The Lahore School’s Ninth Annual Conference on Management of the Pakistan Economy took place on 20 – 21 March, 2013 and the topic of this year’s conference was: “Human Capital Development for Sustained Economic Growth”. The conference participants ranged from leading economists and researchers in Pakistan, India, Sri Lanka, the United Kingdom, and the United States to leading Pakistani policy makers and NGO representatives. Over the course of two days, 14 research paper presentations were made on topics related to public service delivery, with a special emphasis on the education and health sectors as well and human development and social safety nets.
KEYWORDS: Pakistan, USA, India.

JEL: N/A.

Whether to provide services by the public or the private sector has been at the center of debates within governments and those in the international aid industry for decades. Unfortunately, this debate has often been cast in terms of absolutes with the private sector either as savior or demon. Casting the issue in this light simply can’t be correct. It cannot be the case that either is appropriate for every service and with every government regardless of its capability to the exclusion of the other. In every case, policy makers need to ask “how can the government improve the well-being of citizens with the constraints and tools at hand?” Those constraints include the ability to implement and monitor policy. This paper outlines how limitations of the market can be matched to appropriate interventions by government as it actually performs, not as it is hoped to perform. This matching will, by necessity, vary with country circumstance. While pure public goods must be provided by government regardless of its weaknesses and pure private goods should generally be left to the market, most serious policies operate in between. The balance of the limitations of the sectors needs careful analysis. The welfare costs of private market failure are rarely measured and the difficulties of implementing different policies are rarely discussed let alone quantified. Policies that are sensitive to deviations from perfect implementation should be avoided in preference to those that are more robust to circumstances. Further, every policy will generate interest groups that will constrain future decisions through political pressure.
KEYWORDS: Social services delivery, governance, education, health delivery, Pakistan.

JEL: H11, L88.

One of the most critical challenges Pakistan faces today is the need to improve and expand its education system. With important political and demographic changes taking place, greater devolution and strengthened democracy, this is an opportune moment to build a better system. Not only does the purpose of education have to be defined beyond what has been left over from colonial administrative objectives, but a much greater effort has to be invested in developing the skills and talents of the majority of the population. Punjab, Pakistan's largest province, has taken several education reform initiatives to improve education outcomes. However about a quarter of school age children are still not attending school either because they never enrolled or because they dropped out early. Low transition rates to secondary education are of special concern. Moreover, recent assessments have shown that students' knowledge and comprehension of basic subjects remains alarmingly low. Improved learning in schools is therefore another important challenge. Patterns in learning achievement in Punjab indicate the importance of school level factors, implying that a good school could make up for other regional and socio-economic disparities. Better quality schools also attract more students from the poorest families, because when parents expect better returns from education, the time and resources spent on schooling becomes worthwhile. This paper will review the extent to which critical gaps in achievement levels and other educational outcomes have been addressed by past policies and current reform programs.
KEYWORDS: Education, schooling, Pakistan.

JEL: I21.

This paper presents descriptive statistics on the government school education system in Sindh. The data are obtained from the latest administrative annual school census in Sindh (2011/12). The province’s schooling system comprises 48,932 schools of which 47,000 are primary, middle, and elementary schools, giving Sindh one of the densest public schooling systems in the world with almost 1.8 schools for every 1,000 people in rural Sindh. The functional schooling capacity, however, is low, with less than 15 percent of these schools having at least two teachers and access to basic facilities such as toilets, drinking water, electricity, and boundary walls. Against this backdrop, we examine key trends in education outcomes using the Pakistan Living Standards and Measurement surveys for 2004/05 and 2010/11. We find that the net enrollment rates (NERs) at primary, middle, and secondary level in Sindh stagnated, at best, during 2007–11 after a sharp increase registered in 2006; this trend is similar to that of the rest of Pakistan. Gains in NER vary significantly across districts with some performing exceptionally better than others. Finally, we cross-validate these statistics using independent household- and school-level census data on 300 communities, collected as part of an ongoing impact evaluation study in three districts of rural Sindh.
KEYWORDS: Patronage model, administrative data, PSLM, net enrollment rate, student achievement, public education, Sindh, Pakistan.

