The Scale of Smuggling out of Bangladesh Author(s): W. B.

Reddaway and Md Mizanur Rahman Reviewed work(s): Source: Economic and Political Weekly, Vol. 11, No. 23 (Jun. 5, 1976), pp. 843-849 Published by: Economic and Political Weekly Stable URL: http://www.jstor.org/stable/4364685 . Accessed: 26/11/2011 04:20
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SPECIALARTICLES

The

Scale

of

Smuggling

Out

of

Bangladesh

W B Reddaway Md Mizanur Rahman

An economist visiting Bangladesh is likely to be rather puzzled by two thinggs. First, the topic of smuggling of rice and jute from Banaladesh ito India will be raised with astonishintg frequency; and second, the "estimtates" (or rather guesses) which are presented as to the scale of these operations vary enormously, 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 of smuggling are cotsidered.
AN economist visiting Bangladesh is likely to be rather puzzled by two things. First, the topic of smuggling of rice and jute from Bangladesh to India will be raised with astonishing frequency; and second, the "estimates" (or rather guesses) which are presented as to the scale of these operations vary enormously, from unimportant figures to well over a mnilliontons p;er year. There is also a good deal of discussion about the relative importance of various possible motives for this smuggling. At the rather superficial level, these operations can be attributed simply to the fact that an Indian rupee can be sold for two takas on the black market, instead of one, so that it pays to smuggle out rice even if a maund costs more takas than it will fetch in rupees: this merely shifts the problem, however, to explaining the black market rate for the taka. At a more profound level, two main motives are commonly mentioned. and both may well be important. First, owners of takas (perhaps obtained through dubious trading operations) may wish to convert them into rupees as a store of value, perhaps for subsequent repatriation (when a more favourable exchange rate may prevail), perhaps for use in India if the owner decides to emigrate, perhaps for later spending in India on things which the owner would not be allowed to buy under Bangladesh exchange controls. If this sort of capital flight is the motive, there may be no effective limit to the price which some owners of takas will pay for rupees, either by purchases on the black market or by incurring apparent losses through a purchase of rice for 300 takas and its sale for 200 rupees. Refugees from Nazi Germany, and Asians expelled from Uganda by General Amin, provided extreme examples to show that owners of capital considered that it was better to get their capital oi4t of the country by any means and on any terms, rather than simply abandon it. The second main motive applies to people who do not wish to send money out of the country, but merely tc do trade with India which is forbidden (or severely limited) by Bangladesh exchange controls and import licences. If (say) Indian sarees can be sold in Bangladesh for three times the Indian price (reckoned at par of exchange), it will pay to smuggle out rice at an apparent loss to get rupees to buy them, and then smuggle the sarees in. The black market rate of exchange does not appear in the calculation: so long as the price ratio between Indian sarees and rice is much higher in Bangladesh than it is in India, the incentive to do the "double smuggling" will be powerful.1 Whichever of these two motives provides the incentive for smuggling goods out of Bangladesh, it is manifest that these goods need not be confined to jute and rice. The basic objective of the smuggler is simply to obtain Indian rupees, and he will select his merchandise in the light of a combination of criteria, e g, relative price on the two sides of the border, ease of adquisition in Bangladesh, ease of sale in India, ease of transport (per 100 rupees of prospective proceeds), risk of detection on the border. A limited amount of guidance ornthe things smuggled is provided by the value of different categories of goods which have been seized at the border: for 1973-74 the ten leading items for outgoing operations, as reported by the Bangladesh Rifles, were as shown in Table A. These figures, in which rice and jute come quite low in the list, may be completely misleading as a guide to the pattern of the goods which are not intercepted: they do however serve to show that smuggling covers a wide vatiety vf gcods, and is not confined to jute and rice. This paper 'deals first with evidence about the scale on which rice is smuggled out, and then, in Part II, turns its attention to jute. Various independent approaches are considered.

