SNA are, in the SSDS, the indicators shown in terms of the number of human beings related to the various demographic or social phenomena. However, the economic accounts of education, health, and the like can also use data expressed in value terms. These accounts were in fact conceived of as an extension and elaboration of the accounts set up in the SNA. Finally, it should be noted that in the SSDS there is a greater reliance on stocks data than in the SNA, since in contrast with the position in economics, existing sociodemographic statistics tend with few exceptions to concentrate on stocks to the exclusion of flows. This situation is related to the circumstance that it is easier to collect statistics on individuals for a given point of time than for periods of time.

Basic Readings for Part 5

Denison, E. F. "Classification of Sources of Growth." Review of Income and Wealth, ser. 18, no. 1 (March 1972): 1-26. International Labor Office. "Measuring the Adequacy of Employment in Developing Countries." Journal of Development Planning, no. 5 (1972): 145-58. Leontief, W. "Theoretical Assumptions and Nonobserved Facts." American Economic Review 61 (March 1971): 1-7. Moser, C. "Social Indicators: Systems, Methods and Problems." Review of Income and Wealth, ser. 19, no. 2 (June 1973): 133-41. Nadiri, I. M. "International Studies of Factor Inputs and Total Factor Productivity, Brief Survey." Review of Income and Wealth, ser. 18, no. 2 (June 1972): 129-54. Ruggles, N., and Ruggles, R. "A Proposal for a System of Economic and Social Accounts." In The Measurement of Economic and Social Performance, M. Moss, ed., Studies in Income and Wealth, no. 38. New York: NBER, 1973, pp. 111-46. Stone, R. "A System of Social Matrices." Review of Income and Wealth, ser. 19, no. 2 (June 1973): 143-66. United Nations. Guidelines for the Study of the Transfer of Technology to Developing Countries. New York: 1972, pp. 1-53. United Nations. Methods for Establishing Targets and Standards for Housing and Environmental Development. New York: 1968, pp. 21-39. United Nations. Natural Resources of Developing Countries: Investigation, Development and Rational Utilization. New York: 1970, pp. 3-42. United Nations, Economic Commission for Europe. ECE Symposium on Problems Relating to Environment. New York: 1971, pp. 21-39. United Nations, Economic Commission for Europe. Economic Aspects of Automation. New York: 1971, pp. 1-60. United Nations, Economic Commission for Europe. Investment in Human Resources and Manpower Planning. New York: 1971, pp. 3-26. United Nations Industrial Development Organization. Techniques of Sectoral Planning: The Chemical Industries. New York: 1966, pp. 1-53.

Techniques of Planning 6 we concentrate on the techniques of planning. Issues related to planning techniques have been discussed, of course, in earlier parts. For example, the systematization of development plans offered in chapter 2 is highly relevant to the issues of preferable techniques to be discussed now. The review of national planning experiences in chapter 3 should also be bome in mind when considering various techniques. Likewise the relationships of the plan and the market described in chapter 5 and the planner's attitude toward their roles will also influence his thinking about the most appropriate planning techniques for his country at the given stage of development. Since the present work aims to show the major problems of planning—including its techniques—in a logical sequence, it may be useful to reiterate here in a simplified manner the main steps of our discourse thus far: possibilities and experiences with planning; institutional preconditions of planning; determination of the overall strategies for planning; and analysis of social preferences and other relevant evidence for planning, including basic statistics and systems of data. The sequence of the hypothetical country to embark upon planning would be approximately the following: (a) evaluation of the need to introduce planning and the returns expected from such a step; (b) establishment of the necessary institutional setting for the kind of planning selected, (c) selection of national objectives to be pursued by the plan; and (d) assembling of the relevant scientific, statistical, and other information as the first step in the elaboration of the plan. The next step is selection of the appropriate techniques of planning.1 No single planner can have a mastery of all of the specific techniques IN PART

1. Naturally the decisions concerning planning techniques may also provide feedback regarding the other steps, for example, the needs for data.

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available for use in economic planning. Nevertheless, it can be required that all planners have a general knowledge of the characteristics of the various modern techniques available for economic analysis and planning, even if their more detailed expertise may relate only to one or two of them. Unfortunately, the teaching of the various techniques at universities is often so technically oriented that even an otherwise well-trained economist may not be quite aware of the special relevance of the available techniques to economic planning. The study of the various specific techniques in terms of their applicability for planning puiposes is often not pursued systematically by economic planners as a key preparatory step to economic planning. Quite often, emphasis is placed on only one or two better-known techniques, and the use of alternative or additional techniques is neglected. In view of this fact, part 6 is intended to give a rather nontechnical review of various techniques from the viewpoint of their possible applicability in economic planning. A general review of the various planning techniques and models is undertaken in chapter 14. This chapter considers the different techniques in terms of eleven levels of classification: informal and formalized planning techniques; formalized techniques, algebraic and numerical mathematical models; determinate and stochastic systems; overall, sectoral, regional, and specific models; highly aggregated, aggregated, and disaggregated models; short-term, medium-term, and long-term models; computer and noncomputer techniques; forecasting, indicative, and command models; centralized, mixed, and decentralized models; quarterly and annual models; and classification according to the mathematical character and complexity of the models (linear, nonlinear, etc.). In selecting examples for the various groupings, I concentrated on examples for which more detailed descriptions are available in the United Nations publications indicated in the footnotes. These publications are widely available internationally, and hence interested planners usually can get access to them locally. The review of planning techniques is followed by a somewhat more detailed discussion of some key models and procedures. Such treatment cannot be accorded to all the techniques of potential use in planning, as this would go much beyond the frame set for the present study; regarding the techniques not discussed below, references are made to the literature cited at the end of part 6 and in the footnotes.

