Transcript econ215session8slides

ECON 215
Introduction to Economy of
Ghana
Session 8 – Economic Planning Part 1
Lecturer: Dr. Augustine Gockel
Contact Information:[email protected]
College of Education
School of Continuing and Distance Education
2014/2015 – 2016/2017
Session Overview
• Session Overview: One of the critical tools for national
development is planning. In this session, students will be
introduced to the basics in economic planning and the basis
for long term economic planning. The session ends with a
preliminary discussion of economic planning in Ghana.
Goals/ Objectives: At the end of the session, the student will
• Understand the basic concepts in economic planning
• Be able to examine the rationale for economic planning
• Be able to appreciate the timeline of economic planning in
Ghana
Slide 2
Session Outline
The key topics to be covered in the session are as follows:
• Topic One: Introduction to Economic Planning
• Topic Two: Argument/Rationale for Economic Planning
• Topic Three: Economic planning in Ghana Part 1: Before
Independence (1957)
Slide 3
Reading List
• Refer to students to relevant text/chapter or reading materials
you will make available on Sakai
Slide 4
Topic One
INTRODUCTION TO ECONOMIC
PLANNING
Slide 5
Definition of Economic Planning
• According to Todaro and Smith (2003), economic planning also
known as development planning is a deliberate governmental
effort to coordinate economic decision making over a specified
period of time.
• It is undertaken with the aim of influenced(influencing), directing
and in some cases controlling the level and growth of key
macroeconomic variables such as income, consumption,
employment, investment and inflation in order to achieve
programmed development objectives.
• The difference between an economic plan and economic
planning is that an economic plan is a specific set of quantitative
economic targets to be achieved in a given period of time while
economic planning refers to the implementation process of an
economic plan.
Slide 6
Types of Economic Plans
• There are two main types of economic plans: the
partial/indicative economic plan and the comprehensive
economic plan.
• Partial/indicative plan covers only a part of the national
economy such as agriculture, industry, public sector, etc. This
type of plan relies entirely on the market mechanism for the
allocation of resources and commodities.
• Under such plans, economic projections are made by the
government in consultation with the private sector in an
attempt to influence its investment decisions (but on a pure
voluntary basis)
Slide 7
Types of Economic Planning Cont’d
• Comprehensive plan is one that sets its targets to cover all major sectors
of the national economy. In the case of comprehensive planning,
distinction can be made between project plan and multi-sectoral plan.
These types of comprehensive plans are widely used by governments of
Less Developing Countries (LDCs).
• Project plan is the most disaggregated and detailed of all the kinds of
plans. It involves drawing up of a project, undertaking a cost-benefit
analysis and programming its execution so that all the requisite inputs are
available at the right time.
• Multi-sectoral plan involves the identification of the various sectors of the
economy and analyzing the interdependencies among them in order to
provide the linkage. The primary objective of this plan is the optimal
allocation of investments in a consistent and efficient manner among the
various sectors of the economy so as to produce the desired sectoral
output
Slide 8
Planning Process
• Every plan goes through fundamental process and these
are:
• Identifying the main objective of a plan
In Ghana, government identifies its social and economic
objectives, for example to reduce unemployment,
inflation and fiscal deficits.
• Setting targets to realize the set objectives
The government of Ghana might decide to reduce inflation
from 40% to 8%.
• Laying down the framework within which to
implement, coordinate and monitor the development
plan.
Slide 9
Dimensions of planning
• Space dimension of planning is concerned with the plan’s coverage. It
could be the distribution of the plan over the various regions, districts, or
constituencies of a country.
• Time dimension of planning is concerned with the time frame within
which the plan spans. There are three time horizons within which
economic planning spans:
• Annual plan: An economic plan with a life span of one year. This
essentially could be equated with the annual budget.
• Medium-term plan: Normally last for five years
• Long-term plan: They are also known as perspective plans and they could
range from 10-15 years.
Slide 10
Topic Two
ARGUMENTS/RATIONALE FOR
ECONOMIC PLANNING
Slide 11
The Market Failure Argument
• One of the reasons why a country should embark on economic
planning is the existence of market failure.
• Most countries rely on market mechanisms rather than
government controls , to allocate goods and services.
• Despite the advantages enjoyed from the efficient operation of
the price mechanism (freedom of choice/preference, flexible and
easily adapt to demand conditions, creates incentives for growth,
etc), there are instances where the market mechanism, left to
itself, fails to operate efficiently.
• When this happens the country is said to have experienced
market failure. Market failure therefore refers to the inabilty of
the price mechanism to optimally or efficiently allocate scarce
resources.
Slide 12
The Market Failure Argument Cont’d
• As a result of market failure, it is believed that a country should have an
economic plan to direct the its allocation of resources. Market failure
prevails under the following conditions:
• The existence of public goods
A good or service is said to be a public good when it is non-rival in
consumption and non-excludable. This implies for any given level of
output, consumption by one individual need not diminish the quantity
consumed by someone else (non-rivalry in consumption) and it is
prohibitively expensive to exclude anyone from enjoying the benefits of
the good (non-excludability).
