The aim of this study is to examine the relationship between intellectual capital efficiency and the firm's profitability. The importance of intellectual capital (IC) and the related philosophy of the knowledge economy have captured the attention of researchers and business enterprises in the World Trade Organization (WTO) era. IC is widely recognized as a tool that is critical to running a successful business in a highly competitive environment. Various models have been introduced to measure the numerous facets of IC, including the Skandia navigator, Tobin's Q, and value added intellectual coefficient (VAIC). This article examines the role of IC efficiency in the firm’s net profit using the VAIC developed by Ante Pulic (1998). It also investigates its correlation with the firm’s profitability, using regression models. A five-year data set for Lahore Stock Exchange Index companies (LSE-25) was obtained from audited financial reports, and used to calculate human capital, structural capital, and capital-employed efficiency of companies in different industrial sectors. The results obtained using multiple regression analysis supports the argument that IC efficiency contributes significantly to the firm's profitability. Practically, IC efficiency can be used as a benchmark and strategic indicator to direct financial and intellectual resources in the right direction, i.e., to enhance the firm’s ultimate corporate value. It can also be developed as a management tool to create a sustainable comparative advantage in the competitive global knowledge economy. The study is a pioneering attempt to measure the impact of IC efficiency on net profit using cross sectional time series data.
KEYWORDS: Knowledge Economy, Intellectual Capital, Value Added, VAIC, LSE-25.

JEL: C22, C59.

The available evidence in Pakistan suggests that inflation is a monetary phenomena. This paper examines the relationship between the determinants of inflation and its volatility by using monthly data for 1990:M1-2007:M5. The determinants of inflation are estimated by a VAR analysis, which shows that inflation, the interest rate and money supply move together. A VAR model assumes constant error variance. We relaxed this assumption by employing an ARCH/GARCH model and conclude that inflation is volatile in nature. For measuring the qualitative nature of the inflationary process we used an EGARCH model. It confirms that the time effect model is significant. It also suggests that in the first four months of the calendar year, the inflationary shock is negative and it can, therefore, hamper growth.
KEYWORDS: Inflation, Volatility, Pakistan, Money Supply, Interest Rate.

JEL: E31, E51, C01.

Greif, Avner, Institutions and the Path to the Modern Economy: Lessons from Medieval Trade. Cambridge University Press, 2008, pp. 452, Price £19.99. In a comparative study of the late medieval European and Muslim worlds, Greif analyzes the effect of institutions—especially those that facilitated impersonal exchange, such as trade—on the performance of modern economies. His argument rests on the premise that past institutions have an effect on consequent ones, and he contributes the disparity in performance of the Muslim and European economies to their distinct institutional trajectories. The book comprises several parts. It defines institutions in great detail; provides a comparative account of institutions in the medieval European and Muslim worlds; and applies a theoretical, analytical, and empirical framework—particularly game theory—to studying institutions.
KEYWORDS: Modern Economy, European and Muslim worlds, theoretical, analytical, empirical framework.

JEL: N/A.

In April 2008, the Centre for Research in Economics and Business (CREB) at the Lahore School of Economics hosted the Fourth Annual Conference on the Management of the Pakistan Economy on the theme, “Ensuring Stable and Inclusive Growth.” The Centre’s director, Naved Hamid, invited a number of prominent speakers including academics, economists, current and former government officials, and other experts to present a combination of research and policy papers, which can be broadly grouped under two major headings: i) Pakistan’s macroeconomy and ii) Poverty and inequality in Pakistan. These topics were selected because of their timeliness, given the increasing macroeconomic pressures facing the country, in particular those coming from the exchange rate and inflation, and the impacts on poverty that could result. The papers presented at the conference are summarized below:
KEYWORDS: Pakistan, CREB, Lahore School, fourth, annual conference, Pakistan Economy, inclusive growth.

JEL: N/A.

The article provides an overview of the Pakistani economy and addresses various sectoral issues currently being faced by the economy. The first and the most critical problem highlighted concerns the protection of the poor. Other issues highlighted relate to education, healthcare, housing, taxation and energy. This paper discusses how the current account deficit needs to be tackled by higher tariffs, exchange rate adjustments, and possible export duties. The paper also discusses the need to reduce the cost of production for industry and upgrade governance through an emphasis on the local government system. Regarding public sector investments, the paper explains how the government needs to be transparent about the Public Sector Development Programme, and allow projects to be executed by the provinces.
KEYWORDS: Pakistan, Balance of Payments, Fiscal Deficit, Education, Health, Poverty, Public Investment.

