Economic Planning
Senior 6 · Economics
Economic Planning
Lesson 2 of 4
25 min
In 1928 the Soviet Union began its First Five-Year Plan. Gosplan, the State Planning Committee, set output quotas for steel, coal, machinery and grain, and every state enterprise and collective farm was ordered to meet them. Managers who failed could be punished.
In 1947 France launched its first plan, prepared by a small office, the Commissariat général du Plan, led by Jean Monnet. It concentrated on six basic sectors: coal, electricity, steel, cement, farm machinery and rail transport. The targets were agreed in "modernisation commissions" where officials, employers and trade unions sat together, and firms were steered towards them mainly by cheap credit, much of it from Marshall Plan aid, not by orders.
Think: both documents are called "plans". What exactly is different about them? And which of the two does Rwanda's NST2 resemble more?
Definition
Imperative (directive) planning: planning in which the targets are orders. The state owns or controls most enterprises, allocates their inputs and fixes prices, and units must meet their quotas. W. Arthur Lewis (The Principles of Economic Planning, 1949) called this "planning by direction".
Indicative planning: planning in which the state sets targets and forecasts for the whole economy, but the private sector is guided towards them by information, consultation and incentives (credit, tax relief, public investment) rather than commanded. Lewis called this "planning by inducement".
| Feature | Indicative planning | Imperative planning |
|---|---|---|
| Status of targets | Guides and forecasts for private firms; binding only on the state's own bodies | Legal orders for every unit |
| Ownership | Mainly private, in a market economy | Mainly state or collective |
| Prices | Set mostly by the market | Fixed by the planners |
| Means | Incentives, public investment, credit, information, consultation | Quotas, rationed inputs, administrative orders |
| Flexibility | Firms adjust to new conditions | Rigid until the plan is revised |
| Main risk | Firms may ignore the targets | Shortages, waste and the knowledge problem |
| Examples | France from 1947; Rwanda's NST2 for the private sector | USSR from 1928 until 1991 |
Many real plans mix the two. Since its 11th Five-Year Plan (2006–2010), China has divided its targets into "expected" ones, which guide firms and local governments, and "binding" ones, such as limits on energy use, which officials are obliged to meet. Rwanda's NST2 is binding on ministries and districts, through the budget and performance contracts (lesson 4), but for private farms and firms it is indicative: the state uses public investment, credit schemes and incentives to draw them towards the targets.
| Basis and types | Meaning, with an example |
|---|---|
| Time: short-term, medium-term, long-term (perspective) | Short-term: one year, such as an annual budget or action plan. Medium-term: usually 3 to 7 years, such as NST2 (2024–2029). Perspective: 15 to 30 years or more, such as Vision 2050. |
| Coverage: comprehensive (aggregate), partial (sectoral), project | A comprehensive plan covers the whole economy; a partial plan covers one sector, such as energy; a project plan covers a single investment, such as a dam. |
| Who plans: centralised (top-down), decentralised (bottom-up) | In centralised planning a national body sets all targets. In decentralised planning, districts, sectors and firms set their own targets within national priorities, and these are added up. |
| Unit of measurement: financial, physical | A financial plan is stated in money (Frw to be spent and raised). A physical plan is stated in real quantities: classrooms, kilometres of road, megawatts, teachers. |
| Revision: fixed, rolling | A fixed plan runs unchanged for its whole period. A rolling plan is reviewed every year and extended by one year, so it always looks the same distance ahead. |
| Political system: democratic, authoritarian | In democratic planning, priorities are debated and consulted on, and approved by an elected parliament; in authoritarian planning, a small group decides. |
| Place: national, regional, local | A national plan covers the country; regional and local plans cover a province, a city or a district. |
Definition
Perspective plan: a long-term plan (15 to 30 years or more) that states where the country wants to be, and is carried out through a series of medium-term plans. Example: Vision 2050.
Rolling plan: a plan that is reviewed every year and extended by one year, so that its horizon never shortens.
