Tariff Protection, Import Substitution, and Investment Efficiency: Reply

The essence of Papanek’s comments are that the methodology of our study has biased our results and hence that our conclusions must be qualified. As pointed out by Papanek the issues raised in our paper are of crucial importance to policy and planning decisions in Pakistan and for this reason much more work needs to be done before one can determine what a rational policy for industrial development would be. However, we do not believe that the issues raised by Papanek would significantly affect our results. We do not mean to imply that our results are not open to substantial qualifications but we do feel that the methodological questions raised by Papanek are not the relevant ones. In what follows we discuss each of the three “adjustments” which Papanek proposes and state why they do not, or may not, alter our results in any significant way. Finally, we suggest what we believe to be the more important issues which may affect our conclusions about what the direction of industrialization should be. Papanek’s first “adjustment” relates to the use of output at market prices rather than at factor cost. This issue arises only because we do not have world prices and must make some assumption about the relationship between domestic prices and world prices. In this sense, Papanek’s [first point is part of his third “adjustment” regarding our price assumption.