Comments on "Shadow Pricing and Macroeconomic Analysis: Some Illustrations from Pakistan" by Squire et al.

The paper is too long for conveying the message that shadowpricing used as a method of analysis in micro-economic issues of projectselection is also useful for analysing macro-economic issues, such asforeign and domestic borrowing by the government, emigration, etc. Muchof the methodological discussion in the paper is available in a readilyaccessible form in several publications of each of the coauthors; Incontrast, the specific application of the methodology to Pakistaniproblems is much too cavalier. While it is hard to disagree with theauthors' claim that shadow pricing "constitutes a relatively informalattempt to capture general equilibrium effects" (p. 89, emphasis added),their depiction of traditional analysis is a bit of a caricature:essentially it sets up a strawman to knock down. After all in thetraditional partial equilibrium analysis, the caveat is always enteredthat the results are possibly sensitive to violation of the ceterisparibus assumptions of the analysis, though often the analysts willclaim that extreme sensitivity is unlikely. Analogously, the shadowpricing method presumes "stationarity" of shadow prices in the sensethat they are “independent of policy changes under review" (p. 90). Theessential point to be noted is that the validity of this assertion or ofthe "not too extreme sensitivity" assertion of partial equilibriumanalysts can be tested only with a full scale general equilibrium model!At any rate this reviewer would not pose the issue as one of traditionalpartial equilibrium macro-analysis versus shadow pricing as anapproximate general equilibrium analysis, but would prefer a descriptionof project analysis as an approach in which a macro-general equilibriummodel of a manageable size (implicit or explicit) is used to derive aset of key shadow prices which are then used in a detailedmicro-analysis of projects.