JEL: I21, I28, O20.

While schooling outcomes for girls have improved over the period 2001–11, progress has been uneven within Pakistan. Rural girls lag far behind urban girls and progress across the provinces remains unequal. The transition to secondary school—in some ways more critical for improving employability, reproductive health, and other outcomes—shows even more disparate progress by province and income class. Questions about the preference for public versus private schools and the actual choice of schools available to girls in most rural areas need to be answered if we are serious about a rapid escalation of secondary school enrollments for girls. We use data from the Pakistan Integrated Household Survey for 2001/02 and the Pakistan Social and Living Standards Measurement Survey (PSLMS) for 2007/08 and 2010/11 to look at patterns in this transition. Access is likely to be the main driving force behind the transition to secondary-level schooling. Initial findings reflect the almost total reliance on public schools for 10–14-year-old girls. This suggests that private secondary schools are not an option for girls in rural areas. The next major intervening factor is household income level: even rich families appear to favor public schools for girls. The data also suggest that girls from poor and large families compete with their brothers and other siblings for limited resources. Importantly, secondary school is only an option on completing primary school and the choices are greater at the primary school level. We study the choice of secondary school as conditioned on factors driving primary school completion. Regional patterns reflect the expansion of private schools in Punjab and Khyber Pakhtunkhwa (KP), less so in Sindh and Balochistan.
KEYWORDS: Poverty, girls, education, urban-rural gap, Pakistan.

JEL: I24, I21.

This paper investigates the economic (i.e., labor market) outcomes of “training” for individuals in Pakistan. The labor market benefits of general education have been relatively well explored in the literature and specifically in Pakistan. They point to the benefits of education accruing both from education or skills that promote a person’s entry into more lucrative occupations and from raising earnings within any given occupation. This research delves into another angle by investigating the role, if any, of acquired “training“—technical, vocational, apprenticeship, or on-thejob— and its impact through both channels of effect on economic wellbeing. This is done using data from a unique, purpose-designed survey of more than 1,000 households in Pakistan, collected in 2007. Multinomial logit estimates of occupational attainment show how training determines occupational choice. In addition, we estimate the returns to schooling and to training separately for men and women. The results show that, while training significantly improves women’s chances of entering self-employment and wage work (as well as the more “lucrative” occupations), only wage-working women benefit from improved earnings through the training they have acquired. On the other hand, men who have acquired skills this way benefit through an improved probability of being self-employed and earning higher returns within that occupation.
KEYWORDS: Returns to schooling, vocational training, apprenticeship training, occupational choice, Pakistan.

JEL: J24, I21, J16.

Over the past decade, Pakistan has seen the rapid growth of a third sector in education: shadow education. According to the Annual Survey of Education Report (2013), 34 percent of private school students and 17 percent of public school students undertake private tuition in Punjab. Anecdotal evidence suggests that private tuition has a positive impact on learning outcomes. Keeping this in view, it is possible that private tuition, rather than a difference in schooling quality, is driving the observed learning gap between public and private schools? This study employs a fixed-effects framework, using panel data from the Learning and Educational Achievement in Punjab Schools (LEAPS) survey, to quantify the impact of private tuition on learning outcomes in public and private schools. We analyze the demand and supply dynamics of the shadow education market in Punjab, and find that private tuition has a positive significant effect on learning outcomes, specifically for public school students. For English, much of the learning gap between public and private schools is explained by the higher incidence of private tuition among private school students, but this is not the case for mathematics and Urdu. We also find that private tuition is predominantly supplied by private school teachers, but that they do not shirk their regular class hours to create demand for their tuition classes, as is normally believed. On the demand side, private tuition acts as a substitute for receiving help at home. Moreover, it supplements formal education rather than substituting for low-quality formal schooling.
KEYWORDS: Public versus private education, education quality, tutoring, Pakistan.

JEL: I21, I00, I28.

