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Does Uncovered Interest Rate Parity Hold After All?
Muhammad Omer, Jakob de Haan and Bert Scholtens
Published:July - Dec 2019
This paper tests Uncovered Interest Rate Parity (UIP) using LIBOR rates for six major international currencies for the period January 2001 to December 2008. We find that UIP generally holds over a short-term (above 5-months) horizon for individual as well as groups of currencies. Our results suggest that it is important to consider the cross-correlation between currencies. We also find that “state dependence” plays an important role for currencies with a negative interest rate differential vis-à-vis the US dollar. This state dependence could also be instrumental in explaining exchange rate overshooting.
KEYWORDS:
UIP,
LIBOR,
system SUR,
system DGLS,
system DOLS.
JEL: G12, F31, G15.
Identifying and Understanding High Growth Firms in the Pakistani Textile and Apparel Sectors
Waqar Wadho and Azam Chaudhry
Published:July - Dec 2019
In this article, we investigate the distinguishing features of fast growing firms in the Pakistani textile and apparel sectors. We find that the distribution of firm growth- both in terms of employment and sales - is very heavily skewed toward the right-tail, confirming earlier findings that firm growth is generated by a very small number of firms. We found that small and young companies grow faster and generate higher employment. We also used various indicators of a firm’s innovation behavior and found that more innovative firms grow faster. Our results suggest that it is not the possession of individual attributes, but rather a combination of particular firm attributes that defines fast growing firms. Specifically, we found that the blend of being small, young and innovative explains the fast growth in firms. on overall these companies also create more jobs.
KEYWORDS:
Firm growth,
employment creation,
young innovative companies,
textiles,
Pakistan.
JEL: O12, L26.
Surplus Education and Earnings Differentials in Pakistan: A Quantile Regression Analysis
Maqbool H. Sial, Ghulam Sarwar and Mubashra Saeed
Published:July - Dec 2019
This study empirically investigates the effect of surplus education on the earnings distribution in Pakistan using quantile regression. The method of realized matches is used to measure the required level of education in each occupation from the Pakistan Social and Living Standards Measurement (PSLM) 2013-14 survey data. There is heterogeneity in returns to surplus education among overeducated workers. These returns are higher for workers at the upper half as compared to the lower half of the earnings distribution. Surplus education earns positive returns but less than the returns associated with the level of education required for jobs. Further, the difference in returns among the overeducated is higher than the difference in returns among workers who have the required education for the job. The findings imply that the surplus education factor is significant in explaining how education contributes in earnings differentials and inequality.
KEYWORDS:
Surplus education,
earning inequality,
labor markets,
Pakistan.
JEL: I24, J31.
Sources of Market Power among Firms in Sub-Saharan Africa: Do Institutions Matter in Competitive Policies?
Musa Abdu and Adamu Jibir
Published:July - Dec 2019
In the context of a high prevalence of both poverty among households and
business failures among firms in the majority of Sub-Saharan African (SSA)
countries, competition is seen as one of the viable tools for transforming and
improving these economies. This can be achieved by boosting productivity,
improving output markets, increasing innovation and promoting economic growth.
This study examines the sources of market power among firms within a variety of
institutional settings using a large sample of data from 23 SSA countries. Tobit
panel models comprising both fixed and random effects are used to estimate the
determinants of market power. The study reveals that a large number of firms control
less than 5 percent of the market with a few firms controlling between 5 and 34
percent of the market. At the same time, there are a small number of firms controlling
between 30 and 100 percent of the markets in Sub-Saharan Africa. The findings
further show that economic and political institutions significantly matter in the
determination of power among firms in SSA. However, the influence of institutions
varies significantly depending on the type of institutions and regional differences.
KEYWORDS:
Competition,
institutions,
firm,
market power.
JEL: D41, K20, L22, L41, O55.
