While much research in economic development has pointed out the negative impact of corruption on growth, less research has been devoted to studying the relationship between corruption and demographic transition. This theme is developed into an overlapping generation model in which corruption affects fertility decisions through its negative impact on physical capital formation and its productivity. The analysis indicates that, when the level of corruption is high, the productivity of capital is low and fertility is excessively high because of the relatively low cost of raising children. Theoretical and empirical results show that, in both developed and developing countries, corruption creates distortions and leads to low-equilibrium traps. Introducing child quality into the model accelerates the pace of demographic transition and produces effects similar to reducing the level of corruption. Empirical estimates confirm the predictions of the model and support the proposition that fertility declines in less corrupt countries.
KEYWORDS: Endogenous fertility, corruption, productivity of physical capital, Economic growth.
JEL: F43, 012, J13, 016.

This article shows how institutional quality can affect the relationship between trade and growth. Our model looks at an economy in which the export sector is a high-innovation sector. In this economy, a government that is politically threatened by innovation can use its tariff policy to block innovation and increase domestic revenues. In this case, higher tariffs reduce economic growth and the government faces a tradeoff: It can either (i) raise tariffs, collect greater rents, and increase stability; or (ii) it can reduce tariffs and increase long-run growth and instability. When the quality of a country’s institutions are reflected in the costs of increasing tariffs, it can be shown that countries with strong institutions gain more (in terms of growth) from trade than countries with weak institutions, due to the effect of institutions on trade policy. It is also possible to show that the quality of institutions in one country can spill over into another by affecting its trading partner’s growth rate of income. However, these results are reversed in the case where a country has a highly innovative domestic sector—this explains the tariff-growth paradox in which countries experience higher growth with higher tariffs in earlier stages of development, but higher growth with lower tariffs in later stages of development.
KEYWORDS: Economic growth, institutions, trade, tariffs.
JEL: F13, E1, O41, O43.

This study is an attempt to investigate trade–labor market linkages in Pakistan. Our main hypothesis that trade liberalization leads to an increase in labor-demand elasticity is empirically verified using a panel data approach for the period 1970/71–2000/01 for 22 selected manufacturing industries in Pakistan. We use ordinary least squares to estimate models in levels and first-differences, in addition to a fixed effects model. Overall, our findings suggest weak evidence of increased labor-demand elasticity as a result of trade liberalization in Pakistan’s manufacturing sector. Nor does the study find support for a positive labor market and trade linkage from an employment point of view—as otherwise suggested by standard trade theory. This may be due to increased capital intensity in the manufacturing sector by time, and the infusion of new technology. It could also be attributed to labor market imperfections preventing trade liberalization from favorably influencing employment conditions in Pakistan. Our policy recommendations based on the study’s results stress the need for skill enhancement measures to increase labor productivity, helping it become competitive according to the demands of globalization.
KEYWORDS: Trade openness, labor-demand elasticity, Pakistan.
JEL: F16.

The degree of substitutability of different monetary assets serves as a valuable source of information for Pakistan’s monetary authorities in the context of money demand analysis. Barnett’s (1980) concept of the micro-foundations of money demand has paved the way for a more comprehensive demand system analysis. Locally flexible functional forms are unable to estimate substitution elasticities at all data points, and thus, we use the asymptotically ideal model, which is a semi-nonparametric globally flexible functional form. Our data on income, price, and substitution elasticities show that there is less-than-perfect substitution among monetary assets. The results of Allan and Morishima elasticities show that the former are inherently biased toward showing monetary assets as complements, making Morishima a better choice. The study recommends that it is high time Pakistan’s monetary authorities abandoned the simple-sum aggregation method, which assumes perfect substitution among monetary assets.
KEYWORDS: Substitution, semi-nonparametric, globally flexible, Morishima elasticity.
JEL: E41.

Land titling and ownership rights have recently been advocated in policy circles as a powerful tool for poverty reduction. The lack of formal titling prevents the use of property as collateral, and hence prevents the capital embedded in these assets from being "unlocked." Some studies show a fairly insignificant relationship between informal loans and property rights, while others indicate a significant positive relationship between formal loans (credit cards, bank loans, etc.) and land ownership. The objective of this article is to look at the impact of owned titled land on formal and informal loans among urban households in Lahore. Here, formal loans are seen in terms of bank loans and credit cards while informal loans are characterized as loans taken from relatives, friends, or local moneylenders. The findings suggest that land ownership has a positive and significant relationship with formal loans but no relationship with either bank loans or informal loans alone.
KEYWORDS: Property rights, land ownership, credit access, formal loans, urban households, Working Capital.
JEL: O15, O16, D14.

