Open AccessOverinvoicing, Underutilization, and Distorted Industrial Growth
Author(s) -
Gordon C. Winston
Publication year - 1970
Publication title -
pakistan development review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.154
H-Index - 26
ISSN - 0030-9729
DOI - 10.30541/v10i4pp.405-421
Subject(s) - incentive , liberian dollar , investment (military) , government (linguistics) , simple (philosophy) , economics , language change , capital (architecture) , set (abstract data type) , monetary economics , capital market , foreign direct investment , market economy , microeconomics , international economics , macroeconomics , finance , law , art , linguistics , philosophy , literature , archaeology , epistemology , politics , political science , computer science , history , programming language
With an artificial exchange rate, a government establishes aset of prices that makes certain transactions highly profitable at thesame time that it estab¬lishes laws making those transactions illegal.We usually call it "corruption" when people follow the government'sprice incentives instead of its contradictory legal incentives. InPakistan, the dollar sells for 4.75 rupees in the official market butfor two to three times that much in the free market. Handsome profitsare made by those who can trade in both. This paper describesoverinvoicing of capital-equipment imports in Pakistan industry. Moraldimensions of the problem are not at issue. The central question is howoverinvoicing affects the allocation of investment and, therefore, thestructure of industry — how (and by how much) overinvoicing changes thecosts of capital to the men who make investment decisions1. The logic ofthe problem can be developed with simple equations but an understandingof overinvoicing and its consequences does not depend on algebra. Thereader who finds equations more a hindrance than a help can omit themand still get a clear sense of the shape and magnitude of theproblem.