The Lahore School’s Ninth Annual Conference on Management of the Pakistan Economy took place on 20 – 21 March, 2013 and the topic of this year’s conference was: “Human Capital Development for Sustained Economic Growth”. The conference participants ranged from leading economists and researchers in Pakistan, India, Sri Lanka, the United Kingdom, and the United States to leading Pakistani policy makers and NGO representatives. Over the course of two days, 14 research paper presentations were made on topics related to public service delivery, with a special emphasis on the education and health sectors as well and human development and social safety nets.
KEYWORDS: Pakistan, USA, India.
JEL: N/A.

This paper investigates the causal impact of public school enrolment on child labor. Our main hypothesis is as follows: Is school enrolment a substitute for child labor? Recognizing that schooling and work choices are jointly determined by parents in a utility maximizing framework, the study applies an instrumental variable solution to the problem of simultaneity. This approach entails using the receipt of free textbooks and access to a public primary facility as instruments for public school enrolment. Using data from the Multiple Indicator Cluster Survey for 2007/08, our working sample consists of children between 5 and 14 years of age, which makes up 25 percent of the surveyed population. The results suggest that public school enrolment can be used as a substitute for child labor. On average, a 1 percentage point increase in a household’s enrolment ratio has the potential to reduce the number of hours of paid labor by almost 5 percentage points, ceteris paribus. This substitutability is highest among poor, urban, male children. Moreover, the incidence of child labor is higher among larger poor families.
KEYWORDS: Child labor, school enrolment, instrumental variable, tobit, fixed effects, education subsidy, Pakistan.
JEL: F66.

The economic and institutional structure required to successfully adopt and implement an inflation targeting framework (ITF) is often lacking in emerging economies. This paper evaluates these structures both qualitatively and quantitatively for Pakistan’s economy. Although our comprehensive assessment finds that many of the core requirements remain unrealized, the literature and real-time experience argue that an ITF remains possible for emerging economies even in the absence of these conditions. We investigate whether—were the State Bank of Pakistan to adopt an ITF—there exists a stable and significant relationship between the policy rate (monetary tool) and inflation measure (objective). It is important to analyze this bivariate relationship, given the key role of the interest rate in mitigating deviations between actual and target inflation when working within an ITF. To illustrate this relationship, we use Granger Causality test, but our estimates fail to find any significant link between the interest rate and inflation. On the basis of our overall findings, we suggest that Pakistan, in the absence of most of the fundamental requirements of an ITF, is perhaps not yet ready for it.
KEYWORDS: Inflation targeting, Pakistan, monetary policy.
JEL: E52, E30, E58.

Clusters have the potential to grow, but their potential in Pakistan is rarely analyzed and examined. This study examines the knitwear cluster of Lahore in general and the performance of enterprises in particular. Most of the literature on clusters in Pakistan has not looked at the characteristics of the individual enterprises that play a pivotal role in cluster development. Using primary data collected from 59 finished-knitwear producers in Lahore, this study assesses the role of human capital in acquiring multifaceted innovations. We find that general human capital acquired by schooling and specific human capital acquired through operational experience is associated with the size of the enterprise. Additionally, specific human capital acquired through operational and marketing experience is strongly correlated with improved marketing channels.
KEYWORDS: Clusters, human capital, schooling, multifaceted, Pakistan.
JEL: E24.

According to the Harberger-Laursen-Metzler (HLM) effect, an exogenous temporary increase in the terms of trade leads to an improvement in the current account balance. This paper uses a recursive vector autoregression to investigate empirically the existence of the HLM effect in Pakistan, using a time series dataset for the period 1980–2009. Two important results emerge. First, real income deteriorates with an improvement in the terms of trade. Second, the current account balance also responds negatively to innovations in the terms of trade, which implies that the HLM effect does not exist in Pakistan.
KEYWORDS: Terms of trade, current account, economic growth, recursive VAR, Pakistan.
JEL: C3, F32, F41.