Increasing Exports through Tariff Reductions on Intermediate Goods
Nida Jamil and Rabia Arif
Published:Jan - June 2019
To counter the severe trade deficit problem that Pakistan faces, we explain
how to move up the value chain of exports by reducing tariff rates on the intermediate
inputs used by local manufacturers. The availability of cheaper intermediate inputs
through tariff reductions can substantially reduce input constraints. We begin by
identifying trends in the tariff rates imposed on intermediate inputs, and their imports
over time by Pakistan and its counterparts. Using an instrumental variable approach,
we measure the gains that can be achieved by importing more of these intermediate
inputs in terms of export performance indicators. We emphasize that input tariff
reductions could help Pakistan expand exports. We also identify specific sectors in
which intermediate input tariff reductions could have significant gains for Pakistan in
terms of export growth. We recommend the need to reduce intermediate input tariffs
in these sectors only, rather than general tariff reductions across all sectors.
KEYWORDS:
tariffs,
Pakistan.
JEL: F13.
What Drives Inflation-Output Tradeoff Dynamics in Pakistan? An Assessment of International Linkages and Global Trends
Muhammad Ayyoub and Julia Wörz
Published:Jan - June 2019
This article illustrates the dynamics of and tradeoff between inflation and
output in Pakistan by utilizing data on 18 major trading partners in a cointegration
analysis. In doing so, we use key features of the global vector autoregressive approach
to construct a model that captures foreign-specific variables related to Pakistan; these
are analyzed empirically along with domestic data for the period 1972–2014. Our
findings show that, after accounting for the impact of increasing interdependencies,
trade spillovers and changing global macroeconomic conditions, a long-run
equilibrium relationship exists between domestic inflation and output. The foreign
variables have a significant impact on the key domestic variables. In particular,
domestic inflation and trade openness, foreign inflation and world oil prices have
significant explanatory power for Pakistani output. Policymakers in Pakistan should
therefore account for global developments, specifically in trading partner economies
KEYWORDS:
Pakistan,
cointegration,
cross-country spillovers,
inflation-output dynamics,
oil prices.
JEL: E31, E52, O47.
The Aid, Macroeconomic Policy Environment and Growth Nexus: Evidence from Selected Asian Countries
Saima Liaqat, Hafiz Khalil Ahmad, Temesgen Kifle and Mohammad Alauddin
Published:Jan - June 2019
This study empirically investigates the aid effectiveness debate in light of
the Burnside-Dollar (2000) hypothesis that the recipient country’s policy
environment is critical for aid effectiveness. Based on data from ten Asian
countries for 1984–2015 and in line with Burnside and Dollar (2000), we
construct a new composite policy index. Employing two-stage least squares to
estimate the model, we find that aid had a negative impact on economic growth
during the study period for these countries, thus refuting the Burnside-Dollar aid
effectiveness hypothesis.
KEYWORDS:
foreign aid,
macroeconomic policy,
economic growth,
Burnside-Dollar hypothesis,
Asia.
JEL: 040, P45.
Cryptocurrencies, Blockchain and Regulation: A Review
Ayesha Afzal and Aiman Asif
Published:Jan - June 2019
The evolution of money has accompanied the development of civilizations and technological innovations, leading to today’s cryptocurrencies. Cryptocurrencies have become a popular mode of payment globally because of their low cost, high-speed transferability and a decentralized tracking network that provides secure transactions and a high degree of anonymity. However, the decentralized system of cryptocurrencies has made global monetary systems more dynamic and therefore more prone to misuse as well as posing a threat to financial stability. Cryptocurrencies are also gaining popularity in Pakistan: its first cryptocurrency, named ‘Pakcoin’, was launched in 2015. The State Bank of Pakistan does not recognize any digital currency, and the Federal Board of Revenue and Federal Investigation Agency have taken legal action against local and internationally traded cryptocurrencies. This article reviews these risks and provides various regulatory solutions so that methods can be developed to improve the management of financial innovations and create a safer environment in which financial innovation can continue. Furthermore, developing countries such as Pakistan can take advantage of distributed ledger technology (used in cryptocurrencies) in applications including: microfinance to help the unbanked, in data identification systems and in land registries to help enforce property rights.
