The Rental Cost of Capital for the Manufacturing Sector-1959-1960 to 1970-1971

Stephen E. Guisinger, Shahnaz Kazi


Pakistan, like other under-developed countries, is faced with
a situation where factor prices do not reflect their scarcity values,
thereby leading to a waste of valuable resources in the form of highly
capital intensive techniques and excess capacity in the manufacturing
sector. Low costs of using capital in Pakistan have been attributed to a
combination of factors e.g. low rates of interest, overvaluation of
domestic currency, low tariffs on machinery imports, and fiscal
incentives such as tax holidays and accelerated depreciation aimed at
encouraging investment. In this paper a formula incorporating the effect
of various such policy packages on the cost of capital has been used to
estimate the market and "real" rental cost of capital over time
(1959-1960 to 1970-1971) providing a measure of the degree of distortion
introduced into the factor market via government policies.

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