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World Bank Document Policy,Research, and ExtemalAffairs WORKING PAPERS Officeof the VicePresident DevelopmentEconomics The World Bank Public Disclosure Authorized May 1990 WPS 439 Public Disclosure Authorized Indicative Planning in DevelopingCountries Public Disclosure Authorized Bela Balassa The lack of success of planning, together with the growing understandingof the importanceof incentivesand markets,have contributedto the Public Disclosure Authorized declineof planningin the 1980s.The question remains,then, what should the role of the publicsector in devel- oping countriesbe? The Policy. Research, and External Affairs Cmnplex distibutes PRE Working Papers to disseminate the findings of work in progress and to encourageLhe exchangc of ideas amongBank staff and all others interestedin developmt issues.Thesepaperm cmry the names ofthe authorsm flect onlytheir views, and should be used and cited accordingly.The fndings, interpeutimss and conclusions ae the authors own. They should not be attuibuted to the World Bank, its Board of Directors, its managcmcnt or any of its membr counties. ~~ t , | Policy,Research, and Extemrl Atairs --.. rl WORKINGPAPERS Office ot the Vice President .- 4 . ' ' ', - ' ' ' ' ' This paperE- a product of the Office^ofthe Vice President, Development Economics-is part of a larger effort in PRE to study development policies. Copies are available free from the World Bank, 1818 H Street NW, Washington DC 20433. Please contact Norma Carnpbell, room S9-047, extension 33769 (23 pages). Indicative planning involves the establishment ments, and the evaluation of public sector of sectoral targets which are not compulsory for projects. the private sector and are imbedded in macro- economic projections that pertain to a period of Available evidence indicates the superiority several years. Indicative planning has been of private enterprises over public enterprises. It widely practiced in developing countries during further appears that increases in the size of the the postwar period. At the same time, the government adversely affect growth perform- review of the experience of these countries ance in developing countries. Finally, increases indicates that it failed to have favorable eco- in the share of public investment tend to be nomic effects while utilizing scarce administra- associated with a decline in the share of total in- tive resources. vestment in GNP and with a fall in investmnent efficency. The lack of success of planning, together with the growing understanding of the impor- Nevertheless, there is evidence that infras- tance of incentives and markets, have contrib- tructural investments favorably affect private in- uted to the decline of planning in the 1980s. The vestment. At the same time, such investments question remains, then, what should the role of should be subject to rigorous project evaluation the public sector in developing countries be? so that appropriate choices may be made among This question may be addressed by considering altemative investments. They should also be the choice between public and private enter- based on multiannual programs. Thus, the prises in the manufacturing sector, the size of the usefulness of planning re-emerges in the con- govemment, the implications of public invest- fines of public sector investment in infrastruc- ture. The PRE Working Paper Series disseminates the findings of work under way in the Bank's Policy, Research, and Extcrnal Affairs Complex. An objective of the series is to get these findings out quickly, even if presentations are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent official Bank policy. Produced at the PRE Dissemination Center INDICATIVEPLANNING IN DEVELOPING COUNTRIES Bela Balassa Table of Contents Page No. I. Introduction ......................... ........... 1 II. An Evaluation of Indicative Planning . 1 III. Relying on Incentives and Markets . 7 IV. The Role of the Public Sector in Developing Countries . 14 V. Conclusions . 19 * The author is Professor of Political Economy at the Johns Hopkins University and Consultantat the World Bank. He prepared this paper for the Conference on IndicativePlanning, held in Washington, D.C. in April 1990. The author is indebted to participantsat the Conference and to Mary Shirley for helpful comments and to Shigeru Akiyama for research assistance. Indicative Planning in Developing Countries Bela Balassa I. Introduction Following the example of the Soviet Union, several developing countries prepared multi-annualplans in the early postwar period. These plans were comprehensiveand dirigiste. Their failure brought about changes in the planning process towards an approach that has been christened indicativeplanning. Under indicativeplanning, sectoral targets are