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Plans, Projects, and Priorities

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
September 1964
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LEAVING aside differences in method and organization, all planning activities may be said to have two elements. One is a comprehensive stocktaking of the real and financial resources of the economy, the other an attempt to project into the future the use of these resources in such a way as to get the most development. The two key questions thus are “where are we now?” and “where shall we go from here?” To answer the first question is a tedious chore; to deal with the second is a challenge to the imagination of the expert and the policymaker.

Mr. Adler is Director of the Economic Development Institute of the World Bank. He was formerly with the Federal Reserve Bank of New York. He is a Dr. juris of the German University of Prague and a Ph.D. in Economics of Yale University.

No wonder then that the planners all over the world often do not pay enough attention to the first part of the task and concentrate on the second. The result is that planning often becomes a mechanistic exercise of spelling out, with various degrees of detail and accuracy, and under various assumptions, which may or may not be justified, what is wanted in the future—while the plans lose their relevance to the current conditions which they are supposed to change.

It is not, of course, always possible to give plans firm roots in the present even in such short-range projections as an annual government budget. In most countries the preparations for next year’s budget have to get under way at a time when last year’s performance is not yet fully known, so that the basis of the budget “plan” cannot be certain. The more the planning period extends into the unknown, and the more ambitious the planners are about methods and refinement, the greater the gap between the presumed basis of the plan and its real basis in the workaday economy.

“Where Are We Now?”

This problem can never be fully resolved. But there is much to be said for a closer scrutiny of the current state of affairs than planners in many countries customarily give them. Over and over again development plans have become obsolete before they were completed, because they were not up-to-date to begin with. The only way to remedy this is to improve on the flow of current information from the various sectors of the economy, and particularly from government departments, to the planners. It is only on the basis of a thorough knowledge of what is going on in the present that any meaningful determination of what is to happen can be made. Moreover, the stimulation of the constant flow of data is bound to help the planners to make a rational choice among alternatives and to determine attainable targets. Even more useful is an appraisal of the responses of the various sectors of the economy to measures already taken.

In many countries attempts have been made to solve the problem by making extensive use of the records of past experiences. Historical series are compiled to ascertain the path of the economy in the past, and current trends and average values of the relevant economic variables are deduced from them. There is much to be said in favor of such an exercise. To view the future in the perspective of the past, and to ascertain the basic trends of national economic history, is indispensable for a proper appreciation of the various forces at work in the economy and their relative strength. But it is unfortunately not always sufficiently clear in the minds of the planners that even the most painstaking and accurate evaluation of past trends is not a substitute for an equally painstaking and accurate evaluation of the current economic scene.

“Where Shall We Go?”

The usefulness of the forward look—the glamor part of planning—depends on the extent to which two conditions are met. One is that a distinction must be made between what is likely to happen automatically, i.e., without changes in policies, and what will happen only if certain changes are made. The second condition is that the plan is treated as a statement of policy on which decisions of all economic units in the economy can be based with reasonable assurance. The distinction between forecasts of what will happen in the future “automatically,” and what will happen if, and only if, the government takes certain measures, is important because it permits the planners, and through them the policymakers, to focus their attention on the limited number of issues on which decisions must be made. In recent years it has become rather fashionable to couch much of economic analysis, and particularly the analysis of economic development, in terms of decision making. The argument has been that economic development is held back by the inability or the unwillingness of the supposed decision makers, be they in the government or in the private sector, actually to make decisions; and much thought has been given by economists and other social scientists to ways of rendering decision-making easier. Perhaps the most important service which a planning exercise renders is that it contributes to the decision-making process by distinguishing those issues on which decisions must be made and those issues on which decisions may be delayed.

Comprehensive or Piecemeal?

One of the common shortcomings of development planners is their insistence that many decisions must be made at the same time and, conversely, that there is no point in acting on one policy recommendation without at the same time acting on all corollary issues. Some Latin American economists in particular have argued that anti-inflationary measures are useless without fiscal reforms, a thorough overhaul of land ownership, a reform of the educational system, and so on. Since everything interlocks everything must be done at once.

This view is mistaken in two important respects. In the first place, it fails to take account of the political mechanics of decision making. Irrespective of the differences in political institutions, decisions involve large numbers of persons who must be consulted and convinced, or, failing the latter, overruled and placated. In the second place, the insistence on comprehensive enactment overlooks the fact that one major policy decision is bound to change the constellation of circumstances which are to be changed by other decisions.

There thus emerges an important conceptual asymmetry. On the one hand there is the need for a comprehensive view of the economy; to know where all its parts stand at present and in what direction they are to move. In that sense planning must be comprehensive. But when it is looked at in another way, as the business of formulating a practical strategy, planning cannot and must not be comprehensive: it must be phased, or piecemeal.

