the scale of smuggling out of bangladesh

8/3/2019 The Scale of Smuggling Out of Bangladesh

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The Scale of Smuggling out of BangladeshAuthor(s): W. B. Reddaway and Md Mizanur RahmanReviewed work(s):Source: Economic and Political Weekly, Vol. 11, No. 23 (Jun. 5, 1976), pp. 843-849Published by: Economic and Political WeeklyStable URL: http://www.jstor.org/stable/4364685 .

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SPECIAL-ARTICLEST h e S c a l e o f Smuggling O u t o f Bangladesh

W B ReddawayMd MizanurRahman

An economist visiting Bangladesh is likely to be rather puzzled by two thinggs. First, the topicof smuggling of rice and jute from Banaladesh ito India will be raised with astonishintg frequency; andsecond, the "estimtates" (or rather guesses) which are presented as to the scale of these operations varyenormously, from unimportant figures to well over a million tons per year.This paper deals first with evidence about the scale on wzhich rice is smuggled out, and then,in part 11, tuirns its attention to juxte. Various in dependent approaches to estimating the scale ofsmuggling are cotsidered.AN economist visiting Bangladesh islikely to be rather puzzled by two th-ings. First, the topic of smuggling ofrice and jute from Bangladesh to Indiawill be raised with astonishing frequ-ency; and second, the "estimates" (orrather guesses) which are presented asto the scale of these operations varyenormously, from unimportant figures towell over a mnillion ons p;er year.There is also a good deal of discus-sion about the relative importance ofvarious possible motives for this smug-gling. At the rather superficial level,these operationscan be attributed simplyto the fact that an Indian rupee can besold for two takas on the black market,instead of one, so that it pays to smug-gle out rice even if a maund costs moretakas than it will fetch in rupees: thismerely shifts the problem, however, toexplaining the black market rate for thetaka.At a more profound level, two mainmotives are commonly mentioned. andboth may well be important. First, own-ers of takas (perhaps obtained throughdubious trading operations) may wish toconvert them into rupees as a store ofvalue, perhaps for subsequent repatria-tion (when a more favourable exchangerate may prevail), perhaps for use inIndia if the owner decides to emigrate,perhaps for later spending in India onthings which the owner would not beallowed to buy under Bangladesh ex-change controls.If this sort of capital flight is themotive, there may be no effective limitto the price which some owners of takaswill pay for rupees, either by purchaseson the black market or by incurring ap-parent losses through a purchase of ricefor 300 takas and its sale for 200 rupees.Refugees from Nazi Germany, andAsians expelled from Uganda by Gene-ral Amin, provided extreme examples toshow that owners of capital consideredthat it was better to get their capital

oi4t of the country by any means andon any terms, rather than simplyabandon it.The second main motive applies topeople who do not wish to send moneyout of the country, but merely tc dotrade with India which is forbidden (orseverely limited) by Bangladesh ex-change controls and import licences. If(say) Indian sarees can be sold inBangladesh for three times the Indianprice (reckoned at par of exchange), itwill pay to smuggle out rice at an ap-parent loss to get rupees to buy them,and then smuggle the sarees in. Theblack market rate of exchange does notappear in the calculation: so long as theprice ratio between Indian sarees andrice is much higher in Bangladesh thanit is in India, the incentive to do the"double smuggling" will be powerful.1Whichever of these two motives pro-vides the incentive for smuggling goodsout of Bangladesh, it is manifest thatthese goods need not be confined tojute and rice. The basic objective of thesmuggler is simply to obtain Indianrupees, and he will select his merchan-dise in the light of a combination ofcriteria, e g, relative price on the twosides of the border, ease of adquisitionin Bangladesh, ease of sale in India,ease of transport (per 100 rupees ofprospective proceeds), risk of detectionon the border.A limited amount of guidance orn hethings smuggled is provided by thevalue of different categories of goodswhich have been seized at the border:for 1973-74 the ten leading items foroutgoing operations, as reported by theBangladesh Rifles, were as shown inTable A. These figures, in which rice andjute come quite low in the list, may becompletely misleading as a guide to thepattern of the goods which are not in-tercepted: they do however serve toshow that smuggling covers a wide va-tiety vf gcods, and is not confined to

jute and rice.This paper 'deals first with evidenceabout the scale on which rice is smuggledout, and then, in Part II, turns its at-tention to jute. Various independent ap-proaches are considered.

