As part of the massive One Belt One Road (OBOR) project or ‘New Silk Road’ the governments of China and Pakistan have announced that a significant ‘corridor’ will be constructed in Pakistan. This paper looks in detail at the $46 billion China-Pakistan Economic Corridor (CPEC) package of transport, energy and manufacturing projects and asks how we can analyse the impact of a transformative expansion of infrastructure. This paper draws lessons from various old-fashioned economics including Rostow, Hirschman and others and the historical case studies of transformative infrastructure expansion in the nineteenth century United States, Mexico, Germany and India to explore the conditions under which CPEC could promote sustainable long-run economic growth in Pakistan.
KEYWORDS: Pakistan, China, China-Pakistan Economic Corridor (CPEC), growth.
JEL: O10.

Reforms have begun in Pakistan to sustain the funded pension scheme for government-operated pension schemes such as the Employees Old Age Benefit Institution (EOBI). Presently, the EOBI operates its own fund and invests most of its assets in government-backed securities which are basically interest-bearing debt instruments. Although the returns on the EOBI’s fund have been high for a short period due to higher interest rates and minimum pension distributions, this trend is not likely to continue. Funded pension schemes depend heavily on portfolio performance because risk is transferred to contributors. Therefore, asset allocation becomes considerably important. The purpose of this study is to determine optimal asset allocation and the role of international diversification specifically for the EOBI’s funds and generally for newly created funded pension schemes in Pakistan. The article analyzes the potential benefits accrued through international investments based on historical returns over almost five decades with varying degrees of risk aversion coefficients. Varying degrees of risk may allow policymakers to incorporate their strategies for future asset behavior and take timely action to counter the potential threat of aging, demographic shifts, and liabilities and to ensure decent benefits for pensioners.
KEYWORDS: Asset allocation, international diversification, pension fund, Pakistan.
JEL: G11, G23.

This paper utilizes three Multivariate General Autoregressive Conditional Heteroscedasticity (MGARCH) models to determine variance persistence in the Greater China region from 2009 to 2014. The first approach applies the Baba, Engle, Kraft and Kroner (BEKK) model and shows that the Shanghai Stock Exchange Composite Index (SSEI), Taiwan Capitalization Weighted Stock Index (TAEIX) and the Hang Seng Stock Index (HSEI) stock returns are all functions of their lagged covariances and lagged cross-product innovations. The second MGARCH approach applies two methodologies, namely, dynamic conditional correlation (DCC), and constant conditional correlation (CCC) estimations. The DCC model concludes both short- and long-run persistencies between Taiwan’s TAIEX and Hong Kong’s HSEI. Alternatively, the CCC model confirms the initial findings of the BEKK model, and adds that the relationships among these three strong economies are stable in the long-run. The log-likelihood values determine that the DCC model is better in judging volatility dynamics in the Greater China region, because of economic clauses brought by the Closer Economic Partnership Arrangement (CEPA), the Economic Co-operation Framework Agreement (ECFA) and the Hong Kong - Taiwan Business Cooperation Committee (BCC).
KEYWORDS: Greater China Region, stock market returns, volatility dynamics, MGARCH models.
JEL: P45, C30.

In the last two decades, the financial services sector in Pakistan has seen remarkable growth and structural development. However, it is debatable whether the financial markets and institutions have contributed meaningfully towards promoting growth in the real economy. This paper provides a brief background of the theoretical and empirical literature on the linkage between the financial services sector and economic growth. It evaluates the development of Pakistan's financial markets and institutions in comparison to a cohort of developing countries. The country's governance and regulatory environment in light of these theories and the empirical evidence is compared with other countries. The weaknesses in the linkages between finance and economic growth are identified within the framework of the theoretical models and relevant empirical evidence. The final section discusses the challenges Pakistan faces in making its financial services sector become an effective driver of economic growth.
KEYWORDS: Financial services, economic growth, Pakistan.
JEL: O16.

