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With an artificial exchange rate, a government establishes a
set of prices that makes certain transactions highly profitable at the
same time that it estab¬lishes laws making those transactions illegal.
We usually call it "corruption" when people follow the government's
price incentives instead of its contradictory legal incentives. In
Pakistan, the dollar sells for 4.75 rupees in the official market but
for two to three times that much in the free market. Handsome profits
are made by those who can trade in both. This paper describes
overinvoicing of capital-equipment imports in Pakistan industry. Moral
dimensions of the problem are not at issue. The central question is how
overinvoicing affects the allocation of investment and, therefore, the
structure of industry — how (and by how much) overinvoicing changes the
costs of capital to the men who make investment decisions1. The logic of
the problem can be developed with simple equations but an understanding
of overinvoicing and its consequences does not depend on algebra. The
reader who finds equations more a hindrance than a help can omit them
and still get a clear sense of the shape and magnitude of the
problem.

The Economics of Agricultural Development is an important
book. Throughout the book, Mellor uses economic analysis to organize,
extend, understand, and evaluate the economic facts of the agricultural
sector in a de¬veloping country. He treats agricultural development
within the framework of overall economic growth and highlights the
interaction between agriculture and the rest of the economy.
("Agriculture and Foreign Exchange", for instance, is the title of one
early chapter, "Agriculture and Capital Formation" is the title of
another.) It is not enough, for instance, to show that chemical
fertilizer can have significant influence on agricultural output in a
developing country. It is also necessary to consider alternative uses of
the scarce foreign exchange it requires and alternative uses of
industrial capital. Also it is necessary to decide when to stop
increasing fertilizer supply and turn to other activities. This
essen¬tial integration of agriculture into overall development activity
acts as a useful antidote to the special pleading that tends to surround
sectoral planning for so large and politically powerful a sector as
agriculture and to those economic theorists who ignore this sector,
which produces 50-90 per cent of GNP.

This paper combines simplified Harrod-Domar and
Mahalanobis-type models, first to show that the internal consistency of
a development plan may well depend on supply relationships that are
usually ignored in aggregate planning, and second, to suggest the value
of a more general version of the "two-gap" model [11]. An empirical
application of this analysis, to be published separately, will look at
these supply relationships and their influence on Pakistan's
development. The argument of the paper is simple and not unfamiliar. To
the extent that installed capital is specific in what it produces and
the products themselves are specific and non-substitutable between
investment and consumption uses, the pattern of investment in one period
may determine the allocation of subse¬quent income to saving or
consumption and, therefore, the rate of growth of national income. As
this constraint of insufficient physical capital is softened by trade, a
foreign exchange constraint may enter. Part I sets the context by
broadly contrasting the Harrod-Domar and Mahalanobis views of growth.
Part II develops a formal but quite simple model of an economy whose
growth is limited by either saving or physical output constraints. Part
III introduces trade as an alternative source of capital, relaxing the
physical capital constraint. Part IV deals with geographical specificity
of capital sources in a 'four-gap model'.

By these rules, "import substitution" should be paid extra
since it has been used to mean many different things. These notes are
intended, therefore, to clarify or at least specify some of the issues
and ambiguities surrounding discussion of import substitution in the
hope that future research and policy can thereby be more efficiently
directed and these sometimes muddied issues can thereby be more clearly
understood. Since its objective is to point up sources of conceptual
confu¬sion that have appeared in import substitution studies and
policies, distinctions will be drawn sometimes too sharply where this is
useful, even at the risk of over¬simplifying a complicated problem.
Finally, it should be clear from the outset that the paper makes no
pretence at major originality.