I
Rice
PRINCIPLES OF METHOD USED FOR RICE

Inevitably, no statistics exist about the scale of smuggling operations. The approach in this Note is to seek some indirect guidance from price statistics which have already been collected for different parts of the country. Since we wrote this paper, we have learned that an intelligent collection of local gossip in border areas led to conclusions broadly similar to ours. The principle of the method is simple. Suppose that the price of a standard quality of rice is known for each of a number of rural centres near the border, and that these are all "surplus areas" i e, they produce more rice than is consumed locally. In the absence of smuggling, the surplus would be transported towards the deficit areas of Bangladesh, notably Dacca. Suppose that prices are also known for the same quality of rice in rural centres at distances of? (say) 3 and 10 miles inland from each border place and that these are on the route which the surplus rice would normally follow in seeking an internal market; suppose furTABrEA Category (1) (2) (3) (4) (5) (6) (7) (8) (9) Value in Thousand Takas Gold/Silver 481 Fish 349 Currency 206 Medicine 182 Eggs and milk powder 154 Gunny bags 126 Rice/Paddy 114 Flour 106 Skins 90

(UO.jue

843

June 5, 1976
TABLEI Border Place Map Code Name Distance* from Frontier

ECONOMIC AND POLITICAL WEEKLY

AND INLAND PRICES RICE NEAR FRONTIER BETWEEN COMPARISON OP Neighbour Place Name Distance* from Border Place Price in Neighbour as Percentage of Price in Border Dec 1973 Jan 1974 Feb 1974 Mar 1974 May 1974

R1 R2 R3
R4 R5

Meberpur Sunamganj Joypurhat Satkhira Nawabganj Nawabganj Netrakona Barguna**

3 6 7 9 11 11 19
**

Chuadanga Sylhet Naogaon Khulna Natore Rajshahi Mymensingh Patuakhali

16 31 22 32 45 24 22 20

103.2 113.6 51.8 107.9 99.5 98.9 119.1 114.4

102.7 110.1 94.5 103.4 101.3 101.0 113.1 112.8

98.3 96.1 100.4 110.7 107.6 102.2 99.5 102.4

99.9 84.7t 103.4 110.0 101.9 101.0 89.6t 103.4

94.6 104.1 103.6 104.0 98.8 99.4 115.8 103.5

R6
R7

R8
* **

Distances (in miles) are measured straight, without regard to means of transport. Smuggling would be by boat: Barguna is 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 reporting:

(i) Smuggling was rampant in Mlrch, but was greatly reduced by the Army's arrival in April. (ii) The border area had run short of rice in March. but got fresh supplies in May from the boro crop. ther that these centres are also surplus areas. The following points can be made: (a) In the absence of smuggling, the prices recorded would show an upward progression as one went inland from the border, to reflect the cost of transport. (b) If smuggling were a really major factor, then rice would fetch a higher price at the border place than in the two neighbouring inland centres, so as to attract supplies to the frontier. (c) Intermediately, if rice were smuggled out on a small scale, so as not even to absorb the surplus of the border areas, then the price would still be lowest at the border and rise progressively (but less rice would move inland from the border area than in our first case). (d) If rice were smuggled out on a moderate scale, so as to absorb the whole of the surplus in the border area to a depth of about 5 miles from the frontier, then the price would fall between the border centre and the one 3 miles inland, and then rise in the one 10 miles inland. Inverting this collection of statements and making some simplifying assumptions, one would be able to say (if all data were available and perfectly accurate) that the place where the price was
844

lowest would miarkthe cut-off point. Smuggling would absorb the surpluses (not the whole production) of the area between that point and the border. This conclusion would be upset if smuggling were largely done by big operators who loaded lorries at places far inland, and then drove them over the border. This procedure seems rather improbable, as the operators could save money by buying and loading the rice nearer to the border. We gather moreover that the "local gossip" mentioned above lent no support to the idea that such operations were quantitatively important.
DATA PROBLEMS FOR RICE

Inevitably,

the nature of the

data

available compliCates greatly the proceTABLE

dure which one would like to follow. In the case of rice, the free market price for coarse rice is reported daily to the Ministry of Food and Civil Supplies in respect of some 80 places. Our first step was, therefore, to look at all of these which could be reasonably regarded as "near the border", and to see whether there was a second place on the list which could be treated as the "inland neighbour", i e, which was reasonably near, and preferably on the natural route by which supplies would go to internal markets. In a very few cases there was a third place further inland which could be regarded as meeting the requirements of the "10 miles away centre" mentioned in the previous section: these were however so rare that we could make no systematic use of them.
OF JUTE NEAR FRON1IER AND INLAND