KEYWORDS:
cryptocurrency,
blockchain,
regulation,
Pakistan.
JEL: G19.
The Determinants of Firm Survival among Small Cluster Firms
Sana Ullah, Babur Wasim Arif and Muhammad Tariq Majeed
Published:Jan - June 2019
This study analyzes the impact of education, experience, and social capital on firm survival using two waves of a survey conducted in 2008 and 2017 for the electrical fittings cluster based in Sargodha, Pakistan. Estimating a probit model, we find that the entrepreneur’s education, experience, and social network are each positively correlated with firm survival. The interactions of education with both production and marketing experience are also significantly and positively related to firm survival while interactions of social capital with experience are not. Therefore, for the firms in this sector, education plays an important role directly as well as through production and marketing experience.
KEYWORDS:
Education,
experience,
social capital,
firm survival,
Pakistan.
JEL: J24, L26, L69.
Energy Pricing Policies and Consumers’ Welfare: Evidence from Pakistan
Muhammad Atta-ul-Islam Abrar, Muhsin Ali, Uzma Bashir and Karim Khan
Published:Jan - June 2019
This study analyzes the impact of energy pricing policies on consumers’
welfare in rural and urban Pakistan. The study is based on pooled data from the
Household Integrated Economic Survey for the period 1984/85 to 2011/12. We use
the Almost Ideal Demand System to estimate parameters and price elasticities. The
welfare analysis suggests that the rise in energy prices has been greater than the rise
in the general consumer price index over this period. Therefore, consumers have
incurred high expenditures in all years from 1984 to 2012, with a consistent welfare
loss for all consumers with a decreasing trend. Additionally, the welfare loss to rural
consumers is greater than that to urban consumers.
KEYWORDS:
welfare,
Pakistan,
energy pricing,
almost ideal demand system.
JEL: Q41, C1, D60.
Testing the Governance-Productivity Nexus for Emerging Asian Countries
Ghulam Mustafa and Muhammad Jamil
Published:Jan - June 2018
This paper presents panel data estimates of the relationship between
governance, aggregate labor productivity (ALP) growth and total factor
productivity (TFP) growth for 12 Asian economies between 1996 and 2013. Our
results show that government effectiveness has a positive and significant effect on
ALP in both levels and first differences. Regulatory quality has a positive impact on
ALP only in first difference. Although both government effectiveness and regulatory
quality have a positive effect on TFP growth in first difference, only political stability
is significant and positive in the levels specification. Other findings indicate that
physical capital and human capital have a positive effect on ALP growth. We also
find evidence of positive spillover effects with respect to human capital. The positive
association between governance, economic growth and productivity provide a better
understanding of the role of governance in enhancing economic performance. Our
findings have policy implications for ways to achieve good governance to enhance
economic growth and productivity.
KEYWORDS:
total factor productivity,
economic growth,
governance.
JEL: D24, E24, C23, O40.
Inventory, Marketing and Markups of Exporters: The Case of Spinning, Weaving and Finishing Textile Sector of Pakistan
Imtiaz Ahmad and Zafar Mahmood
Published:July - Dec 2018
This paper studies the impact of inventory-intensity, marketing-intensity and firm size on the markups of exporting firms. We used audited financial statement data of publicly listed companies in the spinning, weaving and finishing industry within the textiles sector of Pakistan. We document five observations: 1) average markup of exporters is relatively higher than non-exporters; 2) there is higher dispersion in markups of non-exporters relative to exporters; 3) large firms have relatively higher markup and marketing-intensity; 4) firms which have higher marketing- and inventory-intensity also have higher markups; and 5) exporters have relatively higher markup elasticity with respect to marketing-intensity, inventory-intensity and growth in inventory-intensity.
KEYWORDS:
Markups,
inventory intensity,
marketing intensity,
firm size,
Pakistan.
JEL: F14, L11, L25.
