Most empirical studies on sectoral change provide evidence in favor of the complementarities between manufacturing and services, claiming that both sectors generally grow in parallel. This study investigates the complementarities hypothesis for the SAARC countries, which have dominant services sectors but have not graduated to industrial status. We ask whether the rapid growth and value addition of services presents an opportunity or threat for value addition in manufacturing, when the latter sector is still at a premature stage. Our findings do not validate the complementarities between manufacturing and services overall in the case of the SAARC countries. However, there appear to be potential complementarities once services is interacted with trade variables.
KEYWORDS: Manufacturing sector, services sector, economic growth, SAARC.
JEL: O47, O14, N65.

This paper examines the effects of fiscal decentralization on the education sector for a sample of 62 countries. The results suggest that different sources of fiscal decentralization have distinct effects on education expenditure and quality. While subnational governments that are financed through own-tax revenues are more likely to increase the funds allocated to education, they also seem less concerned with maintaining teaching quality. This study provides evidence that decentralized structures cater better to local social needs. Fiscal decentralization is, therefore, an important policy instrument for achieving social goals.
KEYWORDS: Fiscal decentralization, education expenditure, teaching quality, panel data.
JEL: I21, H40, H52, H75, H71.

While corporate diversification is a fundamental issue both in the management literature and in corporate policy, the question that remains is whether it destroys or enhances firm value. This empirical study of the corporate diversification–value relationship for Pakistani firms looks at the role of asymmetric information and insider trading over a 10-year sample period, 2005–14. Using the industrial entropy index and purchase ratio to capture corporate diversification and insider trading, respectively, the study provides empirical evidence that questions the agency theory-based explanation of the corporate diversification–value relationship. Our results show that, in cases of asymmetric information, insiders increase the purchase of their firms’ shares in the open market when diversification is high. This contradicts the corporate diversification–value destruction stance of agency theory as well as the idea that outside investors’ undervaluation occurs due to information asymmetries. These results have strategic implications for corporate diversification strategies and are relevant to firm managers, regulators and shareholders.
KEYWORDS: Corporate diversification, agency effect, information asymmetry, insider trading, Pakistan.
JEL: G32, G14.

This paper uses the multivariate GARCH dynamic conditional correlation framework proposed by Engle (2002) to investigate time-varying conditional correlation between developed markets and emerging and frontier Asian (EFA) markets. It employs monthly returns data for 2000–14 to capture the potential contagion in developed (the US, Europe and Japan) and EFA stock markets. A key finding is the increasing conditional correlation among EFA and developed markets, especially during the 2008 financial crisis. The study finds that, during periods of financial turmoil, EFA markets are exposed to shocks and spillover effects from developed markets along with a substantial shift in the regime of conditional correlation. This has important implications for investors interested in diversifying portfolios in EFA markets during financial crises.
KEYWORDS: Emerging and frontier Asian markets, financial contagion, financial crisis, dynamic conditional correlation.
JEL: G11, G15, F65, F3.

By mobilizing savings, financial markets play a crucial role in economic development. Given that the literature does not fully explore the nexus between financial activities and tax revenue, this study attempts to analyze the role of financial markets in generating tax revenue in Pakistan, using time series data for the period 1975–2014. It finds that, in the long run, the number of bank branches and market capitalization have a positive and significant impact on tax revenue. While credit to the private sector has a bidirectional relationship with tax revenue, public sector credit has an insignificant impact. In the short run, only the number of bank branches and market capitalization have a significant impact on tax revenue.
KEYWORDS: Financial sector, financial liberalization, tax revenue, Pakistan.
JEL: C32, G38, H21, G1.

Since the early 1990s, Pakistan’s economy has continued to lose its earlier growth momentum, except for a brief spurt in 2002–06. This has now become cause for considerable concern and urgent policy action is needed to revive the economy and move it to a higher growth trajectory. This slowdown during a period of rapid globalization (at least till 2008) and unprecedented technological advancement has raised fundamental questions as to the growing lack of competitiveness, both at the global level as well as against cheaper and better-quality imports in the domestic economy. In addition, recurring balance-of-payments crises have forced Pakistan to frequently seek IMF assistance and resort to severe contractionary policies to restore macroeconomic stability.
KEYWORDS: Pakistan, economy, IMF, 12th annual Conference, Management of the Pakistan Economy.
JEL: N/A.