2:

COMPARISON

BEIWEEN

PRICES

[See map] Map Code Neighbour place Border Place Distance' Distance* Name from from Na-me
Frontier Border

Place

Price in Neighbour as Per Cent of Price ill Border Sept 74 Sept 73 98.6 104.3 101.0 95.9 105.2 98.5 98.3 103.7

J1
J2 J3 J.
J5
*

101.0 87.4 15 9 Rupdia miles) are measured straight, without regard to means of Distances (in transport.

Meherpur Companyganj Joypurhat Brahmanbaria Jhikargacha

3 4 7 9

Chuadanga Bhairab-bazar Naogaon Bhairab-bazar

16 24 22 9

AND 'POLITICAL WVEEKLY ECONOMIC-'

TABLE 3: PIIOFITAND (INLAND) LEGALTRADE PROFIT SMIUGG.ING [See map] (Takas per maund) Date* CompanyganjBhairab-bazar Smuggling Profit 7 14 21 28 5 19 26 Sept. Sept. Sept. Sept. Oct. Oct. Oct. '74 '74 '74 '74 '74 '74 '74 14.6 13.9 1.9 -6.5 50.4 37.4 45.6 Legal Trade Profit (C to B) -9.0 12.5 0.5 -11.5 15.0 25.5 27.5 BrahmanbariaBhairab-bazar Smuggling Profit 13.6 13.9 3.9 12.0 53.4 36.9 40.6 Legal Trade Profit (Br to Bh) -10.0 12.5 2.5 7.0 18.0 25.0 22.5

2 Nov. '74 9 Nov. '74

50.7 11.6

20.0 7.5
one day different.

50.7 11.6

20.0 7.5

* Indian dates are sometimes

Given these pairs, it was tempting to look separately at the figures for each of them, to see whether the price at the border was higher: if so, this would seem to suggest smuggling on a scale large enough to attract rice from inland to that border place. Unfortunately, however, inspection of the figures made it clear that they were not adequate to serve as a basis for such a simple operation. Thus, (a) The prices in each place showed erratic movements from one day to the next, so that the relative prices of neighbour and border might change erratically. The best way of treating them seemed to be to take an average of a good nuimber of days in the month, to represent that rmonth, and hope that errorsof reporting, quality variations, etc, would then largely average out. (b) It is clearly possible that, when rice is traded at various prices in each centre and varies in quality even within the category "coarse rice", the methods adopted by the reporter in the border place may vary from those used in the neighbouiringplace and introduce an error into the comparison. Consequently the most that one can really do with any safety is to provide material for an overall assessment, rather than arrive at conclusions for each area separately. And by repeating the calculations for three different months, one can provide some additional guidance which is particularly useful if the conclusions from each month's figures are much the same. One must however recognise that the reporter at (say) Rajshahi might consistently tend to use methods- which led him to report unduly,h4gh (or low) in relation to the

reporter at Natore, so that the data for the different months are not completely
independent.
RESULTS FOR RICE

price in the inland (or "neighbour") place as a percentage of the price in the border place, for each of the five months. Looking at these figures as a group, there is not much doubt about the main impression which they create. Only twelve out of the 40 figures are below 100 (ignoring one of 99.9), and no pair of places has more than two months below 100: this suggests the generalisation that smuggling was typically on a scale not big enough to attract rice from the inland place to the border. Moreover, most of the figures which are below 100 would be readily explicable on the hypothesis that errors in the data would be likely to produce a few perverse figures: possible explanations of the two figures below 90 are given under the Table, but it is doubtful whether one should attempt to explain intheir basis is so dividual figures wNhen uncertain.2
COMMrENTrS ON RESULTS FOR RICE

