The existing literature on education and poverty considers mostly primary data from an income point of view. However, the benefits of education vary from a direct income effect to positive externalities, which can help reduce poverty. This paper uses panel data for 40 developing countries for the period 1999 to 2007, and estimates coefficients by applying the random effect generalized least squares (GLS) technique. The study concludes, first, that income growth plays a moderately positive role in alleviating poverty, but that income distribution does not play a key role in poverty alleviation in the sample overall. Second, it concludes that education is the most significant contributor to poverty alleviation.
KEYWORDS: Education, income, income distribution, poverty alleviation, GLS, Pakistan.

JEL: I32, I30.

Edited by Shahrukh Rafi Khan and Jens Christiansen, Towards New Developmentalism, Market as Means Rather than Master, Routledge, Taylor and Francis Group, London and New York, 2011, ISBN13: 978-0-415-77984-5, pp 286. Neo-liberalism has virtually seen its day and over the last three decades a significant amount of scholarship has evolved that provides a viable alternative to this paradigm. Further, the global financial and economic crisis plaguing countries the world over from 2007-2009 has led to the exploration of alternatives that are presented in this book by scholars.
KEYWORDS: Book review, neo-liberalism, strategy, financial crisis.

JEL: N/A.

This paper is a first attempt to measure and analyze inflation uncertainty in Pakistan. It makes several contributions to the literature. In the first stage, using quarterly data from 1976:01 to 2008:02, we model inflation uncertainty as a time varying process using the GARCH framework. In the second stage, we analyze the asymmetric behavior of inflation uncertainty using the GJR-GARCH and EGARCH models. For further analysis of asymmetry and leverage effects, we develop news impact curves as proposed by Pagan and Schwart (1990). Finally we investigate the causality and its direction between inflation and inflation uncertainty by using the bivariate Granger-Causality test to determine which inflation uncertainty hypothesis (Friedman-Ball or Cukierman-Meltzer) holds true for Pakistani data. We obtain two important results. First, the GJR-GARCH and EGARCH models are more successful in capturing inflation uncertainty and its asymmetric behavior than the simple GARCH model. This can also be seen from news impact curves showing a significant level of asymmetry. Second, there is strong evidence that the Friedman-Ball inflation uncertainty hypothesis holds true for Pakistan.
KEYWORDS: Inflation, uncertainty, GJR-GARCH, EGARCH, Friedman-Ball hypothesis, Pakistan.

JEL: E31, C22, E37.

One of the more celebrated propositions found in international trade is the case that trade liberalization is associated with declining prices, so that protectionism is inflationary. In line with this view, Romer (1993) postulates the hypothesis that inflation is lower in small and open economies. The objective of this study is to examine Romer’s hypothesis in Pakistan. For this purpose, we have used multivariate cointegration and a vector error correction model. The study covers the period from 1960 to 2007. The empirical findings under the cointegration test show that there is a significant negative long-run relationship between inflation and trade openness, which confirms the existence of Romer’s hypothesis in Pakistan.
KEYWORDS: Trade openness, inflation, cointegration, vector error correction model, Pakistan.

JEL: F41, C22, O53.

The objective of this paper is to assess the conditions for inflation targeting in Pakistan. The recent inflationary surge in Pakistan calls for rethinking monetary policy afresh. This paper argues the case for inflation targeting in Pakistan as a policy option to achieve price stability. The country experienced an inflation rate of just below 10 percent during 1970-2009, which makes it a potential candidate for inflation targeting. Applying the VAR technique to data for the same period, inflation is shown to be adaptive in nature, leading us to reject the accelerationist hypothesis. The Lucas critique holds as people are found to use forward-looking models in forming expectations about inflation. The paper also sheds some light on the State Bank of Pakistan’s level of preparedness for the possibility of adopting inflation targeting, for which transparency and autonomy are prerequisites. The interest rate channel can play the role of a nominal anchor in the long run.
KEYWORDS: Monetary policy, central bank, inflation targeting, Pakistan.

