It is essential that policymakers consider cyclical changes in output. Monthly industrial production is one of the most important and commonly used macroeconomic indicators for this purpose. However, monthly estimates of industrial production are not available for Pakistan. Instead, policymakers rely on a large-scale manufacturing (LSM) index that accounts for only 10 percent of GDP. Another limitation of this index is that it accounts primarily for private sector industry, leaving out the direct public sector presence in industrial production. Economic policymakers rely heavily on the LSM index to gauge economic activity in Pakistan. In this study, we compute a new industrial production index (IPI) that extends to the whole industrial sector in Pakistan, incorporating additional information that the LSM index misses. Post-estimation, we build seven econometric models reflecting conditions in the real, financial, and external sectors to estimate year-on-year changes in the new IPI. Our results show that the root mean square error of the ARDL model reflecting financial conditions is lowest of the models tested, which included AR, VAR, and BVAR, across all horizons.
KEYWORDS: Economic indicator, industry studies, econometric forecasting, Pakistan.
JEL: L600, C80, C530.

Expanding home-ownership poses a fundament financial challenge arising out of the long-term nature of the asset, which calls for the development of institutions and markets to facilitate the flow of long-term funds. Development of the secondary mortgage market would alleviate classical maturity mismatch and liquidity issues. The public sector can provide an enabling environment with sound macroeconomic policies, corporate governance, rule of law, and enforceability of contracts. This study draws policy implications using the empirical evidence on the determinants of mortgage depth and penetration across countries. A large part of the variation in these two dimensions across countries is explained by the level of their financial development. Development of long-term sources of funds intermediated through specialized institutions seems particularly important, as we find that the development of pension funds, which are a source of long-term funding, is strongly associated with mortgage market development. Monetary and macro-economic stability, as indicated by a low and stable rate of inflation, appears to be a strong predictor of mortgage market development. We also detect a positive relationship between the degree of competition in the financial sector and mortgage market development.
KEYWORDS: House financing, mortgage markets, securitization, affordable housing, Pakistan.
JEL: G21, G28, G50.

This study investigates the impact of various fiscal policy instruments on the income inequality of Pakistan using an Auto Regressive Distributed Lag (ARDL) model on annual data. We find that direct taxes reduce income inequality, measured using the Gini index, while indirect taxes increase disparities. As the major portion of tax revenues are indirect taxes, the current tax regime of Pakistan does not achieve income redistribution. Similarly, development expenditures have significantly reduced income inequality, likely through the creation of employment opportunities. On the other hand, the overall fiscal deficit increases income inequality, due to a rising public debt financed by (regressive) indirect taxes. This study suggests that in the case of Pakistan, where direct taxes are low, a large shadow economy exists, and weak tax administration prevails, an increase in development expenditures and broadening of the tax base of direct taxes should be the main fiscal policy tools for income redistribution. Moreover, persistent high fiscal deficits in the long run should be avoided. Finally, governments should reduce educational inequalities and promote democratic values in the country in order to promote greater fairness in distribution of income.
KEYWORDS: Fiscal policy, Gini index, taxes, development expenditures, ARDL, Pakistan.
JEL: E62, D63, H27.

Emerging research in empirical economics posits a question on the relation between underlying risk preferences and reflective cognitive ability. In an experimental setting, a preliminary sample of 260 participants undergo a series of incentivized choice experiments to elicit risk preferences and a Cognitive Reflection Test (CRT) to obtain estimates of their reflective ability. We sidestep potential biases by using a Fechner error specification along with a contextualized version of the utility function. Individuals who are more likely to avoid risky outcomes have significantly lower scores on the CRT. The analysis validates a prominent relationship spanning the economics and psychology literature and suggests a potential direction of causal inference for future research.
KEYWORDS: Risk, cognitive reflective ability, behavioral economics, Pakistan.
JEL: C36, C91, D81.

Pomegranates are one of the most important fruits in the Kandahar province of Afghanistan, which is famous for its pomegranates around the world. Pomegranates play a vital role in the socio-economic life of those who grow them. This study empirically analyzed the value chain of pomegranate production in Kandahar using primary and secondary data. Primary data was collected from 200 pomegranate growers in the Dand, Panjwai, and Daman districts of Kandahar province. These growers were selected using a random sampling method and the data was collected using a structured, pre-tested questionnaire. The secondary data was collected from traders, local collectors, and exporters of pomegranates involving 30 pomegranate selling companies. The value chain analysis shows that from the main four chains of pomegranate production (farmer, collector, trader, and exporter), the main actors are the exporters who process pomegranate and add the greatest value by investing in marketing, shipment, and warehousing and receive highest profit margin among the stakeholders. Exporters of pomegranates to Europe earn an average of 66 Afghani per kg. The next greatest beneficiaries are the growers or farmers who earn an average of 23 AFN on each kg. Local collectors who buy pomegranates from farmers earn the least, at an average of 13 AFN per kg over the costs of processing and transportation.
KEYWORDS: Production, labor, cost, profit margin, farmers, Afghanistan.
JEL: D4, D46.

