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Financing Constraints: Determinants and Implications for Firm Growth in Pakistan
Hamna Ahmed and Naved Hamid
Published:Sept 2011
This study has a twofold objective: (i) to investigate the determinants of
firm growth, specifically the extent to which finance constrains enterprise
growth; and (ii) to explore the determinants of external financial access in
Pakistan. External financial access is defined as access to credit through
institutional sources such as private commercial banks, nonbank financial
institutions, and state-owned banks and agencies. The study uses data from the
second round of the Investment Climate Assessment Survey conducted by the
World Bank in FY 2007. The methodology entails using an instrumental variable
approach to estimate the impact of external financial access on firm growth while
employing a probit model to explore the determinants of external financial access.
The results suggest the following: First, finance is a binding constraint to firm
growth in Pakistan—a 10 percent increase in the working capital financed
through external sources is predicted to increase the average annual growth rate
by 5.6 percentage points. Second, financial depth is important for access—across
the country, access is better where there is greater penetration of financial
infrastructure. Third, a range of internal factors such as size, export status,
quality of human capital, and organizational form emerge as important
determinants of external financial access in Pakistan.
KEYWORDS:
Financial Access,
Firms,
Financial Depth,
Pakistan.
JEL:
C36,
043.
Norms of Cooperation, Trust, Altruism, and Fairness: Evidence from Lab Experiments on Pakistani Students
Theresa Thompson Chaudhry and Misha Saleem
Published:Sept 2011
A rich area of economic research focuses on the role of controlled
experiments to understand interactions between agents and agents’ own deepseeded
preferences as they pertain to pro-social behavior. Four of the most
common games—the prisoner’s dilemma, and the trust, ultimatum, and dictator
games—have been used both in laboratory and field settings, and with student
and nonstudent participants. Cardenas and Carpenter (2008) have compiled
evidence for these four games that has been collected from behavioral experiments
conducted in the US and a number of developing countries. In this paper, we
wish to add to the existing evidence by presenting the results of lab experiments
carried out on a population of economics students at a university in Lahore.
KEYWORDS:
Behavioral Environment,
Games,
Lahore,
Pakistan.
JEL:
C73,
C93.
Prospects for Cooperative Marketing among Surgical Instrument Producers in Pakistan
Theresa Thompson Chaudhry
Published:Jan - June 2011
Given that clustered firms in developing countries generally sell their
goods through multinational firms, we seek to determine under what conditions
might clustered surgical instrument firms band together and form a cooperative
to “break out” of their relationship with multinational buyers to market their
own goods. Our results, based on a survey of surgical instrument producers in
Sialkot, Pakistan, demonstrate that firms are more likely to be interested in such
initiatives once they have already had some direct experience in marketing, such
as selling products under their own brand name and having already sold some
goods directly to hospitals. Firms that have had relationships of longer duration
with customers tend to be less likely to be interested in joint action initiatives.
This indicates that a higher opportunity cost of engaging in joint action (as
proxied by relationships of longer duration) reduces the likelihood of cooperative
marketing initiatives in clusters.
KEYWORDS:
Surgical instruments,
goods,
cooperative,
market,
Pakistan.
JEL:
D24,
M31,
J54.
The Trade Potential of Pakistan: An Application of the Gravity Model
Nazia Gul and Hafiz M. Yasin
Published:Sept 2011
This paper attempts to estimate Pakistan’s trade potential, using the gravity model of trade. Panel data for the period 1981-2005 across 42 countries is employed in the analysis. The coefficients obtained from the model are then used to predict the country’s trade potential worldwide as well as within specific trading regions. The results reveal that Pakistan’s trade potential is highest with countries in the Asia-Pacific region (the Association of Southeast Asian Nations [ASEAN]), the European Union (EU), the Middle East, Latin America, and North America. Specifically, the maximum potential exists with Japan, Sri Lanka, Bangladesh, Malaysia, the Philippines, New Zealand, Norway, Sweden, Italy, and Denmark. Therefore, Pakistan should explore ways and means to further improve its trade relations with the countries concerned, and also concentrate on ASEAN, the Middle East, and the EU to increase its market share as far as possible. The volume of trade between Pakistan and other members of the South Asian Association for Regional Cooperation (SAARC) and Economic Cooperation Organization (ECO) is very low, despite the existence of significant potential. The main obstacles to this end are the political and social tensions among neighboring countries, particularly between Pakistan and India, which are the main players of SAARC. The same obstacles exist in the case of the EU and NAFTA, where Pakistani exports are adversely affected by political considerations.
