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.

In a market driven economy, price signals guide and regulate production, consumption and marketing decisions over time, form and place. Identifying the causes of price differences in interregional or spatial markets has therefore become an important economic analytical tool to understand markets better. If markets are not well integrated, price signals are distorted, which leads to an inefficient allocation of resources. Further, it may constrain sustainable agricultural development and aggravate inequitable patterns of income distribution. This paper examines the degree of spatial market integration in the regional apple markets of Pakistan using cointegration analysis and monthly wholesale price data from January, 1996 to December, 2005. Results show that apple markets are perfectly integrated and Quetta is the dominating market. The high degree of market integration observed in this case is consistent with view that apple markets in Pakistan are quite competitive and provide little justification for government intervention designed to improve competitiveness to enhance market efficiency.
KEYWORDS: Market Integration, Cointegration, Apple, Pakistan.

JEL: Q13.

This study is an attempt to determine the capital structure of listed firms in the chemical industry of Pakistan. The study finds that by studying a specific industry's capital structure, one can ascertain unique attributes, which are usually not apparent in the combined analysis of many sectors as done by Shah and Hijazi (2004). This study analyzed 26 of 39 firms in the chemical sector, listed at the Karachi Stack Exchange for the period 1993-2004 using pooled regression in a panel data analysis. Six regressors i.e. firm size, tangibility of assets, profitability, income variation, non-debt tax shield (NDTS) and growth were employed to examine their effects on leverage. The results show that these six independent variables explain 90% of variation in the dependent variable and, except for firm tangibility, results were found to be highly significant. The study has policy implications of importance for researchers, investors, analysts and managers.
KEYWORDS: Chemical, Panel Data, Karachi Stock Exchange, Pakistan.

JEL: C51.

Gera, Nina, Structural Adjustment Programs in Pakistan: A Boon or a Bane? Lahore School of Economics Press, Lahore, 2007, pp 169, Price PKR 300. Underdeveloped countries such as Pakistan have been suffering from problems like deficits in the balance of payments, budget deficits, inflation, etc. These countries have been receiving foreign grants and concessional loans, yet the problems were not solved. This continued for about thirty years. Starting from 1980, International Financial Institutions such as the International Monetary Fund (IMF) and World Bank started to consider interventions in these economies and tied their foreign aid to certain structural reforms.
KEYWORDS: Book review, structural adjustments, Pakistan, IMF.

JEL: N/A.

On 24th March 2008, the nation lost one of its leading economists, Dr. Abdul Razzaq Kemal. Not only was he an authority on the Pakistani economy and on economic policy making, he had an unassuming, sensitive personality, and was humble and modest to the core. Born on April 14, 1946 in Amritsar, India, Dr. Kemal had a PhD in economics from Manchester University, UK and a Masters degree in economics from Stanford University, USA. He was the co-author and coeditor of 12 books and had 186 research articles published in both national and international journals and books.
KEYWORDS: A.R. Kemal, memory, in memoriam.

JEL: N/A.

This paper presents an analysis of smallholders’ access to rural credit and the cost of borrowing using survey data from Pakistan. Rural credit in Pakistan comes from formal and various informal sources. The tenure status, family labor, literacy status, off-farm income, value of non-fixed assets and infrastructure quality are found to be the most important variables in determining access to formal credit. On the other hand, the total operated area, family labor, literacy status and off-farm income are found to be the most important factors in determining the credit status of the smallholders from informal sources. The results show that the cost of borrowing from formal sources falls as the size of holding increases. The analysis confirms the importance of informal credit, especially to the smallest of the smallholders and tenant cultivators.
KEYWORDS:

JEL:

This paper has analyzed the incidence of government expenditures on health and education by using the benefit incidence approach. Recent household level data from the Pakistan Standards of Living Measures (PSLM) has been used to calculate the incidence for Pakistan overall, and at provincial and regional levels, of different education and health services. GINI and concentration coefficients have been used to measure the benefit inequalities of public expenditure. The results demonstrate that education expenditures are progressive in overall Pakistan. The progressiveness hypothesis regarding health expenditure is accepted partially, as the expenditure is progressive for Pakistan overall, but regressive at regional and provincial level of services. Efforts should be directed towards the horizontal and vertical equity in the allocation of resources both at the provincial and regional levels, and greater targeting of rural and low-income groups can make the expenditure programs more effective and result oriented.
KEYWORDS: Benefit Incidence, Health, Education, and Pakistan.