Education is one of the most important means of economic development, and there is consensus among policymakers that it is better to be educated than not. The debate on education is not, therefore, whether it is good or bad, rather it centers on whether the state should intervene in its provision. Public provision of education at the school level is generally considered one of the most important investments for creating social opportunities to help the wider population actively participate in various economic activities. This study investigates whether public spending on education in Pakistan is pro-poor at various levels of schooling. We find that public spending at the primary and secondary level is progressive, while higher education spending is regressive. These results hold at the national and provincial level. Based on these findings, we recommend that the government increase its spending on primary, secondary, and technical education. Higher education, however, should be provided on merit, and the private sector should be encouraged to provide high-quality education.
KEYWORDS: Education, economic, development, Pakistan.
JEL: I25.

This study estimates a set of fixed effects/random effects models to ascertain the long-run relationships between poverty, income inequality, and growth using pooled data from eight household income and expenditure surveys conducted between 1992/93 and 2007/08 in Pakistan. The results show that growth and inequality play significant roles in affecting poverty, and that the effect of the former is substantially larger than that of the latter. Furthermore, growth has a significant positive impact on inequality. The results also show that the absolute magnitude of net growth elasticity of poverty is smaller than that of gross growth elasticity of poverty, suggesting that some of the growth effect on poverty is offset by the rise in inequality. The analysis at a regional level shows that both the gross and net growth elasticity of poverty are higher in rural areas than in urban areas, whereas the inequality elasticity of poverty is higher in urban areas than in rural areas. At a policy level, we recommend that, in order to reduce poverty, the government should implement policies focusing on growth as well as adopting strategies geared toward improving income distribution.
KEYWORDS: Poverty, inequality, growth, pooled data, Pakistan.
JEL: I32, O40.

McCartney, Mathew, Pakistan – The Political Economy of Growth, Stagnation and the State, 1951–2009, Routledge, London and New York, ISBN13: 978-0-415-57747-2 and ISBN13: 978-0-203-81476-5, 2011, pp. 241. This book is, one can assert without a doubt, sui generis, unique in that it provides an entirely new perspective on the development of Pakistan’s political economy. It is a thorough and objective analysis, an eye-opener, and the author leaves no stone unturned.
KEYWORDS: Pakistan, development, Growth, capital, political economy.
JEL: N/A.

The Lahore School’s Eighth Annual Conference on Management of the Pakistan Economy took place on 16 – 17 May, 2012 at the school’s Main Campus. The topic of this year’s conference was: “Towards Accelerated Economic Growth in Pakistan: Its Need and Feasibility”. It was attended by the country’s leading economists, Pakistani and foreign academics, and renowned researchers from India, Sri Lanka, United Kingdom, and United States. Some 25 research papers and oral presentations were made during the two days of the conference. The richness of the discussions during the two days of the conference cannot be adequately captured in a short report but, as a record of the salient issues raised, it could be useful for the participants as well as others interested in the subject. Since discussions in different sessions tended to overlap, what is offered here is a composite summing-up rather than a chronological account of the actual proceedings.
KEYWORDS: Pakistan, Lahore School, Annual Conference, Pakistan economy.
JEL: N/A.

This article attempts to show that a strategy for accelerated growth for Pakistan is both necessary and feasible. Pakistan’s macroeconomic conditions are broadly similar to some of its more rapidly growing neighbors. The country’s macroeconomic imbalances and inflation need to be brought down, but the required adjustment does not entail precipitate action, which could further depress the economy. We develop a “Heterodox Scenario,” which shows that macroeconomic adjustments can be phased in over the next few years and will be easier to make if the economy were to grow more rapidly. For accelerated growth to materialize, as a minimum, determined steps are needed to overcome the energy crisis, sharply raise the investment rate—particularly, private investment—and strengthen Pakistan’s competitiveness in the world market. A national strategy is needed toward that end.
KEYWORDS: Growth, inflation, economy, strategy, Pakistan.
JEL: O10, E22.