ECONOMIC PLANNING

the process by which key economic decisions are made or influenced by central governments. It contrasts with the laissez-faire approach that, in its purest form, eschews any attempt to guide the economy, relying instead on market forces to determine the speed, direction, and nature of economic evolution. Economic planning was first attempted in the Soviet Union in the 1920s when, in order to achieve rapid industrialization of a predominantly agricultural and highly disorganized economy, the new Communist regime instituted a rigorously controlled command economy. About the same time, planning gained considerable appeal in noncommunist countries as a way of responding to the economic difficulties of the period between the two world wars. Later, during World War II, most governments were forced to introduce strict control of their economies, and by the 1950s the idea that governments should take a significant role in planning and influencing economic activities was widely accepted. Today, the majority of countries engage in some form of planning activity. Currently, the extent and nature of economic planning in any country tends to be closely related to the political complexion of the government in question. At one extreme is the detailed and rigid planning practiced by some communist countries (notably China and, until recently, most eastern European countries and the former Soviet Union). This involves government ownership of most means of production and the central allocation of resources determined in the light of the government's economic, political, and social objectives. It requires the central government's determination of what is produced, the level of individual prices, the level of wages, the level of investment, foreign trade, and all other variables of the economy. It also requires enormously detailed control of the activities of individual enterprises and a vast and expensive central-planning bureaucracy. The theoretical justification for this approach to economic planning is that, since market forces are indifferent to social values and can be manipulated by owners of wealth, they cannot be relied on to bring about socially and politically desirable objectives. Furthermore, it is argued, because they cannot guarantee full employment, they are not even capable of ensuring the efficient use of available resources. Against this it is argued that, by eliminating competition, command planning destroys the incentive to effort and enterprise, thereby leading to inefficiency. It is also argued that, despite a vast army of planners, it is not actually possible to control or even identify the myriad activities that make up the economy and that the inevitable results are slow and erratic economic growth, shortages, and structural imbalances necessitating dramatic and wasteful readjustments from time to time. The economic achievements of the most rigidly planned economies in the second half of the 20th century were generally disappointing and eventually resulted in deep dissatisfaction with the inflexibilities of such systems. In the 1950s some communist countries began to experiment with a less rigid variant of the original concept. The process started in Poland in 1956, and, despite strong Soviet pressure against reform, it continued throughout the 1960s and '70s in most of eastern Europe. It was taken farthest in Hungary, where, although the bulk of the factors of production continue to be in public ownership, a fair degree of private enterprise in the supply of consumer goods, services, and foodstuffs had emerged by the 1970s. At the same time, the management of publicly owned enterprises was given a degree of freedom over production and pricing decisions, and incentives were provided in the form of profit-related bonuses. This kind of planning proved relatively successful in Hungary, Yugoslavia, and China, but it met with greater resistance when introduced into the Soviet Union itself by the Soviet leader Mikhail Gorbachev in the late 1980s. The subsequent collapse of the Soviet Union in 1991 necessitated a completely revised approach to economic planning there and elsewhere where Soviet influence had recently disappeared. Most of eastern Europe began to abandon central planning and to convert to private enterprise by the early 1990s, with the mixed economies of the Western democracies as the prime model. The mixed economies of western Europe, North America, and Japan have perhaps made the most viable use of economic planning. Although the extent of planning and government control varies from country to country, the capitalist framework and a sizable private sector are retained in virtually all cases. Furthermore, except for detailed control over one or two key publicly owned sectors, most Western governments tend to influence their economies by regulating such broad economic factors as the