JEL: N/A.

Education is one of the most important factors in human development. The data from two household surveys were used to estimate the returns to education and gender disparities in wages in Pakistan. The model, an extension of Becker and Mincer models, was used to quantify the returns to investment in education. The results revealed that income gaps attributable to education level were significant. Income gaps between educated and uneducated workers in first-time employment also tend to increase with experience. Women earn significantly less than their male counterparts. These differences may be interpreted as the maximum possible effect of discrimination against women. Women also earn less because they acquire less cumulative work experience than men, as a result of breaks in their work histories, owning to the demand of motherhood and domestic chores. Education quality was much lower for students from poor families; the majority of these poor attended public school and did not have access to better quality private schools. Such differences strengthened the influence of the distribution of education and the structure of returns on income concentration.
KEYWORDS: Earnings function, gender inequality, human capital.

JEL: N/A.

The value of rainfall forecasts for rainfed rice production in the Philippines is estimated under the assumption that farmers adjust the quantities of fertilizer and labor if rainfall forecasts are available. Using a panel of 46 rice farmers in Tarlac, Philippines, a heteroskedastic production function with growing season rainfall (July to October) as one of the independent variables is estimated. The expected value of rainfall forecasts under the assumption of simultaneous adjustments in both fertilizer and labor was estimated to be slightly more than 1% of the net return from rice production. Taking the rainfed rice area in the Philippines of 1.2 million ha and a net return of $446/ha, the total value of the forecast was estimated to be $6.6 million per year. The expected value was also estimated under the assumption that, instead of forecasts of rainfall amounts for each year, forecasts made are for rainfall “above average”, “average”, or “below average”. The value of rainfall forecasts was found to be highest and ranged between 1.4%-4.5% of the net return when the forecast is ‘above average’. The Philippine Atmospheric, Geophysical and Astronomical Services Administration (PAGASA) could help farmers by investing more of its resource for the accurate prediction of ‘above average’ rainfall events.
KEYWORDS: The Philippines, rainfall, forecast, heteroskedastic, prediction.

JEL: N/A.

The study employs the Girton and Roper (1977) measure of exchange market pressure (defined as the sum of exchange rate depreciation and foreign reserves outflow), to examine the interaction between exchange market pressure and monetary variables, viz. domestic credit (Reserve Money) and the interest rate. Evidence from impulse response functions suggests that domestic credit has remained the dominant tool of monetary policy for managing exchange market pressure. The increase in domestic credit upon increases in exchange market pressure (during 1991-98) was imprudent. The results suggest that fiscal needs/growth objectives might have dominated external account considerations during this period. Post 9/11 there is evidence of sterilized intervention in the forex market. The interest rate has also weakly served as the tool of monetary policy during the hay days of foreign currency deposits (1991-98). The finding implies that, for the interest rate to work as tool of monetary policy vis-a-vis exchange market pressure, a reasonable degree of capital mobility is called for.
KEYWORDS: Pakistan, Exchange Market, Pressure, Monetary Policy, State Bank, SBP.

JEL: N/A.

In this paper we compare the performance of different GARCH models such as GARCH, EGARCH, GJR and APARCH models, to characterize and forecast financial time series volatility in Pakistan. The comparison is carried out by comparing symmetric and asymmetric GARCH models with normal and fat-tailed distributions for the innovations, over short and long forecast horizons. The forecasts are evaluated according to a set of statistical loss functions. Daily data on the Karachi Stock Exchange (KSE) 100 index are analyzed. The empirical results demonstrate that the use of asymmetry in the GARCH models and the assumption of fat-tail distributions for the innovations improve the volatility forecasts. Overall, EGARCH fits the best while the GJR model, with both normal and non-normal innovations, seems to provide superior forecasting ability over short and long horizons.
KEYWORDS: APARCH; EGARCH; Fat-tailed distribution; Forecast; Forecast horizon; GARCH; GJR; KSE 100; Volatility.

JEL: N/A.