IRicePRINCIPLES OF METHOD USED FOR RICE

Inevitably, no statistics exist about thescale of smuggling operations. The ap-proach in this Note is to seek some in-direct guidance from price statisticswhich have already been collected fordifferent parts of the country. Since wewrote this paper, we have learned thatan intelligent collection of local gossipin border areas led to conclusions broad-ly similar to ours.The principle of the method is simple.Suppose that the price of a standardquality of rice is known for each of anumber of rural centres near the border,and that these are all "surplus areas"i e, they produce more rice than is con-sumed locally. In the absence of smug-gling, the surplus would be transportedtowards the deficit areas of Bangladesh,notably Dacca.Suppose that prices are also knownfor the same quality of rice in ruralcentres at distances of?(say) 3 and 10miles inland from each border place andthat these are on the route which thesurplus rice would normally follow inseeking an internal market; suppose fur-

TABrEACategory Value inThousand Takas

(1) Gold/Silver 481(2) Fish 349(3) Currency 206(4) Medicine 182(5) Eggs and milk powder 154(6) Gunny bags 126(7) Rice/Paddy 114(8) Flour 106(9) Skins 90(UO.jue 8843


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June 5, 1976 ECONOMIC AND POLITICAL WEEKLYTABLEI COMPARISONETWEENRICESOP RICE NEARFRONTIER ND INLAND

Border Place Neighbour Place Price in Neighbour as Percentage of Price in BorderMap Name Distance* Name Distance* Dec 1973 Jan 1974 Feb 1974 Mar 1974 May 1974Code from fromFrontier Border Place

R 1 Meberpur 3 Chuadanga 16 103.2 102.7 98.3 99.9 94.6R2 Sunamganj 6 Sylhet 31 113.6 110.1 96.1 84.7t 104.1R3 Joypurhat 7 Naogaon 22 51.8 94.5 100.4 103.4 103.6R 4 Satkhira 9 Khulna 32 107.9 103.4 110.7 110.0 104.0R5 Nawabganj 11 Natore 45 99.5 101.3 107.6 101.9 98.8R6 Nawabganj 11 Rajshahi 24 98.9 101.0 102.2 101.0 99.4R7 Netrakona 19 Mymensingh 22 119.1 113.1 99.5 89.6t 115.8R8 Barguna** ** Patuakhali 20 114.4 112.8 102.4 103.4 103.5

* Distances (in miles) aremeasuredstraight,withoutregardto means of transport.** Smugglingwould be by boat: Barguna s on a navigable river.near the coast.

(t) Two possible explanations for the relatively high price at the border in March are available, apart from erratic price re-porting:(i) Smuggling was rampant in Mlrch, but was greatly reduced by the Army's arrival in April.(ii) The borderarea had run short of rice in March. but got fresh supplies in May from the borocrop.

ther that these centres are also surplusareas. The following points can bemade:(a) In the absence of smuggling, theprices recorded would show anupward progression as one wentinland from the border, to reflectthe cost of transport.(b) If smuggling were a really majorfactor, then rice would fetch ahigher price at the border placethan in the two neighbouringinland centres, so as to attractsupplies to the frontier.

(c) Intermediately, if rice weresmuggled out on a small scale,so as not even to absorb the sur-plus of the border areas, then theprice would still be lowest at theborder and rise progressively (butless rice would move inland fromthe border area than in our firstcase).(d) If rice were smuggled out on amoderate scale, so as to absorbthe whole of the surplus in theborder area to a depth of about5 miles from the frontier, thenthe price would fall between theborder centre and the one 3 milesinland, and then rise in the one10 miles inland.

Inverting this collection of statementsand making some simplifying assump-tions, one would be able to say (if alldata were available and perfectly accu-rate) that the place where the price was

lowest would miarkthe cut-off point.Smuggling would absorb the surpluses(not the whole production) of the areabetween that point and the border.This conclusion would be upset if smug-gling were largely done by big opera-tors who loaded lorries at places far in-land, and then drove them over theborder. This procedure seems rather im-probable, as the operators could savemoney by buying and loading the ricenearer to the border. We gather more-over that the "local gossip" mentionedabove lent no support to the idea thatsuch operations were quantitatively im-portant.

DATA PROBLEMS FOR RICEInevitably, the nature of the dataavailable compliCates greatly the proce-

dure which one would like to follow.In the case of rice, the free market pricefor coarse rice is reported daily to theMinistry of Food and Civil Supplies inrespect of some 80 places. Our first stepwas, therefore, to look at all of thesewhich could be reasonably regarded as"near the border", and to see whetherthere was a second place on the listwhich could be treated as the "inlandneighbour", i e, which was reasonablynear, and preferably on the naturalroute by which supplies would go to in-ternal markets. In a very few cases therewas a third place further inland whichcould be regarded as meeting the re-quirements of the "10 miles away cen-tre" mentioned in the previous section:these were however so rare that wecould make no systematic use of them.

