This study revisits the relationship between the fiscal deficit and economic growth in Pakistan to determine whether there exists a threshold fiscal deficit that might serve as a benchmark for policymakers aiming to promote growth through fiscal expansion. We apply the smooth transition autoregressive model to time-series data for the period 1972–2014. The empirical analysis shows that the threshold level of fiscal deficit is 5.57 percent of GDP, above which the deficit has a negative impact on growth. Overall, the fiscal deficit has a negative impact on economic growth, mainly because it has tended to remain above the threshold level. However, there is room for fiscal policy to promote growth, provided the fiscal deficit is kept below the threshold level and public spending is channeled into productive investments that raise the country’s long-term growth potential.
KEYWORDS: Fiscal deficit, threshold level, economic growth, STAR, Pakistan.

JEL: O47, H12, C24.

In this article it is argued that Pakistan has had a consistently overvalued exchange rate and the policy with regards to management of the exchange rate has undergone a significant change in recent years. We show that prior to March 2013, the policy target of the exchange management was stability of the real effective exchange rate. However, during the tenure of the current government, the policy target for exchange rate management seems to have been stability of the nominal exchange rate against the US dollar. As the currencies of Pakistan’s major trading partners (UK, Europe and China) have depreciated against the dollar during this period, the real effective exchange rate has appreciated by over 20 percent since the time that the current policy makers took office. Overvaluation in general and the recent reversal in the exchange rate management policy in particular have had an adverse impact on exports and the manufacturing sector. This not only has serious negative consequences for the long term, growth of the economy, but has greatly increased the short-term risk of a balance of payments crisis.
KEYWORDS: Pakistan, exchange rate, overvaluation.

JEL: F31, F33, O24, F63.

This article investigates monetary policy effectiveness in Pakistan in the presence of external uncertainties stemming from the economic growth of developed economies and international oil price movements. We estimate a structural VAR model to gauge the impact of international oil prices and global demand on key macroeconomic variables in Pakistan. Our findings suggest that monetary policy remains an effective tool for controlling inflation. An increase in oil prices (supply shock) leads to higher real policy rates, real exchange rate depreciation, an economic growth slowdown and rising inflation. A global demand surge leads to higher real policy rates, real exchange rate appreciation, economic growth and rising inflation. Real policy rates adjust upward in response to inflation and real exchange rate shocks. The real exchange rate depreciates if inflation increases. This indicates that the monetary authorities in Pakistan are generally able to stabilize consumer prices and real exchange rates in the economy.
KEYWORDS: Monetary policy, real exchange rate, inflation, oil prices, Pakistan.

JEL: E52, E58, E22, E47.

Macroeconomic growth and stability are two of the major benefits of financial development, though there are differences in the literature on the channels through which this growth and stability can be achieved. In recent years, a number of emerging economies experienced phenomenal growth. At a micro level, one needs to understand why and how financial deepening could bring changes in economic agents’ behavior leading to an impact on the saving- investment relationship. At the macro level, financial development, integration and globalization could be possible channels to growth. The purpose of this paper is two-fold. First, we provide a comprehensive discussion of the theoretical and empirical literature on the role of important micro- and macro-policy variables in achieving macroeconomic stability with reference to Southeast Asia. Second, we present new empirical evidence using data from a selected sample of countries from the Asia Pacific region on the links between financial integration, trade integration and growth.
KEYWORDS: Macroeconomic stability, financial development, economic integration, financial inclusiveness, fixed-effect, Granger causality.

JEL: C33, F15, F43, F63, E61, F02.

There has been considerable discussion on the drivers of economic growth in East Asia. While most studies recognize that capital accumulation and macroeconomic management were critical in hastening growth, few have examined systematically and comparatively how policy frameworks – spearheaded through selective interventions – stimulated technical progress and the different performance outcomes achieved by these countries. This article attempts to address the gap by systematically analyzing the investment regimes, sources of finance, technological upgrading and policy frameworks of Indonesia, Malaysia, the Philippines, South Korea and Thailand with a view to explaining their economic growth performance.
KEYWORDS: Finance, innovations, industrial policy, technological upgrading, East Asia.

JEL: O16, O40.

This paper focuses on the case of Bangladesh as an example of a country that is at risk of falling into the ‘middle income trap’, in other words the risk that a country that has attained middle income levels will then be unable to join the club of developed countries. This paper uses the theory of Unequal Exchange from the Dependency School to understand the middle income trap in Bangladesh and further argues that the ideas of productivity, competitiveness and technological change derived from orthodox economic thinking are not useful in understanding growth prospects and policy responses in contemporary middle income countries. Alternately, the paper explains the role of structural change as a means of sustaining growth in middle income countries.
KEYWORDS: Bangladesh, middle income trap, unequal exchange, structural change.

JEL: O14, O40.