XIV Techniques of Planning: An Overall Review of this chapter is devoted to a few general problems of planning techniques. The remainder offers a review of various planning techniques, the "universe" of which is classified in eleven different ways. T H E FIRST S E C T I O N

1. The formal planning problem Let us assume that the most general formal objective of planning is to subject the socioeconomic process to a systematic and sustained influence regarding the achievement of prescribed objectives. It is also assumed that the results should make society better off.1 There are two aspects of this requirement: the results of planned socioeconomic processes should be superior to results expected from an unplanned state of the same processes in the given country, and the comparative nature of this requirement extends to economic expansion and contraction as well. In expansion more efficient growth, and in contraction, dampened negative effects, should characterize the planned state compared to an unplanned state for the same economy. In summary, the planned economy should be more efficient than the unplanned one for the given country at the level of the society as a whole and over a longer period of time. The comparative interpretations of "superiority" do not imply that actual comparisons can normally be made between "unplanned" and "planned" states for the same country. The desirability of planning usually cannot be determined on the basis of such direct evaluations. In 1. Here we disregard the difficulties involved in the measurement of results and in the setting of criteria regarding welfare.

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practice, planning is mostly introduced for unavoidable reasons, that is, in situations where an unplanned system cannot cope with the range of problems faced by society in general and by the economy in particular. For purposes of the present discourse it will be assumed that the superiority of planning is proven in such situations. As stated above, the most general formal objective of planning is to subject the economic and social process to a systematic and sustained influence regarding the achievement of prescribed objectives.2 Planning can of course contribute to the setting of the overall targets. In this case its task is twofold: assistance in the selection of overall goals, and the charting of the way toward their achievement. In a narrower interpretation of planning, the planner is charged only with the second responsibility—the prescription of objectives is undertaken essentially outside the planning process. In the context of planning techniques this is manifested especially in the degree of introduction of exogenous variables. Generally the larger the number of variables that are "given" outside the technique applied, the greater the likelihood that the planner's contribution to the selection of targets is reduced, minimal, or none. This statement does not imply that the role for "prescribing overall objectives" should be given to the planner instead of the political decisionmaker. However, it leads to the following observations: 1. The planner should be given a chance, in the process of formulating the overall objectives, to help select the most effective possible mix of overall goals. With the aid of his techniques, the planner is usually able to put forward recommendations regarding the selection of the most efficient combination of objectives based on the criteria adhered to by the decisionmakers. 2. Conversely, if the planner has to develop the most efficient solution to a set of overall objectives derived without the use of his analytical techniques, while he may be able to find an optimal path to achieve the goals set, he cannot contribute to the selection of an optimal mix of overall objectives. 3. The present work, as can be inferred from earlier chapters, favors the approach outlined under (1) above. Generally the success of 2. From a purely formal viewpoint it is immaterial whether the prescribed objectives benefit society as a whole or only some social strata.

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this approach also requires that only the overall objectives, that is, the most general goals of the nation, should be fixed by the political authorities and the more detailed targets should emerge from the planning system (which in our preferred interpretation includes both planning and the market). As Heal put it: Formulating the planning problem as a problem of achieving, or attempting to achieve, certain specified targets is not a genuine alternative to the approach that involves formulating it as a constrained maximisation problem. If feasible targets are chosen, then either they may be inefficient, or a constrained maximisation problem must be solved to find them. If, on the other hand, infeasible targets are chosen, then finding the feasible state of the economy nearest to them is itself a constrained maximisation problem. 3

For practical reasons and on the basis of political decisions, the objective of the planner (as opposed to the wider notion of the objective stated in the planning problem) may very well be to construct a plan that conforms in the best possible manner to the set of targets chosen by the political leadership. The planner's participation in the selection of these targets does not entirely obviate the difficulties involved in choosing objectives outside the process of optimization. Kornai's system 4 actually involves the planner in the determination of target values for variables considered important and proceeds with the development of the economic plan accordingly. As Heal also recognizes, despite its "intellectual shortcomings" the technique of "planning via specified targets is an approach that is frequently adopted." 5 This practice is not only a result of "the difficulties involved in constructing an objective function" mentioned by Heal. Other reasons involve targets selected on the basis of motives too remote from economic and welfare considerations, which make their consideration in optimization procedures extremely difficult. In certain cases there may also be a discrepancy between stated and genuine goals. Political leaders involved in seeking unattainable goals may not care for the scrutiny of optimization procedures regarding their stated "targets." 3. G. M. Heal, The Theory of Economic Planning (Amsterdam: North Holland, 1973), p. 23. 4. J. Kornai, Mathematical Programming of Structural Decisions (Amsterdam: North Holland, 1967). 5. Heal, Theory of Economic Planning, p. 24.

