In the context of such an institutional setting, we can identify two principal
components of development planning in mixed economies:
1. The government’s deliberate use of domestic saving and foreign finance
to carry out public investment projects and to mobilize and channel scarce
resources into areas that can be expected to make the greatest contribution
toward the realization of long-term economic objectives (e.g., the construction
of railways, schools, hydroelectric projects, and other components of
economic infrastructure, as well as the creation of import-substituting industries
or projected future export sectors)
2. Governmental economic policy (e.g., taxation, industrial licensing, the setting
of tariffs, and the manipulation of quotas, wages, interest rates, and
prices) to stimulate, direct, and in some cases even control private economic
activity so as to ensure a harmonious relationship between the desires of private
business operators and the social objectives of the central government
Thus even when development planning is quite active, there is almost always
a balance between the extremes of market inducement and central control,
as is readily evident from our simplified characterization of planning in
mixed market economies.
14 In general, the greater the
divergence between shadow and market prices, the greater the need for
social cost-benefit analysis in arriving at public investment decision rules.
3. Finally, we need some decision criterion to reduce the stream of projected
social benefit and cost flows to an index, the value of which can then be
used to select or reject a project or to rank it relative to alternative projects.
Let us briefly examine each of these steps of project appraisal.