Pakistan and India have not yet normalized trade relations and gained the full benefits of bilateral trade despite significant developments to this end since 2011. Pakistan has yet to reciprocate the most-favored-nation status granted by India. This study investigates the benefits of trade liberalization between the two countries by studying the global competitiveness of Pakistan’s industrial sector from a policy perspective. We construct a revealed comparative advantage index for manufacturing products (HS 2-digit level) for Pakistan, India, and China for the period 2003–12, and then identify the changing patterns of comparative advantage for Pakistan. We find that 18 industries should be protected upon liberalizing trade with India. These industries are termed ‘vulnerable’ as they have moved from either borderline competitiveness to becoming uncompetitive or vice versa. Additionally, the excessive concessions granted to China in its free trade agreement with Pakistan and the resistance to opening up trade with India may have resulted in inefficient trade, i.e., imports from a less competitive partner and exports to a less lucrative market. We aim to establish a direction for further research to determine the ex ante impact of trade with India on the economy via a change in the production levels of these vulnerable industries, given the impact of free trade with China and the availability of Chinese substitutes.
KEYWORDS: Pakistan-India trade, revealed comparative advantage, manufacturing exports, trade liberalization.
JEL: F10, F11, F12.

Growing economic cooperation between the Pakistani and Turkish governments—manifested in the recently proposed preferential trade agreement (PTA)—has served to strengthen the historically good relations between both countries. This paper explores the trade relationship between Pakistan and Turkey in an attempt to analyze the potential gains for Pakistan under the proposed PTA. We evaluate potential trade opportunities using descriptive statistics and three trade indices: a trade complementarity index, export similarity index, and intraindustry index. Our findings suggest that Pakistan’s trade surplus with Turkey, strong export similarities, and intra-industry trade would allow greater opportunities for firm synergies between the two countries. This, in turn, would help Pakistan achieve greater value addition and a broader market base for its exports. The Government of Pakistan should, therefore, lobby strongly for the proposed PTA (which might later evolve into a free trade agreement) and leverage the agreement in such a way that Pakistan can maximize its potential benefits.
KEYWORDS: Preferential trade agreement, Pakistan, Turkey, trade complementarity index, export similarity index, intraindustry trade index.
JEL: F14, F15, F13.

This paper investigates the conventional import demand function for Pakistan using time-series data sourced from the World Development Indicators for the period 1970 to 2010. Using a vector error correction model and impulse response functions, we show that, for the given period, relative prices and income lose their significance as long-run determinants of import demand. This indicates the need for additional determinants. We compare the residuals of the conventional import demand function with those of a model that includes the terms of trade and foreign exchange availability (in addition to the conventional parameters) as determinants of import demand, and find that the latter largely resolves much of what is nondeterministic in the former model. The paper also explores the peculiar trend of a falling imports-to-GDP ratio (from the 1980s to the 2000s), which is unusual for a developing country. In a subsidiary regression analysis for this period, we argue that falling net capital inflows explain this persistent fall in the imports-to-GDP ratio. The recovery thereafter, when Pakistan started catching up with other developing economies, may have been responsible for the 2008 balance-of-payments crisis.
KEYWORDS: Pakistan, import demand function estimation, capital inflows, balance of payments.
JEL: F140.

With growing global and regional economic integration, Pakistan, too, is actively seeking to enhance regional economic cooperation; it has entered into various regional and bilateral trade agreements that encompass trade policies ranging from import substitution to export promotion. However, the country’s imports remain concentrated in a few product categories as well as in terms of origin. Despite several regional trade agreements, Pakistan has not been able to source its imports from regional trading partners. This stems from constraints relating to trade facilitation, regulatory frameworks, and physical infrastructure. Our empirical analysis shows that, while changes in real income and import prices have a significant effect on import demand in the long run, variations in the domestic price level do not. If Pakistan is to grow at 7–8 percent per annum as envisaged in official development plans, it will continue to experience strong growth in imports to meet its rising industrial and consumer needs. Pakistan needs to develop a strategy to use regional integration schemes as a platform for enhancing trade ties in both imports and exports. This will ensure greater trade and investment links with its regional trading partners, helping to lower the transaction costs of trade and boosting economic growth.
KEYWORDS: Pakistan, import demand, regional integration.
JEL: F13, E64.