Engel’s Law states that the share of food in household expenditure declines with households’ total expenditure—a regularity that is clearly evident in Pakistani household income and expenditure data. This study uses an “Engel curve” to incorporate additional social effects—including the impact of education on welfare—to infer the differential impact of education on measures of household wellbeing across income groups and provinces. Our Engel curve specifications close the gap between economic theory and empirical applications critical to evaluating the effects of education on economic wellbeing. The results show that net primary and matriculation education enrolment ratios can bring about a significant improvement in people’s welfare. Accordingly, there is a need to specifically redirect resources to Balochistan where access to educational opportunities is rather low; and to increase access to such opportunities in Sindh and Khyber Pakhtunkhwa. Data for the period 2008–11 shows that households in the two lowest income groups are worst off in terms of access to educational opportunities. Efforts should thus be stepped up to enhance their access to educational opportunities at the primary and matriculation levels. The study’s predictions are intended to guide policymakers in terms of where to concentrate their efforts and reduce economic distortions, and move the economy onto a sustainable path in the long run.
KEYWORDS: Modified Almost Ideal Demand System, Pakistan, education, hedonic prices.

JEL: P24, I131.

The intervention of local elites is often cited as an impediment to policy implementation in many developing countries. In this paper, we present initial results from an original primary household dataset from eight tehsils of rural Punjab, Pakistan. We examine descriptive statistics on patron–client interaction and correlations between household characteristics and that relationship. The study raises some key findings. First, households report connections with a range of officials; they interact most heavily with local officials, but a large number of households also report interacting with their provincial and national politicians. Second, many households report receiving active assistance both from local officials and from provincial and national politicians in accessing certain state services, in particular in applying for national identity cards. Third, households report links with many patrons outside their own biraderi or clan. Fourth, vulnerable households, such as landless and female-headed households, appear less likely to interact with and less likely to receive assistance from patrons, suggesting that patronage activity could increase the inequality of outcomes. Fifth, better-off households appear more likely to assist patrons in a range of areas. Finally, local officials and politicians had tended to recommend candidates in the last election, and rural households were strongly convinced that their vote was not secret from their patrons or officials. This is possibly consistent with patronage-based politics and bloc voting.
KEYWORDS: Patron, client, rural, Pakistan.

JEL: P16, D7.

We analyze educational attainment over three generations in rural Punjab, Pakistan, to determine if the fruits of post-independence development have translated into comparable rates of educational and social opportunities for all strata in the village economy. We show that the differences in class status institutionalized at the time of colonial village settlement lead to a sustained divergence in the rate of intergenerational educational mobility, with limited mobility for nonproprietary and marginalized groups compared to proprietary groups. Inter-class differences in the rate of mobility are higher in proprietary landed estates where the colonial state had concentrated land rights and governance in the hands of landowners compared to crown estates that had a more egalitarian arrangement of land rights and governance. We find that the divergence in inter-class mobility is worrying, so much so that the current generation of marginalized households appears to have fallen a generation behind in terms of educational attainment, even though it resides in the same villages as the proprietary households.
KEYWORDS: Inequality, education, development, Pakistan.

JEL: I25, I21.

Although the Millennium Development Goals provide countries with wellrounded objectives for achieving human development over a period of 25 years, Pakistan is not on track to achieving the health-related goals. With the eighth highest newborn death rate in the world, in 2001–07 one in every ten children born in Pakistan died before reaching the age of five. Similarly, women have a 1 in 80 chance of dying of maternal health causes during reproductive life. Compared to other South Asian countries, Pakistan currently lags behind in immunization coverage, contraceptive use, and infant and child mortality rates. Expenditure as a percentage of private expenditure on health is about 98 percent, positioning Pakistan among those countries with the highest share of out-of-pocket payments relative to total health expenditure (World Health Organization, 2009). Pakistan is also going through an epidemiological transition where it faces the double burden of communicable diseases combined with maternal and perinatal conditions, as well as chronic, noninfectious diseases. The landscape of public health service delivery presents an uneven distribution of resources between rural and urban areas: The rural poor are at a clear disadvantage in terms of primary and tertiary health services, and also fail to benefit fully from public programs such as the immunization of children. The poor state of public facilities overall has contributed to the diminished role of public health facilities, while the private sector’s role in the provision of service delivery has increased enormously. Following the 18th Amendment to the Constitution, the health sector has been devolved to the provinces, but the distribution of responsibilities and sources of revenue generation between the tiers remains unclear. A multipronged national health policy is needed that tackles the abysmal child and maternal health indicators, and reduces the burden of disease. Moreover, it is imperative to improve the provision of primary and tertiary healthcare with a strong monitoring system in place.
KEYWORDS: Millenium Development Goals, public health, Pakistan.