TABLE 2: COMPARISON BEIWEEN PRICES OF JUTE NEAR FRON1IER AND INLAND[See map]Border Place Neighbour placeMap Distance* Name Distance' Price in Neighbour asCode Na-me from from Per Cent of PriceFrontier Border ill BorderPlace Sept 73 Sept 74

J1 Meherpur 3 Chuadanga 16 98.6 105.2J2 Companyganj 4 Bhairab-bazar 24 104.3 98.5J3 Joypurhat 7 Naogaon 22 101.0 98.3J. Brahman-baria 9 Bhairab-bazar 9 95.9 103.7J5 Jhikar-gacha 9 Rupdia 15 87.4 101.0* Distances (in miles) are measured straight, without regard to means oftransport.

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ECONOMIC-' ND 'POLITICAL WVEEKLY

TABLE 3: SMIUGG.ING IIOFITAND (INLAND) LEGALTRADE PROFIT[See map]

(Takas per maund)Date* Companyganj- Brahmanbaria-Bhairab-bazar Bhairab-bazar

Smuggling Legal Trade Smuggling Legal TradeProfit Profit (C to B) Profit Profit (Br to Bh)7 Sept. '74 14.6 -9.0 13.6 -10.014 Sept. '74 13.9 12.5 13.9 12.521 Sept. '74 1.9 0.5 3.9 2.528 Sept. '74 -6.5 -11.5 12.0 7.05 Oct. '74 50.4 15.0 53.4 18.019 Oct. '74 37.4 25.5 36.9 25.026 Oct. '74 45.6 27.5 40.6 22.52 Nov. '74 50.7 20.0 50.7 20.09 Nov. '74 11.6 7.5 11.6 7.5

* Indian dates are sometimes one day different.Given these pairs, it was tempting tolook separately at the figures for eachof them, to see whether the price at theborder was higher: if so, this wouldseem to suggest smuggling on a scalelarge enough to attract rice from inlandto that border place.Unfortunately, however, inspection ofthe figures made it clear that they werenot adequate to serve as a basis for sucha simple operation. Thus,(a) The prices in each p ace showederratic movements from one dayto the next, so that the relativeprices of neighbour and border

might change erratically. Thebest way of treating them seem-ed to be to take an average of agood nuimber of days in themonth, to represent that rmonth,and hope that errors of reporting,quality variations,etc, would thenlargely average out.(b) It is clearly possible that, whenrice is traded at various prices ineach centre and varies in qualityeven within the category "coarserice", the methods adopted bythe reporter in the border placemay vary from those used in theneighbouiringplace and introducean error into the comparison.Consequently the most that one canreally do with any safety is to providematerial for an overall assessment, ratherthan arrive at conclusions for each areaseparately. And by repeating the cal-culations for three different months, onecan provide some additional guidancewhich is particularly useful if the con-clusions from each month's figures aremuch the same. One must however re-cognise that the reporter at (say) Raj-

shahi might consistently tend to usemethods- which led him to report un-duly,h4gh (or low) in relation to the

reporter at Natore, so that the data forthe different months are not completelyindependent.RESULTS FOR RICE

We thought it hest to work with pri-ces for months befor? the 1974 flood,since this might well have introducedadditional disturbances in the reportingsystem; as well as producing somestrange situations. We therefore usedprices for December 1973, January 1974,February 1974, March 1974 and May1974: in all these months except May,smuggling was alleged to be on a sub-stantial scale, and was the subject ofmiuchdiscussion. It is also of some in-terest to note that the army startedpatrolling the border in April, whichwe thought might make a comparisonbetween, March and May of particularinterest.The pairs of places which we used(which include a number which verydubiously met-our requirem,ents,sincethere were so few good cases) are shownin Table 1. This Tfable also shows the

price in the inland (or "neighbour")place as a percentage of the price inthe border place, for each of the fivemonths.Looking at these figures as a group,there is not much doubt about the mainimpression which they create. Onlytwelve out of the 40 figures are below100 (ignoring one of 99.9), and no pairof places has more than two monthsbelow 100: this suggests the generalisa-tion that smuggling was typically on ascale not big enough to attract rice fromthe inland place to the border. More-over, most of the figures which are be-low 100 would be readily explicable onthe hypothesis that errors in the datawould be likely to produce a few per-verse figures: possible explanations ofthe two figures below 90 are givenunder the Table, but it is doubtful whe-ther one should attempt to explain in-dividual figures wNhenheir basis is souncertain.2