KEYWORDS:
Trade potential,
gravity model,
Pakistan.
JEL:
O16,
F19.
Comparative Advantage of Major Crops Production in Punjab: An Application of Policy Analysis Matrix
Muhammad A. Quddus and Usman Mustafa
Published:Jan - June 2011
This study uses data from 1999/2000 to 2004/05 to determine the relative efficiency of major crops (wheat, rice, sugarcane, and cotton) in Punjab (Pakistan) and their comparative advantage in international trade as measured by economic profitability and the domestic resource cost (DRC) ratio. An economic profitability analysis demonstrates that Punjab has a comparative advantage in the domestic production of wheat for self-sufficiency but not for export purposes. In basmati production, Punjab has a comparative advantage, and increasing Basmati production for export is a viable economic proposition. The nominal protection coefficient (NPC), effective protection coefficient (EPC), and DRC for Irri rice are more than 1: the given input-output relationship and export prices do not give Punjab a comparative advantage in production of Irri for export. Sugarcane growers did not receive economic prices (i.e. prices reflecting true opportunity costs) during 2001/02 and 2002/03 in an importing scenario, while in 2003/04, the NPC was 1.02, indicating positive support to sugarcane growers. The NPCs estimated under an exporting situation range from 1.33 to 1.99, indicating that the prices received by growers are higher than the export parity/economic prices. This is also an indication that sugarcane cultivation for exporting sugar is not feasible in terms of economic value. The NPCs for cotton under an importing scenario were less than 1 while under an exporting scenario were either close to or greater than 1, implying an expansion in cotton production as imports have been more expensive than domestic production.
KEYWORDS:
Crops,
comparative advantage,
domestic resource cost,
policy analysis matrix (PAM),
Pakistan.
JEL:
Q18,
Q17.
Impact of Monetary and Macroeconomic Factors on Wheat Prices in Pakistan: Implications for Food Security
Khalid Mushtaq, Abdul Ghafoor, Abedullah, and Farhan Ahmad
Published:Jan - June 2011
This paper attempts to evaluate the impact of monetary and macroeconomic factors on real wheat prices in Pakistan for the period 1976-2010, using Johansen’s co-integration approach. The Augmented Dickey-Fuller test reveals that all the variables used are first-difference stationary, except the trade openness indicator, which is second-difference stationary. There is also a long-run equilibrium relationship among these variables. The results indicate that real money supply, openness of the economy, and the real exchange rate have a significant effect on real wheat prices in the long run. The impulse response function shows that a trade openness shock impacted wheat prices to some extent and that it took three to four years for prices to become stable, following the shock. The findings of the study suggest that the policy thrust should focus on increasing wheat supply in the country by enhancing production or by liberalizing trade. Efforts should also be directed toward stabilizing the value of the Pakistani rupee against foreign currencies, especially the US dollar.
KEYWORDS:
Wheat prices,
co-integration,
Pakistan.
JEL:
E31,
E00.
The Reserve Equation and the Analytics of Pakistan’s Monetary Policy
Rubina Hassan
Published:Jan - June 2011
This paper deals with the computation and analysis of some fundamental reserve aggregates and associated monetary statistics, which impart important information regarding the design and conduct of monetary policy at the State Bank of Pakistan (SBP). Specifically, we compute the data series for borrowed, unborrowed, free, and drainable reserves using balance sheet data published by the SBP for the period 1985-2009. Results show that Pakistan’s monetary policy revolves around managing the exchange rate while using the t-bill rate as a key policy instrument. However, the value of the t-bill rate is both incorrectly and sub-optimally related to macroeconomic fundamentals rendering monetary policy time inconsistent. This hinges on the finding that, since 2000/01, the SBP has targeted the net free reserves of the banking system at 4 percent of total private deposits. Among other observations, we find that the scope of open market operations as a tool of monetary policy remains limited and that this limited role of open market defenses derives from the concern of the central bank to sterilize its own foreign exchange reserves. Furthermore, the growth rate of unborrowed plus drainable reserves bears a strong negative correlation with the annual average rate of inflation, which, on account of the former being consistently negative since 2005, implies that neither the government nor the SBP have an overriding concern for controlling inflation.