JEL: I18.

Pakistan has a large and dispersed primary public health system that gives citizens access to trained doctors and staff, and to subsidized medicines. However, both the use of these facilities and health outcomes remain low. Improvements in information and communications technology provide exciting opportunities to leverage technology to improve management. This paper presents a detailed qualitative and quantitative study of the institutional context in which such interventions in the public health sector in Punjab would be trialed. We describe the structure and management of primary healthcare facilities, present selected results from a survey of a representative sample of basic health units, and identify some key issues. We also report and discuss officials’ responses to the question of how services might be improved.
KEYWORDS: Healthcare infrastructure, public sector management, Pakistan.

JEL: I18.

This paper examines the effects of increased connectivity in rural areas on child health outcomes. In particular, it studies whether improved access to markets for rural areas through an upgraded road network and greater openness, as measured by village electrification status, has had a positive impact on child health outcomes and awareness of health practices such as immunization and prenatal care. Using a 16-year panel dataset from rural Pakistan, we estimate two iterations of a probit model, where one examines the probability of child i being vaccinated and the second estimates the incidence of use of prenatal care. The results support the hypothesis that greater connectivity, as measured by road connectivity and electrification, improves health outcomes by increasing the likelihood of immunization and uptake of prenatal care.
KEYWORDS: Child immunization, prenatal care, access to markets, electrification, rural Pakistan.

JEL: I10.

Pakistan has launched two far reaching social protection programs. The federal government’s Benazir Income Support Program has, at its core, an unconditional cash grant for the poorest households. Responding to the concern that this runs the risk of creating a large pool of permanent government handout recipients, the federal government has also launched an ambitious skills development program. At the provincial level, the government of Punjab is implementing skills development as social welfare in the four poorest Southern Punjab districts. The paper discusses the structure of the two programs, their success at reaching the poor and the monitoring challenges to assess their overall effectiveness.
KEYWORDS: Social protection, targeted transfer program, skills development, Pakistan.

JEL: R58, 020.

This study makes the case that economic uncertainties—i.e., the extent to which economies face systemic uncertainties—need to be considered another dimension of human development because they render development vulnerable, diminish social welfare, and constrain human capabilities. We propose a methodology for adjusting the human development index (HDI) for economic uncertainties, using the time variability of income changes as a proxy. We construct an adjusted index associated with the income component for the 2011 HDI. Our analysis indicates that such an index contains additional information. The percentage loss in the income component of the HDI seems to reflect the variability in economic indicators arising from the political and economic tribulations experienced by each country. In Pakistan’s case, the results of a timeseries analysis of the percentage loss from the uncertainty adjustment appear to closely trace the country’s political and economic upheavals.
KEYWORDS: Human development index, capabilities, human development, economic growth, economic vulnerability, uncertainty, risk.

JEL: D63, I32, I38.

Microinsurance in Pakistan is still in its nascent stages. More than half of the current microinsurance policies in effect in Pakistan are offered through the Benazir Income Support Program (BISP), with the remainder provided in conjunction with microcredit services offered by various microfinance institutions (MFIs), microfinance banks, nongovernment organizations, and rural support programs (RSPs). The policies offered by the microcredit sector are mainly creditlife policies, which cover loan balances in the event of the borrower’s death. In addition, some lenders—principally the RSPs—offer small health insurance policies covering the hospitalization of the borrower and (sometimes) their spouse. As catastrophic health expenses and deaths in the family are among the most important economic stressors that households face, it makes sense that microinsurance should first make inroads in these areas. It is difficult to say what impact microinsurance has had in Pakistan, since few rigorous evaluations have been undertaken to date. What we do know is that utilization has been low, explained by providers as limited client awareness of the benefits and coverage. In the short to medium term, microinsurance outreach can be expanded by offering health microinsurance (HMI) coverage to microcredit borrowers’ entire households, and by offering HMI to all community members within an RSP, rather than only microloan borrowers and their spouses. Partnering with mobile phone operators for automated, digital payments can also significantly expand potential customer volume while reducing transaction costs. HMIs might also be combined with health savings accounts that households can use to pay for medications and outpatient services not covered by HMI plans. Provinces could also leverage the existing database of poverty scorecards implemented by BISP to channel partially government-subsidized microinsurance policies toward poor households just above the BISP threshold.
KEYWORDS: Microinsurance, social insurance, poor, Pakistan.