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Finally, in many cases the specification of overall targets may not be the result of choice but the outcome of unavoidable socioeconomic pressures and constraints. For example, balance-of-payment difficulties, coupled with an unfavorable credit rating (and/or the lack of capital abroad for the given purposes) may force the planner at the outset to feature efforts to eliminate the deficit, regardless of whether such steps fall within the theoretically optimal set of targets. Nevertheless, if possible, the formal planning problem should be considered as a constrained maximization task. Accordingly the broad task of the planner is to choose x so as to maximize the utility of x subject to certain prevailing conditions. As a practical matter, restrictions on the value of x are unavoidable (usually the requirement being that x be nonnegative or not exceed some number m in value). The maximand u(x) is the objective function and the limiting equation g(x) = 0 specifies a given restricted set of values from which x must be chosen. The problem is to choose, of all those values of x that satisfy the equation g(;t) = 0, the one offering the highest value of u(x).e The recognition that the formal planning problem can be interpreted as a constrained maximization problem also focuses attention on the relevant resource and production constraints. The existence of resource constraints—in terms of the factors of production—is easy to visualize in the planning process. The existence of production constraints is a less evident circumstance of planning, inasmuch as it refers to the various technological conditions governing and limiting the production process. As will be discussed later in the context of input/output techniques, the recognition and proper use of the technological coefficients of production is a key element in the process of planning. As Tinbergen stated, the planner has to "maximize social utility or welfare under the side conditions of the laws of production." 7 2. Planning

techniques—systematized

The classifications of planning models and techniques shown below are intended to serve as guidance to the various methods that may 6. For a detailed discussion see Heal, Theory of Economic Planning, chapter 1 and appendix. 7. J. Tinbergen, Central Planning (New Haven: Yale University Press, 1964), p. 83.

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be useful to the planner. Probably no classification of planning techniques will be fully agreeable from all points of view, and the systematization contained in this section is not exempt from difficulties in this respect. Nevertheless, it is considered a useful, concise way of viewing the growing arsenal of techniques to be considered by planners. The essence of the systematization introduced here consists in the attempt to classify the various planning techniques according to certain criteria. Actually eleven ways of classifying were adopted and, generally speaking, these pertain to the same universe of models and techniques. In other words, the various levels of classification are often overlapping in terms of the techniques covered, and a given model may be classified at several levels. a. First level of classification

The two main categories at this level are informal and formal planning techniques. Nonformalized planning techniques. The distinction between the informal and formal categories relates to the nonmathematical or mathematical character of the planning procedures evaluated in terms of this criterion. Incidental use of mathematical tools does not qualify an informal planning technique to be considered a "formalized" technique. The application of the mathematical apparatus has to be at the center of a technique for it to be considered a formalized one. The introduction of this classification is not meant to create the impression of assigning superiority to formalized techniques. While the latter often possess advantageous qualities (usually a higher degree of objectivity, easier identification and checking of the underlying assumptions, etc.), their usefulness can be limited by various factors. For example, the lack of a suitable statistical basis may prevent the adoption of formalized techniques. Even if the statistical basis is adequate, the formalization of certain propositions central to the given planning issue (e.g., the precise formulation of the criterion of optimality or of social preferences) may entail such difficulties that an informal technique needs to be adopted. Strictly speaking, probably no overall planning procedure in practical use in any country could be accepted as "formalized" planning. The distinction offered here does not even aim at the division of the planning

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system as a whole into formalized and nonformalized systems. It is assumed that most planning systems utilize both formalized and informal procedures to some degree. Depending on the degree of reliance on formalized techniques, the system as a whole also may be characterized as a "heavily formalized" or "largely informal" system (or as an "even mixture" of the two). The aim of the classification offered here is to indicate the difference between planning techniques rather than between full planning systems from the point of view of mathematical formulation. As an example of an informal planning technique, we mention the use of material balances in Soviet planning, which deal with individual types of products (metals, fuels, electric power, items of machinery, and equipment) in physical quantities: The materia] balances and the distribution programmes constructed on their basis are highly important for the correlation of production and consumption in economic programmes. These balances are constructed for individual commodities and are important in the planning of material and technical supply. . . .Thus, the branches of engineering are the main producers in the balances of equipment but act as the main consumers in the balances of metal. In their turn branches of metallurgy which are the main sources of resources in balances of metal act as the main consumers in the balances of ore, coke, electricity, and other material balances. Thus, every branch is at one and the same time a producer and consumer. Owing to this the alteration of projections in one balance calls for adjustments in a number of other balances. 8

Partly because the individual balances are drawn up in terms of physical quantities—but mainly because of their essentially informal (mathematically nonformalized) character—despite their usefulness in certain contexts, it is not possible to carry out the necessary adjustments indicated by Eidelman in a thorough manner. If the planner needs to focus on the systematic interrelationship among the various branches of the economy, reliance on mathematically formalized interindustry (input/output) systems is called for. 9 Projections carried out for Western countries in terms of their national 8. M. R. Eidelman, " S y s t e m of Plan and Report Balances in the U S S R , " in Report of the Seminar on Statistics for Planning (New York: United Nations. 1969), pp. 38-39. 9. Chapter 15 deals with the input/output system. References to various input/output models can also be found later in the present section.

