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.

By mobilizing savings, financial markets play a crucial role in economic development. Given that the literature does not fully explore the nexus between financial activities and tax revenue, this study attempts to analyze the role of financial markets in generating tax revenue in Pakistan, using time series data for the period 1975–2014. It finds that, in the long run, the number of bank branches and market capitalization have a positive and significant impact on tax revenue. While credit to the private sector has a bidirectional relationship with tax revenue, public sector credit has an insignificant impact. In the short run, only the number of bank branches and market capitalization have a significant impact on tax revenue.
KEYWORDS: Financial sector, financial liberalization, tax revenue, Pakistan.

JEL: C32, G38, H21, G1.

Since the early 1990s, Pakistan’s economy has continued to lose its earlier growth momentum, except for a brief spurt in 2002–06. This has now become cause for considerable concern and urgent policy action is needed to revive the economy and move it to a higher growth trajectory. This slowdown during a period of rapid globalization (at least till 2008) and unprecedented technological advancement has raised fundamental questions as to the growing lack of competitiveness, both at the global level as well as against cheaper and better-quality imports in the domestic economy. In addition, recurring balance-of-payments crises have forced Pakistan to frequently seek IMF assistance and resort to severe contractionary policies to restore macroeconomic stability.
KEYWORDS: Pakistan, economy, IMF, 12th annual Conference, Management of the Pakistan Economy.

JEL: N/A.

Labor productivity growth has received scant attention in Pakistan even though it is the foundation of rising living standards and a country’s ability to compete in the world market. Productivity rises when producers invest and introduce new technologies to reduce production costs and improve the quality and range of goods produced. Competition among producers entails a constant search for areas of improvement, tapping new technologies and finding innovative ways to produce and deliver the output to consumers. This is entrepreneurship. The first part of the paper discusses productivity growth and its drivers. The second part explains the critical importance of technological progress and innovation in economic growth and the catch-up process. Entrepreneurship and how it might be stimulated in Pakistan is discussed next. The paper concludes with a few ideas on how science and technology might be promoted in Pakistan.
KEYWORDS: Labor, productivity, entrepreneurship, Pakistan.

JEL: E24, O14.

This study focuses on the estimation of the covariance matrix as an input to portfolio optimization. We compare 12 covariance estimators across four categories – conventional methods, factor models, portfolios of estimators and the shrinkage approach – applied to five emerging Asian economies (India, Indonesia, Pakistan, the Philippines and Thailand). We find that, in terms of the root mean square error and risk profile of minimum variance portfolios, investors gain no additional benefit from using the more complex shrinkage covariance estimators over the simpler, equally weighted portfolio of estimators in the sample countries.
KEYWORDS: Variance-covariance matrix, mean-variance criteria, portfolio management.

JEL: G11, G15, C51, C13, C52.

This paper reviews Pakistan’s productivity performance over the last 35 years (1980–2015) and identifies factors that help explain the declining trend in labor productivity and total factor productivity (TFP), both of which could have served as major drivers of productivity growth – as happened in East Asia and more recently in India. A key finding is that the maximum TFP gains and their contribution to economic growth are realized during periods of high-output growth. The lack of sustained growth and low and declining levels of investment appear to be the most important causes of the low contribution of TFP to productivity growth, which has now reached levels that should be of major concern to policymakers vis-à-vis Pakistan’s growth prospects. Using the endogenous growth model, we examine the contribution of physical capital, human capital and TFP to labor productivity. The results suggest that, over these 35 years, the contribution of physical capital and education remains modest and there has been a declining trend in TFP growth. This shows that Pakistan’s economy has not taken full advantage of the favorable technological developments and rapid globalization of the period. We also question the view expressed in recent studies that Pakistan’s growth has been driven primarily by factor inputs, namely labor and capital, and not by TFP growth. The paper argues to the contrary that it is the lack of investment in and growth of the stock of capital embodying the most recent knowledge and technology that has inhibited TFP growth post-1990. Finally, there is an urgent need for further research to understand the dynamics of growth in services and to raise TFP in this sector as India has done post-1990.
KEYWORDS: Growth, labour, capital, labour productivity, total factor productivity, Pakistan.

JEL: D24, O47, E01.

Growth in Pakistan has been surprisingly sustainable. GDP growth of 5 percent p.a. since independence and no recession since (at least) 1960 according to World Bank data represents a creditable performance when compared to all but the most successful developing countries. Pakistan has significantly transformed the structure of its economy during these same decades; in 1950 99 percent of its exports were agricultural goods and by the 1990s exports were largely manufactured goods. This very success indicates a growing constraint on sustaining growth into the future or the concern that Pakistan may be headed for a Middle Income Trap. Although there does exist scope for continued growth based on further structural changes - in particular the large number of people still employed in agriculture or the women not currently engaged in the labor force - for growth to be sustained a more intensive or productivity-oriented growth will be necessary. This paper first outlines the importance of productivity growth for sustaining GDP growth in Pakistan, then examines the historical and comparative productivity performance of Pakistan, and explores a number of case studies of successful technological change, particularly in South Asia, and finally attempts to draw some lessons for contemporary Pakistan.
KEYWORDS: Technology adoption, productivity, political economy, Pakistan.

