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, H3, E620, 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.

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: H3, E620, 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.