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accounts usually should be considered informal planning techniques. In such procedures the country's national accounting system forms the basic framework that secures the consistency of the targets selected. The planned program is shown for the final year of the plan in terms of the system of accounts of the nation. Sometimes supplementary equations are also used to specify some essential features of the system. 10 As a third example of a nonformalized planning technique, program and performance budgeting is mentioned. Although this technique is applied to government budgeting, because of the variety and size of government activities it covers it should receive the planner's interest. As the relevant United Nations manual emphasized, "In the planning process, the government budgeting system naturally assumed great significance, and the need for its modernization soon became obvious and was recognized. It was found necessary to develop new budgetary techniques and methods of financial management which would strengthen the role of the budgetary system as an effective instrument in the implementation of development plans."" The introduction of program and performance budget systems usually means an interrelated set of changes related to programs, performance, and the budget accounts themselves. Programs need to be established in terms of the functions of government (education, health, agriculture, etc.) and activities related to these functions. Activities are segments of programs devoted to the production of end products of a given program. Attention to performance requires the development of various management tools such as unit costs, work measures, and performance standards. "The development of unit cost data and of productivity measures should enable, over a period of time, the establishment of norms and standards for comparison purposes." 12 Thirdly, the system of budget accounts—and government financial management in general—has to be aligned with the needs of the system regarding programs and performance evaluation. In the United States, in 1965 President Lyndon Johnson directed the 10. K. Ohkawa, "The Use of National Income Accounts for Long-range Planning in Japan," Income & Wealth, ser. 10, Bowes and Bowes. London. 1964, pp. 51-69. 11. A Manual for Program and Performance Budgeting (New York: United Nations, 1965). p. vii. 12. Ibid., p. 2.

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major agencies of the federal government to implement the PlanningPrograming-Budgeting System (PPBS), stating that "the basic rationale of such a system is to improve the manner in which the government allocates its resources, insuring that they are used optimally in accordance with the goals and programs chosen by the nation's political process." 13 Both financial and physical indicators are used in the system to evaluate programs, standards, and performance. Formalized planning techniques. As already indicated, the distinguishing characteristic of formalized techniques is their mathematical nature. Except for the informal procedures discussed above, all of the models and techniques mentioned in this section belong to the formalized category. The final (eleventh) level of classification lists the categories of planning tools by mathematical character and complexity. All of the various models of growth, systems of programing, and interindustry analysis, belong to the sphere of formalized planning techniques. Although institutional differences may have an impact on the application of the formal models, generally speaking they can be utilized under a great variety of socioeconomic conditions. 14 Accordingly Koopmans, in a review of growth models, was able to introduce his discussion in the following manner: I do wish to claim that the studies I will report on are not tied to any particular form of economic organization. Their postulates concern (a) production possibilities, and (b) intertemporal preferences regarding consumption. Technology is, indeed, universal. As to intertemporal preferences, there are, of course, important institutional differences in how these are arrived at and given effect to in different economic systems. However, in the present pre-institutional type of analysis, I shall merely assume that such preferences are given. 15

Formal models of this sort usually deal with the initial capital stock, the optimality criterion, the assumption regarding population growth, the appropriate production function and the assumptions concerning its change over time, and so on. Consumption flows, the data regarding the 13. "The Planning-Programming-Budgeting System in the United States," in Multi-level Planning and Decision-making (New York: United Nations, 1970). p. 151. 14. One of our classifications deals with the models of institutionally different socioeconomic systems (see ninth level of classification below). 15. T. C. Koopmans, "Objectives, Constraints and Outcomes in Optimal Growth Models," Econometrica 35 (January 1967): 2 (Koopman's emphasis).

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labor force, and assumptions about technological change are also built into these models. As discussed later, some of the formalized models are very aggregated, and others are elaborated in detail. 16 b. Second level of classification This is a subdivision of the formalized techniques into two main groups: purely algebraic, and numerical mathematical models. Nonnumerical algebraic models. These models are formulated in algebraic terms, representing the economic structure abstractly, and are helpful in analyzing the functioning of the system and giving the properties of the optimal solution. On the basis of this analysis it may be possible to formulate various decision criteria. If this analysis is supplemented by the issuance of certain central parameters (determined on the basis of overall balances for the economy), these parameters can provide a guide for partial optimizations in various elements of the system. In other words, the nonnumerical model may be helpful for arriving at overall central parameters while the detailed numerical solution has to be found by the relevant decisionmaking units of the subsystems. Kalecki's growth model can be used to show a few characteristics of models in this category. The Kalecki model is an aggregate one-sector model that expresses the growth rate of output as a linear function of investment shares in the G N P (according to MPS concepts), the replacement ratio, and the parameter of independent technical progress. The production function relates output to fixed capital and to stocks. The variables, mathematical formulation, and solution of the model are as follows. 17 A.

Variables: df

d/

Y

r =

— growth rate of G N P

Y =

GNP

16. See the fifth level of classification below. 17. See Long-term planning (New York: United Nations, ECE, 1971), pp. 36-37, based on M. Kalecki, Zarys Teorii Wzrostu Gospodarski Socjalistycznej [An outline of the theory of growth in the socialist economy] (Warsaw: PWN, 1963).