JEL: O14, O49, Q16.

While export diversification is considered to foster export growth and enhance GDP growth rates, this diversification has not translated into higher exports for Pakistan. In addition to diversification, the country must undergo a structural transformation of its exports to upgrade to a more sophisticated export basket. This entails shifting its comparative advantage from primary to manufactured exports and, further, from a labor-intensive to a more capital-intensive productive structure. In order to explain Pakistan’s paradoxical situation, this paper analyzes Pakistan’s orientation in the ‘product space’ as it affects the process and rate of structural transformation. In addition, we assess the sophistication of Pakistan’s exports based on their complexity and technological sophistication. Our analysis refutes the traditional argument that diversification leads to greater exports and faster economic development. It also shows that the bulk of the country’s productive capabilities are concentrated in the periphery of the product space, which is very weakly connected to the tightly packed industrial core. The export basket is neither complex nor technologically sophisticated, producing low-tech undifferentiated products. It seems that Pakistan is left with few nearby options for structural transformation, leaving it without a path to other, more sophisticated areas in the core of the product space. We argue that accelerating the process of structural transformation will require revisiting industrial policy, strengthening the country’s institutions and strategic collaboration between the public and private sectors.
KEYWORDS: Pakistan, structural transformation, technological sophistication, diversification, product space, growth, exports.

JEL: F1, F19, F43, O14, F10, O33.

In a knowledge-based economy, it has become increasingly important to better understand critical aspects of the innovation process such as innovation activities beyond R&D, the interaction among different actors in the market and the relevant knowledge flows. Using a sample of 431 textiles and apparel manufacturers, this paper explores the dynamics of firms’ innovation activities by analyzing their innovation behavior, the extent and types of innovation, the resources devoted to innovation, sources of knowledge spillovers, the factors hampering technological innovation and the returns to innovation for three years, 2013–15. Our results show that 56 percent of the surveyed firms introduced technological and/or nontechnological innovations, while 38 percent introduced new products, these innovations were generally incremental as the majority of innovations were new only to the firm. Furthermore, the innovation rate increases with firm size; large firms have an innovation rate of 83 percent, followed by medium firms (68 percent) and small firms (39 percent). Technologically innovative firms spent, on average, 10 percent of their turnover on innovation expenditure in 2015. Acquisition of machinery and equipment is the main innovation activity, accounting for 56 percent of innovation expenditures. Large firms consider foreign market sources (clients and suppliers) and small firms consider local market sources their key source of information and cooperation. 63 percent of technological innovators cite improving the quality of goods as their most important objective. Lack of available funds within the enterprise is the single most important cost factor hampering innovation, followed by the high cost of innovation. Our results show that 67 percent of the turnover among product innovators in 2015 resulted from product innovations that were either new to the market or new to the firm.
KEYWORDS: Innovation, technological, non-technological, Pakistan.

JEL: O14, O32.

Drawing on the successful industrialization and catch-up experience of the UK, the US, Germany, France, Italy, Sweden and Japan, and later South Korea and Taiwan, we argue that industrialization is a necessary phase for normal economies to stimulate rapid economic growth and structural change. This paper compares Pakistan’s industrialization with that of selected economies in East Asia. The evidence shows that Pakistan not only has the lowest GDP per capita of this group, it has also industrialized the least. Pakistan enjoyed its highest manufacturing growth rates in the 1950s and 1960s. Thereafter, manufacturing grew slowly and unevenly until the 1990s and 2006, largely through clothing exports. While Pakistan has faced deindustrialization since 2006, technology upgrading was never an integral part of its industrial policy. In contrast, the developmental role of the state, with a strong focus on technological catch-up and science-based education, is what propelled South Korea’s leading firms to the world’s technology frontier. Clientelist pressures compromised a similar role in Malaysia, the Philippines and Indonesia, although foreign-owned firms helped expand their manufactured exports. A structured technology upgrading framework was never part of policy planning in the Philippines, Indonesia and Thailand, while Malaysia’s technology upgrading blueprint, launched in 1991, lacked sound execution. Export manufacturing in the Philippines, Indonesia, Thailand and Malaysia through imports of cheap foreign labor has benefited from low wages and foreign direct investment. The comparison offers Pakistan an opportunity to learn from both the more successful and less successful industrializers in East Asia, that it might create the conditions for rapid economic growth and structural change.
KEYWORDS: Industrialization, deindustrialization, industrial policy, technological upgrading, Pakistan.

JEL: O14.

This study analyzes entrepreneurial ability in Pakistan through a cross-sectional comparison of provinces and districts based on data from the Global Entrepreneurship Monitor for 2010–12. The aim is twofold: to (i) identify individual and country-level factors that affect nascent and potential entrepreneurs and (ii) see how regional income levels and the degree of development affect entrepreneurship (of both the opportunity and necessity varieties), eventually contributing to innovation and economic growth. We investigate the effect of total early-stage entrepreneurial activity on entrepreneurial framework conditions at the regional level and then evaluate the impact of education, age, gender and entrepreneurial ability on potential entrepreneurs, nascent entrepreneurs and baby business owners to examine the entrepreneurial startup process.
KEYWORDS: Entrepreneurship, income, development, regional, Pakistan.

JEL: L26, O10.