The China-Pakistan Economic Corridor (CPEC): Considering Contemporary Pakistan through Old-Fashioned Economics and Historical Case Studies
Matthew McCartney
Published:July - Dec 2018
As part of the massive One Belt One Road (OBOR) project or ‘New Silk Road’ the governments of China and Pakistan have announced that a significant ‘corridor’ will be constructed in Pakistan. This paper looks in detail at the $46 billion China-Pakistan Economic Corridor (CPEC) package of transport, energy and manufacturing projects and asks how we can analyse the impact of a transformative expansion of infrastructure. This paper draws lessons from various old-fashioned economics including Rostow, Hirschman and others and the historical case studies of transformative infrastructure expansion in the nineteenth century United States, Mexico, Germany and India to explore the conditions under which CPEC could promote sustainable long-run economic growth in Pakistan.
KEYWORDS:
Pakistan,
China,
China-Pakistan Economic Corridor (CPEC),
growth.
JEL: O10.
Asset Allocation for Government Pension Funds in Pakistan: A Case for International Diversification
Fahd Rehman
Published:Jan - June 2010
Reforms have begun in Pakistan to sustain the funded pension
scheme for government-operated pension schemes such as the Employees
Old Age Benefit Institution (EOBI). Presently, the EOBI operates its own
fund and invests most of its assets in government-backed securities which
are basically interest-bearing debt instruments. Although the returns on the
EOBI’s fund have been high for a short period due to higher interest rates
and minimum pension distributions, this trend is not likely to continue.
Funded pension schemes depend heavily on portfolio performance because
risk is transferred to contributors. Therefore, asset allocation becomes
considerably important. The purpose of this study is to determine optimal
asset allocation and the role of international diversification specifically for
the EOBI’s funds and generally for newly created funded pension schemes
in Pakistan. The article analyzes the potential benefits accrued through
international investments based on historical returns over almost five
decades with varying degrees of risk aversion coefficients. Varying degrees
of risk may allow policymakers to incorporate their strategies for future
asset behavior and take timely action to counter the potential threat of
aging, demographic shifts, and liabilities and to ensure decent benefits for
pensioners.
KEYWORDS:
Asset allocation,
international diversification,
pension fund,
Pakistan.
JEL: G11, G23.
Variance Persistence in the Greater China Region: A Multivariate GARCH Approach
John Francis Diaz, Peh Ying Qian and Genevieve Liao Tan
Published:July - Dec 2018
This paper utilizes three Multivariate General Autoregressive Conditional Heteroscedasticity (MGARCH) models to determine variance persistence in the Greater China region from 2009 to 2014. The first approach applies the Baba, Engle, Kraft and Kroner (BEKK) model and shows that the Shanghai Stock Exchange Composite Index (SSEI), Taiwan Capitalization Weighted Stock Index (TAEIX) and the Hang Seng Stock Index (HSEI) stock returns are all functions of their lagged covariances and lagged cross-product innovations. The second MGARCH approach applies two methodologies, namely, dynamic conditional correlation (DCC), and constant conditional correlation (CCC) estimations. The DCC model concludes both short- and long-run persistencies between Taiwan’s TAIEX and Hong Kong’s HSEI. Alternatively, the CCC model confirms the initial findings of the BEKK model, and adds that the relationships among these three strong economies are stable in the long-run. The log-likelihood values determine that the DCC model is better in judging volatility dynamics in the Greater China region, because of economic clauses brought by the Closer Economic Partnership Arrangement (CEPA), the Economic Co-operation Framework Agreement (ECFA) and the Hong Kong - Taiwan Business Cooperation Committee (BCC).
KEYWORDS:
Greater China Region,
stock market returns,
volatility dynamics,
MGARCH models.
JEL: P45, C30.