JEL: E31, E52, C32.

Using Theil’s inequality coefficient based on the mean square prediction error, this paper evaluates the forecasting efficiency of the central government budget and revised budget estimates in Pakistan for the period 1987/88 to 2007/08 and decomposes the errors into biasedness, unequal variation and random components to analyze the source of error. The results reveal that budgetary forecasting is inefficient in Pakistan and the error is due mainly to exogenous variables (random factors). We also find that neither the budget nor revised budget estimates of revenue and expenditure satisfy the criteria of rational expectations of forecasting. Further, there is very little evidence of improvement in the efficiency of budgetary forecasts over time.
KEYWORDS: Budget, Forecast errors, Theil’s inequality coefficient, rational expectations, Pakistan.

JEL: C53, E62, H68.

Keynes (1930) proposed that an asset is more liquid than another “if it is more certainly realisable at short notice without loss” (vol. II, p. 67). This definition suggests that the liquidity of an asset is twofold. First, an asset should have a market that can readily absorb the sale, and second, do so without risk to its final value. This suggests that investors should be rewarded for both the level of liquidity and liquidity risk. The standard form of asset pricing models assumes financial markets to be perfectly liquid. In a perfectly liquid market, there are no arbitrage possibilities. Therefore, the under traditional asset pricing approach, all assets that have similar expected cash flows must have the same price. This phenomenon of frictionless markets ignores the impact of liquidity of financial assets on their respective prices and consequently on returns. The relation between liquidity and expected returns has been statistically observed and explains certain market anomalies such as the small firm effect, equity premium, and risk-free rate puzzle.
KEYWORDS: stock returns, Liquidity, frictionless markets.

JEL: N/A.

The liberalization of the agricultural sector in general and the rice subsector in particular has been a major component of Bangladesh’s structural adjustment program initiated in 1992. However, the government has continued to intervene in the rice subsector. This paper examines whether the regional/divisional rice markets have become spatially integrated following the liberalization of the rice market. Wholesale weekly coarse rice prices at six divisional levels over the period of January 2004 to November 2006 were used to test the degree of market integration in Bangladesh using co-integration analysis and a vector error correction model (VECM). The Johansen co-integration test indicated that there are at least three co-integrating vectors implying that rice markets in Bangladesh during the study period are moderately linked together and therefore the long-run equilibrium is stable. The short-run market integration as measured by the magnitude of market interdependence and the speed of price transmission between the divisional markets has been weak.
KEYWORDS: Market liberalization, integration, vector error correction model, rice, price transmission, Bangladesh.

JEL: Q11, D40.

The Sixth Annual Conference on the Management of the Pakistan Economy was hosted by the Center for Research in Economics and Business (CREB) of the Lahore School of Economics from April 22nd to April 23rd, 2010 and the annual Special Edition of the Lahore Journal of Economics contains the Papers and Proceedings of this conference. The objective of the conference was to promote discussion on economic management and strategic issues facing Pakistan today, because if the country can successfully deal with key challenges, it can make the transition to a middle income country by 2020. These challenges include addressing the recurrent energy crises, overcoming the persistent poor government revenue mobilization effort and bridging the growing regional disparities and lack of trust between the four provinces.
KEYWORDS: Pakistan, Lahore School, Annual Conference, CREB, Sixth, economic management.

JEL: N/A.

This article suggests that Pakistan requires a different development paradigm. The analysis begins by giving a quick overview of some of the larger economies of the region and assesses the divisions that have developed between the people as a result of national strategies. The paper goes on to present a brief history of the previous attempts at decentralization in Pakistan and a discussion of how these were thwarted. This is followed by a discussion of how decentralization can be successful in Pakistan after the 18th Amendment and the 7th NFC Award.
KEYWORDS: Development, policy, decentralization, Pakistan.