This study identifies the extent to which various socioeconomic groups are vulnerable to aggregate business cycle fluctuations. Socioeconomic groups are classified by gender, location, employment status, education, income and age cohort. The asymmetric behavior of aggregate economic growth indicates that some groups gain less during recovery and boom phases and are thus most vulnerable to recessions. A vulnerability index in calculated for different socioeconomic groups and the empirical results show that employers with a graduate degree in Balochistan are the most vulnerable group and that female workers are more vulnerable than male workers. Additionally, the study employs panel data on inflation and employment to investigate the implications of macroeconomic fluctuations on vulnerable groups. The results indicate that food inflation has a strong negative impact on real earnings, while nonfood inflation increases real earnings. The panel data and vulnerability index findings are consistent with each other. The study also presents policy implications for existing public social safety net programs and prospective private social innovation programs targeting vulnerable households.
KEYWORDS: Business cycle fluctuations, socioeconomic groups, vulnerability, GMM, Pakistan, real earnings.

JEL: E32, E24, E31, J16, J11.

Pakistan’s agricultural sector has experienced restructuring over the last decade, from changes in land markets to the move toward nonagricultural labor markets. However, agriculture remains one of the most important sources of livelihood, accounting for 45 percent of the country’s workforce. It is also a key policymaking area, but the role of small farmers in poverty reduction is still being examined. The future of small farms cannot be viewed in isolation, that is, without taking into account their synergies with nonfarm rural activities. We measure the impact of diversifying sources of livelihood on household income and consumption among small farms in rural Pakistan. Using a balanced panel of 2,058 households from the Pakistan Panel Household Survey (2001–10), we find that both consumption and income are (i) significantly higher for households that have diversified their sources of income and (ii) diversified households also plant greater varieties of crops. These results suggest that nonagricultural activities tend to complement agricultural activities with a view to improving welfare in a rural economy.
KEYWORDS: Agriculture, income, diversification, Pakistan.

JEL: O1, Q1, E2.

Almost half the world’s adult population lacks access to a formal bank account and other financial services. Pakistan is no exception and it is also among those countries at the lower end of the spectrum of financial inclusion. However, steps are being taken by government regulators and the private sector to improve access to financial services such as credit, savings, remittances and insurance. The introduction of mobile banking is a notable step in this context. Mobile banking, which comprises mobile wallets and over-the-counter transactions, is rapidly growing around the world and has the potential to reduce barriers to financial inclusion and thus transform economies. The benefits of this platform are even more pronounced for economies with a weak financial architecture and where formal banking entails considerable costs in terms of time and distance. This paper traces the history of mobile banking in Pakistan, studies various models of mobile banking and assesses its current state using the available data to understand how this segment has evolved and transformed conventional banking structures in the country. It also touches on the ecosystem that needs to be built in Pakistan to utilize the full potential of mobile technology.
KEYWORDS: Mobile banking, financial inclusion, branchless banking, Pakistan.

JEL: O16, G21, G23, G28.

Although health and safety regulations are a key aspect of labor market policymaking, very few studies have examined compensating wage differentials and the statistical value of injury in Pakistan’s context. This study looks at injury risk against occupation and industry, using data from the Labor Force Survey for 2013/14. We target five blue-collar occupations in two industries (construction and manufacturing), which tend to account for the highest number of injuries. However, we find that the statistical value of injury in these occupations is too small to reflect the wage premium that workers should be paid for risky jobs.
KEYWORDS: industry, labor market conditions, public policy, Pakistan.

JEL: O14.

The literature on industrial organization shows that geographic and industrial concentration affects firm turnover. This study conducts a firm-level analysis to gauge the impact of agglomeration on firm entry and exit in domestic industries in Punjab, Pakistan. It also illustrates how certain industries exist in clusters while others are highly dispersed. The results suggest that higher rates of firm entry and exit are associated with highly agglomerated industries.
KEYWORDS: agglomeration, firm entry, firm exit.

JEL: D22, L16.

This study applies panel least squares and fixed effects to a sample of 40 banks for the period 2006–14 to identify the key determinants of nonperforming loans (NPLs) in Pakistan. The findings suggest that, in addition to some macroeconomic and bank-specific variables, the corporate debt–equity ratio and financial burden have a positive, significant impact on NPLs, while corporate asset utilization and the diversification of bank activities significantly reduce the volume of NPLs. This has policy implications not only for the federal government, but also for bank managers, regulators and policy advisors.
KEYWORDS: nonperforming loans, bank asset quality, diversification, Pakistan.

JEL: G21, G28, G00.

This study examines whether there is a causal relationship between selected stock markets in Asia and the US. Based on stock values from a sample of nine Asian stock markets, we find a positive correlation with US stock market prices in most cases, the exception being Vietnam. Our results indicate significant long-run and short-run causality in both directions between the Asian and US stock markets. These findings show that, while both sets of markets are integrated, there are still valuable opportunities for international investors to diversify their portfolios in the US and Asia.
KEYWORDS: stock market, short and long term causality, Asia, USA.

JEL: F21.

