This article identifies constraints and barriers to growth for small firms in Pakistan, a survey of the existing literature and through in-depth interviews with a sub-sample of firms in two important SME sectors, that is electrical fans and sporting goods. Policy recommendations for the SME sector include addressing problems in contract enforcement (such through alternative dispute settlement mechanisms), promoting R & D through linkages with academia locally and research institutions globally, simplifying of the tax regime to encourage transparency, resolving the energy crisis and rationalize power tariffs, increasing the availability of credit to SMEs (allowing alternative forms of collateral). In addition, more detailed recommendations specific to the fan and sporting goods sectors are also offered.
KEYWORDS: Pakistan, SMEs, light engineering, constraints, electrical fans, sporting goods.
JEL: L10, L60.

This study estimates a cost function for fossil fuel-based electricity generating plants operating in Pakistan during 2006–11. It employs a six-year panel dataset for 31 plants to estimate the cost function parameters. In the absence of any current evidence on comparative cost performance, the study’s attempt to document the economic efficiency of power plants in a large electricity sector is an important contribution to the literature. We find that on average, private nonutility plants (IPPs) are about 17 years younger than utility-owned plants and that the average capacity utilization, as measured by load factor, is higher for private IPPs than for public plants. After controlling for observables, the results show that, for a large part of the system, private plants produce electricity at a lower unit fuel cost than utility-owned public plants. The low efficiency of public plants is likely a result of the lack of operational maintenance and routine repairs. We find that the average fuel price (PRs per MMBTU) is lower for public plants and utility-owned private plants compared to nonutility-owned private plants which is mainly due to the composition of the fuel mix used for power generation. We also find that (i) the partial effect of fuel price changes on the average unit cost is higher for private plants than for public plants and (ii) on average, private plants use relatively expensive fuels compared to public plants. On an average fuel cost comparison, the private sector plants may be better base load plants than public sector plants, though the private sector plants may not be being used as base load plants because of the higher tariffs they change.
KEYWORDS: Cost function, utility-owned public plants, load factor, productive efficiency.
JEL: D22, D24, L94.

This study analyzes the impact of corporate governance and ownership structure on earnings management for a sample of 372 firms listed on the Karachi Stock Exchange over the period 2003–10. We estimate discretionary accruals using four well-known models: Jones (1991); Dechow, Sloan, and Sweeney (1995); Kasznik (1999); and Kothari, Leone, and Wasley (2005). The results indicate that discretionary accruals increase monotonically with the ownership percentage of a firm’s directors, their spouses, children, and other family members. This supports the view that managers who are more entrenched in a firm can more easily influence corporate decisions and accounting figures in a way that may serve their interests. This finding is consistent with prior research evidence on the role of dominant directors in expropriating external minority shareholders in Pakistan. Further, our results indicate that institutional investors play a significant role in constraining earnings management practices. We do not find any evidence that CEO duality, the size of the auditing firm, the number of members on the board of directors, and ownership concentration influence discretionary accruals. Among the control variables, we find that firms that are more profitable, are growing, or have higher leverage actively manage their earnings, while earnings management decreases with the age of the firm. The results are robust to several alternative specifications.
KEYWORDS: Corporate governance, earnings management, ownership structure, discretionary accruals, KSE, Pakistan.
JEL: G32, G3, M4.

This study investigates whether exposure to downside risk, as measured by value-at-risk (VaR), explains expected returns in an emerging market, i.e., Pakistan. We find that portfolios with a higher VaR are associated with higher average returns. In order to explore the empirical performance of VaR at the portfolio level, we use a time series approach based on 25 size and book-to-market portfolios. Based on monthly portfolio data for October 1992 to June 2008, the results show that VaR has greater explanatory power than the market, size, and book-to-market factors.
KEYWORDS: Value-at-risk, emerging market, Fama-French factors.
JEL: G32, C32.

This paper uses foreign direct investment (FDI) data from 39 developing countries for the period 2002–11 to explore whether the expected future turmoil risk of a country plays a significant role in determining FDI. It concludes that countries for which the expected future turmoil risk is very high are likely to have lower FDI inflows than countries for which the expected future turmoil risk is low, keeping all other factors constant. The results also illustrate that GDP per capita, democratic accountability, religious tension, and FDI inflows in the previous period are important determinants of FDI in developing countries.
KEYWORDS: Political risk, foreign direct investment, expected future turmoil risk.
JEL: F23, C33, C23, F21.