COMMrENTrS ON RESULTS FOR RICEIf our border places had all been re-ally near the frontier, and if the neigh-bour places had been within 10 miles ofthem, the above result would have beena very important one: it would meanthat smuggling,was, at most, taking thesurpluses (not the whole output) pro-duced in the area within (say) 5 milesof the frontier.Unfortunately, the lack of suitablereporting centres forced us to take asborder places ones which were furtherfrom. the frontier than we would havewished (see Table 1). Even if we couldestablish that all our border-places wvereoutside the area from which rice wassmuggled, there would still be amoderately suibstantial area nearerthe border about which we couldsay nothing. Formally, our resultswotuld be consistent with the, be-

TABLE 4: SUPPLY AND USAGE OF JUTE (INCLUDING MESHTA) IN BANGLADESH(lakh bales)

1972/73 1973/74SupplyProduction 66.24 61.50PlusCarry-over* from previous year 12.62 22.11AMinusEnd-season stock* -22.11 -23.58

Apparent Usage 56.75 60.03UsageExports 28.26 26.62Mill Consumption 24.97 29.41Growers' Consumption (estimated) 1.50 2.00Destroyed and unaccounted for 2.02 2.00

Apparent Usage 56.75 60.03* Held by mills, traders and growers.

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une , ECONOMIC AND POLITICAL WEEKLYlief that there is no smuggling at all;but equally they woud be consistentwith the belief that it absorbs the wholesurplus of that xarea.

Worse still, the neighbour places areon average about 25 miles away, sothat we are testinigwhether an alleged-ly high demand from smugglers is suffi-ciently powerful to divert rice fromquite a distance inland to the borderplaces.At the risk of straining the data, itseems worthwyhile o try to set an up-per limit to the likely scale of smuggl-ing. We therefore assume, rather arbi-trarily, that a "typical" border place(i e, one at the average distance fromthe frontier) is within the area seriouslyaffected by smuggling, and try to assesshow much furthc-r nland the area mightstretch. As the "neighbour" price was

on average higher (by 3.1 per cent), thecut-off point would seem to be typicallynearer to the border place than to theneighbour. This would mean that thearea from which the surplus might beregarded as potentially available forsmuggling would extend inwards fromthe frontier to a depth equal to thedistance to the border place (averagingabout 10 miles) plus perhaps one-quar-ter of the distance between the borderplace and the neighbour,3 making atotal of about 15 to 20 miles. The dis-tance, we repeat, is meant to give anupper limit to the area from which thesurplus might be regarded as availablefor smuggling.

As a very rough test of this conclu-sion, we tried eliminating the threepairs of places where thnedistance bet-ween them exceeds 25 miles, and theresult is, therefore, most uncertain.This leaves the broad picture littleaffected. Of the 25 rem,aining figuresin Table 1, eight are below 100 (i e,again rather under one-third); on ave-rage the neighbour price is againhigher, by 2.7 per cent this time in-stead of .3.1 per cent; the average dis-tance of the border place from thefrontier is 10 miles; and the final con-clusion would be slightly reduced toabout 15 miles.

We do not feel competent to trans-late this concluision into a figure forthe maximum tonnage of rice smuggl-ed per vear, because we do not knowhow to assess the surplus of rice in aborder area with a depth of about 15miles. We do wish to emphasise how-ever the arithmetic point that the areain question cannot be assessed by tak-ing the full length of the boundary,-with all its wiggles and curves, and

TABLE 5: SUPPI.Y AND USAGE OF JUTE (INCILUDING MESHTA) IN INDIA(lakh bales)

1972/73 1973/74SulpplyProduction 65.0 87.5Imports 2.5 3.0Opening Stock 16.5 12.5Less closinp Stock -12.5 n.a.Apparent Usage 71.5 n.a.UsageExports 0.5 2.0Mill Consumption 69.0 62.5Domestic Consumption 2.0 3.0Apparent Usage 71.5 67.5

mutiplying by 15: this counts mostplaces many times over, because theyare within 15 miles of more than onespot on the boundary. The relevantarea may perhaps he about one-sixthof the area of Bangladesh.4AN Al.TERNATIVE APPROACH

