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Organization, Management, and Wage Practices in Pakistan’s Electrical Fan and Readymade Garment Sectors
Theresa Thompson Chaudhry and Mahvish Faran
The electrical fan sector in Pakistan has existed since at least the country’s independence and produced for the domestic market for most of its history, although the sector has had strong export growth in the last 15 years. On the other hand, the readymade garment sector has a shorter history, but has been export-oriented from the beginning. The fan sector has retained the traditional batch production system while garments are produced along a line. Nonetheless, both rely on piece rate-based wages to meet their production targets. In this paper, we describe production, management, wage practices, quality, and some barriers to reorganization in these sectors.
KEYWORDS: Production, management, quality, wage practices, ready-made garments, Pakistan.
JEL: L67, D20, L23.
The State of Manufacturing in Pakistan
Rajah Rasiah and Nazia Nazeer
The history of successful industrializers, such as South Korea and Taiwan, shows a systematic shift in the production structure from low- to high- value added activities in manufacturing and its resulting impact on agriculture, mining and services. Within manufacturing, the transformation is seen in both a movement from low-value added sectors, such as apparel making, to high-tech activities, such as automotive and electronics products, and, within particular industries, vertical integration into knowledge-intensive activities.
Pakistan’s failure to engender the conditions to stimulate technological upgrading within its leading manufacturing industry of clothing, and a shift away to higher-value added industries is the prime reason why the country has not achieved rapid growth in GDP per capital over the long-term. This paper discusses Pakistan’s stagnation in manufacturing over the period 1960-2013 against the experience of the rapid industrializers of South Korea, Taiwan and Malaysia. Drawing on empirical evidence it argues that Pakistan requires a dynamic industrial policy that focuses on technological upgrading in its existing manufacturing sectors and the creation of competitive advantage in high value-added sectors if the country is to experience sustained long-term economic growth.
KEYWORDS: Manufacturing, industries, policy, Pakistan.
Globalization: The Challenge for Pakistan
This paper makes the case for Pakistan to engage actively in globalization. At present, the country is more a recipient of globalization than a participant. There is a need to shift the terms of engagement from passive to active involvement. Particular effort is needed to encourage foreign companies already present in Pakistan to integrate activities with their global operations. Export-oriented investment requires a more favorable trade regime. Above all, global engagement will require Pakistan to build up its technological capabilities substantially, both at the enterprise level and economy-wide. These shifts imply a revitalized industrial policy endorsed by industry and a vigorous policy thrust aimed at investment-led growth.
KEYWORDS: Globalization, investment, trade, technology, industry, Pakistan.
JEL: F21, O38, O53, F63.
The Impact of the Macroeconomic Environment on Pakistan’s Manufacturing Sector
Inayat U. Mangla and Muslehud Din
This paper analyzes the impact of the macroeconomic environment on Pakistan’s manufacturing sector, emphasizing in particular the role of fiscal and monetary policies in shaping incentives for industrial investment. Arguably, Pakistan’s macroeconomic fundamentals in the last two decades have remained fragile, resulting in severe macroeconomic imbalances that have contributed to macroeconomic instability and hampered private investment in aggregate as well as in the manufacturing sector. Furthermore, macroeconomic stabilization policies have often failed to produce the desired results owing to the lack of coordination between monetary and fiscal policies. Pakistan’s economy has thus lived on borrowed money and time and on rent-seeking behavior. Although some recent macroeconomic indicators have improved slightly, fundamental weaknesses remain. In particular, the recent improvement in the current account deficit was driven largely by the high inflow of remittances, coupled with financial engineering such as loan payments from the International Monetary Fund, “friendly” money, European Union bonds, and Islamic sukuk. It is imperative to think about the consequences of a leveraged reliance on remittances in the aftermath of falling oil prices and global deflation. Prudent macroeconomic management aimed at consolidating public finances and controlling inflationary pressures is essential to boost industrial investment and yield sustainable growth.
KEYWORDS: Pakistan, economic activity, fiscal and monetary policies, manufacturing activity.
JEL: L69, O23.
