Project Appraisal and Foreign Exchange Constraints: A Response

Abstract

In their I983 paper, Bell and Devarajan state (p. 458, footnote) that although their conclusions are 'similar in spirit' to those of BDS, their analysis differs because they permit the government to distribute its trade surplus to consumers in both distortionary and non-distortionary (lump-sum) fashion. For the latter analysis to be possible, we consider that a variable representing lump-sum transfers must be included in both the household budget constraint and the public sector budget constraint; however, neither the equation defining consumer's income in their model (equation (4), page 459) nor the equation defining the government's domestic budget (equation (I4), p. 460) includes lump-sum transfers. Bell and Devarajan maintain that 'none of DT's criticisms of the BDS piece apply to our I983 paper'. The failure to include public sector revenues in the consumer's budget constraint was precisely the point made in our comment on BDS, and the point appears to apply equally to Bell and Devarajan (I983). We accept that Bell and Devarajan reached the same conclusion as ourselves about the general validity of the border price rule; our reference to their paper related to the specification of the income identities in their general equilibrium model, discussed above.