JEL: I32, D33.

As a result of policy inaction in addressing structural issues over a protracted period and a wrong set of economic priorities followed over the past several years, Pakistan’s economy faces a grave set of challenges. Among the many issues, which range from high inflation to power deficits and water stress, the most immediate and pressing is the need to restore fiscal order. While pressure on the coalition government to reduce the economic hardship of the electorate is understandably intense, the policy response needs to balance the alleviation of palpable hardship in the short term, with the ability to provide sustained benefits over the longer term. Given the sharp constriction in available fiscal space, adopting a policy course in the short run that raises expectations of “relief” may not be wise, in either political or economic terms. In the longer term, however, it is a misconception to view the available choices in purely binary terms, i.e. that “macroeconomic stability” (a much-maligned term, loath to politicians not just in Pakistan) is mutually exclusive to “pro-poor” agendas. Raising revenues by broadening the tax base meaningfully, in conjunction with rationalizing bloated government/public sector expenditures can free fiscal resources, which can be diverted to targeted subsidy programs. Ignoring macroeconomic stability, on the other hand, will eventually also undermine the ability of the government to influence economic growth, as growing fiscal and monetary constraints limit its ability to run appropriate policies. As experienced in the 1990s, this will slowdown both investment as well as growth, hurting the poor.
KEYWORDS: Pakistan, Macroeconomic Stability, Fiscal Policy, Monetary Policy.

JEL: E62, E52.

Public policy is aimed at increasing the efficiency of the industrial sector in Pakistan. This paper looks at four issues. Firstly, it looks at the adjustments the new government needs to make to restore macroeconomic balance. Secondly, it discusses the global changes that have occurred in the industrial sector and how these could be incorporated into Pakistani policy making. Thirdly, I have briefly discussed the history of policies implemented in Pakistan. Lastly, I have discussed the importance of decentralized industrial policy making. This paper also conducts an empirical analysis of the impact of industrialization on poverty. It is concluded that industrial development in Pakistan has historically been heavily dependent on government intervention and there was poor growth in this sector as compared to other Asian economies. The paper also presents five proposals aimed at achieving higher growth in the industrial sector.
KEYWORDS: Pakistan, Public Policy, Industry, Competitiveness, Poverty.

JEL: F44, D33, H32, L12, L13.

This paper gives a brief overview of Pakistan’s economic growth over the past decades and critically examines the economic policies of the last government. It draws attention to the unchecked state dominance across all sectors of the economy and emphasizes the need for further privatization. The paper concludes with some suggestions on the way forward towards growth and economic prosperity.
KEYWORDS: Privatization, Economic Policy, Economic Growth.

JEL: O43, L33, Q58.

The objective of this paper is to set out the key components of a development strategy for Pakistan. A fundamental premise of our analysis is that the world economic environment is changing dramatically and a development strategy today must position itself to take advantage of the changes taking place. The paper is divided into five sections: First, we provide a brief review of Pakistan’s experience with development strategies so far. Next, we discuss the changes that have occurred, or are taking place in the global economy, which have strategic relevance for Pakistan. In the third section we look at the current situation in Pakistan with regard to the potential drivers of growth, based on the earlier discussion of the global developments. In the final section key elements of an alternative development strategy for Pakistan are outlined.
KEYWORDS: Development Strategy, Growth, Globalization.

JEL: O40, O20, O11.

This paper explores the past 50 years of data on inflation, growth rates of money and real GDP. It is found that inflation is primarily a monetary phenomena; however, the quantity theory of money does not hold in Pakistan below money supply growth rates of 9 percent. A simple monetary rule is also derived by inspecting the maximum probabilities of keeping inflation low (at most 6 percent); this rule is simply to keep money growth rates below 12 percent. This paper also finds that food inflation too is a monetary phenomena and there is no trade-off between inflation and growth, which are independent in the sense of probability measures. The findings are confirmed by the application of Fisher’s Exact Test. The policy implication is that monetary policy should be pursued independently of growth policies of government.
KEYWORDS: Pakistan, Inflation, Monetary Policy.

JEL: E52, E41.

Pakistan has seen strong economic growth in recent years accompanied by a reduction in poverty. However, growth has been concentrated, which has meant that regional and inter-personal disparities are on the rise. In a contestable political environment, this casts a shadow on the sustainability of high growth. The budget, a corrective instrument, has been subject to boom and bust cycles because of rigid claims, poor tax effort and external shocks, rendering it ineffective in addressing long term priorities. This paper argues that robust budgets for sustained and inclusive growth require government programs to be credible (monitoring and evaluation and public information) and cost effective (streamlined budget cycle, public-private partnerships); this will help increase citizen willingness to pay for public programs via improved tax compliance.
KEYWORDS: Pakistan, Budget, Growth.