Indigenous scientific research is vital for a country’s long-term economic growth. The simple transference of technology or acquisition of expertise ultimately has developmental limitations. Examples from the hydrocarbon industry clearly illustrate this paradox: oil-rich developing countries can afford to procure expert advice with ease, but rarely develop the new skills essential to make the next technological breakthrough or scientific paradigm shift. Underlying this failing is often the absence of a culture of open scientific enquiry. For resource-deficient countries, this is compounded by the dearth of infrastructure. Such countries argue that they cannot afford to finance scientific research, although this does not always require large investments up front. Software research and development is a good example, requiring primarily technical knowhow, skilled labor and a desire for innovative success. The deficit of scientific research in Pakistan stems from many of these factors, even though the requisite human resources are available in abundance. Innovation and entrepreneurship requires a special mix of encouragement and incentives from the government and industry. This paper outlines some of these issues based on the author’s experience of several decades of research leadership and funding in the US and Europe, and his involvement in transferring advanced scientific knowledge to developing as well as developed countries.
KEYWORDS: Scientific research, entrepreneuership, development, Pakistan.
JEL: L26, O30.

Labor productivity growth has received scant attention in Pakistan even though it is the foundation of rising living standards and a country’s ability to compete in the world market. Productivity rises when producers invest and introduce new technologies to reduce production costs and improve the quality and range of goods produced. Competition among producers entails a constant search for areas of improvement, tapping new technologies and finding innovative ways to produce and deliver the output to consumers. This is entrepreneurship. The first part of the paper discusses productivity growth and its drivers. The second part explains the critical importance of technological progress and innovation in economic growth and the catch-up process. Entrepreneurship and how it might be stimulated in Pakistan is discussed next. The paper concludes with a few ideas on how science and technology might be promoted in Pakistan.
KEYWORDS: Labor, productivity, entrepreneurship, Pakistan.
JEL: E24, O14.

This study focuses on the estimation of the covariance matrix as an input to portfolio optimization. We compare 12 covariance estimators across four categories – conventional methods, factor models, portfolios of estimators and the shrinkage approach – applied to five emerging Asian economies (India, Indonesia, Pakistan, the Philippines and Thailand). We find that, in terms of the root mean square error and risk profile of minimum variance portfolios, investors gain no additional benefit from using the more complex shrinkage covariance estimators over the simpler, equally weighted portfolio of estimators in the sample countries.
KEYWORDS: Variance-covariance matrix, mean-variance criteria, portfolio management.
JEL: G11, G15, C51, C13, C52.

This paper reviews Pakistan’s productivity performance over the last 35 years (1980–2015) and identifies factors that help explain the declining trend in labor productivity and total factor productivity (TFP), both of which could have served as major drivers of productivity growth – as happened in East Asia and more recently in India. A key finding is that the maximum TFP gains and their contribution to economic growth are realized during periods of high-output growth. The lack of sustained growth and low and declining levels of investment appear to be the most important causes of the low contribution of TFP to productivity growth, which has now reached levels that should be of major concern to policymakers vis-à-vis Pakistan’s growth prospects. Using the endogenous growth model, we examine the contribution of physical capital, human capital and TFP to labor productivity. The results suggest that, over these 35 years, the contribution of physical capital and education remains modest and there has been a declining trend in TFP growth. This shows that Pakistan’s economy has not taken full advantage of the favorable technological developments and rapid globalization of the period. We also question the view expressed in recent studies that Pakistan’s growth has been driven primarily by factor inputs, namely labor and capital, and not by TFP growth. The paper argues to the contrary that it is the lack of investment in and growth of the stock of capital embodying the most recent knowledge and technology that has inhibited TFP growth post-1990. Finally, there is an urgent need for further research to understand the dynamics of growth in services and to raise TFP in this sector as India has done post-1990.
KEYWORDS: Growth, labour, capital, labour productivity, total factor productivity, Pakistan.
JEL: D24, O47, E01.