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TECHNIQUES OF PLANNING

Yp = increase of GNP caused by the independent technological progress K = net fixed capital formation I = gross investment in fixed capital D = depreciation S = stocks (without fixed assets) C = consumption B. Mathematical formulation of the model: Production function (1) Y = — K + Yp

with m > 0 constant, incremental fixed capital/output ratio for base year excluding the influence of technological progress

(2) K = I - D (3) D = a\Y (4) Y = nY

definition of net investment with a, > 0constant, depreciation ratio with n > 0 constant, parameter of independent technical progress

Y (5) r = -p

definition of growth rate of GNP

Supply/demand identity (6) Y = I + C + S C. Solution of the model: From equations (l)-(5) we derive: •. 0\ a + n with a = — constant m Y m (8) Introducing S = fiY with p. constant, incremental stock/output ratio I + S definition of share of total investment in GNP (9) i = —-—

(7) r

1 /

(10) Hence y = i - pr (11) The solution for r with i can be obtained by substituting in equation (7)

as given in equation (10), thus

Overall Review r = -J- (a - n) k k

263 with k = fx + m constant, capital coefficient

Numerical mathematical models. To illustrate the case of numerical mathematical models, we refer to the MODIS models developed in Norway by the Central Bureau of Statistics in cooperation with the Ministry of Finance and the University of Oslo. These models, particularly the MODIS II variant, gave numerical estimates of the production levels of and supplies from each producing sector, of private consumption items, requirements of labor, imports, and other primary inputs by sector. Naturally in order to produce these numerical estimates it was necessary to: (a) have available the numerical value of the input/output coefficients of all sectors and several other types of coefficients and (b) receive as exogenous estimates several variables (final-demand elements, price of labor, etc.). The MODIS II model distinguished 165 sectors of production, 30 import sectors, and 9 categories of income shares (depreciation, direct and indirect taxes, subsidies, and wages and profits by type of organization). The aim of this model in planning use is to obtain a consistent set of estimates of key national accounting variables for the plan year. The model produced as its end result a set of such figures for the endogenous and exogenous variables as well. c. Third level of classification

This classification divides models into determinate and stochastic systems. Determinate systems. A typical case of a determinate model is the input/output system, in which no provision is made for stochastic disturbances and errors. In a sense such determinate systems are special cases of stochastic ones (with probabilities of 1 assumed regarding the outcome of expected events). The elaboration of the British National Plan in the 1960s with the use of an input/output model is an example of use of a determinate system in planning. 18 The matrix of interindustry relations for 1960 was estimated 18. "United Kingdom, Use of an Input-Output Model in the Preparation of the National Plan," in Macroeconomic Models for Planning and Policy Making (Geneva: United Nations, 1967), pp. 85-90.

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for this exercise by a Cambridge University research team under Professor Richard Stone. 19 The basic relationships as determined by Stone, Brown and others were the following: q = Aq

+ h + x —m

/3 =

i'(x - m -

(1) (2)

n = o3q n)

(3)

where q denoted the vector of gross outputs; h the vector of domestic final demand; x the vector of exports; m the vector of competitive imports; n the vector of complementary imports; and /3 the external balance of goods and services. As it can be seen from these equations and their description, stochastic considerations did not enter into the system thus specified, "Equation (1) expresses the equality between supplies (q) and demands (Aq + h + x - m) for commodities. The use of a matrix of fixed input-output coefficients, A, implies proportionality between input and outputs. Equation (2)20 relates complementary imports to production of commodities by simple proportionalities of the input-output type. Equation (3) merely says that the external balance of goods and services is equal to the difference between exports and imports." 21 Stochastic systems. Whereas the determinate system oudined above is based on structural data estimated for a given year, the estimation of stochastic systems requires the use of time series; data on consumer expenditure, investment, export, import, and production for a number of years are needed for their elaboration. A second characteristic of the stochastic approach is that the equations of such systems are not assumed to explain fully the behavior of a given phenomenon in terms of the explanatory variables chosen. The number of the latter is restricted to the important and systematic ones, and the equations always contain an unexplained "residual" factor as well. This characteristic naturally applies not only ex post (i.e., regard19. The Input-Output Tables for the United Kingdom 1954 (London: HMSO, 1961) were utilized for developing the 1960 estimates. The work on the plan had to be concluded by February 1965, at which time the data for 1964 (the base year of the plan) were not yet available. 20. The circumflex denotes a diagonal matrix with the leading diagonal containing all the pertinent values and with zeros elsewhere. 21. "United Kingdom, Use of an Input-Output Model." p. 87.

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ing the years during which the estimating procedure is based on factual data) but also remains a feature of the ex suite forecast given for future periods. No full explanation is expected from this process and the role of the "residual" factor has to be appreciated with respect to the future as well. Thirdly, stochastic systems attempt to consider the effect of errors introduced by the procedures and assumptions adopted in the system. For example, it is realized that it may be necessary for practical reasons to utilize linear or logarithmic-linear equations in the system to approximate relationships that in reality are not of a linear nature. In Economic Planning in Europe the following example is given regarding these issues: In a linear equation describing the demand for a certain consumer good Ct, national income Y, and relative prices pjp are chosen as explanatory variables and, in linear form, the equation is

The symbol u denotes an error term which allows for the fact that the equation only approximates the true relationship and not all of the explanatory variables have been taken into account. With reasonably long time series for Cit Y, and pjp, coefficients a, b, and c can be calculated such that the equation best fits the data. As a criterion for "goodness of fit," variations in the dependant variable which remains unexplained by the equation are often used. The least-squares method, for instance, yields coefficients that minimize the sum of squared residuals.22 We will return to some problems of the stochastic systems in the later chapter dealing with econometric models. d. Fourth level of classification

In this classification, models are subdivided into overall, sectoral, regional, and special models. Overall models. Overall models deal with the economy of a country as a whole, whereas sectoral and regional models deal with individual sectors and regions within the country. Special models are devoted to 22. Economic

Planning in Europe (Geneva: United Nations, E C E , 1965), pp. iii-18.