JEL: G21.

This study aims to capture volatility patterns using GARCH (1,1) models. It evaluates these models to obtain one-step-ahead forecastabilities by employing four major forecasting evaluation criteria, and compares two different currencies— the Pakistan rupee and the US dollar—as domestic and foreign currency-valued exchange rates, respectively. The results show that using an international vehicle currency is favorable in Pakistan’s context. However, the Kuwaiti dinar, Canadian dollar, US dollar, Singapore dollar, Hong Kong dollar, and Malaysian ringgit are found to be preferable when performing direct international transactions. Using the root mean square errors and mean absolute errors techniques, the study also assess the robustness of measuring one-step-ahead forecasts.
KEYWORDS: Time series analysis, GARCH models, foreign exchange markets, forecasting, exchange rate volatility, Pakistan.

JEL: C53, F31, C22, F37, F44.

This article empirically examines the interest rate pass‐through mechanism for Pakistan, using six‐month treasury bills as a proxy for the policy rate (the exogenous variable) and the weighted average lending rate and weighted average deposit rate as endogenous variables representing the lending and deposit channels, respectively. We use data for a six‐year period from June 2005 to May 2011, published by the central monetary authority in Pakistan. The widely accepted error correction mechanism is used to examine the short‐run and longrun pass‐through; a vector error correction mechanism impulse response function helps measure the short‐run speed of the pass‐through. We find that there is an incomplete pass‐through in Pakistan for both the lending and deposit channels. The impact is greater on the lending channel than on the deposit channel in both the short and long run, while the adjustment speed is higher for the lending channel.
KEYWORDS: Interest rate pass‐through, interest rate channel, transmission mechanism, monetary policy, Pakistan.

JEL: E58, E43.

This paper examines the behavior of beta coefficients (systematic risk) for underlying stocks around the introduction of single-stock futures (SSFs) contracts in the Pakistani market, by employing models that account for nonsynchronous and thin trading and varying market conditions as “bull” and “bear” markets. Unlike the results of earlier studies on US markets, the empirical evidence tends to support a decline in systematic risk for the majority of underlying stocks in the post-futures listings period. Nevertheless, similar to SSFs stocks, we also find empirical evidence of a decrease in systematic risk for many of the control group stocks. This indicates that changes in beta estimates for SSFs-listed stocks might not be induced by the introduction of SSFs contract trading, but could be attributed to other market-wide or industry changes that have affected the overall market. Several plausible reasons, such as lack of program trading activities normally associated with index futures, market microstructure differences between developed markets and a developing market such as Pakistan, and the capturing of the “bear” and “bull” market effects on stock betas in our estimation procedure could explain these different results for Pakistan’s market.
KEYWORDS: Systematic risk, beta, stock index futures, single-stock futures, stock price volatility, GARCH model, bear and bull markets, thin trading, Pakistan.

JEL: G10, G13.

This study uses a structural model to analyze the co-determinants of capital structure and stock returns. Applying a generalized method of moments (GMM) model to a panel dataset for 100 nonfinancial firms for the period 2006– 10, our results indicate that both leverage and stock returns affect each other but that the former has a dominant effect on the latter. The results illustrate that profitability, growth, and liquidity are significant determinants of leverage and stock returns. Profitability negatively affects leverage and positively affects stock returns. Growth has a positive effect, while liquidity has a negative effect on leverage and stock returns. Firm size does not have any significant effect on either capital structure or stock returns.
KEYWORDS: Capital structure, stock returns, GMM, Pakistan.

JEL: C33, C36, G30.