This paper analyzes trade among and the convergence of per capita income for India, Pakistan, Bangladesh, and Sri Lanka. The extent of trade and its relationship with the magnitude of income convergence is studied among these countries and their trading partners. We use intra-trade convergence and the difference-in-differences approach for the estimations. The results demonstrate that an increase in trade between the groups decreases the per capita income differential. Our results suggest that trade liberalization policies could be effective in achieving convergence. More importantly, we find that the per capita income of our source countries converged more rapidly under post-liberalization regimes than pre-liberalization regimes.
KEYWORDS: Intra-trade, income convergence, per capita income, South Asia.
JEL: C21.

This paper analyzes a range of host country characteristics that determine foreign direct investment (FDI) flows to developing countries, using panel data on 72 countries for the period 1970-2008. Keeping in view the endogeneity problem of the chosen host country’s characteristics, the model is estimated using the General Method of Moments (GMM) technique. The analysis shows that gross domestic product (GDP), economic growth, and per capita income positively affect FDI—a result consistent with the market-seeking behavior of multinational corporations (MNCs). Furthermore, we find that remittances have a significant and positive impact on FDI. On the other hand, inflation and the balance of payments deficit have negative effects on FDI. MNCs are attracted to host countries that are outward looking and follow trade-promoting policies. This is confirmed by the positive effect of openness on FDI flows to developing countries. The study also finds that the effect of military expenditures on FDI is negative and significant. Finally, our analysis finds that the real exchange rate has a significantly negative impact on FDI.
KEYWORDS: Investment, panel data, developing countries, FDI, GMM.
JEL: F21.

This study examines the technical, allocative, and economic efficiencies of the cotton-wheat farming system in Punjab, Pakistan. It also investigates the determinants of these efficiencies using a non-parametric data envelopment analysis (DEA) technique. Technical, allocative, and economic inefficiency scores are separately regressed on socioeconomic and farm-specific variables to identify the sources of inefficiency using a Tobit regression model. The mean technical, allocative, and economic efficiencies calculated for the system were 0.87, 0.44, and 0.37, respectively. Our results indicate that years of schooling and the number of contacts with extension agents have a negative impact on the inefficiency of cotton-wheat farming in Punjab.
KEYWORDS: Cotton, wheat, economic efficiency, data envelopment analysis.
JEL: D61, C14.

This paper examines the global competitiveness of Pakistan’s fruit exports (dates, mangoes, and oranges), using revealed comparative advantage (RCA). It also analyzes domestic consumption trends among selected fruits grown by major exporters. Our results indicate that Pakistan has a comparative advantage in fruit exports. Comparing the movement in comparative advantage indices for Pakistan with those of its main exporters/competitors demonstrates that Pakistan has a relatively high comparative and competitive advantage in the production of dates and mangoes. The increasing trend of competitiveness in Pakistan indicates that there is potential for higher growth; given that fruit exports are a potential source of higher exports earnings, there is a need to strengthen competitiveness in this sector.
KEYWORDS: Comparative advantage, competitiveness, exports, growth.
JEL: F14, Q18, Q17.

The objective of this paper is to highlight the use of income tax revenue as an indicator of regional development in Pakistan. Initially, we identify a dramatic shift in income tax revenue trends at the provincial level for the period 1992/93 to 2005/06. We develop a simple model of income tax revenue and estimate the relationship between growth of income tax revenue and gross regional product (GRP). Based on the estimated relationship, Punjab appears to have been the fastest growing province during the 1990s, while Sindh shows the greatest level of dynamism in the current decade. This is attributed to high growth rates, especially in large-scale manufacturing during the period, which has a larger sectoral share in Sindh’s economy.
KEYWORDS: Income tax, development, revenue.
JEL: R11, H20.