This paper traces the evolution of “discriminatory” international trading arrangements: (i) regional trade agreements (RTAs), which offer their members better access to each other’s markets; and (ii) preferential trade agreements (PTAs), which offer developing and least developed countries (LDCs) nonreciprocal access to certain markets. The number, coverage, and depth of RTAs have increased tremendously in the last 25 years, potentially leading to even deeper integration among dynamic economies. However, countries on the margin of RTA activity may be in danger of not benefitting from the growth in international trade. The number of countries offering PTAs has also increased with many developing countries now providing LDCs with nonreciprocal market access. This significant level of RTA and PTA activity raises serious challenges for countries such as Pakistan, which remain on the margins. Efforts to rectify this should, in the short term, focus on negotiating RTAs with selected countries to build the required capacity for such negotiations and improve Pakistan’s visibility on the RTA landscape. The country must aggressively seek and defend nonreciprocal market access under PTAs, with particular focus on such GSP schemes as offer additional benefits. Medium-term actions should aim to improve competitiveness by investing in infrastructure, energy, and human resources; adopting a coherent and supportive macroeconomic policy framework; and improving law and order. This will help Pakistan enter into and benefit from RTAs with dynamic economies while substantially reducing its dependence on PTAs.
KEYWORDS: Pakistan, WTO, regional trade agreements, preferential trade agreements, GSP.
JEL: F13, F40.

Recognizing that trade facilitation has contributed significantly to reducing costs and time in cross-border trade, World Trade Organization (WTO) members adopted the new Trade Facilitation Agreement (TFA) at the last ministerial conference in Bali. WTO members are now gearing up to implement the commitments ensuing from the TFA in accordance with the special and differential treatment stipulated for developing countries. This paper assesses the impact of the TFA on Pakistan’s national trade policy and shows how the process of policy formulation in Pakistan should be adjusted so that the agreement can be promptly and correctly implemented on a sustainable basis.
KEYWORDS: Pakistan, world trade organization, trade facilitation agreement (TFA).
JEL: F13, F40.

Regional trade has been an important factor in the economic success of many countries. Within most trading blocs, intra-regional trade comprises 40 percent or more of each member country’s individual trade. However, for the regional arrangements of which Pakistan is a member, intra-regional trade accounts for less than 5 percent. Pakistan’s strategic location is its greatest asset, but it has not leveraged this to its advantage. Although it was a relatively forward-looking country until the mid-1960s its policies have not been favorable to promoting trade and economic development since then. While other successful developing countries have espoused liberal trade regimes since the 1980s—resorting to protectionism only on a selective basis—Pakistan continues to rely on import substitution policies. Clearly, the country needs to revisit its regional and global trade policies.
KEYWORDS: regional trade, Central Asia, regional trade routes, ports, Gwadar.
JEL: F10, L50.

The objective of this study is to understand why parents in rural areas of Punjab, Pakistan, choose to send their children to private schools when free public schools are available. The study utilizes the Privatization in Education Research Initiative (PERI) school choice dataset compiled by the Lahore School of Economics in collaboration with the Punjab Bureau of Statistics. These data provide rich information on parents’ perception of their child’s school relative to alternative schools he or she could have attended. The findings suggest that parents’ perceptions play an important role in school choice. In particular, their perceptions of school quality and employment opportunities emerge as key determinants of private school choice. Additionally, expenditure on and access to private schooling relative to public schooling as well as the socioeconomic status of the household have a significant impact on parents’ probability of choosing a private school for their child.
KEYWORDS: School choice, public vs private, rural Punjab, Pakistan.
JEL: A19, H13, R20.

This study investigates the impact of domestic and foreign currency-valued exchange rate volatility on the export and import demand functions with reference to Pakistan’s trading partners. We use GARCH-based exchange rate volatilities and the least-squares dummy variable technique with fixed-effects estimation to measure the volatility impact on both demand functions. The study evaluates a series of exchange rates from 1970:01 to 2009:12 to compare the long-run impact of volatility with that of the short run. The results show that, when Pakistan employed the US dollar as the vehicle currency with its trading partners, volatility discouraged both imports and exports. In contrast, both the import and export demand functions remained unaffected by volatility distortions when Pakistan traded with its developing partners using bilateral exchange rates valued in domestic currency terms. In policy terms, this implies that Pakistan should opt for direct domestic currency when trading with middle- and low-income countries.
KEYWORDS: GARCH models, foreign exchange markets, volatility, panel data, fixed-effects model, international financial markets, foreign exchange policy, trade, Pakistan.
JEL: C53, F1, F31, C23, G15, F44, O24.

This study focuses on the impact of trade liberalization on firm entry and exit in Punjab’s export manufacturing sector over the decade 2001–10. As far as the province’s export industries are concerned, real exchange rate depreciation attracts new firms but also leads weaker firms to exit. A reduction in local or international tariffs, however, has no significant impact on firm entry or exit.
KEYWORDS: trade liberalization, exchange rates, firm entry, Pakistan.
JEL: F41.