This study focuses on the impact of trade liberalization on firm entry and exit in Punjab’s export manufacturing sector over the decade 2001–10. As far as the province’s export industries are concerned, real exchange rate depreciation attracts new firms but also leads weaker firms to exit. A reduction in local or international tariffs, however, has no significant impact on firm entry or exit.
KEYWORDS: trade liberalization, exchange rates, firm entry, Pakistan.

JEL: F41.

This study examines the impact of analysts’ recommendations on stock prices listed on the Karachi Stock Exchange for the period 2006–12. The recommendations are extracted from the daily Morning Shout report published by Khadim Ali Shah Bukhari Securities Ltd (KASB), which provides buy and sell recommendations for different stocks. We use the market model to estimate the abnormal returns around the recommendation dates for these securities. The study also investigates whether the abnormal returns are due to price pressure or information content. We find that investors earn abnormal returns on the basis of analysts’ recommendations for these securities. The results are robust in considering only the sub-sample subsequent to 2008’s global financial crisis, and are also consistent with the information content hypothesis and price pressure hypothesis.
KEYWORDS: Analysts’ recommendations, information content, price pressure, abnormal returns, market efficiency, Pakistan.

JEL: G14, G24.

This empirical study examines the effects of terms-of-trade (TOT) volatility on inflation in Pakistan, using annual data for the period 1972 to 2012. The results show that TOT volatility has a significant negative effect on inflation in Pakistan. This result is robust to alternative equation specifications and TOT volatility measures. Output growth has a negative effect on inflation while foreign export prices have a positive effect on inflation. Both the depreciation of the nominal exchange rate and money supply increase the inflation rate. The fiscal deficit and world oil prices are also found to increase domestic inflation.
KEYWORDS: Terms of trade, inflation, Pakistan.

JEL: E31, F41.

This study investigates the empirical relationship between spot and forward exchange rate efficiency with reference to Pakistan and the efficiency of its foreign exchange market. We use monthly data from the State Bank of Pakistan and KIBOR rates for the period July 2006 to December 2013. Our results indicate that the forward exchange rate does not fully reflect all the information available. Market players may gain the benefits of volatility speculation due to market inefficiency. Pakistan’s foreign exchange market is still small compared to those of other emerging economies, implying that substantial policy work is required.
KEYWORDS: Foreign exchange markets, forward exchange rate efficiency, efficient market hypothesis, emerging economy, real effective exchange rate, Pakistan.

JEL: F31, G10, F30.

In this study, we formulate a new inflation equation to capture the potential effects of gold and stock prices on inflation in Pakistan. We aim to assess the inflation-hedging properties of gold compared to other assets such as real estate, stock exchange securities, and foreign currency holdings. Applying time-series econometric techniques (cointegration and vector error correction models) to data for 1960–2010, we find that gold is a potential determinant of inflation in Pakistan. On the other hand, it also provides a complete hedge against unexpected inflation. Real estate assets are more than a complete hedge against expected inflation, although stock exchange securities outperform gold and real estate as a hedge against unexpected inflation. Foreign currency proves to be an insignificant hedge against inflation. Given the dual nature of the relationship between gold and inflation, it is increasingly important for the government to monitor and regulate the gold market in Pakistan. Moreover, stock market investment should be encouraged by the government given that asset price inflation does not pose a critical problem for Pakistan as yet.
KEYWORDS: Gold prices, inflation hedging, assets, time series econometrics technique, Pakistan.

JEL: E31, E37, E4.

This paper attempts to answer two important questions in the context of Asian exchange rate regimes with respect to the choice of anchor currencies and dynamic preferences for exchange rate pegging. According to our results, the US dollar is the first choice of a de facto peg for many countries such as China, Hong Kong, the Philippines, and Pakistan. Other countries, apart from Korea and Indonesia, seem to prefer a basket peg comprising two or more anchor currencies with rapidly increasing weight attached to the euro. This shift from the US dollar to the euro reflects changes in the choices, preferences, and policies of these economies as a result of varying macroeconomic and global financial realities.
KEYWORDS: Exchange rate regime, flexibility, pegging, Asia.

JEL: F31, E58, F41, E42, F33.

This article estimates the economic returns to schooling as well as analyzing other explanatory factors for the French labor market. It addresses the issue of endogeneity bias and proposes two new instruments for use in the instrumental variable two-stage least squares technique. Our results show that the proposed instruments are relevant and adequate, based on evidence from the available literature. After using the proposed instruments, we find that the OLS coefficients for schooling are biased downwards. Finally, we choose between the two proposed instruments.
KEYWORDS: Endogeneity bias, instrumental variable, Mincerian model, two-stage least squares, wage regression, France.

JEL: C1, I2, J3, P5.

This study attempts to identify a stable money demand function for Pakistan’s economy, where the monetary aggregate is considered the nominal anchor. With evolving financial innovations and regulations, the stability of money demand has been the focus of numerous debates. Where earlier studies have provided conflicting explanations due to inadequate specifications and imprecise estimations, we find that money demand in Pakistan is stable, if specified properly. For developing countries such as Pakistan, it is important to target monetary aggregates or respond to deviations from the desirable path if monetary policy is to be effectively implemented and communicated; this should remain, if not a primary, then an auxiliary target in the monetary policy framework.
KEYWORDS: money demand, stability, monetarism.

JEL: C20, E12, E41, E5.

This study uses the forward-looking rule and backward-looking Taylor rule to investigate the conduct of monetary policy in Pakistan during 1971–2011. We compare the pre- and post-reform periods, and find that the estimates obtained using the generalized method of moments indicate that no interest rate rule was being followed. This explains the inability of monetary policy to control inflation and minimize the output gap. Although monetary policy was not very active in the pre- and post-reform periods, the post-reform quarterly data show some interest rate inertia and smoothing. Monetary policy was less accommodating of the cyclical nature of the output gap. We conclude that the behavior of the State Bank of Pakistan was not very different under forward- or backward-looking rules.
KEYWORDS: Taylor rule, forward-looking behavior, backward-looking policy, monetary policy, generalized method of moments.

JEL: E52, E58, C22.

Using firm-level balance sheet data for 20 of the 24 exchange companies in Pakistan for the period 2006–11, we explore the sources of firms’ vulnerability to short-term financing shocks. Based on the probability estimates of a maximum likelihood binary probit model, this paper shows that the incidence and degree of vulnerability of foreign exchange companies to short-term financing shocks has risen significantly over time. If not managed opportunely, these shocks can cumulate into long-term financing shocks and even lead to corporate failure in the long run. Our regression results show that the corporate managers of these companies cannot ignore macroeconomic factors such as global changes and the macroeconomic environment (inflation and GDP growth) in addition to firm-specific factors (growth opportunities, firm size, permanent earnings, earnings volatility, and working capital management) when managing their firms’ vulnerability to short-term financing shocks.
KEYWORDS: Foreign exchange companies, vulnerability, financing shocks, Pakistan.

JEL: G30, G33, L80, L89.

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.