Credit Flows to Pakistan’s Manufacturing SME Sector
Imran Ahmad and Karim Alam
This paper profiles the flow of credit to manufacturing SMEs and their subsectors in Pakistan. We discuss the challenges confronting the SME sector as well as the role of the central bank in this context. Based on the literature and data available, we find that the flow of financing to the manufacturing sector witnessed a gradual and steady increase in absolute terms, although its share of total industry credit declined sharply over a nine-year period. Financing to manufacturing SMEs initially declined and then increased over a period of six years.
KEYWORDS: Credit, manufacturing, small & medium enterprise (SME), Pakistan.
JEL: L60, E51.
In Quest of SME-Conducive Policy Formulation
H. C. J. Hanns Pichler
The very topic raises a challenging question: that is, of the role and significance, if not the “survival,” of small and medium enterprises (SMEs) and related structures amid forces, which – particularly in the sphere of industry – tend to favor the “big” over the “small” at first sight. At the same time, this points to underlying aspects and challenges of broader socioeconomic and structural dimensions with a concomitant need to formulate appropriate, more differentiated, and specifically designed business policies. Today, such challenges and related problems are seen as intertwined and multipronged, given (i) the growing international (not least as a strategic ingredient of development) perception of the role and exposure of SMEs in terms of their sector-related structural significance nationally, regionally, and globally; (ii) a closer-to-the-skin view of developments related to ongoing restructuring in the European business environment, which, in the context of SMEs, is in many ways regionally unique; and (iii) the overriding socioeconomic and systems-related aspects of a more comprehensive SME-specific policy formulation.
KEYWORDS: SMEs, business policies, growth.
Private School Participation in Pakistan
Quynh T. Nguyen and Dhushyanth Raju
Published:Jan - June 2015
This study uses multiple rounds of national household sample surveys to examine the extent and nature of private school participation at the primary and secondary levels in Pakistan. Today, one fifth of children in Pakistan—or one third of all students—attend private school. Private school students tend to come from urban, wealthier, and better-educated households than government school students and especially out-of-school children. The characteristics of private school students relative to their government school peers and the former’s composition differ in important ways across Pakistan’s four provinces. Private school participation among children varies largely from one household to another rather than within households, and to a greater extent than government school participation. Private schooling is spatially concentrated, with a few districts (situated mainly in northern Punjab) accounting for most private school students. The spatial distributions of private school supply and participation are strongly correlated. In the 2000s, private school participation rates grew in Punjab, Sindh, and Khyber Pakhtunkhwa and across socioeconomic subgroups, contributing in particular to the growth in overall school participation rates for boys, urban children, and rich children. Nevertheless, the composition of private school students has become more equitable, driven mainly by Punjab, where the shares of private school students from rural and nonrich households have risen.
KEYWORDS: Private schools, private school participation, Pakistan, household surveys.
JEL: I25, I21.
Migration, Remittances, and Household Welfare: Evidence from Pakistan
Masood Sarwar Awan, Mohsin Javed, and Muhammad Waqas
Published:Jan - June 2015
This study examines the costs and household-level benefits of overseas migration in Toba Tek Singh, Pakistan. A household survey was conducted to assess the transaction costs associated with the transfer of remittances and the sources used to finance overseas migration. We also carry out a propensity-score matching exercise, which reveals that overseas migration has substantial benefits as measured by migrants’ consumption levels, their expenditures on health, education, and vehicles, and the level of household savings. Policy options to facilitate migration and the transfer of remittances include (i) establishing technical training institutions to help workers upgrade their skills, (ii) information campaigns on the migration process and opportunities available, (iii) setting up institutions to provide loans for potential migrants, (iv) reducing money transfer costs through formal channels, and (v) building awareness of the Pakistan Remittance Initiative.
KEYWORDS: International migration, remittances, Pakistan.
JEL: F24, F22, I30.
