The issue of global competitiveness is critical for developing countries. This paper looks at the drivers that influence industrial competitiveness and provides a comparison of these drivers for Pakistan, India and China. The analysis shows that Pakistan lags behind China and India in most of the main components of the industrial competitiveness index. The analysis also presents a series of micro and macro level policy recommendations aimed at increasing Pakistan’s industrial competitiveness.
KEYWORDS: Pakistan, global competitiveness, macro level policy, micro level policy.
JEL: N/A.

Though the Pakistani economy had recently achieved some level of macroeconomic stability, at present there are fears that this stability could be threatened. This paper looks at monetary and fiscal reforms over the last decade and focuses on the areas that need to be addressed on both fronts. In particular, the paper looks at how present monetary policy needs greater clarity and how fiscal policy needs to focus on raising public savings and diversifying the sources of borrowing.
KEYWORDS: Pakistan, economy, monetary policy, fiscal policy, macroeconomic stability.
JEL: N/A.

The financial system of Pakistan has undergone a sea-change owing to reforms which were implemented over a period of a decade and a half, 1992-2006. The financial system has moved towards promoting the efficiency of financial intermediation while maintaining stability and fostering growth of the economy. Financial repression of the previous decades has receded though it has not been eliminated. Now a shift is warranted for the reform and restructuring of sectoral or sub-sectoral finance which has to be activity based, not institution based. Pakistan’s financial system has entered the post-reform era with all its potentials, complexities and challenges. How well the financial system performs in this era depends on how sustainable the financial regime is and how resilient it is in coping with change and financial shocks, both domestic and global.
KEYWORDS: Pakistan, financial repression, restructuring, reforming, financial system.
JEL: N/A.

In this paper an attempt has been made to review the financial restructuring process and its importance for economic growth and macroeconomic stability. The main focus is on the financial restructuring efforts undertaken by the government of Pakistan since 1990. We also analyze the impact of financial restructuring by using various financial indicators. The overall results suggest that the financial industry in Pakistan is showing remarkable and unprecedented growth. Unlike 1990, the performance of the financial sector is much better today. After the successful completion of first generation reforms, the introduction of second generation reforms is required, which will help to further strengthen the financial system and transfer the benefits of the first generation reforms to society.
KEYWORDS: Pakistan, restructure, financial sector, first generation reforms.
JEL: N/A.

This paper is primarily aimed at assessing the significance of the exchange rate on Pakistan’s foreign trade. It estimates the Equilibrium Real Effective Exchange Rate (ERER) and exchange rate misalignment for Pakistan using annual data from FY78 to FY06. The Engle Granger cointegration technique is used for the estimation of ERER depending upon various macroeconomic fundamentals as recommended by Edwards (1994). The results of the study are also used for the forecasting of ERER and misalignment up to the year 2010. The results of the study reveal that ERER is determined by variables such as: a) terms of trade, b) trade openness, c) net capital inflows, d) relative productivity differential, e) government consumption, and f) workers’ remittances. The error correction term points to the gradual convergence of the real exchange rate towards the long-run equilibrium level which suggests that the prevailing Pak Rupee exchange rate has not deviated from the ERER and captures economic fundamental trends. Moreover, Pakistan’s foreign trade would depend significantly upon the state of economic fundamentals in the future. Improved economic fundamentals are likely to support trade besides paving the way for enhanced inflows of capital and financial receipts.
KEYWORDS: Equilibrium Real Effective Exchange Rate, ERER, Pakistan, external trade.
JEL: N/A.

