Methods and Techniques of Planning Methods and Techniques of Planning Krishna Khadka 1 krishna Khadka

Coverage Explain different methods and techniques of planning Planning techiques – HD model, LP, I/O method Cost benefit analysis 2 krishna Khadka

Need for Planning method/tools The basic objective of Planning is to allocate the scarce resources into various competing activities so that we get the best return from the limited resources Allocation of resource call for a techniques or models. These models or techniques or tools are known as planning technique For discussion in this session, we have selected only the models which have wide application – used by many countries 3 krishna Khadka

Planning model, tool and technique Model, tool and technique some times are interchangeably used What is model? Model (or equation) are the expression of relationship between economic variables in algebraic (mathematical) notation Use of any model requires huge data on different aspects of the economy. 4 krishna Khadka

Linking of Plans, Programs and Projects There has been strong relationship between plan, program and project What maintains the linkages between plan, program and projects? Plans, programs and projects are linked with each other

Cont… In a sense plan is a systematic compilation of programs and projects that should be done within: a given period of time and in various parts of the nation The relationship can be expressed as Prospective plan – periodic plans – programs and projects The following diagram presents the relationship between plan, program and projects

Plans, programs and projects

Cont… Existence of such relationship calls for sets of models and techniques at various levels

Some Basic Model Almost all development plans use more or less formalized macroeconomic model. Such planning models can be divided into the following categories: 1. Aggregated growth models, models that uses macroeconomic variables such as national employment rate, national export and import. 9 krishna Khadka

Cont… 2. Disaggregated models. multisector input-output, social accounting, and computable general equilibrium (CGE) models, which ascertain (among other things) the production, resource, employment, and foreign-exchange implications of a given set of final demand targets within an internally consistent framework of interindustry product flows. 3. Finally, the most important component of plan is the specific investment projects within each sector and subsector through the technique of project appraisal and cost-benefit analysis CBA. 10 krishna Khadka

Aggregated Growth Models: Based on Macro Variables Developing countries use aggregated growth model in planning their economy Aggregated growth models provide a convenient method for forecasting output (also employment) growth over a three- to five-years period. Almost all such model represent some variant of the basic Harrod-Domar growth model Given targeted GDP growth rates and a national capital- output ratio, the Harrod-Domar model is used to specify the amount of domestic saving necessary to generate such growth. 11 krishna Khadka

Cont… Typically, the necessary amount of domestic saving is not likely to be realized on the basis of existing savings functions, and Hence the basic problem is how to generate additional domestic savings or foreign assistance. For planning purposes, Harrod-Domar model has been typically formulated along the following lines. 12 krishna Khadka

H/D Model H/D model is a simple analysis of capital accumulation in the absence of technological changes. The basic H/D equation is g = K/c Where g = growth rate of output GDP K= saving rate (investment rate) c = capital output ratio

Limitations of H/D Basic limitations of H/D model are: Does not explain the growth rate of sectors Does not explain the role of other factors such as labour and technology Aggregated models do not provide realistic results

Cobb-Douglas Model Many neo-classical economists thought that technology is the main source of growth. Therefore planning technique/model must incorporate variables for the measure of technological changes Accordingly Cobb-Douglas production function is taken as an alternative planning technique (superior to the H/D Model)

Basic Cobb-Douglas Model The functional relationship between variables in the Cobb-Douglas model can be expressed as: Q = f(K, L, …, A t ) While the exaction equation is Q = A t K  L  N  Where Q = production,K = capital, N = labour A t = Technolog at t th period of time  +  +  = 1 constant return to scale  +  +  < 1 decreasing return to scale  +  +  > 1 increasing to scale Cobb-Douglas model is also an aggregated model and does not explain the detail sectoral situation of the economy

Mathematical Programming Mathematical programming especially the linear programming is also used as a planning technique. The basic LP model is Max GDP = A P 1 + M P 2 + S P 3 ……….. + L P n Subject to: a 11 A + a 12 M + ……………. + a 1n L ≤ F a 21 A + a 22 M + ……………. + a 2n L ≤ G ……………………………………………. a n1 A + a n2 M + ……………. + a nn L ≤ K

Cont… And the non-negativity conditions are A≥0, M≥0, S≥0, and so on Although LP is very powerful planning tools it is not very frequently used It requires huge amount of data and Requires skilled manpower 18 krishna Khadka

Input-Output Model Input output table is a statement of output of good or service of a sector and the volume of goods and services which are needed as inputs to achieve the given level of sectoral output Basis of the model/technique No sector of the economy can stand in isolation: each sector has relationship with other sectors of the economy. This is the basis of the computation of input output table and (model)

Transaction Table Output Inputs Intermediate DemandFinal Demand Total AgriIndustSer total Agri Indust Service Primary inputs Total

Technical coefficient/UCS Output Inputs AgricultureIndustryService Agriculture0.03 (5/200) 0.31 (50/160) 0.13 (15/120) Industry0.08 (15/200) 0.13 (20/160) 0.04 (5/120) Service0.03 (5/200) 0.06 (10/160) 0.04 (5/120)

Unit cost structure matrix A Krishna Khadka

Assumptions, uses & limitations of I/O Model Assumptions Single product Constant return to scale Sectoral relations only in terms of inputs and outputs Uses Economic planning Sectoral planning Demand forecasting National income accounting Estimation of sectoral value added Estimation of labour/capital intensity Estimation of import/export ratio Other uses: estimation of shadow prices 23 Krishna Khadka

Cont… Limitations Data problem and Requires huge statistics Aggregation problem: aggregation of sectors Selection of prices and aggregation of prices Composition of the sectors: ag and Manuf Problems of inventory Constant return to scale Other limitations

Selection of Planning Technique The selection of planning technique depends on: Nature of the economic system Level of development of the country Availability of the data Availability of skilled manpower Availability of technology others