We intended to apply an alternativeapproach (which is described more fullyin the section on jute), based on adirect comparison of rice prices oneither side of the border, using theblack-market rate of exchange. Theonly relevant data Nvhichwe were ableto secure, however, were rice prices inComilla and Agartala, and the black-market rate of exchange on the borderbetween them. These figures, which ranfrom August 1974 to November 1974,consistently showed that the Indianprice was substantially lowuer than theBangladesh price, even when convertedat the black-market rate of exchange;there was, in consequence, no apparentincentive to smuggle rice from Comillato Agartala. Moreover, it is very doubt-ful whether this result can be explainedaway in terms of non-comparabilities inthe basis on which the prices were re-corded, since the converted Indianprice -as typically some 20 per centbelow the Bangladesh price.It does not seem to us surprisingthat the Bangladesh price of rice, in aperiod of near-famine, should be sohigh as to make it unprofitableto smug-gle rice out of the country. The black-market rate for the taka was of courseproviding a stimulus to smuggle some-thing out, but that something need notbe rice (as explained in the first sec-tion). This point applies whatever theaggregate amount of smuggling may be.It may help to conclude this sectionby explaining a possible source of con-fusion abouit the probable scale ofsmuggling. On observing the unprece-dentedly high price of rice in Bangla-desh, many people seem to have inferr-

ed that it was caused by large-scalesmuggling of rice out of the country.On general principles, however, it isequally possible to argue that the highprice was caused by production plusimports being inadequate to meet thedemand: the high price would thenmake smuggling unprofitable. The testbetween these two theories is to assessthe gross profit on smujgglingby usingthe Indian price and the black-marketexchange rate, and to supplemenit thisdirect assessment by the calculationsset out in the Jute section. We feelthat people with better access to datashould be able to apply the test muchmore conclusively than we could: ourown limited efforts do however supportthe results of our main approach byfavouring the small smuggling hypo-thesis.II

JuteIn the case of jute, we first appliedthe same method as for rice. The dataavailable are howveverboth less abun-dant and not so suitable to our pur-pose. Thus the number of places fronmwhich prices are collected by the Direc-torate of Agricultural Marketing issmaller; prices are collected weekly, in-stead of daily, and are quite often notreported (possibly because there is in-suflicient business); and the designationof what is covered (loose unassortedjute) makes it clear that there may beserious variations in quality, both bet-ween different places and between twodates in the same place.In consequence, we could only esta-blish five usable pairs of places, andBhairab-bazar acts as "neighbour" totwo different border places. The dis-tances involved are however shorter,which improves the sensitivity of thetest.We took September as the monthwhen supplies of jute are likely to be

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ECONOMICAND'POLITICAtWlIKLY June 5, 1976

MAP-OFP ANGLAPEMshoving border-neighbour bomp&A-sons for muggling of rice and Jut.

scale t 20 miles(INDIA)R3J3

QR3 J3 R2. Q0 ~~~~R2R6 R5 R7R6 R50 B Basar (INDIA)

(INDIA) J2J14 0QRl Ji J4 o Ao ijl Ll J2

UCGanoJ5

~R4

CAC?R4 ~~~~R

BAYOFPENGAL

International boundaryCountry/provincial capital o3Border place 4Neighbour place 0Rice comparison RJute comparison J V

best, and we covered both 1973 and1974. The results, for what they areworth, are shown in Table 2. Thisshows that each pair of places has onefigure below 100 and one above; andwith one exception, all the figures arefairly close to 100.

In trying to draw conclusions, onemust remember that jute differs fromrice in one very important respect.There is virtually no local consump-tion of jute, so that the whole outputof a border place might be smuggledout without attracting supplies from in-land: this is in marked contrast to rice,where only the surplus over local con-sumption was available for smugglingor inland marketing.

It seems, therefore, that Table 2 pre-sents little or no evidence in favour ofthe hypothesis that more jute movestowards the frontier for smuiggling, ra-ther than toxvards the mills of Daccaand Khulna and the legitimate expor-ters, but one cannot carry the analysismuch further.