Obviously, no profit-maximizing firm will supply at all or under-allocate such
public goods. Thus governmental intervention is crucial for the optimal
allocation of public goods and this is achieved through economic planning
Slide 13
The Market Failure Argument Cont’d
• Monopoly power (Increasing Returns to Scale)
Another factor that may cause market failure is the existence of monopoly power. In
theory, market fails to work efficiently, if a single firm sells an essential commodity
for which there are no close substitutes.
When a firm wields so much market power for a commodity it can under-supply the
essential commodity in order to over-price the commodity . Thus the lack of
competitiveness undermine(undermines) the efficiency of the price system in
allocating resources. The government intervenes to correct such anomalies
through the planning mechanism.
• Externalities
Another factor that may cause market failure is the presence of externalities. An
externality exists when the production or consumption activity of an economic
agent affects the productivity or well-being of another economic agent and no
compensation is paid or received for the externally generated costs or benefits.
Slide 14
The Market Failure Argument Cont’d
•
The effects are external to the price system and therefore not taking(taken) into
account in the pricing of the good in question. Obviously firms tend to overallocate when there are external diseconomies/detrimental externalities and
under-allocate when there are external economies/beneficial externalities.
Thus, in the presence of externalities, the competitive price system fails to allocate
resources efficiently. For this reason, there is a need for government to put place
mechanisms that will ensure the efficient allocation of resources through
planning.
• Risk and Uncertainty
The market left on its own to allocate resources mat(might) fail to supply the optimal
quantity of a commodity if there is a high level of risk or uncertainty about the
production, pricing, and the marketing of such commodity. Most firms are risk
averse and will not partake in the production of such goods.
Slide 15
The Market Failure Argument Cont’d
For example, the construction of railways, dams, and roads involve huge sunk
cost such that the profit-maximizing firm will not venture into the
provision of such services. For this reason, the proponents of economic
planning believe that government should intervene by providing goods
that the private sector finds too risky and cover with a lot of uncertainties.
• Information Asymmetry
Access to perfect information is a prerequisite for the smooth running of the
price mechanism. However, this is not the case in the real world especially
in Less Developing(Developed) Countries (LDCs) where information on
output and pricing are poorly disseminated.
Information asymmetry gives wrong signals to and thereby the failure of the
market in the optimal allocation of resources. Governmental intervention
is therefore needed in correcting the distortions created by the price
system in order to maximize social welfare.
Slide 16
Other Arguments for Economic
Planning
• Resource Mobilization and Allocation Argument
It is believed that there is limited financial and skilled manpower in Less Developed
Countries (LDCs). However, these limited financial and skilled manpower resources
in LDCs are channeled into unproductive ventures. Manpower should be used in
the most optimal way especially when there are spillover effects on the economy.
Thus there is the need for development planning to coordinate investment
projects so as to channel these scarce factors into productive uses.
• The Attitudinal or Psychological Argument
It is often assumed that that a detailed statement of national economic and social
objectives can have an important attitudinal or psychological impact on diverse
and often polarised populations in LDCs. Such detailed plans any(may) succeed in
whipping up public support and enthusiasm in a national campaign to improve the
welfare the citizens.
The Foreign Aid Argument
It is argued that the formulation of detailed and feasible development plan with
specific objectives has often been a prerequisite for the inflow of bilateral and
multilateral aid. Such a detailed plan signals donors that the receipts may be used
in the most efficient manner
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Topic Three
ECONOMIC PLANNING IN GHANA PART
1: BEFORE INDEPENDENCE (1957)
Slide 18
Guggisberg’s 10-Year Development
Plan (1920-1930)
•
•
•
The first development plan to have been embarked upon in Ghana (the then Gold
Coast) was a 10-year development plan launched under the colonial governorship of
Sir Gordon Guggisberg in 1919. Even though the plan was scheduled to run from
1920-1930 it only lasted up till 1927. Between 1920 and 1927, only 50% of the
planned expenditure was used in the implementation. The Guggisberg 10-year
development plan covered areas such as physical infrastructure and social services.
The plan essential(essentially) provided a platform for accelerated economic growth
and development in the Gold Coast.
Under the physical infrastructure, the following were achieved (i) By 1927, about
333km of new railway lines had been constructed to link the mining areas (i.e
Western Railways lines) (ii) construction of several roads aimed at opening the
economy to strategic areas (iii) development of water supply system and (iv) the
construction of the Takoradi Harbour in 1928.
With regards to social services, although education and health were not given prior
consideration in the plan (probably they were grouped under town improvements),
they benefitted tremendously from the plan such as the (i) establishment of
Achimota School formerly the Prince of Wales College in 1927 to train
administrators for colonial purpose and the (ii) establishment of Korle-Bu Teaching
Hospital, Tarkwa Hospital and 17 other hospitals.
Slide 19
The 10-Year Plan of Development and
Welfare (1946-1956)
•
•
•
The next major attempt at planning after Guggisberg Plan was the drafting
of another 10-Year Development Plan (1946-1956) which was launched in
1951. The Plan stemmed from a general colonial plan because other
colonies under the British Crown also run the plan contemporaneously.
