This paper shows that inequality in consumption expenditure in Pakistan improved slightly between 1992/93 and 2004/05, and that the extent of inequality in food consumption has remained substantially lower than in nonfood consumption. An important result is that household expenditure on education has been more unequally distributed than overall consumption expenditures. In contrast, healthcare expenditure in urban areas has been distributed relatively more evenly in recent years, while the level of inequality in healthcare expenditures in rural areas has remained persistent and somewhat higher.
KEYWORDS: Consumption inequality, decomposition, Gini coefficient, Pakistan.
JEL: D63, D6, I3, D31.

Using Theil’s inequality coefficient based on the mean square prediction error, this paper evaluates the forecasting efficiency of the central government budget and revised budget estimates in Pakistan for the period 1987/88 to 2007/08 and decomposes the errors into biasedness, unequal variation and random components to analyze the source of error. The results reveal that budgetary forecasting is inefficient in Pakistan and the error is due mainly to exogenous variables (random factors). We also find that neither the budget nor revised budget estimates of revenue and expenditure satisfy the criteria of rational expectations of forecasting. Further, there is very little evidence of improvement in the efficiency of budgetary forecasts over time.
KEYWORDS: Budget, Forecast errors, Theil’s inequality coefficient, rational expectations, Pakistan.
JEL: C53, E62, H68.

Keynes (1930) proposed that an asset is more liquid than another “if it is more certainly realisable at short notice without loss” (vol. II, p. 67). This definition suggests that the liquidity of an asset is twofold. First, an asset should have a market that can readily absorb the sale, and second, do so without risk to its final value. This suggests that investors should be rewarded for both the level of liquidity and liquidity risk. The standard form of asset pricing models assumes financial markets to be perfectly liquid. In a perfectly liquid market, there are no arbitrage possibilities. Therefore, the under traditional asset pricing approach, all assets that have similar expected cash flows must have the same price. This phenomenon of frictionless markets ignores the impact of liquidity of financial assets on their respective prices and consequently on returns. The relation between liquidity and expected returns has been statistically observed and explains certain market anomalies such as the small firm effect, equity premium, and risk-free rate puzzle.
KEYWORDS: stock returns, Liquidity, frictionless markets.
JEL: N/A.

The liberalization of the agricultural sector in general and the rice subsector in particular has been a major component of Bangladesh’s structural adjustment program initiated in 1992. However, the government has continued to intervene in the rice subsector. This paper examines whether the regional/divisional rice markets have become spatially integrated following the liberalization of the rice market. Wholesale weekly coarse rice prices at six divisional levels over the period of January 2004 to November 2006 were used to test the degree of market integration in Bangladesh using co-integration analysis and a vector error correction model (VECM). The Johansen co-integration test indicated that there are at least three co-integrating vectors implying that rice markets in Bangladesh during the study period are moderately linked together and therefore the long-run equilibrium is stable. The short-run market integration as measured by the magnitude of market interdependence and the speed of price transmission between the divisional markets has been weak.
KEYWORDS: Market liberalization, integration, vector error correction model, rice, price transmission, Bangladesh.
JEL: Q11, D40.

The Sixth Annual Conference on the Management of the Pakistan Economy was hosted by the Center for Research in Economics and Business (CREB) of the Lahore School of Economics from April 22nd to April 23rd, 2010 and the annual Special Edition of the Lahore Journal of Economics contains the Papers and Proceedings of this conference. The objective of the conference was to promote discussion on economic management and strategic issues facing Pakistan today, because if the country can successfully deal with key challenges, it can make the transition to a middle income country by 2020. These challenges include addressing the recurrent energy crises, overcoming the persistent poor government revenue mobilization effort and bridging the growing regional disparities and lack of trust between the four provinces.
KEYWORDS: Pakistan, Lahore School, Annual Conference, CREB, Sixth, economic management.
JEL: N/A.

This article suggests that Pakistan requires a different development paradigm. The analysis begins by giving a quick overview of some of the larger economies of the region and assesses the divisions that have developed between the people as a result of national strategies. The paper goes on to present a brief history of the previous attempts at decentralization in Pakistan and a discussion of how these were thwarted. This is followed by a discussion of how decentralization can be successful in Pakistan after the 18th Amendment and the 7th NFC Award.
KEYWORDS: Development, policy, decentralization, Pakistan.
JEL: O20, O23, H77.

This paper looks at the issue of federalism in Pakistan. It begins with an analysis of the conceptual paradigms of federalism and goes on to examine the history of federalism in Pakistan. The paper goes on to discuss the reasons for the failure to develop an organic federal covenant as well as discuss how the 7th National Finance Commission (NFC) Award and the 18th Amendment may be indicative of a paradigm shift. The paper concludes by presenting the way forward for federalism in Pakistan.
KEYWORDS: Federalism, governance, Pakistan.
JEL: H77, O2.

This paper analyzes Pakistan’s energy sector issues and highlights (i) the importance of the link between energy and the environment, and (ii) the central importance of energy efficiency for high return demand-side solutions to meet the country’s energy needs. The paper argues that energy planning should integrate the external cost of energy use in deciding about the composition of supply: coal, oil, gas, hydropower, renewable, nuclear, and solar. By utilizing external cost estimates made by the European Commission for Europe, and the US National Academy of Sciences, a total cost (external + internal) ranking of primary energy sources for Pakistan is estimated. This estimate is at the low end of the cost spectrum because classic pollutants—sulfur dioxide, nitrogen oxides, carbon monoxide—in Pakistan are significantly higher than in Europe or the US. The paper also discusses the experiences of China and OECD countries in increasing energy-wide efficiency. A central lesson emerging from the analysis is that Pakistan will have to significantly increase its energy-related research and development expenditure in order to adequately address its energy sector issues. A quadrupling from 0.25 % of gross domestic product is recommended over a decade.
KEYWORDS: Energy, policy, environment, Pakistan.
JEL: Q48, Q47, Q5.

This paper examines the circular debt problem in the Pakistani energy sector. After presenting the profile of the energy sector in Pakistan, the paper explains why circular debt has emerged in the sector. Two principal reasons are discussed for the circular debt problem: First, consumer tariffs were insufficient to recover the rising costs of power generation and the government (due to fiscal constraints) was not compensating PEPCO for the resulting losses. Second, PEPCO has faced significant problems in recovering dues from consumers. In order to resolve the circular debt problem, sharp adjustments in power tariffs may be required combined with the need by the government to explicitly recognize the costs of power subsidies in the budget.
KEYWORDS: Circular debt, energy, tariff, subsidy, Pakistan.
JEL: Q43, H62, Q48.

This paper looks at the economy-wide demand and the firm level demand for electricity in Pakistan. The economy wide estimation of electricity demand uses panel data from 63 countries from 1998-2008, and finds that the elasticity of demand for electricity with respect to per capita income is approximately 0.69, which implies that a 1% increase in per capita income will lead to a 0.69% increase in the demand for electricity. The firm level analysis uses firm level data from the World Bank’s Enterprise Survey for Pakistan and finds that the price elasticity of demand for electricity across all firms is approximately -0.57, which implies that a 1% increase in electricity prices will lead to a 0.57% decrease in electricity demand across firms. Across sectors, the textile sector has the highest price elasticity of demand (-0.81) while the price elasticity of demand for firms in the electricity and electronics sector is the smallest (-0.31). Finally, firm level data is also used to estimate production functions in order to estimate the impact of electricity shortages on manufacturing output.
KEYWORDS: Electricity, demand, industrial, price elasticity, Pakistan.
JEL: Q41, E01, E39.