money supply, government expenditure, interest rates, etc. The essence of the system is that most production and pricing decisions are made by private business within a broad overall framework, which is set up by the government. The result is a greater degree of enterprise and the absence of a large and expensive planning bureaucracy. The detailed characteristics of economic planning in the West vary widely. The United States has traditionally been less amenable to governmental planning than western Europe, and France has tended to put greater emphasis on government control of the economy than other developed noncommunist countries. Against this general background, the position of a given country also tends to vary over time; Great Britain's Labour government of the 1960s adopted a strongly interventionist and planning-oriented approach, but the main objective of the Conservative government from 1976 was to reduce the state's role in the economy. In the late 20th century, Japan represented perhaps the most successful example of economic planning within a capitalist framework, with government and industry closely cooperating in the planning of patterns of capital investment, research and development, and export strategies. Developing countries have also adopted the theory and practice of economic planning. Although most of them tend to prepare medium-term (five- or six-year) economic development plans, there is no common approach to such planning. While most developing nations have placed substantial sectors of their economies under government ownership or influence, in only a very few countries is there an attempt to practice detailed command planning. Generally, the basic aim of developing countries' economic planning is to mobilize sufficient funds for the development of their infrastructure and selected areas of industry and to exercise a degree of influence over those sectors of the economy (often the output of primary commodities) from which a very large proportion of the country's income flows. Economic planning in developing countries has not been an unqualified success. Not infrequently the plans are either little more than uncoordinated lists of targets, often chosen on political grounds, or overly ambitious outlines of goals determined a priori rather than on a realistic assessment of the available resources. In some cases excessive dependence on price-volatile primary commodities makes long-term planning extremely difficult, while some countries lack the administrative resources and political stability needed to implement their planning objectives. the process by which key economic decisions are made or influenced by central governments. It contrasts with the laissez-faire approach that, in its purest form, eschews any attempt to guide the economy, relying instead on market forces to determine the speed, direction, and nature of economic evolution. By the late 1960s the majority of the world's countries conducted their economic affairs within the framework of a national economic plan. But in the 1980s the theory and practice of economic planning went through a crisis. In the developed market economies the rate of economic growth slowed from the very high levels reached in the 1960s and '70s, and unemployment rose significantly. At the same time, public confidence in the ability of governments to influence for the better the performance of the economy diminished. As a result, the popularity of national economic plans waned and the scope left to the free play of market forces widened. In developing countries, forms of economic planning practiced earlier yielded disappointing results characterized by the growth of heavy state bureaucracies and inefficient public enterprises. In these countries also, although the role of the state remained preponderant, market forces were increasingly relied upon to improve economic performance. In the Soviet Union and its satellites, the backward state of the economy and widespread examples of waste and inefficiency led to attempts to introduce more market solutions into the process of economic planning. These attempts proved largely unsuccessful, however, and the inherent rigidity of the Soviet economic model proved an important factor in the collapse of Communism in eastern Europe and the Soviet Union itself, beginning in 1989. Additional reading Planning in Communist countries General works on Soviet-type planning include Alec Nove, The Soviet Economy, 3rd ed. (1986); Paul R. Gregory and Robert C. Stuart, Soviet Economic Structure and Performance, 3rd ed. (1986); Michael Ellman, Socialist Planning (1979); Marie Lavigne, The Socialist Economies of the Soviet Union and Europe (1974; originally published in French, 1970); Trevor Buck and John Cole, Modern Soviet Economic Performance (1987); David A. Dyker, The Future of the Soviet Economic Planning System (1985); Abram Bergson