We thought it hest to work with prices for months befor? the 1974 flood, since this might well have introduced additional disturbances in the reporting system; as well as producing some strange situations. We therefore used prices for December 1973, January 1974, February 1974, March 1974 and May 1974: in all these months except May, smuggling was alleged to be on a substantial scale, and was the subject of miuch discussion. It is also of some interest to note that the army started patrolling the border in April, which we thought might make a comparison between, March and May of particular interest. The pairs of places which we used (which include a number which very dubiously met-our requirem,ents,since there were so few good cases) are shown in Table 1. This Tfable also shows the
TABLE

If our border places had all been really near the frontier, and if the neighbour places had been within 10 miles of them, the above result would have been a very important one: it would mean that smuggling, was, at most, taking the surpluses (not the whole output) produced in the area within (say) 5 miles of the frontier. Unfortunately, the lack of suitable reporting centres forced us to take as border places ones which were further from. the frontier than we would have wished (see Table 1). Even if we could establish that all our border-places wvere outside the area from which rice was smuggled, there would still be a moderately suibstantial area nearer the border about which we could say nothing. Formally, our results wotuld be consistent with the, be(INCLUDING MESHTA) IN BANGLADESH

4:

SUPPLY

AND USAGE

OF JUTE

(lakh bales)
1972/73 Supply 1973/74

Production Plus Carry-over* from previous year

AMinus

66.24 12.62 -22.11 56.75 28.26 24.97 1.50 2.02 56.75

61.50 22.11 -23.58 60.03 26.62 29.41 2.00 2.00 60.03

End-season stock* Apparent Usage Usage Exports Mill Consumption Growers' Consumption (estimated) Destroyed and unaccounted for Apparent Usage
*

Held by mills, traders and growers.

845

une

,
TABLE

ECONOMIC AND POLITICAL WEEKLY

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

lief that there is no smuggling at all; but equally they woud be consistent with the belief that it absorbs the whole surplus of that xarea. Worse still, the neighbour places are on average about 25 miles away, so that we are testinig whether an allegedly high demand from smugglers is sufficiently powerful to divert rice from quite a distance inland to the border places. At the risk of straining the data, it seems worthwyhileto try to set an upper limit to the likely scale of smuggling. We therefore assume, rather arbitrarily, that a "typical" border place (i e, one at the average distance from the frontier) is within the area seriously affected by smuggling, and try to assess how much furthc-rinland the area might stretch. As the "neighbour" price was on average higher (by 3.1 per cent), the cut-off point would seem to be typically nearer to the border place than to the neighbour. This would mean that the area from which the surplus might be regarded as potentially available for smuggling would extend inwards from the frontier to a depth equal to the distance to the border place (averaging about 10 miles) plus perhaps one-quarter of the distance between the border place and the neighbour,3 making a total of about 15 to 20 miles. The distance, we repeat, is meant to give an upper limit to the area from which the surplus might be regarded as available for smuggling. As a very rough test of this conclusion, we tried eliminating the three pairs of places where thnedistance between them exceeds 25 miles, and the result is, therefore, most uncertain. This leaves the broad picture little affected. Of the 25 rem,aining figures in Table 1, eight are below 100 (i e, again rather under one-third); on average the neighbour price is again higher, by 2.7 per cent this time instead of .3.1 per cent; the average distance of the border place from the frontier is 10 miles; and the final conclusion would be slightly reduced to about 15 miles. We do not feel competent to translate this concluision into a figure for the maximum tonnage of rice smuggled per vear, because we do not know how to assess the surplus of rice in a border area with a depth of about 15 miles. We do wish to emphasise however the arithmetic point that the area in question cannot be assessed by taking the full length of the boundary,with all its wiggles and curves, and 846

(lakh bales) 1972/73

Sulpply

1973/74

Production Imports Opening Stock Less closinp Stock Apparent Usage

Usage

65.0 2.5 16.5 -12.5 71.5 0.5 69.0 2.0 71.5

87.5 3.0 12.5 n.a. n.a. 2.0 62.5 3.0 67.5

Exports Mill Consumption Domestic Consumption Apparent Usage mutiplying by 15: this counts most places many times over, because they are within 15 miles of more than one spot on the boundary. The relevant area may perhaps he about one-sixth of the area of Bangladesh.4