The idea of the comprehensiveness of planning leads to another aspect of the planning process which has become the subject of controversy in recent years; that is the extent and depth of planning over the various sectors of the economy. The fairly common idea that planning can be confined to the public sector, which at first glance appears plausible, is in practice not really meaningful. Useful decisions in the public sector cannot be made without a fairly accurate notion about the direction in which the private sector is moving and what the composition of private investment is likely to be. This is equally true of the size and composition of public expenditures, the selection of public development projects, and the decision to increase or decrease current expenditures for certain purposes. It would obviously make little sense, for example, to include in a development plan for the public sector outlays for a highway or a power project without ascertaining first what the demand for these additional facilities is likely to be. All plans have to be concerned with the private sector as well as the public sector.

The confusion in the controversy about the extent of planning has arisen for two related reasons. One is the fact that in the preparation of projections the planners of many countries have failed to distinguish explicitly between governmental and private decisions—i.e., between decisions about the allocation of resources which the government itself can and must make, and those decisions which are the result of deliberations and actions within the private sector, which can only be influenced by the actions of government through a system of incentives and disincentives.

The second reason is equally the result of the failure to distinguish between what the government can do and what “ought to” be done by the private sector. This failure leads planners to conclude that government must make sure that the projections for the private sector come true, and that the “targets” are reached—presumably by direct government action if the private sector does not live up to the planners’ expectations. These anxieties about making sure that the plans are fulfilled are likely to lead to an extension of direct government action beyond the original intentions of any planner, particularly where government actions can be readily extended—for instance in industry. Such an extension of government activity in fields where the private sector can perform as efficiently as government can, or better, is likely to be at the expense of the government’s attention to tasks which only government can undertake. The result is that the efficiency of the economy goes down.

There is one way in which these tendencies can be curbed. If in the preparation of the projections for private sector activities the planning agencies rely on consultation and cooperation with representatives of that sector, not only are these projections likely to be more accurate but, beyond that, the chances of their being reached are enhanced. The secret of the success of “indicative planning” in France and some other countries is not that these plans were “technically” better—whatever that may mean—but that the plans were formulated in close cooperation with the organizations representing the various industries of the private sector. “Indicative planning” is thus a two-way street. The traffic in one direction indicates what the planners expect the private sector to do; in the other it indicates to the planners what the intentions of the private sector are.

The Place of Investment Projects

The preoccupation of planners in most countries with aggregate physical and financial outputs and inputs has led to what nowadays is probably the most widespread weakness of planning—the neglect of the preparation and evaluation of investment projects. Some years ago, when planning methods were the subject of much concern (and little experience), a distinction was made between “planning from above” and “planning from below.” The first term was intended to characterize an approach by which aggregate targets and projections are made first, with aggregates for sectors being determined subsequently, and so on down the line to specific investment decisions. “Planning from below” on the other hand has meant the assembling of investment projects from all sectors of the economy into investment targets, their grand total then being related to the total available financial and real resources.

When the first attempts were made to formulate development plans in various countries, plans were frequently little more than a list of projects in various stages of preparation—“shopping lists,” as they were sneeringly referred to by those national and international agencies to which they were submitted. It was clear that this simplified version of “planning from below” had little value, for two reasons. In the first place, the projects did not add up to an internally consistent total, and thus exceeded, or fell short of, available resources, leaving unanswered the question of how the rest of the resources should be used or, alternatively, what the priority of the various projects was and how their sequence in time would affect and modify them. The second, and in a way more serious weakness, was that all the projects except for a handful were only the expression of the conviction that this or that investment would be a “good thing,” without any attempt having been made, even in a preliminary way, to determine its cost and relate this to the expected benefits.

It was partly as a result of growing dissatisfaction with this shopping-list approach that the advocates of “planning from above” had an easy task in convincing the government authorities, the public at large, and, above all, each other, that more attention had to be given to determining total requirements, aggregate targets, over-all financial resources, and global objectives. The result of this preoccupation has been a loosening of the relations between the planning agencies concerned with totals on the one hand, and the government agencies and the units in the private sector of the economy concerned with investment projects on the other. With growing frequency the complaint has been heard that the plans were excellent, but that their implementation, which was somebody else’s responsibility, had been deficient.

There have undoubtedly been many good plans and projects which have been badly carried out. But often it was not the implementation that was at fault but the fact that there was little to implement: the plans were not related to specific projects which had been prepared to the point at which their cost could be determined with reasonable accuracy and set off against the benefits to be derived from them. To argue that plans which are not entirely made up of a set of firm investment projects are incomplete would get us right back to the fallacy and limitations of the planning from below approach. A plan must inevitably consist of some parts that are “hard” and others that are “soft,” in order to allow for the interplay of private, dispersed decision-making and uncertainty. But there is obviously a high correlation between the usefulness of a plan and the extent to which it is backed up by specific projects, with their cost and social yield fairly accurately known.

