Estimation of Shadow Prices for Project Evaluation in Pakistan

The purpose of this paper1 is to estimate shadow prices of capital and labour for use in the social evaluation ofprojects.2 The Harberger approach (7) has been used here to estimate the shadow discount rale. Apart from being one of the few demonstrations of the empirical estimation by this approach in ‘literature this is the correct method of .estimating the shadow discount rate where the marginal social value is not equal to the marginal social cost of funds at market equilibrium due to the presence of various distortions. The estimation, in this paper, of the shadow wage rate of unskilled labour of Pakistan improves upon other attempts by taking account of a number of factors not considered hitherto. Firstly, it takes account of the different flows of rural-urban migration to the various industrial cities to estimate more accurately the opportunity cost of employing labour in each city. Secondly, the estimate takes account of the changes in social cost brought about by changes in the consumption bundle of the immigrant labour and the physical relocation of labour. In addition the estimates have been derived under alternative assumptions regarding the marginal productivity of labour in the agriculture stack season.