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selected aspects of a nation's economy (e.g., foreign trade). While econometric models are often considered useful only for purposes of medium-term planning, to indicate the nature of overall planning efforts the illustration offered here pertains to a Japanese project that utilized such models for long-term planning.23 The project comprised actually five models, two of which were long-term. The first of the long-term models utilized structural equations based on time series related to the years 1906-1960. It contained twelve variables shown in seven equations. There were seven endogenous variables: GNP, gross saving, capital stock, replacement, fixed investment of business and government, and households, concerning residential construction—all expressed in constant prices. The five exogenous variables were the following: investment allocation ratio, net exports, employment, trend variables, and dummy variables. The estimated production function and saving function were used to assess the growth potential of the Japanese economy up to 1985. The second long-term model, which was more detailed (containing 31 variables and 21 equations), provided a projection for 1975. The first and second models were linked; for example, the net export variable of the second model was introduced as an "input" into the first one: In a similar way, long-term models provided the medium-term macro- and interindustry models with exogenous data on investment, exports, etc. . . . By building up a complex system of partial models, the complex can profit from the respective advantages of its past. In this model the Japanese have succeeded in linking medium- and long-term plans. This is promising for further research as it provides an alternative to the "discrete" approach most widely used up to now.2'1

Sectoral models. Models pertaining to single sectors (industries) may be constructed separately or within the framework of an overall modeling effort. In the elaboration of sectoral planning models in Czechoslovakia, the latter approach was followed. The task with the sectoral model of the building industry was considered in the following manner, "In forming the plan for the ministry of building industry the basic problem is to achieve, by a choice of the most suitable building technol23. Econometric Models for Medium-Term Economic Plan 1964-1968 (Government of Japan, Economic Planning Agency, 1965). 24. Long-term Planning, p. 51.

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ogy, a balance between the economy's requirements of building and the kinds and volumes of material, labour, fixed assets and financial resources used in the building industry. . . . With the aim of speeding up, mechanizing and improving the quality of these calculations experimental testing of the structural model of building was begun in 1963. " M The model showed the interrelationships of various subsectors of the building industry, as well as inputs from other sectors, deliveries to user sectors, and labor inputs. The data of the model also made possible calculations by methods of linear programing in order to calculate optimal plans. In these exercises more than one objective function was used. The maximization of both profit and output and the minimization of costs of both production and labor utilization were used as optimization criteria. Regional models. To illustrate the usefulness of regional planning models, we refer to the tasks of planning in the Soviet Union, which has one of the planned economies with the greatest need for attention to regional detail. The geographical size and diversity of the country as well as its multilevel administrative setup render regional planning an unavoidable task. Generally speaking, the formalized regional models are of the input/output type. Such models were constructed for particular republics or selected parts of the country. The nonformalized planning techniques adopted in the regions are of course in line with the administrative planning methodology used at the national level. The development of Soviet regional planning models is usually related to the requirements of "planned-proportionate development" and to the "principle of democratic centralism." As formulated for a U.N. publication, the first of these requirements is outlined as follows: "The planning of the economy in the Soviet Union is based on the law of planned development and other objective economic laws. The law of planned development calls for the establishment of the right growth rates and the right proportions, not merely as between sectors of the economy, but also between economic regions of the country." 2 8 Unfortunately, the aforementioned law is not specific regarding the "right" growth rates and "right" proportions for sectors and regions. "The maximum rise in 25. Macro-economic Models for Planning and Policy Making, p. 106. 26. "Soviet Union, the Combination of Sectoral with Territorial Multi-Level Planning," in Multi-level Planning and Decision-Making, p. 121.

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TECHNIQUES OF PLANNING

the productivity of social labour at a minimum outlay" 27 is offered as the criterion to be used to judge "both the sectoral and the regional aspects of the plan." 28 However, under the existing fixed price system, calculations regarding the implementation of this criterion are very difficult. Regarding the application of the "principle of democratic centralism, which is one of the basic general principles of development of a socialist society," 29 the following suggestions are offered: "In planning, the observance of this principle means giving judicious consideration to enterprises' proposals and to local needs and capabilities, and reconciling the interests of the economy as a whole with the initiative of enterprises and local authorities." 30 Here the formulation again leaves ample room for different interpretations regarding possibly conflicting local and central interests. However, in theory the tasks with the techniques of regional planning are made quite clear: "One of the main tasks of territorial planning is to determine what the place and role of each Union Republic31 and economic region should be in the division of labour throughout the Union, and what contribution it can make to the solution of problems affecting the State as a whole." 32 Special models. The work undertaken in Eastern Europe concerning foreign-trade planning exemplifies the application of special models for planning. This is a field of great importance to the smaller socialist countries and therefore it is not surprising that theoretical discussions about foreign-trade efficiency criteria were first published in 1954 in Hungary and Czechoslovakia and were subsequently taken up in Poland and the G.D.R. In the last twenty years a growing sophistication has characterized the planning techniques and models applied to this special area. Research in Poland and Hungary in particular has covered many aspects of the relevant problems. e. Fifth level of classification

This classification groups the various models by their degree of aggregation into highly aggregated, aggregated, and disaggregated (or detailed) models. 27. Ibid. 28. Ibid. 29. Ibid. 30. Ibid. 31. The fifteen constituting Republics (the Russian F . S . S . R . , the Ukraine, Armenia, etc.) are the Union Republics of the Soviet Union. 32. " S o v i e t Union, the Combination of Sectoral with Territorial Multi-level Planning," p. 122.