ed that it was caused by large-scale smuggling of rice out of the country. On general principles, however, it is equally possible to argue that the high price was caused by production plus imports being inadequate to meet the demand: the high price would then AN Al.TERNATIVE APPROACH make smuggling unprofitable. The test We intended to apply an alternative between these two theories is to assess approach (which is described more fully the gross profit on smujgglingby using in the section on jute), based on a the Indian price and the black-market direct comparison of rice prices on exchange rate, and to supplemenit this either side of the border, using the direct assessment by the calculations black-market rate of exchange. The set out in the Jute section. We feel only relevant data Nvhichwe were able that people with better access to data to secure, however, were rice prices in should be able to apply the test much Comilla and Agartala, and the black- more conclusively than we could: our market rate of exchange on the border own limited efforts do however support between them. These figures, which ran the results of our main approach by from August 1974 to November 1974, favouring the small smuggling hypoconsistently showed that the Indian thesis. price was substantially lowuer than the II Bangladesh price, even when converted at the black-market rate of exchange; Jute there was, in consequence, no apparent In the case of jute, we first applied incentive to smuggle rice from Comilla to Agartala. Moreover, it is very doubt- the same method as for rice. The data ful whether this result can be explained available are howveverboth less abunaway in terms of non-comparabilities in dant and not so suitable to our purthe basis on which the prices were re- pose. Thus the number of places fronm the converted Indian which prices are collected by the Direccorded, since price -as typically some 20 per cent torate of Agricultural Marketing is smaller; prices are collected weekly, inbelow the Bangladesh price. It does not seem to us surprising stead of daily, and are quite often not that the Bangladesh price of rice, in a reported (possibly because there is inperiod of near-famine, should be so suflicient business); and the designation high as to make it unprofitableto smug- of what is covered (loose unassorted gle rice out of the country. The black- jute) makes it clear that there may be market rate for the taka was of course serious variations in quality, both betproviding a stimulus to smuggle some- ween different places and between two thing out, but that something need not dates in the same place. In consequence, we could only estabe rice (as explained in the first section). This point applies whatever the blish five usable pairs of places, and aggregate amount of smuggling may be. Bhairab-bazar acts as "neighbour" to It may help to conclude this section two different border places. The disby explaining a possible source of con- tances involved are however shorter, fusion abouit the probable scale of which improves the sensitivity of the smuggling. On observing the unprece- test. We took September as the month dentedly high price of rice in Bangladesh, many people seem to have inferr- when supplies of jute are likely to be

ECONOMIC AND 'POLITICAtW lIKLY

June 5, 1976
important Indian jute centre, situated just over the' eastern border of Bangladesh, and close to two of our "border places" Companyganj and Brahinanbaria. Furthermore, we also obtained the black-market' rate of exchange between rupees and takas which prevailed at that part of the frontier. This enabled us to calculate the apparent gross profit obtainable on smluggling jute from Companyganj to Agartala, by converting the Indian price to takas at the black-market rate of exchange, and subtracting the price at Companyganj; and similarly for Brahmanbaria. The figures for September 7, 1974 (the first date for which they are available) show the calculation, and are of some interest in themselves: Black-marketvalue of 100 takas 44 rupees Price of jute at Agartala, per maund 39 rupees Equivalent in takas 88.6 takas Price of jute at Companyganj, per maund 74.0 takas Gross profit on smuggling, per maund 14.6 takas This calculation involves the danger that the quotations in Agartala and Companyganj might be on a different basis, and of course the black-market rate which was reported to us may be biased (upwards or downwards) compared with the one likely to be obtained by the actual smugglers. If, however, one does the calculations for a series of dates, these biases are likely to be similar oni each occasion, so that one gets quite a good idea of whether the smuggling profit i's or is not fairly constant, and which dates showed a high (or low) profit. Now if smuggling is a rcally major factor, the profit should not vary very much: a rise in Indian demand and in the Indian price will drive up the price at Companygunj, and this will attract large supplies from inside Bangladesh by establishing a price in Companyganj which is above the inland prices. If, on the other hand, smuggling takes only a small fraction of the local output from, the Bangladesh side of the border, and cannot rapidly expand to take advantage of the high price at Agartala, then the smuggling profit can vary a good deal, and there will. be no tendency for a hiigh smiugglingprofit to raise the Companyganj price above the itnland price. This gives us, then, a double test as to which hypothesis fits the facts best: (1) "Big smuggling" predicts fairly stable smuggling profits. "Small
847