This study examines the impact of the 2008 global financial crisis on economic growth and employment in Pakistan. We conduct a time series analysis of quarterly data for 1997–2011, applying the autoregressive distributed lag bounds-testing approach and an unrestricted error correction model. Our analysis suggests that the impact of the crisis was transmitted primarily through two channels—the financial sector and trade—with a corresponding negative effect on economic growth and employment. Of the two channels, the magnitude of the trade effect is larger than that of the financial sector.
KEYWORDS: Financial crisis, financial stress, economic growth, cointegration.
JEL: O16, C51, C43, O4.

This study attempts to determine the factors that affect educated women’s decision to participate in the labor force. Based on a field survey conducted in the district of Multan, we find that a number of factors have a positive and significant impact on women’s decision to work. These include women who fall in the age groups 35–44 and 45–54, the coefficients of all levels of education, the presence of an educated husband, marital status, family structure, and family expenditure. The presence of an educated father, being an educated married woman, location, distance from the district headquarters, the husband’s employment status and income, and ownership of assets significantly reduces women’s labor force participation. The results of the earnings equation show that variables such as women who live in an urban area and their level of education and experience are associated with a substantial increase in earnings with each additional year. The number of children has a negative and significant impact on women’s earnings. The hours-of-work model shows that age and the number of completed years of education have a positive effect on working hours, while the number of dependents and the number of hours spent on household activities have a negative effect on working hours.
KEYWORDS: Human capital, labor force participation, earnings function, time allocation, Punjab, Pakistan.
JEL: D00, J21.

Over the last few years, the Pakistani economy has faced a variety of challenges which has led economic managers to focus more on immediate problems at the expense of long term structural issues. The purpose of the Lahore School’s Tenth Annual Conference on the Management of the Pakistan Economy was to help policy makers take a step back and look at some of the critical issues that Pakistan needs to face if it is to achieve growth in the medium to long term. Thus the central theme of the conference was ‘Pakistan in the Global Economy – Opportunities and Challenges’ and a range of key structural issues was discussed by a variety of experts. What made the conference unique was that many of these issues have not been discussed and debated thoroughly before in the Pakistani context. Some of the highlights of the conference were Asma Khalid’s (from the State Bank of Pakistan) extremely insightful analysis of the parallel foreign exchange market in Pakistan (which has not been analyzed in depth before) as well as the call by many of the presenters for a well-formulated industrial policy in Pakistan. Similarly, the conference also focused on some key export sectors (such as garments) as well as strategies for improving Pakistan’s export competitiveness and diversifying exports. Finally, some of the participants noted that in a rush to access new markets, Pakistan must tread carefully when agreeing to trade agreements with potentially large trading partners. As Pakistani policy makers sit and decide on economic strategies, it is absolutely critical that they pay very close attention to these issues.
KEYWORDS: Pakistan, economy, Pakistan, policy.
JEL: N/A.

This paper seeks to describe and analyze the parallel foreign exchange (FX) market in Pakistan. The very nature of this market implies that there is little formal documentation or data to describe it, and so any assessment will be, by definition, subjective. However, parties that transact in the parallel market are familiar with parts of it, on which basis this paper aims to give a comprehensive picture of the structure and evolution of this market in Pakistan. We start with a brief historical perspective, which flags the importance of workers’ remittances to the country and explains how the bulk of this inflow is transacted through the hundi/hawala network (informal moneychangers). We then place this network within the context of the larger FX market and show how it interfaces with the interbank market. We also discuss how many hundi/hawala agents have evolved into formal exchange companies and list the various sources and uses of FX transacted in the kerb market. The conclusion spells out the importance and resilience of the parallel FX market, the need to push toward full amalgamation with the formal FX market, and the key role of workers’ remittances in Pakistan’s macro-economy.
KEYWORDS: Pakistan, foreign exchange, informal economy, hundi/hawala, macro-economy.
JEL: F31, E44.

One of the most pressing issues concerning policymakers today is the choice of an exchange rate regime. Despite the intricacies of this problem, monetary authorities could narrow down their list of options if they were to focus on the following principles: full implementation to ensure credibility and synchronization with domestic realities and economic infrastructure. This paper proposes an optimal exchange rate regime for Pakistan based on a historical study of the outcomes and performance of different monetary stances adopted over the last 40 years.
KEYWORDS: Exchange rate, flexibility, regime, fear of floating, floating, pegging, Pakistan.
JEL: F31, E58, F41, E42, F33.