AN ALTERNATIVE PPIROACHWe obtained a further clue by amethod which we had hoped to use ona larger scale. The available data, how-ever, allowed only a limited use of themethod, but one which is better thannothing.For a few dates we obtained theprice of jute at Agartala, which is an

important Indian jute centre, situatedjust over the' eastern border of Bangla-desh, and close to two of our "borderplaces" - Companyganj and Brah-inanbaria. Furthermore, we also obtain-ed the black-market' rate of exchangebetween rupees and takas which pre-vailed at that part of the frontier.This enabled us to calculate the ap-parent gross profit obtainable on smlugg-ling jute from Companyganj to Agar-tala, by converting the Indian price totakas at the black-market rate of ex-change, and subtracting the price atCompanyganj; and similarly for Brah-manbaria.The figures for September 7, 1974(the first date for which they are avai-lable) show the calculation, and are ofsome interest in themselves:Black-marketvalue of 100takas 44 rupeesPrice of jute at Agartala, permaund 39 rupeesEquivalent in takas 88.6 takasPrice of jute at Companyganj,per maund 74.0 takasGross profit on smuggling,per maund 14.6 takasThis calculation involves the dangerthat the quotations in Agartala andCompanyganj might be on a differentbasis, and of course the black-marketrate which was reported to us may bebiased (upwards or downwards) com-pared with the one likely to be obtain-ed by the actual smugglers. If, how-ever, one does the calculations for aseries of dates, these biases are likelyto be similar oni each occasion, so thatone gets quite a good idea of whetherthe smuggling profit i's or is not fairlyconstant, and which dates showed ahigh (or low) profit.Now if smuggling is a rcally majorfactor, the profit should not vary verymuch: a rise in Indian demand and inthe Indian price will drive up the priceat Companygunj, and this will attractlarge supplies from inside Bangladeshby establishing a price in Companyganjwhich is above the inland prices.

If, on the other hand, smuggling takesonly a small fraction of the local out-put from, the Bangladesh side of theborder, and cannot rapidly expand totake advantage of the high price atAgartala, then the smuggling profit canvary a good deal, and there will. be notendency for a hiighsmiugglingprofit toraise the Companyganj price above theitnlandprice.This gives us, then, a double test asto which hypothesis fits the facts best:(1) "Big smuggling" predicts fairlystable smuggling profits. "Small

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June 5 1976 BCOWOMICN)'POLITICAt 'WEKtYsmuggling" makes no prediction:smuggling profifs could quitewell be very variable.(2) "Big smuggling" predicts thatwhen smuggling profits are high,the price at Companyganj willexceed that at Bhairab-bazar."Small smugglinig" makes nosuch prediction: the price atBhairab-bazar xvill probably con-tinue to he higher, since somejute moves that way.

Table 3 provides all the data whichwe could obtain to apply these tests.The smuggling profit for each date isset against what we call the "legal tradeprofit", i e, the difference between theBhairab-bazar price and the price atthe border, which is the reward formoving jute towards the mills and otherlegitimate buyers.

There can be no doubt about whatthe Table tells us:(1) The (gross) smuggling profit isvery variable indeed, even withinthis 9-week period. It twice roseto over 50 takas per maund andsank very low in the second halfof September (being actuallynegative on 28th September forCompanygani. This is certainlynot what the big smuggling hy-pothesis predicted.(2) When the smuggling profit ishigh, the legal trade profit doesnot become negative (as the bigsmuggling hypothesis predicts):

on the contrary it became veryhigh itself. The rank correlationfor the two series, is not farshort of + 1. instead of beingnegative.One must not of course exaggeratethe importance of this supplementaryevidence, which is based on a verylimited amount of data. What one shouldsay is simply that we have used allthe data which we could find,-and thatit consistently showed results entirelydifferent from those predicted by the

big smuggling hypothesis.SECOND ALTERNATIVE APPROACH

In the case of jute (but not of rice),It should also be possible to get anidea of the possible amount smuggledby combining the figures for the maintypes of usage (which are known fairlyaccurately) with the figures for produc-tion, plus any rundown in stocks. Thereare some items in the comparisonwhich have to be estimated, but theyare usually known to be small, so thaterrors in them should not seriouslyaffect the assessment.Figures produced by the Jute Boardalso published by the Bangladesh