JEL: O20, O23, H77.

This paper looks at the issue of federalism in Pakistan. It begins with an analysis of the conceptual paradigms of federalism and goes on to examine the history of federalism in Pakistan. The paper goes on to discuss the reasons for the failure to develop an organic federal covenant as well as discuss how the 7th National Finance Commission (NFC) Award and the 18th Amendment may be indicative of a paradigm shift. The paper concludes by presenting the way forward for federalism in Pakistan.
KEYWORDS: Federalism, governance, Pakistan.

JEL: H77, O2.

This paper analyzes Pakistan’s energy sector issues and highlights (i) the importance of the link between energy and the environment, and (ii) the central importance of energy efficiency for high return demand-side solutions to meet the country’s energy needs. The paper argues that energy planning should integrate the external cost of energy use in deciding about the composition of supply: coal, oil, gas, hydropower, renewable, nuclear, and solar. By utilizing external cost estimates made by the European Commission for Europe, and the US National Academy of Sciences, a total cost (external + internal) ranking of primary energy sources for Pakistan is estimated. This estimate is at the low end of the cost spectrum because classic pollutants—sulfur dioxide, nitrogen oxides, carbon monoxide—in Pakistan are significantly higher than in Europe or the US. The paper also discusses the experiences of China and OECD countries in increasing energy-wide efficiency. A central lesson emerging from the analysis is that Pakistan will have to significantly increase its energy-related research and development expenditure in order to adequately address its energy sector issues. A quadrupling from 0.25 % of gross domestic product is recommended over a decade.
KEYWORDS: Energy, policy, environment, Pakistan.

JEL: Q48, Q47, Q5.

This paper examines the circular debt problem in the Pakistani energy sector. After presenting the profile of the energy sector in Pakistan, the paper explains why circular debt has emerged in the sector. Two principal reasons are discussed for the circular debt problem: First, consumer tariffs were insufficient to recover the rising costs of power generation and the government (due to fiscal constraints) was not compensating PEPCO for the resulting losses. Second, PEPCO has faced significant problems in recovering dues from consumers. In order to resolve the circular debt problem, sharp adjustments in power tariffs may be required combined with the need by the government to explicitly recognize the costs of power subsidies in the budget.
KEYWORDS: Circular debt, energy, tariff, subsidy, Pakistan.

JEL: Q43, H62, Q48.

This paper looks at the economy-wide demand and the firm level demand for electricity in Pakistan. The economy wide estimation of electricity demand uses panel data from 63 countries from 1998-2008, and finds that the elasticity of demand for electricity with respect to per capita income is approximately 0.69, which implies that a 1% increase in per capita income will lead to a 0.69% increase in the demand for electricity. The firm level analysis uses firm level data from the World Bank’s Enterprise Survey for Pakistan and finds that the price elasticity of demand for electricity across all firms is approximately -0.57, which implies that a 1% increase in electricity prices will lead to a 0.57% decrease in electricity demand across firms. Across sectors, the textile sector has the highest price elasticity of demand (-0.81) while the price elasticity of demand for firms in the electricity and electronics sector is the smallest (-0.31). Finally, firm level data is also used to estimate production functions in order to estimate the impact of electricity shortages on manufacturing output.
KEYWORDS: Electricity, demand, industrial, price elasticity, Pakistan.

JEL: Q41, E01, E39.

In this paper, we aim to understand residential electricity demand responses to changes in income, in order to assist policymakers in managing demand for electricity and evaluating tariff increases associated with proposed projects for increasing supply, while minimizing the impact on poverty.
KEYWORDS: Electricity, demand, residential, Pakistan.

JEL: Q41, D12, E39.