This paper models the individual-level social capital effect the credit market constraints that reduce the accumulation of costly human capital. Human capital, in turn, improves an individual’s income as well as the bequest that they intend to leave for their children. It also helps reduce inequality across a country. Finally, the model shows that investment in social capital has a negative relationship with the interest rate, so that the initial inherited bequest of every individual affects the output and investment in the short-run, as well as in the long-run.
KEYWORDS: Social capital, credit market, investment, interest rate.
JEL: E24.

Pakistan is an emerging market for fintech, with increasing facilitation for digital payments, widespread internet and smartphone penetration, consumer preferences for social media and booming online commerce. Also, the State Bank of Pakistan provides sound regulations, which act as a platform for fintech growth. While regulations are necessary, they might also become a threat for an industry still in its infancy. This paper aims to provide a qualitative assessment of economic, demographic and technological factors that are conducive for the penetration and growth of fintech in Pakistan. A second, but no less important, objective of this paper is to look at the regulatory framework governing fintech and its contribution in making the segment an active or dormant player in the financial services industry.
KEYWORDS: Fintech, disruption, innovation, financial services, emerging market, Pakistan.
JEL: K20, O16, G20.

Given that autocorrelation tests do not perform well in the presence of heteroskedasticity and in variance-break cases, we present three modified weighted variance ratio tests of autocorrelation. The numerical results show that the proposed tests perform better for small samples. They provide a better approximation of asymptotic distributions and are more powerful when the lag length is mis-specified. The study also applies these tests to data on the daily returns of two companies listed on the Pakistan Stock Exchange.
KEYWORDS: Regression, variance break, wild bootstrap.
JEL: C40.

This paper examines whether regional connectivity causes return and volatility spillovers and the co-movement of stock exchanges to shift from international to regional markets. Using the China-Pakistan free trade agreement (FTA) of 2006 and the China-Pakistan Economic Corridor (CPEC) agreement to represent events of regional connectivity, we test this proposition based on data for two regional stock exchanges (the Pakistan Stock Exchange and Shenzhen Stock Exchange) and two global markets (the FTSE 100 and Nasdaq). We divide the convergence and co-integration of the stock markets into three phases: overall sample (2001–17), pre-FTA and post-FTA, and pre-CPEC and post-CPEC. Applying a GARCH (1, 1) model, co-integration, Granger causality and seasonality, we find that regional connectivity causes return and volatility spillovers and co-movements in the Pakistan Stock Exchange to shift from international markets to regional markets.
KEYWORDS: Financial integration, China-Pakistan economic corridor, interdependency, co-integration, free trade agreement, regional connectivity, Pakistan.
JEL: F15, C22, R58, F21, E44.

This paper examines the impact of exchange rate changes on the stock returns of 232 nonfinancial firms listed on the Pakistan Stock Exchange, for the period January 2000 to June 2014. To mitigate the problem of heteroskedasticity, we use a generalized least squares estimator. The estimated regression models indicate that exchange rate variations have a significant effect on firm value and that firms are exposed significantly to one-period lagged variation in the exchange rate. Our results suggest that, in addition to exchange rate dynamics, increased exchange rate volatility appears to have significant and negative effects on firms’ stock returns. Compared to domestic firms, multinational firms experience greater exchange rate exposure. Finally, we show that exchange rate depreciation and appreciation have significant differential effects on firms’ stock returns. These effects vary significantly across domestic and multinational firms.
KEYWORDS: Exchange rate exposure, stock returns, firm value, domestic firms, multinational firms, volatility of exchange rate, Pakistan.
JEL: G23.

This paper estimates the Mincer wage model for Pakistan’s labor market, using a relatively recent dataset and new independent variables. We employ instrumental variables and two-stage least squares to address the problem of the endogeneity of education. Our results show that the returns to education are biased downward due to endogeneity, with significant wage gaps emerging among different regions, between genders and between urban and rural job markets. The study’s choice of instruments has conceptual as well as empirical grounds. Our findings establish that the wage determination process is different for males and females across provincial labor markets.
KEYWORDS: Endogeneity of education, human capital model, instrumental variables, Mincer regression, labor market, returns to schooling, Pakistan.
JEL: C26.