Batik in its Selected Economic Indi-cators - appear to suggest that smug-gling must be very smalL Table 4shows the position for -1972-73 and1973-74.Smuggling is part of the item for"destroyed and unaccounted for" and

on the face of it, the Table sets a verylow upper limit, since the losses byfire were reported as 1.92 lakh balesand 1.80 lakh bales in the two years:even if these claims exaggerated theamount actually destroyed, smugglingcould hardly amount to more thanabout 1 per cent of the crop, unlessthere are serious errors in some of theother items.Of these other items, growers' con-sumption is only an estimate, but itcannot be negative so that there is

little scope for raising the residual figureby reducing it. The stock figuressimilarly include an estimate for stocksheld by growers and petty traders, butat the end of June, (before the harvest)this: figure is bound to be very smalland the difference between the openingand closing stock is almost negligible.; The crucial question, therefore, ishow far the figure given for productionis to be regarded as an independentfigure - based on the acreage devotedto, jute and an average yield derived

from a sample, as in the case of riceproduction - and how far it is derivedfrom the usage figures by assuming afigure for "destroyed and unaccountedfor". If it is wholly the latter, thenthe Table shows only that the peoplewho produced the production figureassume smuggling to be small. This isquite significant evidence in itself -they are closely concerned in thematter - but it would be more helpfulto work from an independent estimatebased on returns from the fields.5THIRD ALTERNAUVE APPROACH

Another way of making an estimateis to use the Indian figures, and toapply the same technique as in thesecond approach - but looking , thistime a residual on the supply side, toreflect smuggling into the country.From the Monthly Summary of theIndian Jute Mills Association, we wereable to derive the figures shown inTable 5. The 1972/73 figures balanceexactly, without any room for smuggling.,h)ut hey raise again the question of howvthe prodluction figure is derived.

For 1973/74, the closing stocks werenot given in the Summary. On theface of it, the Table -impliesthat theywould have had to rise during the yearfrom 12.5 lakh bales to -35.0 lakhbales, even --without any smuggling.This seems most improbable: it! is alsoin conflict with the partial informationabout mill stocks given in the Summary,which suggests a rise of perhaps 12lakh bales in the closing stock.

A possible explanation is that theproduction figure, which is said to bebased on trade sources, will be. reviseddownwards. The "official forecast"'made by the Indian Govemnent was76.4 lakh bales, which would be givena plausible balance.CONCLUSIONS ABOUT JUTE

The second and third alternativeapproaches should be capable of givingtwo good, and independent, indicationsof the level of smuggling; people withfuller access to the statistical sourcesshould be able to arrive at a fairlyclear view. It would however obviouslyrequi.re a radical alteration of the pro-duction, figures (upwards in Bangladesh,downwards in India) to provide evi-dence in favour of the "big smuggling"hypothesis (taken as meaning that 10per cent or more of the crop wassmuggled into India).Taking these statistical approaches inconjunction with our own indirectapproaches, we feel bound to expressscepticism about the big smugglinghypothesis for jute, just as we did forrice. It seems to us that the quantita-tive importance of smuggling has beenexaggerated, with a resultant detrimentaleffect on assessments of how well thecountry has been governed.Needless to say, this does not imply

hat efforts to cut down smugglingshould be relaxed.

Notes1 The "double smuggling" May ofcourse be divided into two parts:one man m;aysmuggle out the rice,and take his profit by selling rupeesfor 2 takas to another man whobuys and smuggles in the sarees.But this does not affect the basicanalysis.2 Perhaps we should explain that we

also extracted prices for Dinajpur,as "border", and Thaknurgaon, s"inland laeighbour"', and these848


8/8

ECONOMIICAND POLITICAL WVEEKLY June 5, 1976showed figures around 90 for all fivemonths. We, then realised, however,that our preoccupation with near-ness to the border had led us toignore the need for the "neighbour"to be on the route to the inlandmarkets. Inspection of the mapshowed that the surplus rice fromThakurgaon would go to inlandmarkets via Dinajpur, so that theprice there would be higher, whe-ther or not there was large-scalesmuggling: nothing whatever canbe deduced from the figure of 90,and we should not have includedthis pair of places on our originallist.

3 The fraction is put low, becauseone really wants only the addi-

tionfl distance away from the fron-tier.:4 If, to take purely illustrativefigures, one assumed that this areaproduced one-fifth of the *country'srice, and that one-tenth of thatoutput was surplus to the area'sneed for consumption and seed, andwas all smuggled into India, thenone comes to' rather over 2 lakhtons for what is intended to be ahigh estimate. This is not morethan an illustration, but we feelconfident that any figure like amillion tons gets no support wrhat-ever from our results.5 So far as we understand it, anindependent estimate was so madeand agreed closely for each of thetwo years.