This paper discusses the efforts by the Government of Pakistan to implement a General Sales Tax (GST). First, a history of Pakistani tax reform efforts is presented along with the reforms recommended by the National Taxation Reforms Commission. After this, the design and implementation of the GST is discussed followed by an analysis of the political economy and provincial issues that arise in the process of implementing the GST. Finally, the paper discusses various proposals regarding the determination of the base for the GST. The paper concludes that the splitting of the GST by sectors, given the perspective that the 1930’s style sales tax, is not sensible, and the Pakistani formulation is more unstable than the assignment of the GST on goods.
KEYWORDS: Tax, reforms, GST, Pakistan.

JEL: H29.

This paper explores how Pakistan can get out of the low-tax-to-GDP trap and come close to achieving its revenue targets. Examining the trend factors influencing the trend in total and individual tax-to-GDP ratios over a period of twenty years, the paper concludes that partially successful and/or inappropriate tax reforms have put Pakistan in this trap. While highlighting that a period of economic slowdown may not be the best time to make a big push on resource mobilization, the paper presents a strategy which aims at not only enhancing tax revenues but also making the taxation structure more progressive, broad based and balanced.
KEYWORDS: Tax, structure, reform, Pakistan.

JEL: H71, H2.

This paper looks at the Indus Basin Water Strategy for Pakistan. It begins with a historical overview of the Indus Basin Irrigation System (IBIS), the Indus Basin Replacement Works (1960-1980) and the Indus Basin Salinity Control Efforts (1960-2000). The paper then looks at the IBIS irrigation and salinity control investments that have taken place over the last decade (2000-2010). The paper goes on to look at the present situation of the IBIS as well as discuss an IBIS strategy for the next decade. Finally, the paper discusses supply side and demand management strategies for IBIS. Overall, the paper concludes that Pakistan should focus on (1) Creating Additional Surface Storage, (2) Preserving surface water (particularly through lining canals), (3) Controlling Groundwater and controlling salinity (by discouraging excessive tube-well use), (4) Encouraging general efficiency of irrigation water use (through improved land management techniques), (5) Enhancing yields through improved farming practices, and (6) Fully meeting the environmental concerns of the Indus Delta, river systems and wetlands.
KEYWORDS: Indus Basin, water, strategy, irrigation, Pakistan.

JEL: Q25, Q15.

This article is an attempt to examine the short and long-run relationship between the trade balance, income, money supply, and real exchange rate in the case of Pakistan’s economy. Income and money variables are included in the model in order to examine the monetary and absorption approaches to the balance of payments, while the real exchange rate is used to evaluate the conventional approach of elasticities (Marshall Lerner condition). The bounds testing approach to cointegration and error correction models, developed within an autoregressive distributed lag (ARDL) framework is applied to annual data for the period 1970 to 2005 in order to investigate whether a long-run equilibrium relationship exists between the trade balance and its determinants. Additionally, variance decompositions (VDCs) and impulse response functions (IRFs) are used to draw further inferences. The result of the bounds test indicates that there is a stable long-run relationship between the trade balance and income, money supply, and exchange rate variables. The estimated results show that exchange rate depreciation is positively related to the trade balance in the long and short run, consistent with the Marshall Lerner condition. The results provide strong evidence that money supply and income play a strong role in determining the behavior of the trade balance. The exchange rate regime can help improve the trade balance but will have a weaker influence than growth and monetary policy.
KEYWORDS: Trade balance, ARDL, exchange rate, money supply, Pakistan.

JEL: C22, F10, F12, C15.

Using an international dataset on bilateral trade for 137 countries in 2005, we estimate a gravity model to address the question of whether intra-Economic Cooperation Organization (ECO) trade is too low and whether the scale of trade at present is accounted for by regional integration or unilateral liberalization. The results of the gravity model confirm that intra-regional trade is lower than predicted by the gravity equation. The results also validates the theory that the present level of trade is attributed to regional agreements rather than unilateral liberalization, suggesting greater scope for regional cooperation among ECO member countries.
KEYWORDS: Bilateral trade, economic cooperation organization, regionalism.

JEL: P45, N70.