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P LANNING P ARADIGM
played a major role in this recent set of
crises and the resulting recession, remind-
ing us again of the need for light but appropriate
regulation.
So, we are now at a cross-road in terms
of national economic planning. What is
the best mix of reliance on market signals
and government regulation going forward?
While the answers will undoubtedly
change over time and be somewhat
different for each country, and reasonable
people can and will disagree on exact
details, it would be useful to frame the
debate with some general principles. This
brief note is an attempt to provide the essentials
of such a framework.
A few caveats are in order. This paper
is not a comprehensive statement or
analysis of economic development — a
topic still not well-understood. Neither is
this paper intended to be a rigorous
analysis of economic planning. It represents
somewhat of a personal view of
economic planning and it includes somewhat
simplifi ed statements that are nevertheless
directionally correct and appropriate.
It is not a review of the
voluminous economic planning literature
as that has been covered elsewhere (e.g.,
Rostow, 1990).
The Environment for
National Economic Planning
Limits of the Corner Solutions: Economic
planning can fail because of many
reasons. First, it may be impossible to
anticipate important trends, infl exion
points, and other changes. Central eco-
24 THE IIPM THINK TANK
nomic planning often places an undue
burden of providing appropriate and
timely information about consumption
patterns to production organizations. As
noted by many conservative economists
like Hayek and von Mises, this is often
impossible and seems to have been a major
reason for the failure of the Soviet
economic system. A second reason for the
failure of central economic planning is
the need to own or control the means of
production to ensure that appropriate
plans are carried out. However, the lack
of private ownership or control makes it
diffi cult to motivate workers to produce
appropriate products effi ciently (e.g., a
collectively owned sick cow may die while a
Markets need reliable public
information; but production of such
information may be too costly
similar privately owned one may survive as
the owner is more likely to take care of the
cow in an all night session if necessary). A
market based economy can overcome
these and other limitations of central
economic planning.
However, market signals are not perfect
either. Markets can be ineffi cient and
subject to bubbles. These imperfections
can result from a number of possible factors.
First, markets need reliable public
information to function; but such information
may be too costly to produce or be
unlikely to be produced by private entities.
Second, market participants may not
behave rationally — numerous behavioral
biases among market participants have
been extensive documented. Third, price
discrepancies in markets need to be arbitraged
away effi ciently but such arbitrage
may be limited not only by information
costs, but also by lack of capital, ability to
assess or take on risks, or limited access
to arbitrage opportunities. Fourth, many
production processes often cannot respond
instantly to new demand and this
necessary delay may induce cyclical variations
and instability in market responses.
Finally, there are many market externalities
that may limit the social value of
market signals (Aggarwal, 2004). Many
economic actions depend on free or underpriced
resources in the “commons”
and many economic actions benefi t a
wider set of agents than the one that bears
the cost of such action. In such cases of
market externalities, market signals based
economic actions are usually ineffi cient
and/or impractical.
Thus, it seems that both the extremes
of central economic planning and complete
reliance on market signals for economic
guidance are imperfect and have
many fl aws and limitations; and neither
extreme is an appropriate approach to
national economic planning. Next we examine
some additional factors that are
useful in thinking about the middle way
of economic planning.
Indian Environment for Economic
Planning: There are numerous arguments
that have been advanced to support economic
planning. It should be noted that it
is very diffi cult for any government (or
even private) organization to pick industries
and sectors that are winners or even
those that are likely to succeed in the future.
Nevertheless, based on market externalities,
among the arguments put
forward for economic planning in India
are the following:
First, while India in the past was a
wealthy country (even as late as the 18th and early 19th centuries India produced ap-