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.

One hears little about the Planning Commission’s Framework for Economic Growth launched a year ago. This is indicative of its inappropriateness and lack of consideration of Pakistan’s economy or its structures and political economy. The Framework avoids tackling the core issues of taxation, distribution, and equity. It privileges the market and free enterprise over the role of the state, and undermines and dismisses the significant role and contribution of the government and state in promoting growth, particularly at a time when market failure has made economists rethink the role of markets after 2008. By ignoring central issues related to politics and the articulation of power, and of issues that fall in the realm of political economy, the Planning Commission constructs a technicist script that has little value to the messy world of realpolitics.
KEYWORDS: Growth, political economy, Planning Commission, Pakistan.
JEL: O40, O1.

This article discusses the impact of the current stagflation in Pakistan on the labor market and poverty. The paper presents a preliminary explanation of why the labor market and poverty impact of the current stagflation may be far smaller than projected in recent studies, especially for the rural economy. The main conclusions that emerge are that (1) The overwhelming expected negative impact of low economic growth, high double-digit inflation, and crippling energy shortages on poverty and the labor market appear to have been cushioned by the large increase in remittances, rising wages in agriculture and services, and social safety nets; (2) there is, however, no reason for complacency since over 20 million people live in absolute poverty and that the economy remains in deep stagflation, (3) the PSLM (HIES) 2010/11 data should be made publicly available so that it can be subject to more critical analysis and (4) studies on poverty should be based on a close integration of macro-sectoral–micro-factors to fully capture the underlying “poverty dynamics.”
KEYWORDS: Macro-dynamics, economic growth, cycles, Pakistan.
JEL: F43, P46.

This article has a rather modest aim. In contrast to most analyses that abound, it submits that Pakistan’s energy crisis stems primarily from a suboptimal policy and only secondarily from governance issues. This does not mean that governance is not an important issue. With around 20 different organizations involved in the power sector—e.g., WAPDA, PEPCO, PPIB, AEDB, GENCOs, and IPPs—there is much scope for governance failures. In addition, there is much malfeasance perpetrated by political and other interests. Still, since governance mechanisms are significantly shaped by incentive systems and operating policy regimes, we will argue that the problem lies primarily in policy choices made earlier, and focus in particular on two elements of the policy that need to be revisited.
KEYWORDS: Power crisis, policy, governance, Pakistan.
JEL: G30.

Since the 1950s, Pakistan has been trying to industrialize by investing in industries that have low value-added, notably cotton textiles. Here, low value-added means that the export value of the cotton textiles less the value of the raw cotton used to make them was low relative to the cost of the investment needed to make the textiles, i.e., contrary to the usual assumption, cotton textile manufacture was capital-intensive. The cause was the protection of the importing countries. But goods with high value-added in this sense required advanced technical knowledge, which is mostly the proprietary knowledge of the firms whose research and development (R&D) has generated it. Over time, all the production of goods that do not require such technical knowledge has passed to low-wage countries whose mutual competition keeps the value-added low. Since Pakistan cannot compete in high-value-added goods, it must emulate the East Asian economies by collaborating with firms in high-wage countries—i.e., subcontracting them to make simple components—and progress through such collaboration to receiving the knowledge and training to making components with higher value-added.
KEYWORDS: Pakistan, textiles, protection, value-added, subcontracting.
JEL: O14.