establishedbut these are not compulsory for the private sector. In a subsequent stage, these targets have also been abandoned and emphasis has been given to prices and markets. This paper will deal with indicative planning in developing countries. It will describe the efforts made to undertake indicative planning and evaluate these efforts. It will further consider the more recent orientation towards reliance on incentives and markets. Finally, the role of the public sector will be examined. II. An Evaluation of Indicative Planning Indicative planning (for short, planning) involves the establishment of sectoral targets which are not compulsory for the private sector. These targets are imbedded in macroeconomicprojections that pertain to a period of several years. Planning in developing countries goes back to colonial times. In fact, at U.S. insistence,four-year recovery programs were drawn up by the European countries participatingin the Marshall Plan, which included their -2- overseas territories. However primitive these plans were, they provideda basis for planning at the time of independence. As Killick notes, "in Africa during the 1960s 'having a plan' became almost a sine qua non of political independence. With the active encouragementof the World Bank and other aid agencies, most newly independent states hastened to prepare medium-term developmentplans, often buildingupon foundations already laid in the colonial period" (1983, p. 47). He adds that "the general model to which planners aspired was for a 'comprehensive'plan (in the sense of including the private sector and para-statal organizations) that presented a strategy and targets for the development of the economy, typically for a five-year period ... " (Ibid). The statementabout Africa also applies to Asia where countries prepared developmentplans upon securing independence. Planning assumed particular importance in India where the Soviet example motivated the earlier plans. Multi-annualplans were also prepared in Sri Lanka, Pakistan and, subsequently,Bangladesh. Different considerationsapply to Latin America, where national independencewas attained in the 19th century. In the years followingthe Second World War, the U.N. Economic Commission for Latin America proposed planning to be undertaken by Latin American countries, expressing the view that "the principal task of government ... is to give long-run direction to economic developmentby the means of detailed plans ... " (Hirschman,1961, p. 22). However, plans were not prepared until 1961 when the Alliance for Progress program sponsoredby the United States came into effect. As Urrutia notes, "in Latin America, development plans were a prerequisitefor -3- qualificationfor loans from the Alliance for Progress programme" (1988, pp. 5-6). Foreign aid agencies contributed to planning also elsewhere in the developingworld. Thus, "the macro-economic plans that calculated foreign- exchange needs and showed that a country could profitably absorb foreign aid were used by aid officers in bilateral and multilateralagencies to justify credits and grants ... International bureaucracieshad trouble convincing donors to lend to countrieswhere such justifications,in the form of plans, did not exist ... " (Ibid, p. 6). This statementapplies to the World Bank as well as to the U.S. government. The World Bank's 1949-50 Annual Report stated that member countries "know, too, that if they formulate a well-balanceddevelopment program based on the (Bank] Mission's recommendations,the Bank will stand ready to help them carry out the program by financing appropriateprojects" (p. 18). Also, it was noted that the United States "in a complete reversal of Point Four philosophyhas shifted its support from technical assistanceto planning" (Watson and Dirlam, 1965, p. 48). But, how about the success of the plans? An early appraisal, in the mid-1960s, was made by Albert Waterston, the World Bank's planning expert. Having reviewed the experienceof more than 100 countries,Waterston reached the conclusion that "among developing nations with some kind of a market economy and a sizeable private sector, only one or two countries seem to have been consistentlysuccessful in carrying out plans" (1966, p. 14). More recent reviews of planning experiencesof developingcountries confirm Waterston'sconclusion. Thus, two decades later, Killick concluded 4 that "medium-termdevelopment planning has in most ldcs almost entirely failed to deliver the advantagesexpected of it" (1986, p. 103). Killick also carried out a comprehensive survey of the African experience. In his view, "there is no doubt that the generaloutcome of the above survey of the available evidence on plan executionhas been negative ... Actual results show wide dispersion
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