JEL: E22, O43, E23.

The dramatic increase in international food and fuel prices in recent times is a crucial issue for developing countries and the most vulnerable to these price shocks are the poorest segments of society. In countries like Pakistan, the discussion has focused on the impact of substantially higher food and fuel prices on poverty. This paper used PSLM and MICS household level data to analyze the impact of higher food and energy prices on the poverty head count and the poverty gap ratio in Pakistan. Simulated food and energy price shocks present some important results: First, the impact of food price increases on Pakistani poverty levels is substantially greater than the impact of energy price increases. Second, the impact of food price inflation on Pakistani poverty levels is significantly higher for rural populations as compared to urban populations. Finally, food price inflation can lead to significant increases in Pakistani poverty levels: For Pakistan as a whole, a 20% increase in food prices would lead to an 8% increase in the poverty head count.
KEYWORDS: Pakistan, Poverty, Inflation, Household Budget, Food, Fuel.

JEL: D33, R21, E3.

The main focus of this study is Rural Punjab and it contributes to regional poverty research in two ways; first, using a more recent household survey data, carried out in August 2007 by the Pakistan Institute of Development Economics (PIDE), it provides fresh poverty estimates for the rural areas of the Punjab. Second, the poverty differential across the agroclimatic zones of Punjab have been explained by urbanization, overseas migration and the labor market structure operating in these zones. This study shows four major factors that explain inequalities in poverty levels. First, the rural areas of two zones, barani and rice/wheat, are well integrated with urban settings. This integration has allowed their rural populations to work in the industrial sector of Central Punjab and the services sector in North Punjab primarily Rawalpindi and Islamabad. Second, the belt from Lahore to Attock in the Punjab has benefited the most from overseas migration. The flow of remittances has helped in reducing poverty levels. Third, the cotton/wheat and low intensity zone still largely depend for employment on the agricultural sector while this dependency is very low in the barani zone, which has good opportunity to seek job opportunities for its labor force in the armed services and government departments. Finally, demographic and social factors including education are less favorable in the cotton/wheat and low intensity zones which negatively impacts on a breakthrough in poverty reduction.
KEYWORDS: Pakistan, Poverty, Migration, Labor Market.

JEL: D33, J20, J61.

The article is the first comprehensive attempt at estimating the variation in the incidence, intensity and severity of poverty in the Punjab at the level of sub-provincial regions and districts. This estimation has been made possible because of the availability of the Multiple Indicators Cluster Survey (2003-04), which has a sample that is representative at the district-level. Estimates suggest the existence of a high poverty enclave in the south and the west regions of the Punjab. The incidence and severity of poverty in a majority of districts in this enclave, with a few exceptions, is extremely high with one out of every two households being poor on average. The high levels of poverty in this enclave contrast with the relatively low poverty in the more urbanized north, where households are well integrated into the national and international labor market. The paper also argues that there is tremendous variation in the poverty experience of the districts in the centre. Poverty incidence in the more urbanized and industrialized northern districts of the centre contrasts sharply with the experience of Kasur, Okara and Pakpattan, where the incidence and severity of poverty is extremely high. Finally, we find that in nine districts rural households do much worse in terms of poverty incidence than their urban counterparts. The gap between urban and rural poverty incidence and severity is highest within the district of Lahore suggesting that urbanization co-exists with a large poor population that inhabits the periurban areas of the district. An important aim of development policy and poverty targeting is to bridge these multi-faceted divides in the geography of poverty.
KEYWORDS: Poverty, Pakistan.

JEL: I32, D33.

The structural transformation of Pakistan’s economy has not been accompanied by a concomitant decline in the proportion of labor employed in agriculture. While this transformation has resulted in a non-farm sector that is large and growing it has not lead to the rapid absorption of the pool of relatively low productivity labor away from the agriculture sector, as predicted by conventional development theory embodied in the models of the 1960s. Despite the obvious importance of the role of a vibrant rural non-farm economy (RNFE), and in particular, a vibrant non-farm services sector to address the challenges of poverty, food security, agricultural growth and rural development, this sector has received inadequate attention in the debate in Pakistan. Based on a review of literature and data from two large surveys – the Rural Investment Climate Survey of Pakistan 2005 and the Surveys of Domestic Commerce 2007 – this paper attempts to analyze the factors underlying the low level of development of the rural non farm economy and the potential role it can play in Pakistan’s economic development.
KEYWORDS: Pakistan, Poverty, Rural, Development.