MAP &ANGLAPEM -OFP

shoving border-neighbour

bomp&A-

sons for muggling of rice and Jut.

scale

20

miles

(INDIA)

R3J3
QR3 J3
R6 R5

R2. R7 0

Q
~~~~R2
(INDIA)

R6

0
(INDIA)

R5
B Basar J2J14

Q 0

Rl Ji

J4

ij o El Ll J5 ~R4

J2
GanoC

o UA

?R4

~~~~R

CAC I
OFP BAY BENGAL boundary
capital
o3

International

Country/provincial 4 Border place

Neighbour place 0 Rice comparison R Jute comparison J

best, and we covered both 1973 and 1974. The results, for what they are worth, are shown in Table 2. This shows that each pair of places has one figure below 100 and one above; and with one exception, all the figures are fairly close to 100. In trying to draw conclusions, one must remember that jute differs from rice in one very important respect. There is virtually no local consumption of jute, so that the whole output of a border place might be smuggled out without attracting supplies from inland: this is in marked contrast to rice, where only the surplus over local consumption was available for smuggling or inland marketing.

It seems, therefore, that Table 2 presents little or no evidence in favour of the hypothesis that more jute moves towards the frontier for smuiggling, rather than toxvards the mills of Dacca and Khulna and the legitimate exporters, but one cannot carry the analysis much further.
AN ALTERNATIVE APPIROACH We obtained a further clue by a

method which we had hoped to use on a larger scale. The available data, however, allowed only a limited use of the method, but one which is better than
nothing.

For a few dates we obtained the price of jute at Agartala, which is an

June 5 1976

BCOWOMIC AN)'POLITICAt 'WEKtY

For 1973/74, the closing stocks were not given in the Summary. On the face of it, the Table -implies that they would have had to rise during the year from 12.5 lakh bales to -35.0 lakh bales, even --without any smuggling. This seems most improbable: it! is also in conflict with the partial information about mill stocks given in the Summary, which suggests a rise of perhaps 12 lakh bales in the closing stock. A possible explanation is that the production figure, which is said to be based on trade sources, will be. revised downwards. The "official forecast"' made by the Indian Govemnent was 76.4 lakh bales, which would be given a plausible balance.
CONCLUSIONS ABOUT JUTE

smuggling" makes no prediction: Batik in its Selected Economic Indismuggling profifs could quite cators - appear to suggest that smugwell be very variable. gling must be very smalL Table 4 (2) "Big smuggling" predicts that shows the position for -1972-73 and when smuggling profits are high, 1973-74. the price at Companyganj will Smuggling is part of the item for exceed that at Bhairab-bazar. "Small smugglinig" makes no "destroyed and unaccounted for" and such prediction: the price at on the face of it, the Table sets a very Bhairab-bazar xvill probably con- low upper limit, since the losses by tinue to he higher, since some fire were reported as 1.92 lakh bales and 1.80 lakh bales in the two years: jute moves that way. even if these claims exaggerated the Table 3 provides all the data which amount actually destroyed, smuggling we could obtain to apply these tests. could hardly amount to more than The smuggling profit for each date is about 1 per cent of the crop, unless set against what we call the "legal trade there are serious errors in some of the profit", i e, the difference between the other items. Bhairab-bazar price and the price at the border, which is the reward for Of these other items, growers' conmoving jute towards the mills and other sumption is only an estimate, but it legitimate buyers. cannot be negative so that there is There can be no doubt about what little scope for raising the residual figure the Table tells us: by reducing it. The stock figures (1) The (gross) smuggling profit is similarly include an estimate for stocks very variable indeed, even within held by growers and petty traders, but this 9-week period. It twice rose at the end of June, (before the harvest) to over 50 takas per maund and sank very low in the second half this: figure is bound to be very small of September (being actually and the difference between the opening negative on 28th September for and closing stock is almost negligible. Companygani. This is certainly not what the big smuggling hy; The crucial question, therefore, is pothesis predicted. how far the figure given for production (2) When the smuggling profit is high, the legal trade profit does is to be regarded as an independent not become negative (as the big figure - based on the acreage devoted smuggling hypothesis predicts): to, jute and an average yield derived on the contrary it became very high itself. The rank correlation from a sample, as in the case of rice for the two series, is not far production - and how far it is derived short of + 1. instead of being from the usage figures by assuming a negative. figure for "destroyed and unaccounted One must not of course exaggerate for". If it is wholly the latter, then the importance of this supplementary the Table shows only that the people evidence, which is based on a very who produced the production figure limited amount of data. What one should assume smuggling to be small. This is have used all say is simply that we quite significant evidence in itself the data which we could find,-and that they are closely concerned in the it consistently showed results entirely matter - but it would be more helpful different from those predicted by the to work from an independent estimate big smuggling hypothesis. based on returns from the fields.5
SECOND ALTERNATIVE APPROACH THIRD ALTERNAUVE APPROACH