KEYWORDS:
Monetary policy,
central banks,
Taylor rule,
monetary targets,
Pakistan.
JEL:
E52,
E58,
E51.
The Role of Education and Income in Poverty Alleviation: A Cross-Country Analysis
Pervez Zamurrad Janjua and Usman Ahmed Kamal
Published:Jan - June 2011
The existing literature on education and poverty considers mostly primary data from an income point of view. However, the benefits of education vary from a direct income effect to positive externalities, which can help reduce poverty. This paper uses panel data for 40 developing countries for the period 1999 to 2007, and estimates coefficients by applying the random effect generalized least squares (GLS) technique. The study concludes, first, that income growth plays a moderately positive role in alleviating poverty, but that income distribution does not play a key role in poverty alleviation in the sample overall. Second, it concludes that education is the most significant contributor to poverty alleviation.
KEYWORDS:
Education,
income,
income distribution,
poverty alleviation,
GLS,
Pakistan.
JEL:
I32,
I30.
Book Review: Edited by Shahrukh Rafi Khan and Jens Christiansen Towards New Developmentalism, Market as Means Rather than Master, Routledge, Taylor and Francis Group, London and New York, 2011, ISBN13: 978-0-415-77984-5, pp 286.
Shahrukh Rafi Khan and Jens Christiansen
Published:Jan - June 2011
Edited by Shahrukh Rafi Khan and Jens Christiansen, Towards New Developmentalism, Market as Means Rather than Master, Routledge, Taylor and Francis Group, London and New York, 2011, ISBN13: 978-0-415-77984-5, pp 286.
Neo-liberalism has virtually seen its day and over the last three decades a significant amount of scholarship has evolved that provides a viable alternative to this paradigm. Further, the global financial and economic crisis plaguing countries the world over from 2007-2009 has led to the exploration of alternatives that are presented in this book by scholars.
KEYWORDS:
Book review,
neo-liberalism,
strategy,
financial crisis.
JEL:
N/A.
Asymmetric Behavior of Inflation Uncertainty and Friedman-Ball Hypothesis: Evidence from Pakistan
Syed Kumail Abbas Rizvi and Bushra Naqvi
Published:July - Dec 2010
This paper is a first attempt to measure and analyze inflation uncertainty in
Pakistan. It makes several contributions to the literature. In the first stage, using
quarterly data from 1976:01 to 2008:02, we model inflation uncertainty as a time
varying process using the GARCH framework. In the second stage, we analyze
the asymmetric behavior of inflation uncertainty using the GJR-GARCH and
EGARCH models. For further analysis of asymmetry and leverage effects, we
develop news impact curves as proposed by Pagan and Schwart (1990). Finally
we investigate the causality and its direction between inflation and inflation
uncertainty by using the bivariate Granger-Causality test to determine which
inflation uncertainty hypothesis (Friedman-Ball or Cukierman-Meltzer) holds
true for Pakistani data. We obtain two important results. First, the GJR-GARCH
and EGARCH models are more successful in capturing inflation uncertainty and
its asymmetric behavior than the simple GARCH model. This can also be seen
from news impact curves showing a significant level of asymmetry. Second, there
is strong evidence that the Friedman-Ball inflation uncertainty hypothesis holds
true for Pakistan.
KEYWORDS:
Inflation,
uncertainty,
GJR-GARCH,
EGARCH,
Friedman-Ball hypothesis,
Pakistan.
JEL:
E31,
C22,
E37.