The plan primarily sought to enhance infrastructure (development) and
social services (welfare augmentation). The 1946 plan was an excerption to
the generally ambitious plans of Ghana. For instance, the estimated for
capital expenditure of 11.4 million was far less than the 24.8 million of the
Guggisberg Plan. During the period, the self-government campaign
initiated by Nkrumah’s C.P.P which had gained ground by the 1950s led to
the election of the first African majority of government in 1951.
This is shortly after the introduction of the 10-Year Plan of Development
and Welfare. Consequently, Nkrumah’s C.P.P government decided to
transform the ongoing 10-Year Plan of Development and Welfare into a 10Yea Plan for Economic and Social Development of the Gold Coast (19511961) which was to be phased into two 5-year plans instead of 10-year,
although considerable additions were made to the original plan (i.e 19461956), the basic structure of the plan remained unchanged.
Slide 20
Nkrumah’s 10-Year Development Plan
(1951-1961)
• This was a more significant plan because it was under the leadership of an
African government. The primary objective of the plan was the
development of economic and productive services. The plan was
supposed to use 74 million as the implementation fund
• Although the primary objective of the plan was the development of
economic and productive services, there was allocation problem because
68.4% of the amount was devoted to the building of infrastructure (roads,
railway, etc), and only 16.9% was allocated to economic and productive
services which was the main objective.
• In addition, 14.8% went to common services and administration thereby
further emphasizing allocation and prioritizing problem. In terms of
implementation, it operated from 1951 to 1956 because it coincided with
the independence of Ghana. Then from 1958 to 1959, there was the
consolidated plan aimed at putting things together in preparation for the
second 5-Year plan, which existed between 1959 and 1964.
Slide 21
Nkrumah’s 7-Year Development Plan
(1963/1964-1969/1970)
• This plan could be described as the most comprehensive plan to be
formulated in Ghana because it virtually encompassed all the major
sectors of the economy. The fundamental objective of the plan was
to modernize agriculture and develop industry on the basis of a
socialist society. The plan was to operate under the politicoeconomic philosophy of work and happiness.
• Under the plan there were major achievements: (i) Extensive
infrastructure development: Tema Township, Tema Motorway, Tema
Harbour, Akosombo Dam (ii) Massive development of education
such as the establishment of KNUST and 26 secondary schools
under the Trust Schools Scheme (for example, Ghana National
College, Sunyani Secondary School, Dormaa Secondary School,
Mfantseman, Asankragua, St.Johns, etc.; (iii) Establishment of
several factories
Slide 22
Nkrumah’s 7-Year Development Plan
(1963/1964-1969/1970) Cont’d
In spite of the significant achievements, the plan had some failures. Reasons for the
failures include:
• The economy depended heavily on the vagaries of the weather resulting in low
agricultural output and this problem still persists in the development process
• Instability in the world market; the economy was facing unfavourable terms of
trade for its major export earner – cocoa. The plan’s expectation of 400 per ton for
cocoa never materialised since the actual prices in 1964 and 1965 were 356 and
276 respectively.
• There was controversy between the technocrats (economists) and the politicians
on certain policy areas. For instance, while Nkrumah and his team of politicians
were emphasizing industrial development, the technocrats were considering the
modernisation of agriculture as the bases for industrialization.
• There were situation in which, instead of raising the capacity levels of existing
enterprises, new enterprises, which were not included in the plan, were
established
• There were no requisite Cost Benefit Analysis (i.e. feasibility studies) in
undertaking projects and nepotism in the award of contracts.
• There was lack of fiscal coordination between the plan and the annual budget
Slide 23
Acheampong’s 5-Year Development
Plan (1975/76-1979/80)
• The Plan was formulated to tackle three problems: (i) the high level of
unemployment in the system; (ii) the persistent balance of payments
(BOP) deficits and (iii) the inflationary pressures in the economy.
• The primary aim of the plan was to build an independent national
economy which would be firmly structured on the potentials of the
economy in line with Acheampong’s philosophy of self-reliance.
There were six specific goals:
• The acceleration of the growth of real GDP. An average growth rate of
5.5% per annum of real GDP was envisaged
• To ensure the full employment of the nation’s resources – human and
natural
• To ensure equitable distribution of the internal integrity of the cedi
through the control of rapid inflation.
• Promotion of national economic independence in terms of the creation of
effective links between sectors of the economy so that development
becomes mutually re-enforced
Slide 24
Acheampong’s 5-Year Development
Plan (1975/76-1979/80) Cont’d
The targets set in the plan were not fully realised. Several factors
accounted for the failure of the plan, among which were:
• Delay in the launching of the plan; it was not until April 1977 that the
plan came into effect, thus the growth targets announced as early as
1975 could have not(not have) been achieved.
• Constant fluctuations in price of primary products
• The inability of the industrial sector to expand enough to absorb the
products from agricultural sector
• The incomes policy of the government was also assumed to be partly
responsible in that the minimum wage was too high, and this affected
employment of labour leading to massive excesses of labour
• The price elasticity of cocoa was low
• High rates of inflation; in some cases reaching 3-digits as in 1977 where
inflation reached 117.6%. Such high rates of inflation raised the cost of
implementing the projects.
Slide 25
References
Slide 26