This paper examines the prospects of expanding bilateral trade between Pakistan and China particularly in the context of the recently signed free trade agreement between the two countries. Using the augmented gravity model in the tradition of Rose (2004), the paper shows that there is significant potential for the expansion of bilateral trade between the two countries as a result of the free trade agreement. The paper also analyzes bilateral trade flows between the two countries in terms of a trade specialization index and the Grubel-Lloyd index of intra-industry trade. We show that bilateral trade between the two countries is heavily tilted in favor of China and that this situation may persist in the short term.
KEYWORDS: Pakistan, China, FTA, Pak-China, trade patterns, export diversification.
JEL: 040, F10, E23.

This paper examines and critiques the worldwide mushrooming of preferential trading arrangements and traces its implications for Pakistan. It points out that this development is fundamentally contrary to the principle of most-favored-nation (MFN) treatment, which was the cornerstone of the post-war multilateral trading system as embodied in the General Agreement on Tariffs and Trade (GATT) and by the World Trade Organization (WTO). The causes of the rise in bilateral and regional trading arrangements are discussed and it is shown that they pose a real threat to many relatively small economies, including Pakistan. The paper discusses the various preferential trade agreements Pakistan has already signed. It notes that, with the exception of its trade agreement with China, Pakistan has not succeeded in concluding preferential trading arrangements with any of the strategically and systemically more important countries, viz., the US, European Union, and Gulf Cooperation Council (GCC). The South Asia Free Trade Area (SAFTA) could potentially be of considerable importance for Pakistan’s long-term economic growth, but this potential might not be realized if India and Pakistan fail to overcome their mutual differences. Finally, the paper explores steps that might be taken to promote Pakistan’s economic interests in its bilateral relations. It points out that, apart from achieving a measure of macroeconomic stability, Pakistan needs to improve its international competitiveness through productivity improvements and be more strategic in its trading relations. Its market access to leading industrial countries that are entering free trade agreements (FTAs) with Pakistan’s competitors is a real threat and remedial actions are required.
KEYWORDS: Trade, Pakistan, growth.
JEL: F13, P45.

This paper analyzes how trade can develop between low and high wage countries when there is free trade and when there is protection. In particular, the paper focuses on Pakistani industrial development from the 1950’s and how standard international trade theory relies on specific assumptions about the nature of capital, which may not hold. This, in turn, has specific implications for industrial policy in low wage countries.
KEYWORDS: International trade, investment, comparative advantage.
JEL: F19, J00, J39.

The slow pace of progress of the South Asian regional trade integration process under SAARC has prompted many countries to seek bilateral agreements. Sri Lanka is a case in point with bilateral agreements with both India and Pakistan. While the former is acknowledged to have yielded positive results, the latter has remained of limited interest. Given that India remains the single most important trading partner for almost all other South Asian countries, regionalism in South Asia essentially entails bilateral market access to India. The current evidence suggests that India has attempted to do so via a host of bilateral and regional arrangements, but that the emerging nature of that integration process is unlikely to be an ‘inclusive’ South Asian regional grouping.
KEYWORDS: Economic integration, South Asia, trade liberalization.
JEL: F15, R10, F10.

Pakistan and India are the two largest economies in South Asia with very low levels of bilateral trade. This has been the result of border disputes and political tensions, but also of inward-looking import-substitution growth strategies. Trade (including official and unofficial) between the two countries stood at around US$ 2.5-2.6 billion in 2007/08 but it could potentially be as much as US$ 5-10 billion or two to four times its current levels. The Composite Dialogue Process (CDP) has led to substantial improvements in political relations over the last 5 years and trade relations have shown positive outcomes as well. This paper recommends that the process be strengthened further by restarting the stalled CDP, Pakistan granting most favored nation (MFN) status to India, continuing to reduce impediments to trade and trade logistics, and perhaps even considering the possibility of a free trade agreement (FTA) with India.
KEYWORDS: Bilateral trade, Pakistan, India, competitiveness.
JEL: F19, 024.

This study analyzes the role of human capital and job attributes, i.e., supply-side determinants, in determining wages in a period of trade liberalization. Using the Mincerian earning function and based on data from the Labor Force Surveys, we construct a model to estimate various wage determinants and compute the rates of return to different educational qualifications and relative occupational wage shares for the years 2005/06 and 1990/91. The estimated earning functions for 1990/91 and 2005/06 are compared to investigate whether individual characteristics—such as gender, job location, nature of job, educational qualifications, and different occupations—cause the wage gap to widen or contract under conditions of trade liberalization. The mean and quantile regression approach is used for estimation purposes. Our key findings postulate (i) an increasing gender pay gap, (ii) a higher wage premium to the highest educational qualification, and (iii) more or less stable relative wages for different occupations over time. In addition, wage dispersion across occupational groups appears more pronounced in 1990/91 than in 2005/06, implying a declining trend in the difference in wage distribution across occupations. Our findings suggest that trade liberalization cannot be presumed to pose a threat to the labor market in the wage context. However, exposing labor to an open market has not increased the productivity and skills of labor or helped reap the potential benefits of trade liberalization.
KEYWORDS: Trade liberalization, wage determination, human capital, Pakistan.
JEL: J31, F16.