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Highly aggregated models. The aggregate, one-sector neoclassical growth models are good examples of this type. For illustration a socalled real volume version of the model is shown here (with one degree of freedom), which assumes fixed prices and "completes the CobbDouglas production function with relations of a more or less definitional character in a growth model instead of the assumption of profit maximization under perfect competition." 3 3 A.

Variables: Note: Y = K = L = / = D = C =

GNP capital labor net investment depreciation consumption

B. Mathematical formulation Production function (1) Y = 8KaL0ept

of the model:

with the following parameters: 8 > 0, unit productivity of capital and labor a > 0, elasticity of output with respect to capital elasticity of output with respect to labor p, rate of independent technical progress a + /3 = 1 decreasing] 1 constant ? returns 1 increasing J to scale p = 0 nonindependent technical progress

(2) / = K

definition of net investment

(3) D =3CI

with 3C > 0 constant, ratio of depreciation in investment

33. p. 37.

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TECHNIQUES OF PLANNING

(4) L = L0eu

assumption for labor supply; with L0 = original stock of labor and A = growth rate of labor (X = 0 means constant labor) Distribution equation (total demand) (5) Y = / + D + C

Aggregated models. Models from two to twelve sectors can be considered to belong to this group. For example, the eleven-sector input/ output model that was the second part of the Dutch long-term plan for 1950-1970 belongs to this class. However, the whole Dutch model should be considered a disaggregated planning tool (see diagram that follows). Disaggregated models. The description of the 1950-1970 long-term planning model of the Netherlands would go beyond the limits of this section. However, it is useful to reproduce the simplified scheme of the model, to indicate the main directions of the relationships covered in it (see diagram that follows). 34 f. Sixth level of classification

In this classification, models are differentiated as short-term, medium-term, and long-term planning techniques. The notions of "short-term," "medium-term," and "long-term" are applied in the same sense as in chapter 2. Short-term models. An example of short-term planning models is Model 63-D of the Netherlands. This model contains 39 equations, of which 13 are reaction equations for consumption, investments, exports, imports, employment, unemployment, wages, prices (for consumption, investment, exports, and autonomous expenditures), and deposit. The other equations are definitional. Costs of the reaction equations were estimated by the limited-information maximum-likelihood method and the remainder, by two-stage least squares. The sampling period for the underlying time series covered the years 1923-1938 and 1949-1960. The main aim of Model D-63 was "(i) to forecast as accurately as possible next year's economic development. This forecast provides the policymaker with a numerically elaborated frame of reference against which he 34. Economic

Planning

in Europe,

pp. iii-24.

Demographic

Import

Ratio of export

N o t e . - T h e arrows indicate the direction of the dependences

" Policy instruments

Scheme of the simplified Netherlands' long-term model, 1956. From Economic Planning in Europe (Geneva: United Nations, ECE, 1965), Chapter III, p. 24.

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TECHNIQUES OF PLANNING

may evaluate the possibility or disability of new measures. . . . (ii) To provide reliable estimates of the economic consequences of changes in policy." 35 Medium-term models. Medium-term plans are the basic vehicles of planning; for example, those in the Soviet Union. While "historically annual plans were the first to be developed . . . beginning with 1928 the five-year plans were assumed by Soviet economy as the basis for its d e v e l o p m e n t . . . at present, the basic form of planning is the five-year programme with an annual breakdown of basic targets." 36 Input/output techniques are also now involved in the work on these plans. However, the basic framework utilized is the system of overall economic balances of the national economy. There are four main types of balances involved: national income balances, material balances, global socialproduct balances, and consolidated factor (manpower and fixed capital) balances. An important feature of the plan is that it should be drawn up by "addressees," that is, by agencies responsible for carrying out the compulsory directives in the plan, which cannot be changed without approval from the center. In the preparatory stages of the medium-term plans, great efforts are devoted to investment analysis. Long-term models. An example of long-term models is the "Investment '85" model of Electricité de France. This model was prepared to assist investment decisions of the agency by making calculations regarding the optimal structure of electricity production in France (including aspects of regional distribution). For the first two five-year periods covered, 1971-1975 and 1976-1980, the model subdivided France into six regions. The siting of new equipment and the transmission of energy were studied in terms of these regions. (The 1981-1985 period was considered as a "buffer period" of less detailed analysis.) In this model a nonlinear cost function was developed. The work resumed the earlier efforts of 1954, 1957 (a model of 70 constraints and 90 unknowns), and 1958 (a model with 180 constraints and over 200 unknowns) by Electricité de France. 35. "Netherlands, the Short-term Model of the Central Planning Bureau and its Forecasting Performance (1953-1963)," in Macro-economic Models for Planning and Policymaking, p. 35. 36. A. N. Yefimov, "Organization of Planning in the USSR," Report of the Seminar on Statistics for Planning (New York: United Nations, 1969), p. 29.