Given the importance of food industries in Pakistan, this study analyzes their cost structure by estimating the transcendental logarithmic cost function. The study also considers elasticity of substitution along with own-price elasticity and cross-price elasticity. Four factor inputs, i.e., labor, capital, energy, and materials, are used to estimate the cost function. The results indicate that materials account for the highest share of the cost. The elasticity of substitution of materials for capital and energy is also weak. The own-price elasticities indicate that the demand for materials is least responsive to a change in its own price while the demand for other inputs varies with price. The cross-price elasticities show that labor, capital and energy are substitutes for each other. The output elasticity of cost demonstrates the presence of economies of scale.
KEYWORDS: Translog cost function, elasticity of substitution, cross-price elasticity, Allen’s partial elasticity.
JEL: D24, Q11.

The study attempts to seek evidence on regional economic integration in driving labor productivity convergence in low- and middle-income East Asian states towards Japan, the country assumed to be the regional technology leader. The labor productivity convergence of low- and middle-income East Asian countries towards their rich neighbor is modelled against their national levels of innovation, technology spill-overs from the regional economic leader and their productivity differential with the frontier country. The hypothesized relationship is empirically verified for seven East Asian states, using a robust econometric approach. The time-series test estimates under Error Correction Representation yield absolute support in favor of valid productivity convergence occurring between Japan and its low-and middle income neighbors. However, panel data estimates generated with better statistical power outperform the time-series test findings and these results reject the significance of Japan as the regional productivity growth driver for its regional developing states.
KEYWORDS: Regional economic integration, productivity convergence, growth spill-over, time-series error correction model, panel cointegration estimators.
JEL: E24, F15.

Neoclassical price theory, and its extension to IMF country advice, argues that balance-of-payments crises such as Pakistan’s are better resolved by depreciating the exchange rate, making exports cheaper and imports dearer. We argue that a partial equilibrium analysis of just the tradeable goods market on the current account side ignores the capital market on the capital account side, where an increase in outflows allows no equilibrium value for the exchange rate, through a phenomenon dubbed ‘depreciationary expectations’, akin to inflationary expectations. This phenomenon will not allow the exchange rate to settle at an equilibrium level, leading to a vicious downward cycle. In such a case, capital controls may well be needed to counter the downward cycle, allowing a return to growth.
KEYWORDS: Balance of payments, exchange rates, equilibrium analysis, Pakistan.
JEL: D51, F38.

This paper examines patterns of export creation and diversion by analyzing Pakistan’s trade agreements at the two-digit industry level for all 88 export-oriented industries. We compare the net change in exports with nine free trade agreement (FTA) partners and the top 15 partners with most-favored nation (MFN) status. We find that 45 industries account for USD4.1 billion in export creation across all Pakistan’s FTA partners. Here, net exports increase after FTAs with both FTA and MFN partners. Conversely, export diversion worth USD137 million occurs in 10 industries with all FTA partners as net exports to FTA partners rise while net exports to MFN partners fall. In the same manner, we find that net exports in 33 industries declined by USD500 million with FTA and MFN partners. The total net exports addition after FTAs was USD3.5 billion or, on average, USD350 million annually, accounting for about 1.4 percent of Pakistan’s total annual goods exports. On average, Pakistan has successfully created exports in half its export-oriented industries, although highly subsidized industries exhibit either export diversion or a net decline with both MFN and FTA partners. A difference-in-difference analysis shows that exports to China and Mauritius rose significantly while the remaining seven FTA partners did not have a significant increase in exports after the FTAs were implemented. In view of these findings, we suggest revisiting the policy of export subsidies.
KEYWORDS: Free trade agreements, export creation, export diversion, industries.
JEL: F14, F1, F68.

Temporary unskilled migration and the remittances it generates have the potential to reduce child labor and improve educational outcomes in developing countries. However, recent literature points towards the adverse impact of the parental absenteeism on children left behind. We build a theoretical model to explore the joint impact of remittances and parental absenteeism on child labor and human capital formation of children left behind in the context of unskilled workers’ migration. We find threshold conditions for the relative wage of source to destination countries beyond which unskilled migration helps in reducing child labor and increasing human capital. Moreover, the threshold is endogenous and depends on the sensitivity of human capital formation to parental absenteeism relative to the child’s time spent on acquiring human capital. In a special case when the former is equal to the latter, the wages in the destination country should at least be twice as much as in the source country to have a detrimental (promoting) impact on child labor (human capital formation). Since the importance of parental absenteeism would depend on a variety of sociocultural factors such as marriage, presence of extended families, religious communities, and social networks, there will be heterogeneity in the impact of unskilled migration.
KEYWORDS: Migration, child labor, parental absenteeism, human capital.
JEL: F24, F22, J24, O15.