Poverty is a complex phenomenon based on a network of interlocking economic, social, political, and demographic factors. An understanding of the extent, nature, and determinants of rural poverty is a precondition for effective public policy to reduce poverty in rural Pakistan. The present study attempts to analyze the impact of socioeconomic and demographic characteristics of households on poverty, using primary data collected in the village of Betti Nala in Tehsil Jatoi, district Muzaffargarh in southern Punjab. We have used two distinct approaches: (i) a poverty profile, and (ii) an econometric approach in our empirical analysis. The results show that household size, dependency on household, participation, landholdings, and number of livestock have a significant impact on poverty incidence. Our final conclusion is that efforts should be made to improve socioeconomic factors in general and demographic factors in particular to alleviate rural poverty in remote areas of Pakistan, while land should be allotted to landless households.
KEYWORDS: Poverty, households, Punjab, Pakistan.
JEL: C10, A13, J19.

This study is based on data from a cross sectional survey of 120 farms located along the Mithaluck irrigation canal in central Punjab. The data collected were analyzed using (i) the residual imputation method, and (ii) the change in net income method, and applied to a linear programming model to estimate the value productivity of irrigation water. Returns to irrigation varied by farm size and location on the canal, but were generally found to be very high relative to the estimated delivery cost of irrigation water. The results of this study could prove useful in determining the economic feasibility of various resources for supplementing water and improving delivery and application efficiencies.
KEYWORDS: Irrigation, value of water, residual imputation, Punjab, Pakistan.
JEL: C20, A10.

Mangoes are one of Pakistan’s most important fruits; the country is the world’s fourth largest producer and exporter of mangoes. Integrated markets are those where price signals are transferred from one to another, allowing physical arbitrage to adjust any disturbances in these markets; integrated markets are thus a sign of efficiency. From this viewpoint, we investigate domestic integration among ten major mango markets, i.e., Lahore, Faisalabad, Multan, Gujranwala, Sargodha, Karachi, Hyderabad, Sukkur, Peshawar, and Quetta employing Johansen’s cointegration approach and error correction model. Data on monthly wholesale prices data (PRs/100 kg) were obtained from the agricultural and livestock marketing advisor, Government of Pakistan. The results of the study confirm the presence of integration among major mango markets in Pakistan. These markets were able to adjust for 16 to 68% of disequilibrium in one month, implying that it takes almost two to six months to remove any disequilibrium and to move back to long-run equilibrium. The Granger causality test shows that the Karachi market has bidirectional causality with Lahore, Faisalabad, Multan, Hyderabad, and Sukkur, and a unidirectional relationship with the rest. An impulse response analysis was also conducted to check the stability of these markets given a standard error shock to the Karachi base market.
KEYWORDS: Mangoes, cointegration, causality, Pakistan.
JEL: C01, A10.

This study explores the long-term dynamic relationship between equity prices and monetary variables for the period June 1998 to June 2008. Monetary variables include money supply, treasury bill rates, foreign exchange rates, and the consumer price index. The data have been examined using multivariate cointegration analysis and Granger causality analysis. Johansen and Juselius’ multivariate cointegration analysis indicates the presence of a long-term dynamic relationship between the equity market and monetary variables. Unidirectional Granger causality is found between monetary variables and the equity market. In the case of money supply, a positive relationship supports the liquidity hypothesis. Impulse response analysis indicates that the interest rate shock has a negative impact on equity returns in the Pakistani equity market. Exchange rates also have a negative impact on equity returns in the short run. However inflation has little impact on returns in the equity market. Variance decomposition analysis suggests that the interest rate, exchange rate, and money supply shocks are a substantial source of volatility for equity returns. The contribution of a monetary shock to the equity returns ranges from 4% to 16% over different time lags. Similarly, the VECM also confirms the presence of a short-term relationship between monetary variables and equity returns. This state of affairs demands that monetary variables be considered an important factor in determining stock market movements. Policymakers should be more vigilant and careful in designing monetary policies as it has a direct impact on cash inflows into the capital market and on the stability of the capital market.
KEYWORDS: Monetary variables, equity, causality, Pakistan.
JEL: G12, E31.