Financial planning: planning of the money that the plan will cost and of where it will come from. Physical planning: planning of the real resources and outputs the plan needs and produces.
A plan can be judged like an exam answer, against a checklist. Each line below is a question you can ask of any plan.
| Characteristic | The question to ask |
|---|---|
| Clear and consistent objectives | Do the targets support each other, with enough instruments (Tinbergen)? |
| Quantified, time-bound targets | Does each target have a number, a baseline and a date? |
| Reliable data | Where do the baselines come from: a census, surveys, the national accounts? |
| Realism | Are the targets within reach, given past performance and resources? |
| Costed and financed | Is there a cost estimate, and a source for every franc? |
| Clear priorities | Which projects come first if money runs short? |
| Coordination | Do the sector plans, district plans and annual budgets match it? |
| Flexibility | Is there a mid-term review, and a way to change course? |
| Participation | Were citizens, firms and local governments consulted? |
| Responsibility and monitoring | Who reports on each indicator, how often, and from what data? |
NST2's own monitoring matrix shows several of these features: each indicator has a baseline (2023–24), a mid-term target (2026–27), an end target (2028–29), an institution responsible for reporting, and a data source (MINECOFIN, NST2, pp. 44–55).
Worked example 1: are two NST2 targets consistent?
NST2 targets exports of goods and services of US$3,509 million at baseline and US$7,316 million at the end (NST2, p. 46). Elsewhere it expects exports to grow by an average of 13% a year (p. 10). Are these consistent?
Step 1: the ratio. : exports must roughly double.
Step 2: growth over five years (2023–24 to 2028–29). Solve :
Step 3: what 13% would give. After five years: million, short of the target. After six years: million, which matches.
Conclusion. The two figures agree only if growth is counted over six years, from calendar 2023 to 2029. Over the five fiscal years in the matrix, the target needs about 15.8% a year. A careful reader of any plan checks the base year before judging whether a target is realistic.
Worked example
Worked example 2: the physical plan and the financial plan (illustrative figures)
A district's three-year physical plan is to build 1,200 classrooms at Frw 25 million each. Its financial plan allocates Frw 21 billion. Is the plan consistent? If not, what can be done?
Cost: million, that is Frw 30 billion.
Financing gap: billion, or of the cost.
Classrooms the money buys: .
Conclusion. The physical and financial plans do not match. The planner must close the gap by raising more money (a transfer from the national budget, or a partner's grant), by cutting unit costs (community labour, a cheaper design), or by phasing (840 classrooms now, the rest in the next plan). Writing "1,200 classrooms" without the money is a wish, not a plan.
Warning
"Indicative" does not mean "optional for the government". Under indicative planning the targets guide private firms, but the state's own spending, ministries and districts are bound by them. Don't describe Rwanda's NST2 as "a list of suggestions".
Check the base year. A growth rate depends on the number of years it is calculated over. Use , and count carefully.
Tip
To classify any plan in an exam, run through five questions: How long? (time) How much of the economy? (coverage) Who decides? (centralised or decentralised) Orders or incentives? (imperative or indicative) Money or things? (financial or physical)
Important
Imperative planning gives orders to state-controlled units; indicative planning guides a market economy with targets, information and incentives. Plans are also classified by time, coverage, who plans, unit of measurement, revision, political system and place. A good plan has consistent, quantified and dated targets based on reliable data, is costed and financed, sets priorities, and names who is responsible for each result.
South China Morning Post, "How do China's five-year plans work?". As you watch, note how the plan is drafted and approved, and which of its targets guide firms and which must be met by officials. Then place China's plans on the spectrum in the diagram above.
Practice
Sources and credits
Written by Ganzaa: the text, the diagram, the tables, the worked examples and the practice items. The figures in worked example 2 and practice item 4 are illustrative. This lesson adapts CC BY-SA material and is shared under CC BY-SA 4.0.