This study is based on the premise that agriculture remains the key issue in all reform efforts of Pakistan and the Doha Round of trade talks has strategic significance for the second round of the country’s farm sector reforms. It is argued that although there are differences among the individual developing countries, the majority have a comparative advantage in agricultural production and removing farm sector export subsidies and tradedistorting, domestic subsidies is their common concern. Evidence is provided to support the view that the Uruguay Round negotiations on agricultural subsidies are not a done deal, because although signed by the members, the Agreement on Agriculture is not ‘ratified’ by the recent farm bills of the developed countries which continue to defy economic logic and the WTO (World Trade Organization). On the other hand, the evidence provided from Pakistan shows that the governments of developing countries are not fighting the farmers’ cause since they are poorly managing agricultural policy and have been overly compliant with respect to the Uruguay Round ruling on reducing farm subsidies and increasing trade liberalization. The analysis shows that although the developed countries stand to gain far more from the liberalization of trade in agricultural commodities than the developing countries, the handful of farmers in developed countries are the stumbling block to the regeneration of world trade. It is argued that to alleviate world poverty, the developed countries need to demonstrate their willingness to gradually remove both the absolute value of subsidies provided to their farmers and the tariff and non-tariff barriers that protect agriculture. Finally, the author maintains that at world trade forums, the developing countries have exhibited poor representation due to lack of leadership.
KEYWORDS: Agriculture, Pakistan, developing countries, economic reforms.
JEL: N/A.

Factor endowments and cross country differences create regional disparities among states. The disparity in sizes between the Chinese and Pakistani economies can lead to the creation of trade patterns that can positively or negatively impact the latter’s economy. The present paper attempts to analyze the pros and cons of forming a Free Trade Agreement (FTA) with China given the size, structure and trade patterns of Pakistan’s existing economy. It also deals with the crucial questions of: Can the formation of an FTA with China benefit Pakistan? Will trade liberalization under an FTA with a neighboring country like China spur Pakistan’s trade and growth? Looking at trends and trade patterns of Pakistan, the potential of Pakistan’s existing economy is analyzed to enhance interregional trade and export diversification by further deepening cooperation with China. In the light of this analysis, the paper also outlines a number of recommendations to extract the maximum benefit for Pakistan’s economy from this recently signed FTA with an old economic partner, China.
KEYWORDS: Pakistan, China, FTA, Pak-China, trade patterns, export diversification.
JEL: N/A.

This paper seeks to identify the major determinants of female labor force participation in Pakistan, specifically with reference to rural and urban areas. Limited dependent variable techniques (Logit and Probit) are utilized to determine the factors affecting female labor force participation. This analysis uses data taken from the PSLM (Pakistan Social and Living Standards Measurement Survey, 2004-05) which measure individual and household characteristics of females between the ages of 15-49. Empirical results suggest that age, educational attainment and marital status have significant and positive effects on female labor force participation (FLFP). When women belong to the nuclear family and have access to vehicles, they are more likely are they to participate in economic activities, whereas a large number of children and the availability of home appliances reduces the probability of FLFP. The results imply that reducing the child care burden on females and facilitating educational attainment would lead to a higher labor force participation rate for females in Pakistan.
KEYWORDS: FLFP, Pakistan, gender, female labor force, participation, educational attainment.
JEL: N/A.

This paper examines the empirical relationship between financial development and economic growth for high income countries. The study focuses on both indirect finance and direct finance, separately as well as jointly. Applying the methodology of Nair-Reichert and Weinhold (2001) for causality analysis in heterogeneous panel data, two sets of results are reported. First, the evidence regarding the relationship between financial development and economic growth from a contemporaneous non-dynamic fixed effects panel estimation is mixed. Negative and statistically significant estimates of the coefficient of the inflation and financial development interaction variable indicate that financial sector development may even be harmful to economic growth when inflation is rising. Second, in contrast with the recent evidence of Beck and Levine (2003), heterogeneous panel causality analysis applied on a refined model indicates that there is no definite evidence that finance spurs economic growth or growth spurs finance. Most of our findings are in line with the Lucas (1988) view that the importance of financial matters is overstressed. The only exception is the case of activity in stock markets where our result supports the Robinson (1952) view that finance follows enterprise.
KEYWORDS: Financial development, financial matters, panel data, economic growth.
JEL: N/A.

The demand for M2 in Pakistan is positively influenced by real GDP and currency appreciation and negatively influenced by the domestic interest rate and the foreign interest rate. These results confirm international capital mobility and currency substitution. The Box-Cox transformation indicates that the log-linear function cannot be rejected while the linear function can be rejected at the 5% significance level. The log-linear form of the demand for M2 shows a small value of the mean absolute percent error and performs better in the CUSUM and CUSUMSQ tests than the linear form.
KEYWORDS: Currency substitution, capital mobility, Box-Cox model, CUSUM and CUSUMSQ tests.
JEL: E41.