Money Supply AnalysisSrinivasMadhur

1N his article, 'Factors AffectingMoney Supply Critical Examinationof Reserve Bank's Analysis', (January26,1976), S B Gupta argued that the RBIanalysis of the factors affecting moneysupply is 'empty' as well as 'faulty', andhe suggested an alternative schemebased on the inoney-multiplier theoryof money supply determination.3 Criti-cising Gupta's article, N A Mujurndarhas argued that "the RBI analysis issuperior to the analysis based on themoney-multiplier theory if only for thereason that, while the latter provides amechanistic explanation of money-supplyvariations, the former provides an eco-nomic explanation".2 In their supple-ment to Mujumdar'sarticle, S L Shetty,V A Avadhani and K A Menon, raiseda number of other issues, which, accord-ing to them, though incidental toGupta's main theme, are important inthemselves.3 A critical evaluation ofsome of the issues that sprang up dur-ing the controversy is the primary con-cern of this short note.In section I, we discuss some of theissues raised by Mujumdar'scritique ofthe money-multiplier theory. Section IIis devoted to an examination of thefurther issues raised by Shetty andothers. The last section summarises thetentative conclusions which the preced-ing two sections lead us to.

IMujumdar summeariseswhat he callsthe main ingredients of the money-mul-tiplier theory as follows: "Firstly, thethe supply of money (M) is a highly sta-ble increasing function of high-poweredmoney (H) alotne. Secondly, factors go-verning high-powered money and chang-es in it arc largely policy controlled; and

thirdly, factors governing the money-multiplier (m) are largely endogenous,ie, they are dependent upon the beha-vioural choices of the public and thebanks."4The second and third propositionsseem to be allright, except that one hasto give due imiportance to the termlargely. However, the first proposition isnot carefully worded. Since the statu-tory reserves which the commercialbanks keep are not available to banksto meet their currency drains or clear-ing drains of cash, it is necessary toadjust the data on H -for the statutoryreserve changes. The H so adjusted isknown as adjusted high-powered money.Symbolically,H* = H -A R.R (AD)where H* is the adjusted high-poweredmoney, H total high-powered money,R.R required reserve-ratio, and AD theaggregate deposit of the commercialbanks. It is clear from the above equa-tion that, if the required reserve-ratioremains the same during the periodunder consideration, there cannot be anydifference between high-powered moneyand the adjusted high-powered money;thus the first proposition would be un-exceptionable. But if this ratio changesduring the period under consideration,the first proposition would be mislead-ing. Suppose, the required reserve-ratio is stepped up during the periodunder consideration. Other things re-maining the same, the money supplywould fall even though high-poweredmoney remains the same. This is be-cause the adjusted high-powered moneyhas shrunk. Hence, to guard againstsuch pitfalls, it would be wise to readthe first proposition as follows:

Other things remaining the same, thesupply of money is a highly stable,increasing function of adjustcd high-powered money. Perhaps, much of Mu-jurndar's onfusion regarding the money-multiplier theory could have been avoid-ed had he read the first proposition inthese terms. Let us illustrate this point.After summarising the main ingredientsof the money-multiplier theory, hespeaks of a corollary of the multiplierapproach, viz, "the larger the propor-tion of bank reserves in reserve money,the higher the value of the moneymultiplier is likely tc be".5 Observingwhat he calls "the typical illustrationof 1973-74", he considers the corollarymisleading. No doubt, the' corollary ismisleading. But the misleading natureof the corollary is inherited from theloosely-worded first proposition of themultiplier theory. A careful reading ofthe first proposition (as indicated above)would have led him to believe -that,through the technique of variaticns inthe statutory reserve-ratio, the centralbank can affect the surplWof adjustedhigh-powered money, leaving the moneymultiplier to be determined endogen-ously, by the behavicur of the banksand the public.

Perhaps one could attribute this con-fusion about the money-mlultipliertheory to Gupta for not introducingthe concept of adjusted high-poweredmoney and its importance in the se-mantic exercise of section I of his paper.Later, when presenting the money-multiplier theory also, he says: "In itssimplest form, the theory says that thesupply of money (MS) is a highly stableincreasing function of high-poweredmoney (H) alone. In other words, itsays that as H changes M also changesin the same direction." On anotheroccasion too, he wrote: "Ordinarily, thehigher the proportion of reserves inH, the greater also the high-powered-ness of H in that the same H, otherthings being the same, will come tobe associated with a larger amount ofmnoney."7 One does not know whetherGupta included the constancy of therequired reserve ratio in his "otherthings being the same" assumption.These misleading wordings of themoney-multiplier theory might havecaused confusion in the minds of many,including Mujumdar. But the fact thatGupta was very much aware of thelimitations of such loose wording isapparent from one of his DSE work-ing Papers in which he discusses thisproblem of adjusting the high-powered

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the scale of smuggling out of bangladesh

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