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.

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.