JEL: R23, R11.

Periodic research and documentation of the extent and nature of inter-regional and intra-regional inequalities is a pre-requisite for formulating cost effective interventions for the promotion of spatially balanced and sustainable development. These interventions can be in the shape of increased fiscal resource transfers and/or fiscal incentives to the private sector for promoting investments in lagging regions. The analysis of inter-regional and intra-regional consumption and non-consumption inequalities in this paper are a preliminary attempt at assessing their status.
KEYWORDS: Pakistan, Inequality, Consumption, Social Indicator.

JEL: D31, E21.

This paper investigates the relationship between human capital and economic growth in Pakistan with aggregate time series data. Estimated with the Johansen (1991) approach, the fitted model indicates a critical role for human capital in boosting the economy’s capacity to absorb world technical progress. Much higher returns, including spillovers, to secondary schooling in Pakistan than in OECD economies is consistent with very substantial education under-investment in Pakistan. Similarly, extremely large returns to health spending compare very favorably with industrial investment. Human capital is estimated to have accounted for just under one-fifth of the increase in Pakistan’s GDP per head. Since the 1990s, the impact of deficient human capital policies is shown by the negative contribution to economic growth.
KEYWORDS: Human Capital, Economic Growth, Cointegration, Pakistan.

JEL: O53.

The main focus of this paper is to measure the speed of adjustment of the exchange rate by means of the persistent profile approach developed by Pesaran and Shin (1996) to examine the symmetry and proportionality assumptions of the purchasing power parity (PPP) theory of exchange rates for the Pak-rupee vis-à-vis the US-dollar exchange rate over the period 1982Q2-2005Q4. Using cointegration and vector error-correction modeling approaches, we find considerable support for the validity of weak-form PPP in Pakistan. Furthermore, the symmetry and proportionality assumptions of PPP are not verified. In the short-run, the exchange rate and foreign prices play a significant role in the convergence process to achieve long-run equilibrium. However, the speed of adjustment is very slow and the persistence profiles suggest that almost 4-5 years are required to eliminate deviations and bring the nominal exchange rate in line with the long-run equilibrium path.
KEYWORDS: Exchange Rate, Purchasing Power Parity, Cointegration, Vector Error Correction, Pakistan.

JEL: F37.

This study analyzes the future prospects of wheat production in Pakistan. Parameters of the forecasting model are obtained by estimating a Cobb-Douglas production function for wheat, while future values of various inputs are obtained as dynamic forecasts on the basis of separate ARIMA estimates for each input and for each province. Input forecasts and parameters of the wheat production function are then used to generate wheat forecasts. The results of the study show that the most important variables for predicting wheat production per hectare (in order of importance) are: lagged output, labor force, use of tractors, and sum of the rainfall in the months of November to March. The null hypotheses of common coefficients across provinces for most of the variables cannot be rejected, implying that all variables play the same role in wheat production in all the four provinces. Forecasting performance of the model based on out-of-sample forecasts for the period 2005-06 is highly satisfactory with 1.81% mean absolute error. The future forecasts for the period of 2007-15 show steady growth of 1.6%, indicating that Pakistan will face a slight shortage of wheat output in the future.
KEYWORDS: Wheat, ARIMA, Production Function, Pakistan.

JEL: Q16.

The paper focuses on Idara-e-Kissan, a vertically integrated cooperative in the dairy sector, which procures fresh milk, processes it and uses the profits earned in urban milk product markets to provide development services to member farmers. The analysis suggests that, compared to a control group of non-members, the cooperative’s members had 29% higher net returns per milk animal, 9% more milk buffaloes, 6% fewer dry buffaloes and they used three times more milk fat-enhancing cottonseed cake. The members had better access to animal vaccination, artificial insemination, and visits from livestock extension workers; they were able to secure more animal treatments per year, and reported greater satisfaction with service provision. The cooperative’s successes were more modest in areas where the benefits of inputs and services provided were more public, e.g. livestock breed improvement and enhancing fodder productivity, indicating that there is an important role for the government in supplying public goods such as livestock/agriculture R&D.
KEYWORDS: Milk, Dairy, Livestock, Cooperative, Pakistan.

JEL: Q18.