Long-term Plans and Annual Budgets

Some confusion and controversy have arisen about the duration of a plan and the commonly accepted practice of carrying it forward by means of annual budgets. In ideal conditions the annual budget is but the yearly implementation of a part of the plan. But conditions are often far from ideal, and in many countries the annual budgets are related to the plan only in the vaguest way. To some extent the annual budgets (and the occasional modifications in the budget in the course of a fiscal year) reflect the errors made in the forecasts which are explicit or implicit in the plan. But there is much evidence that suggests that the divergence between the recommendations of a five-year plan and the subsequent decisions taken through the annual budget and other measures simply reflect the weaknesses inherent in so many plans referred to above—the failure to relate the plan aggregates to specific projects under way or to be undertaken. The arguments of those who feel that the preparation of five-year plans is a waste of time (and, it may be added, a waste of scarce technical expertise), and that a better preparation of projects in the framework of annual budgets is all that is necessary, are based upon a misconception of what the content of a plan should be. If a plan is nothing but a projection of aggregate requirements, resources, and so forth, and does not contain specific projects, those who consider plans and planning useless are right. But the answer is not to do away with plans; it is to have plans with a content that is operationally significant, that is to say plans which can really be acted upon through an annual allocation of resources.

Priorities

Economists who are wedded to the idea that economic development depends almost entirely on the effectiveness of aggregate planning are bound to object to the introduction of specific projects into the planning process. They will point out that projects can be selected only after their priority has been determined. This, however, implies that priorities can be determined in the abstract without being related to projects and their evaluation.

This is obviously incorrect. On general theoretical grounds it may be argued that there is no need for a special effort to settle priorities in the planning process, because the yield of each project determines its priority rating. By selecting the projects with the highest yields in all sectors of the economy, the best possible allocation of resources is assured. The advantage of looking at the concept of priority from this point of view is that it brings out the usefulness of the priority concept as well as its limitations. The selection of projects without reference to any priority would be adequate if three conditions were fulfilled: (a) that market prices reflected real cost to the economy; (b) that all outputs were sold in the market, and (c) that development plans, explicitly or by implication, were not concerned with the actual and the projected, or promised, income distribution (see below). Whenever any one of these conditions is not fulfilled, the yield test of projects must be supplemented by some form of priority determination.

The concept of priorities comes into its own in the case of public services which are not sold at market prices because a quantification of their benefits is impossible. Attempts have been made to determine the benefits of expenditures for such public services as education, public health, and medical care, but the economic calculus has obviously limited application to expenditures of this sort, particularly for the evaluation of specific projects (what size school? how many hospital beds? how much police protection?) when compared with an evaluation of aggregate outlays. Thus some sort of priority rating, based on rules of thumb, political and social considerations, and so on, must take the place of the yield test.

Income Distribution

The final and in practice most important irea in which priority considerations affect decisions is in the present and future distribution of income. Investment in nightclubs and movie houses and lipstick factories may have the highest yield in an array of projects, but no planning agency would dare to recommend that public funds be invested in such undertakings or that investment be allowed for such purposes in a system of investment licensing. The argument usually advanced in the case of luxury goods and services is that they would serve a small number of people and not the economy as a whole; sometimes projects are ruled out on moral grounds (e.g., gambling casinos, liquor distilleries). It seems that this line of reasoning is but a disguise for the pursuit of an objective implicit in all development efforts: to bring about, in the course, and as a consequence, of development, a more even distribution of income; or to put the same proposition in its most moderate (and timid) form, at least to prevent a growing unevenness of the distribution of income.

In the conditions which prevail frequently in underdeveloped countries, however, an otherwise desirable redistribution of income may conflict with growth objectives. The sale of some goods and services at subsidized prices “so that more people can enjoy them” may lead to a misallocation of scarce resources and reduce capital formation. Moreover, the result of such policies may well be that most benefits of subsidies go to persons who can well afford to pay the full cost of the subsidized produce or service; if that is so neither income distribution objectives nor growth objectives may be attained.

All this is not to suggest that priorities based on income distribution, or, more broadly, on social considerations have no place in the planning process—there is something inherently objectionable in the use of public funds for the construction of race tracks or country clubs. There is no doubt that income distribution is a major development problem. But it does suggest that aside from fairly obvious exceptions, the solution of the income distribution problem cannot be attempted through the application of some preconceived priorities (with or without fringes of morality considerations) regarding the allocation of capital and other scarce resources. The solution must be sought in part through expenditures aiming directly at alleviating the miseries of people in acute or chronic distress, in part through fiscal measures, and in part through accelerating the process of economic growth by the best possible allocation of resources based on economic criteria.

It is hardly possible to summarize thoughts on planning, and on the role of projects and priorities in the planning process, that have ranged over so wide an area. One conclusion may, however, emerge from them. The preparation of a plan that is to serve those responsible for the direction and guidance of an economy is a difficult task, which offers innumerable challenges to the intellectual acumen and integrity of the planners. It takes technical competence, resourcefulness, and imagination to make a plan; to make a good plan takes all that together with the courage and humility to recognize the limitation of planning.

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