The second and third alternative approaches should be capable of giving two good, and independent, indications of the level of smuggling; people with fuller access to the statistical sources should be able to arrive at a fairly clear view. It would however obviously requi.re a radical alteration of the production, figures (upwards in Bangladesh, downwards in India) to provide evidence in favour of the "big smuggling" hypothesis (taken as meaning that 10 per cent or more of the crop was smuggled into India). Taking these statistical approaches in conjunction with our own indirect approaches, we feel bound to express scepticism about the big smuggling hypothesis for jute, just as we did for rice. It seems to us that the quantitative importance of smuggling has been exaggerated, with a resultant detrimental effect on assessments of how well the country has been governed. Needless to say, this does not imply hat efforts to cut down smuggling should be relaxed.

In the case of jute (but not of rice), It should also be possible to get an idea of the possible amount smuggled by combining the figures for the main types of usage (which are known fairly accurately) with the figures for production, plus any rundown in stocks. There are some items in the comparison which have to be estimated, but they are usually known to be small, so that errors in them should not seriously affect the assessment. Figures produced by the Jute Board also published by the Bangladesh 848

Another way of making an estimate is to use the Indian figures, and to apply the same technique as in the second approach - but looking , this time a residual on the supply side, to reflect smuggling into the country. From the Monthly Summary of the Indian Jute Mills Association, we were able to derive the figures shown in Table 5. The 1972/73 figures balance exactly, without any room for smuggling., h)utthey raise again the question of howv the prodluction figure is derived.

Notes 1 The "double smuggling" May of

course be divided into two parts: one man m;aysmuggle out the rice, and take his profit by selling rupees for 2 takas to another man who buys and smuggles in the sarees. But this does not affect the basic analysis.

Perhaps we should explain that we also extracted prices for Dinajpur, as "border", and Thaknurgaon, as "inland laeighbour"', and these

ECONOMIICAND POLITICAL WVEEKLY showed figures around 90 for all five months. We, then realised, however, that our preoccupation with nearness to the border had led us to ignore the need for the "neighbour" to be on the route to the inland markets. Inspection of the map showed that the surplus rice from Thakurgaon would go to inland markets via Dinajpur, so that the price there would be higher, whether or not there was large-scale smuggling: nothing whatever can be deduced from the figure of 90, and we should not have included this pair of places on our original list. 3 The fraction is put low, because one really wants only the additionfl

June 5, 1976
distance away from the fron-

tier.: 4 If, to take purely illustrative figures, one assumed that this area produced one-fifth of the *country's rice, and that one-tenth of that output was surplus to the area's need for consumption and seed, and was all smuggled into India, then one comes to' rather over 2 lakh tons for what is intended to be a high estimate. This is not more than an illustration, but we feel confident that any figure like a million tons gets no support wrhatever from our results. 5 So far as we understand it, an independent estimate was so made and agreed closely for each of the two years.