and Herbert S. Levine (eds.), The Soviet Economy: Toward the Year 2000 (1983); and P.J.D. Wiles, Economic Institutions Compared (1977). For historical background, see Alec Nove, An Economic History of the U.S.S.R. (1969, reprinted with revisions, 1982); and the highly detailed and well-documented survey of the creation of the system in Edward Hallett Carr and R.W. Davies, Foundations of the Planned Economy, 192629, 3 vol. in 5 (196976). For a discussion of Mikhail Gorbachev's reform program, see Abel Aganbegyan, The Challenge: Economics of Perestroika, trans. from Russian (1988). Fundamental theoretical discussions are offered in Jnos Kornai, Economics of Shortage, trans. from Hungarian, 2 vol. (1979, reissued 1980); V.V. Novozhilov, Problems of Cost-Benefit Analysis in Optimal Planning (1970; originally published in Russian, 1967); Joseph S. Berliner, The Innovation Decision in Soviet Industry (1976); and on a more empirical level, Ronald Amann, Julian Cooper, and R.W. Davies (eds.), The Technological Level of Soviet Industry (1977).On social policy, see Alastair McAuley, Economic Welfare in the Soviet Union (1979). On foreign trade, see Franklyn D. Holzman, Foreign Trade Under Central Planning (1974); and Philip Hanson, Trade and Technology in Soviet-Western Relations (1981). Analyses of agricultural development include Stefan Hedlund, Crisis in Soviet Agriculture (1984); D. Gale Johnson and Karen McConnell Brooks, Prospects for Soviet Agriculture in the 1980s (1983); and Karl-Eugen Wdekin, Agrarian Policies in Communist Europe (1982). More general works on socialist planning are Wlodzimierz Brus, The Economics and Politics of Socialism (1983); Alec Nove, The Economics of Feasible Socialism (1983); and Branko Horvat, The Political Economy of Socialism: A Marxist Social Theory (1982). On other eastern European countries, see David Granick, Enterprise Guidance in Eastern Europe: Comparison of Four Socialist Economies (1975); Ljubo Sirc, The Yugoslav Economy Under Self-Management (1979); and Jnos Kornai, Contradictions and Dilemmas: Studies on the Socialist Economy and Society (1986; originally published in Hungarian, 1983), on Hungary. On the background to Chinese reforms, see Mark Selden and Victor Lippit (eds.), The Transition to Socialism in China (1982). Alexander Nove Planning in developed countries A historical introduction to the development of economic planning in western Europe is provided in M.M. Postan, An Economic History of Western Europe, 19451964 (1967). A major technique of planning is discussed in Harold A. Hovey, The Planning-Programming-Budgeting Approach to Government Decision-Making (1968). Techniques of measuring social aspects of economic growth are explored in Eleanor Bernert Sheldon and Wilbert E. Moore (eds.), Indicators of Social Change: Concepts and Measurements (1968). Later assessments of the appropriate role of government with respect to planning include Samuel Brittan, The Role and Limits of Government: Essays in Political Economy (1983, reissued 1987); Leo Pliatzky, Paying and Choosing: The Intelligent Person's Guide to the Mixed Economy (1985); and Alice M. Rivlin (ed.), Economic Choices 1984 (1984). A general survey of problems faced by governments in improving overall economic performance is given in Structural Adjustment and Economic Performance (1987), a collection of data prepared for the Organisation for Economic Co-operation and Development. John Hackett Planning in developing countries A good introduction to the theory and practice of economic planning in the developing countries is W. Arthur Lewis, Development Planning: The Essentials of Economic Policy (1966), which illustrates the various stages of drawing up a consistent development plan but also emphasizes that sound fundamental economic policies are more important than formal planning techniques. Albert Waterston, Development Planning: Lessons of Experience (1965, reissued 1974), is a well-documented survey of development plans in various countries, particularly good in discussing the various administrative and fiscal problems of development planning. Wolfgang F. Stolper, Planning Without Facts: Lessons in Resource Allocation from Nigeria's Development (1966), is a case study with a pragmatic and general approach to development planning. Later research includes William R. Cline and Sidney Weintraub (eds.), Economic Stabilization in Developing Countries (1981), essays on a range of topics; David Bevan et al., East African Lessons on Economic Liberalization, (1987); a study of the effectiveness of economic incentives; Paul M. Lubeck (ed.), The African Bourgeoisie: Capitalist Development in Nigeria, Kenya, and the Ivory Coast (1987), a study of the current state of African economies; and Norman Gemmel (ed.), Surveys in Development Economics (1987), a review of contemporary opinion on the subject. Hla Myint Anne O. Krueger