Role of Financial Services in Economic Growth: Policy Implications for Pakistan
Jamshed Y. Uppal and Inayat U. Mangla
Published:July - Dec 2018
In the last two decades, the financial services sector in Pakistan has seen remarkable growth and structural development. However, it is debatable whether the financial markets and institutions have contributed meaningfully towards promoting growth in the real economy. This paper provides a brief background of the theoretical and empirical literature on the linkage between the financial services sector and economic growth. It evaluates the development of Pakistan's financial markets and institutions in comparison to a cohort of developing countries. The country's governance and regulatory environment in light of these theories and the empirical evidence is compared with other countries. The weaknesses in the linkages between finance and economic growth are identified within the framework of the theoretical models and relevant empirical evidence. The final section discusses the challenges Pakistan faces in making its financial services sector become an effective driver of economic growth.
KEYWORDS:
Financial services,
economic growth,
Pakistan.
JEL: O16.
Human and Social Capital Complementarities in the Presence of Credit Market Imperfections
Natasha Moeen
Published:July - Dec 2018
This paper models the individual-level social capital effect the credit market constraints that reduce the accumulation of costly human capital. Human capital, in turn, improves an individual’s income as well as the bequest that they intend to leave for their children. It also helps reduce inequality across a country. Finally, the model shows that investment in social capital has a negative relationship with the interest rate, so that the initial inherited bequest of every individual affects the output and investment in the short-run, as well as in the long-run.
KEYWORDS:
Social capital,
credit market,
investment,
interest rate.
JEL: E24.
Is Pakistan Ready to Embrace Fintech Innovation?
Syed Kumail Abbas Rizvi, Bushra Naqvi and Fatima Tanveer
Published:July - Dec 2018
Pakistan is an emerging market for fintech, with increasing facilitation for digital payments, widespread internet and smartphone penetration, consumer preferences for social media and booming online commerce. Also, the State Bank of Pakistan provides sound regulations, which act as a platform for fintech growth. While regulations are necessary, they might also become a threat for an industry still in its infancy. This paper aims to provide a qualitative assessment of economic, demographic and technological factors that are conducive for the penetration and growth of fintech in Pakistan. A second, but no less important, objective of this paper is to look at the regulatory framework governing fintech and its contribution in making the segment an active or dormant player in the financial services industry.
KEYWORDS:
Fintech,
disruption,
innovation,
financial services,
emerging market,
Pakistan.
JEL: K20, O16, G20.
Modified Variance Ratio Test for Autocorrelation in the Presence of Heteroskedasticity
Sohail Chand and Nuzhat Aftab
Published:Jan - June 2018
Given that autocorrelation tests do not perform well in the presence of heteroskedasticity and in variance-break cases, we present three modified weighted variance ratio tests of autocorrelation. The numerical results show that the proposed tests perform better for small samples. They provide a better approximation of asymptotic distributions and are more powerful when the lag length is mis-specified. The study also applies these tests to data on the daily returns of two companies listed on the Pakistan Stock Exchange.
KEYWORDS:
Regression,
variance break,
wild bootstrap.
JEL: C40.
The Paradigm Shift in the Pakistan Stock Exchange’s Financial Integration Post-FTA and CPEC
Abdul Wahid and Muhammad Zubair Mumtaz
Published:Jan - June 2018
This paper examines whether regional connectivity causes return and volatility spillovers and the co-movement of stock exchanges to shift from international to regional markets. Using the China-Pakistan free trade agreement (FTA) of 2006 and the China-Pakistan Economic Corridor (CPEC) agreement to represent events of regional connectivity, we test this proposition based on data for two regional stock exchanges (the Pakistan Stock Exchange and Shenzhen Stock Exchange) and two global markets (the FTSE 100 and Nasdaq). We divide the convergence and co-integration of the stock markets into three phases: overall sample (2001–17), pre-FTA and post-FTA, and pre-CPEC and post-CPEC. Applying a GARCH (1, 1) model, co-integration, Granger causality and seasonality, we find that regional connectivity causes return and volatility spillovers and co-movements in the Pakistan Stock Exchange to shift from international markets to regional markets.
KEYWORDS:
Financial integration,
China-Pakistan economic corridor,
interdependency,
co-integration,
free trade agreement,
regional connectivity,
Pakistan.
JEL: F15, C22, R58, F21, E44.