This study examines the indirect impact of rural electrification on education. It finds that the greater the likelihood of a household being connected to the electricity grid, the more time the household’s children are likely to spend studying at home. This finding is interpreted as indirect evidence of an improvement in levels of schooling. Using instrumental variables to overcome endogeneity problems, the study’s LATE estimates reveal that providing households with access to electricity leads to children studying an extra 94 - 137 minutes at home per day, on average.
KEYWORDS: rural electrification, infrastructure, education, Peru.

JEL: O12, C31, C81.

This paper examines the energy–poverty nexus in Pakistan at the national and provincial level, using the multidimensional energy poverty index. Based on data from the Pakistan Social and Living Standards Measurement Survey for 2010/11, we find that the average household in Pakistan is 26.4 percent energy-poor. The study shows that the incidence of energy poverty is higher in rural areas than in urban areas, with a similar trend at the provincial level. A comparison with findings based on data from 2008/09 shows a slight decrease in energy poverty at the national level.
KEYWORDS: energy, poverty, households, Pakistan.

JEL: Q01.

This study estimates the magnitude of trade misinvoicing in Pakistan with 21 of its developed trading partners in 52 major traded commodities during 1972–2013. We find that the total volume of trade misinvoicing for this period exceeds US$92.7 billion. The gross revenue loss borne by the national exchequer due to trade misinvoicing is estimated at US$21.2 billion. Moreover, the total net revenue loss is an estimated US$11 billion in the form of evasion of customs duties and export withholding tax. The annual average net revenue loss due to trade misinvoicing is almost equivalent to 11.2 percent of the total revenue generated from customs tariffs. We also find that customs tariffs and the interest rate are positively associated with import under-invoicing, while improvements in the current account balance and political stability reduce the extent of import over-invoicing. Capital account openness is found to be insignificant in determining trade misinvoicing.
KEYWORDS: Trade misinvoicing, revenue loss, capital flight, reverse capital flight, black money, Pakistan.

JEL: F14, K20, F13, H26, O17.

Most empirical studies on sectoral change provide evidence in favor of the complementarities between manufacturing and services, claiming that both sectors generally grow in parallel. This study investigates the complementarities hypothesis for the SAARC countries, which have dominant services sectors but have not graduated to industrial status. We ask whether the rapid growth and value addition of services presents an opportunity or threat for value addition in manufacturing, when the latter sector is still at a premature stage. Our findings do not validate the complementarities between manufacturing and services overall in the case of the SAARC countries. However, there appear to be potential complementarities once services is interacted with trade variables.
KEYWORDS: Manufacturing sector, services sector, economic growth, SAARC.

JEL: O47, O14, N65.

This paper examines the effects of fiscal decentralization on the education sector for a sample of 62 countries. The results suggest that different sources of fiscal decentralization have distinct effects on education expenditure and quality. While subnational governments that are financed through own-tax revenues are more likely to increase the funds allocated to education, they also seem less concerned with maintaining teaching quality. This study provides evidence that decentralized structures cater better to local social needs. Fiscal decentralization is, therefore, an important policy instrument for achieving social goals.
KEYWORDS: Fiscal decentralization, education expenditure, teaching quality, panel data.

JEL: I21, H40, H52, H75, H71.

While corporate diversification is a fundamental issue both in the management literature and in corporate policy, the question that remains is whether it destroys or enhances firm value. This empirical study of the corporate diversification–value relationship for Pakistani firms looks at the role of asymmetric information and insider trading over a 10-year sample period, 2005–14. Using the industrial entropy index and purchase ratio to capture corporate diversification and insider trading, respectively, the study provides empirical evidence that questions the agency theory-based explanation of the corporate diversification–value relationship. Our results show that, in cases of asymmetric information, insiders increase the purchase of their firms’ shares in the open market when diversification is high. This contradicts the corporate diversification–value destruction stance of agency theory as well as the idea that outside investors’ undervaluation occurs due to information asymmetries. These results have strategic implications for corporate diversification strategies and are relevant to firm managers, regulators and shareholders.
KEYWORDS: Corporate diversification, agency effect, information asymmetry, insider trading, Pakistan.

JEL: G32, G14.

This paper uses the multivariate GARCH dynamic conditional correlation framework proposed by Engle (2002) to investigate time-varying conditional correlation between developed markets and emerging and frontier Asian (EFA) markets. It employs monthly returns data for 2000–14 to capture the potential contagion in developed (the US, Europe and Japan) and EFA stock markets. A key finding is the increasing conditional correlation among EFA and developed markets, especially during the 2008 financial crisis. The study finds that, during periods of financial turmoil, EFA markets are exposed to shocks and spillover effects from developed markets along with a substantial shift in the regime of conditional correlation. This has important implications for investors interested in diversifying portfolios in EFA markets during financial crises.
KEYWORDS: Emerging and frontier Asian markets, financial contagion, financial crisis, dynamic conditional correlation.

JEL: G11, G15, F65, F3.