This study explores the association between working capital management and the profitability of textile firms in Pakistan. The efficiency of working capital management is reflected by three variables: cash conversion efficiency, days operating cycle, and days of working capital. We use return on assets, economic value added, return on equity, and profit margin on sales as proxies for profitability. A balanced panel dataset covering 160 textile firms for the period 2000–05 is analyzed and we estimate an ordinary least squares model and a fixed effect model. Return on assets is found to be significantly and negatively related to average days receivable, positively related to average days in inventory, and significantly and negatively related to average days payable. Also, return on assets has a significant positive correlation with the cash conversion cycle, which would suggest that a longer cash conversion cycle is more profitable in the textiles business. The findings of the regression analysis show that average days in inventory, average days receivable, and average days payable have a significant economic impact on return on assets. The findings of the fixed effect model reveal that average days in inventory and average days receivable both have a significant impact on return on assets.
KEYWORDS: Working Capital, profitability, textile sector, Pakistan.
JEL: C33, G32.

Pakistan faces economic challenges in the summer of 2011 with regard to its balance of payments and its public finances, resulting primarily from the suspension of an ongoing International Monetary Fund (IMF) program, the associated cessation of program lending by other multilateral financial institutions, and the termination of the US’s cash logistics support. This paper argues that these challenges can be met without resorting to a new program with the IMF. The policy measures recommended with regard to the balance of payments are: (i) to allow the orderly depreciation of the exchange rate in the foreign exchange interbank market by about 5–15 percent or to PKR90–100/US dollar, (ii) to impose import surcharges of 10–20 percent on nonessential imports, and (iii) to re-impose measures originally imposed to increase the cost of import letters of credit. Public finance-related policy measures recommended on the expenditure side are: (i) to gradually reduce the State Bank of Pakistan’s policy rate by 300 basis points in the fiscal year (FY) 2012 from its present level of 13.5 percent, thereby reducing the interest burden on public debt; and (ii) to utilize these savings to restart the stalled public sector infrastructure development program. These measures will also stimulate economic activity. On tax policy, the paper recommends that: (i) the sales tax rate be increased from its present 16 percent to 18 percent, (ii) custom duties be increased by 10–20 percent on nonessential imports (as also recommended for the balance of payments, and (iii) regulatory and excise duties be increased and their original (FY2011) coverage restored.
KEYWORDS: Economic Policy, Balance of Payments, Public Finance, Pakistan.
JEL: H29, G18.

This paper proposes that the underlying cause of the macroeconomic problems facing Pakistan today are a series of supply shocks which have constrained output growth. It is argued that while the current debate has solely focused on government expenditures and revenues, it is critical to also address the acute energy shortages which is constraining supply. The paper goes on to present four recommendations for breaking out of the present stagflation: (i) prudent macroeconomic management, (ii) reviving the role of the government in development while restoring fiscal balance, (iii) loosening monetary policy in order to spur the private sector, and (iv) improving social safety nets.
KEYWORDS: Economic Growth, Supply Shock, Pakistan.
JEL: F43, P44.

This paper looks at the major factors limiting economic growth in Pakistan. The paper then analyzes the structural problems faced by Pakistan today and goes on to discuss the challenges facing monetary policy makers in Pakistan as well as the problem of budget and trade deficits. The paper concludes with a discussion on the key institutional changes needed in Pakistan.
KEYWORDS: Economic Growth, Budget Deficit, Trade Deficit, Pakistan.
JEL: F50, F49.

Compared to the historical and even contemporary experience of India, Pakistan has long been regarded as a “dependent” economy. Gross domestic product growth in Pakistan is typically argued to be contingent on external factors: trade, financial flows, and the interdependence of asset markets. Beyond the rhetoric, there is only ambiguous and contradictory empirical evidence to support this view. This paper offers a new methodology, that of case studies of growth and stagnation, to test the hypothesis of dependency. The results show that growth in Pakistan is influenced by external factors, but that growth is driven primarily by the dynamics of the domestic economy.
KEYWORDS: Economic Growth, Dependency, Crisis, Pakistan.
JEL: O16, F43.