In April 2009, the Centre for Research in Economics and Business (CREB) of the Lahore School of Economics hosted the Fifth Annual Conference on the Management of the Pakistan Economy on the theme, “Growth, Trade and Development.” The Centre’s Director, Naved Hamid, invited a number of prominent speakers including academics, economists, current and former government officials, and other experts to present a combination of research and policy papers, which can be broadly grouped under two major headings: i) Pakistan’s Growth and ii) Trade and Development in Pakistan. These topics were selected because of their timeliness, given the increasing macroeconomic pressures facing the country, in particular those arising from the exchange rate and inflation, and the impacts on poverty that could result. The papers presented at the conference are summarized below:
KEYWORDS: management, Pakistan, Lahore School, Annual Conference, Pakistan economy, CREB, fifth.
JEL: N/A.

This paper uses Cobb-Douglas and translog production functions to calculate total factor productivity (TFP) in Pakistan over the period 1985 – 2005, first for the manufacturing and agricultural sectors individually, then for the economy as a whole. In manufacturing, productivity increased at an average of 2.4% per year with output growth being driven mainly by increases in capital. Despite the limitations of the available agricultural data, we have determined that productivity has grown at an average rate of 1.75% per year in this sector. The major drivers of growth in agriculture have been increases in labor and TFP. These estimates of sectoral TFP put Pakistan at par or above average as compared to other developing countries, but lagging behind the East Asian economies. For the economy as a whole, TFP has increased at an average rate of only 1.1% a year in Pakistan, resulting in almost three quarters of GDP growth attributed to increases in labor and the capital stock.
KEYWORDS: Growth, labour, capital, total factor productivity.
JEL: D24, E0, F4.

In this paper, we look at the pace at which firms adjust their employment levels as a measure of “microeconomic flexibility.” Flexibility aids in creative destruction processes, where less efficient establishments recede and dynamic firms can rapidly expand. Following the techniques used by Caballero, Engel, and Micco (2004), we use firm-level data from India and Pakistan to estimate the proportion of the gap closed in a year between desired and actual employment. The results for the proportion of the gap closed for India were 0.46 in 2001 and 0.45 in 2000. For Pakistan, we estimated the proportion of the gap closed as 0.2 in 2001 and 0.53 in 2000. The results for 2001 were much lower than expected (and lower than previous estimates for both countries), possibly due to the events of 9/11. Pakistan compared favorably to India in various key sectors, including chemicals, food processing, and garments. Exporters did not seem to have a quicker speed of adjustment.
KEYWORDS: Costs, efficiency, flexibility, inputs, labor.
JEL: E2, J2, J6.

Private industrial development in Pakistan has a mixed track record. This paper presents a political economy overview of industrial development in Pakistan. Starting with an analysis of initial conditions, such as low levels of urbanization and out-migration of bourgeoisie, the paper looks at the ways in which policies were used to create advantages for elites and special interests. The paper also investigates the role of foreign aid in distorting industrial structure.
KEYWORDS: Development, industrial policy, Pakistan.
JEL: F14, F19.

The objective of this study is twofold: (i) to estimate the equilibrium real exchange rate (RER) from a long-run perspective and calculate the degree of overvaluation for the period 1972–2007, and (ii) to test the Dutch Disease hypothesis concerning the effect of capital flows on the RER in Pakistan. Based on various macroeconomic fundamentals suggested in economic literature by Edwards (1988, 1989, 1994), Elbadawi (1994), and Montiel (1997), the equilibrium RER is estimated as a function of the terms of trade, government spending, degree of openness, workers’ remittances, foreign direct investment (FDI) flows, and foreign economic assistance. In view of this study’s long-term focus, all unsustainable and temporary flows are filtered out to obtain an accurate misalignment index. Estimation results are in line with theoretical postulations: an increase in capital flows, government spending on nontradable goods and terms of trade improvement are consistent with an appreciation of the RER, while an increase in the degree of openness is expected to depreciate the RER. Findings suggest that the RER suffers from chronic overvaluation in Pakistan. In spite of filtering out unsustainable and temporary flows, overvaluation increased from 0.75% in 2001 to 22.9% in 2007. A sharp rise in FDI flows (between 2005 and 2007) and an increase in remittances (between 2002 and 2007) are among the main factors that have contributed to this persistent overvaluation. Results also suggest that the Dutch Disease hypothesis holds in the case of Pakistan.
KEYWORDS: Real exchange rate, capital inflow, overvaluation, Pakistan.
JEL: E22, F10, G00.