A note on planning by inducement and direction?

Answer 1

Planning by Inducements

Planning by inducement is often referred to as

'indicative planning'

or

'market incentives'

. In such type of planning, the market is manipulated through incentives and inducements. Accordingly, in this system there is persuasion rather than compulsion or deliberate enforcement of orders. Here the consumers are free to consume whatsoever they like, producers are free to produce whatsoever they wish. But such freedom of consumption and production are subject to certain controls and regulations. The consumers, producers and other factors of production are induced with the help of various fiscal and monetary devices. For example, if the planning authority wishes to boost the production of corn oil in Pakistan it will provide subsidies, tax holidays and loans to the firms involved in production of corn oil. To encourage savings and investment and discourage consumption a suitable package of fiscal and monetary policies can be introduced in the market. Therefore, the desirable results can be attained with the help of incentives and without the imposition of orders and instructions. Moreover, in such planning there is less sacrifice and less loss of liberty - economic as well as non-economic.

Merits of Planning by Inducements:

(a)

Consumers' sovereignty

remain intact. Planning by inducements is more democratic as compare to planning by directions.

(b)

There is a

freedom of choice of profession

.

(c)

In planning by inducements, there is

freedom of enterprise

. Produces are free to produce whatever they like but within in the capacity of given rights.

(d)

Planning by inducements is

smooth and flexible

. It is more popular because it enables to incorporate the changes in resources, technology and taste etc. even after the finalisation and implementation of plan.

(e)

Under this sort of planning, the inertia attached with standardisation can be put to an end and producers are free to produce in accordance with the desire of consumers. Therefore, there is a

variety of goods and services

in the market.

(f)

There are

less administrative costs

involved in planning by inducements.

(g)

The problem of shortages and surpluses is solved as there is an existence of

automated market system

. The demand and supply is automatically adjusted and remain in balance under market economy.

Demerits of Planning by Inducements:

(a)

It also

fails to achieve 100% targets

of economic planning.

(b)

Under planning by inducements, there are

profit motives more than welfare

of public. Private entrepreneurs care for those products which yield high profits. Products or services with less profit or no profit do not attract private entrepreneurs. Such products or services include education, health, defence, security, etc.

(c)

The producers may find the

government policies regarding economic affairs not attractive enough to follow

.d)

There may be disputes among entrepreneurs and the government regarding tax rates, investment policies, interest rates, etc

The mechanism of market economy

may cause the prices to inflate

esp. withreference to under-developed countries or in case of oligopoly where there is ashortage of certain products like petroleum and gas.

(e)

There may be

disharmony between labour and producer

, and there may beserious industrial disputes.

Planning by Directions

This type of planning is practised in socialist countries like China, Former USSR, Cuba, North Korea, etc. Under planning by direction, there is one central authority which plans, directs and orders the execution of the plan in accordance with the pre-determined targets and priorities. It determines the production figures, delivery schedules, quotas regarding the production of the goods, price controls, use of foreign exchange and allocation of resources like labour, etc. amongst different competing uses. Thus, such planning is comprehensive and encompasses the whole economy. Planning by directions is similar to military or defence plans which are carried through orders and instructions. Thus the strategy of planning through directions coincides with the military strategy. Along with the disintegration of former Soviet Union, the methodology of planning by directions has received certain serious setbacks. Now most of the UDCs are tend to adopt market economic system.

Demerits of Planning by Directions:

(a)

Planning by direction is

undemocratic

since the people are ignored all along.

(b)

It is

bureaucratic and totalitarian

. Under bureaucratic system, the individual's sovereignty is completely abolished. Corruption, red tapism, VIP system, tyranny and austerity are the byproducts of bureaucracy.

(c)

Rationing and control result in

black marketing.

(d)

There are shortages of some goods and as well as surpluses of other goods. That is, there is an

imbalance in production output

.

(e)

This sort of planning is

inflexible

. Once the plan is prepared, there is no room for alterations in later phases of planning. A part of the plan cannot be changedwithout simultaneous changes in many interconnected activities. Planning bydirection is so complex that it is impossible to change even a part of it as it willinvolve in altering the whole plan.

(f)

The

fulfilment of plan cannot be guaranteed

, as the planning by direction ishampered by black marketing and corruption.

(g)

Planning by direction also leads to

excessive standardisation

which impinges on consumer sovereignty. In other words, under planning by direction the goods produced are standardised lacking the variety. As in case of USSR, the produced TV, Fridges and Automobiles were identical having no differentiation.

(h)

It also involves

huge administrative costs

, as the planning by direction involves in elaborate census, numerous forms and army of clerks.