Money Supply Analysis

Srinivas Madhur
1N his article, 'Factors Affecting Critical Examination Money Supply of Reserve Bank's Analysis', (January 26, 1976), S B Gupta argued that the RBI analysis of the factors affecting money supply is 'empty' as well as 'faulty', and he suggested an alternative scheme based on the inoney-multiplier theory of money supply determination.3 Criticising Gupta's article, N A Mujurndar has argued that "the RBI analysis is superior to the analysis based on the money-multiplier theory if only for the reason that, while the latter provides a mechanistic explanation of money-supply variations, the former provides an economic explanation".2 In their supplement to Mujumdar'sarticle, S L Shetty, V A Avadhani and K A Menon, raised a number of other issues, which, according to them, though incidental to Gupta's main theme, are important in themselves.3 A critical evaluation of some of the issues that sprang up during the controversy is the primary concern of this short note. In section I, we discuss some of the issues raised by Mujumdar's critique of the money-multiplier theory. Section II is devoted to an examination of the further issues raised by Shetty and others. The last section summarises the tentative conclusions which the preceding two sections lead us to. I what he calls Mujumdar summearises the main ingredients of the money-multiplier theory as follows: "Firstly, the the supply of money (M) is a highly stable increasing function of high-powered money (H) alotne. Secondly, factors governing high-powered money and changes in it arc largely policy controlled; and thirdly, factors governing the moneymultiplier (m) are largely endogenous, ie, they are dependent upon the behavioural choices of the public and the banks."4 The second and third propositions seem to be allright, except that one has to give due imiportance to the term largely. However, the first proposition is not carefully worded. Since the statutory reserves which the commercial banks keep are not available to banks to meet their currency drains or clearing drains of cash, it is necessary to adjust the data on H -for the statutory reserve changes. The H so adjusted is known as adjusted high-powered money. Symbolically, R.R (AD) H* = H -A where H* is the adjusted high-powered money, H total high-powered money, R.R required reserve-ratio, and AD the aggregate deposit of the commercial banks. It is clear from the above equation that, if the required reserve-ratio remains the same during the period under consideration, there cannot be any difference between high-powered money and the adjusted high-powered money; thus the first proposition would be unexceptionable. But if this ratio changes during the period under consideration, the first proposition would be misleading. Suppose, the required reserveratio is stepped up during the period under consideration. Other things remaining the same, the money supply would fall even though high-powered money remains the same. This is because the adjusted high-powered money has shrunk. Hence, to guard against such pitfalls, it would be wise to read the first proposition as follows:

Other things remaining the same, the supply of money is a highly stable, increasing function of adjustcd highpowered money. Perhaps, much of Mujurndar'sconfusion regarding the moneymultiplier theory could have been avoided had he read the first proposition in these terms. Let us illustrate this point. After summarising the main ingredients of the money-multiplier theory, he speaks of a corollary of the multiplier approach, viz, "the larger the proportion of bank reserves in reserve money, the higher the value of the money multiplier is likely tc be".5 Observing what he calls "the typical illustration of 1973-74", he considers the corollary misleading. No doubt, the' corollary is misleading. But the misleading nature of the corollary is inherited from the loosely-worded first proposition of the multiplier theory. A careful reading of the first proposition (as indicated above) would have led him to believe -that, through the technique of variaticns in the statutory reserve-ratio, the central bank can affect the surplW of adjusted high-powered money, leaving the money multiplier to be determined endogenously, by the behavicur of the banks and the public. Perhaps one could attribute this confusion about the money-mlultiplier theory to Gupta for not introducing the concept of adjusted high-powered money and its importance in the semantic exercise of section I of his paper. Later, when presenting the moneymultiplier theory also, he says: "In its simplest form, the theory says that the supply of money (MS) is a highly stable increasing function of high-powered money (H) alone. In other words, it says that as H changes M also changes in the same direction." 6 On another occasion too, he wrote: "Ordinarily, the higher the proportion of reserves in H, the greater also the high-poweredness of H in that the same H, other things being the same, will come to be associated with a larger amount of mnoney."7 One does not know whether Gupta included the constancy of the required reserve ratio in his "other things being the same" assumption. These misleading wordings of the money-multiplier theory might have caused confusion in the minds of many, including Mujumdar. But the fact that Gupta was very much aware of the limitations of such loose wording is apparent from one of his DSE working Papers in which he discusses this problem of adjusting the high-powered 849