THE SHADOW PRICE OF FOREIGN-EXCHANGE IN A DUAL ECONOMY

This paper examines the shadow price of foreign exchange for a dual economy with tariffs, quotas, or VERs. We show that the shadow exchange rate is greater than the official rate in the presence of tariffs, whereas it is greater or smaller than the official rate in the presence of quotas, depending upon whether capital is sector-specific or perfectly mobile. Furthermore, the shadow exchange rate is unambiguously smaller than the official rate for the VER case when capital is intersectorally mobile. The rate, however, may be larger than the official rate when capital is sector-specific. The practical implications of the results for project appraisal are also discussed.