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

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.