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273

g. Seventh level of classification This classification subdivides the various planning techniques into computer and noncomputer techniques. Noncomputer techniques. Except for algebraic (nonnumerical) models, today few models of any complexity are elaborated and operated without reliance on a computer. Computer techniques. Presently almost all models, whether short-, medium-, or long-term, whether determinate or stochastic in character (etc.) are essentially computer techniques. Even the mathematically nonformalized techniques such as planning in the framework of national accounts or with the use of the system of balances in the Soviet Union as well as the PPBS System in the United States involve a great many computer applications.

h. Eighth level of classification This classification relates to the basic nature of the planning process and groups techniques into forecasting, indicative, and command models. Forecasting models. The number of purely forecasting models is of course very large. For example, in the United States, regarding both the economy as a whole and its various segments, many forecasting models have been developed. However, in the framework of the present review, interest centers on those forecasting models which are applied in the process of planning itself and are indications of the nature of that process. The Dutch forecasting model D-63 discussed earlier is a good example of the type of technique (and approach) relevant to this category of models. Indicative models. Naturally the indicative models are best referred to in the context of French indicative planning. The model FIFI (Modèle Physico-Financier de Projection) is perhaps the best-known effort to formalize in a model key aspects of the French indicative planning approach. This complex model contained nearly 1500 equations. For its manipulation about 5000 programs were needed. An important characteristic of the model was its provision for the estimation of both financial and physical flows and equilibria. Another related to the measurement of the impact of foreign competition on French firms.

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TECHNIQUES OF PLANNING

Command models. The models to be classified in this group are related to a "command economy." As described by Heal, this is: an economy where the government can. if necessary, give binding directives concerning consumption and production plans to all consumers and producers in the economy. Such a government may of course operate in a less authoritarian manner, for example by relying on individuals' decisions made in the light of their own self-interests, these interests being approximately directed by some system of incentives. However it must be understood that even though the government may on occasions feel it expedient to adopt such a liberal approach, it is by no means constrained to do so, and in the last resort has always the power to command. 37

Heal's picture of course pertains to an "ideal" state of the command economy, and in practice there are real doubts whether even authoritarian governments can pursue just any sort of economic policy for a prolonged time with a complete disregard for the aspirations of the population. The events in the 1950s in Hungary indicate that there are limits to the effectiveness of "commands" of such type. Nevertheless, in principle the Soviet planning techniques contain a highly dominant command ingredient, as indicated by A. N. Yefimov of the U.S.S.R. Academy of Sciences in a paper published by the United Nations: "The national economic plans have the nature of a directive. They are approved by the government organs and henceforth become obligatory targets." 38 Yefimov also points to the following three features of Soviet planning: (a) "Soviet economic plans are strictly scientific programmes founded on the Marxist-Leninist theory of extended socialist reproduction"; (b) "socialist planning increasingly reflects the growing part played by the economic policy of the state. Active interference by the state into the economic activities of the country makes it possible to concentrate all efforts upon essential economic objectives"; 39 and (c) "planning in the USSR rests on the tremendous constructive potential of organized workers, it gives people a clear programme of action, enables every person to find his place in a nationwide effort." 40 37. 38. 39. 40.

G. M. Heal, The Theory of Economic Planning, p. I. Yefimov. "Organization of Planning in the USSR," p. 29. Ibid., p. 28. Ibid., p. 25.

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275

i. Ninth level of classification

This classification is closely related to the preceding one. However, that level subdivided the planning techniques and models according to their application in forecasting, indicative planning, or directive planning, while the present classification deals with models that describe the economies themselves in respect to their economic mechanism (or economic regime). The three groups of models distinguished are: centralized, mixed, and decentralized models. Owing to the interrelated nature of the characteristics of these systems, it it not practical to deal with them separately. Following Margolis's and Trzeciakowski's design, 41 we prefer to give a general outline pertaining to all three. Assuming that each national decisionmaking structure has two basic components, authority and management, the pertinent economic mechanisms can be visualized in terms of relative centralization of these two functions. "Authority" relates to the preferences, that is, to the level at which the preference will be dominantly determined. "Management" pertains to the relative centralization of the allocation of resources. A schematic presentation of the interrelationships of the two is offered by Margolis and Trzeciakowski in the form of the accompanying table. j. Tenth level of classification

This level simply subdivides models according to their data base, depending on whether quarterly or annual data were used for their construction. Models based on quarterly data. Models based on quarterly data are particularly important for discerning, evaluating, and influencing the cyclical movements in the economic process. This is one of the reasons why the Wharton model of Lawrence R. Klein, the OBE model, and others in the United States rely on quarterly data. Also for forecasting purposes and for simulating the possible effects of alternative policies and forms of government intervention, the availability of the results on a

41. J. Margolis and W. Trzeciakowski (in cooperation with the ECE Secretariat), " T h e General Framework of Decision-making Systems," in Multi-level Planning and Decision Making, pp. 47-62.

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