Implications of Public External Debt for Social Spending: A Case Study of Selected Asian Developing Countries
Sadia Shabbir and Hafiz M. Yasin
Published:Jan - June 2015
For developing countries with budgetary and balance-of-payments gaps to meet, maintaining large stakes of external debt is not free of cost. Highly indebted countries have to set aside a sizeable fraction of their scarce resources to service their debt, which naturally affects their development spending in general and allocations for the social sector in particular. This study examines the behavior of seven developing Asian countries and analyzes the impact of public external debt on social sector spending. The panel dataset includes Pakistan, India, Bangladesh, Sri Lanka, Nepal, the Philippines, and Indonesia, and spans the period 1980–2010. Our empirical analysis is based on three interrelated equations for different spending categories, which are estimated using the general method of moments. The study’s results confirm the common wisdom that outstanding external debt and its servicing liability have an adverse impact on public spending, particularly on social sector spending. This suggests that developing countries need to mobilize their own resources and minimize their dependence on external borrowing as far as possible.
KEYWORDS: Public debt outstanding, debt servicing, fiscal deficit, current account deficit, social sector development.
Relative Factor Abundance and Relative Factor Price Equality in Punjab
Published:Jan - June 2015
This study tests the relative factor price equality across districts in Punjab using the methodology developed by Bernard, Redding, and Schott (2009) and data from the Census of Manufacturing Industries for 2000/01 and 2005/06. The results indicate the absence of relative factor price equalization due to the uneven distribution of factors in the province. Nonproduction (white-collar) workers) are relatively scarce in Punjab, which results in a wage premium for this type of labor. The study adjusts for worker quality by using a Mincerian wage equation as worker quality could explain the wage differential between white-collar and blue-collar workers. However, this exercise yields similar results, implying that factors are distributed unevenly across the districts of Punjab even after controlling for worker quality differences.
KEYWORDS: Sector price, wages, equality, Punjab, Pakistan.
The Effectiveness of Corporate Governance in Constraining Earnings Management in Pakistan
Aysha S. Latif and Fahad Abdullah
Published:Jan - June 2015
Although firms’ annual reports are supposed to provide an unbiased and accurate picture of their financial position, managers may be induced to engage in earnings management in order to circumvent expectations. Such incentives can take the shape of stock prices, management incentives, or debt covenants. The purpose of this study is to investigate the effectiveness of three attributes of corporate governance in constraining earnings management practices. These include board characteristics, audit committee characteristics, and ownership structure. Based on a sample of 120 nonfinancial firms listed on the Karachi Stock Exchange during 2003–12, we find that audit committee independence is negatively associated with earnings management, while CEO duality and institutional shareholding is positively associated with earnings management. Moreover, the effectiveness of governance mechanisms in constraining earnings management practices differs across high- and low-growth firms.
KEYWORDS: Earnings management, financial statements, corporate governance, board characteristics.
An RCA Analysis of Textiles and Clothing in Pakistan, India, and Bangladesh
Published:Jan - June 2015
This study focuses on the revealed comparative advantage analysis for Clothing and Textile sectors of Pakistan, India and Bangladesh. We have applied the Balassa’s (1965) Index for the analysis. The revealed comparative advantage has been analyzed in two different ways: one static on the year 2010 and the other one dynamic based on 1980, 1990, 2000 and 2010. For the dynamic analysis, the average of the three previous years from 2010 were taken and used for revealed comparative advantage. The results show Pakistan’s highest revealed comparative advantage for textiles over both India and Bangladesh. India has revealed a comparative disadvantage in textile in competition of Pakistan and Bangladesh. For clothing, Bangladesh has very dominant revealed comparative advantage when competing with Pakistan and India. Dynamic revealed comparative advantage indicates Pakistan has been gaining a comparative advantage in textiles since 1980 but with a declining percentage of textile export. Bangladesh has significantly gained a comparative advantage in clothing since the 1980s.
KEYWORDS: Revealed Comparative Advantage, Textile, Clothing, Product Positioning, Balassa Index, Pakistan.
JEL: F14, F15, F10, O57.
The Comparative Efficiency of Public and Private Power Plants in Pakistan’s Electricity Industry
Amir Jahan Khan
Published:July - Dec 2014
This study estimates a cost function for fossil fuel-based electricity generating plants operating in Pakistan during 2006–11. It employs a six-year panel dataset for 31 plants to estimate the cost function parameters. In the absence of any current evidence on comparative cost performance, the study’s attempt to document the economic efficiency of power plants in a large electricity sector is an important contribution to the literature. We find that on average, private nonutility plants (IPPs) are about 17 years younger than utility-owned plants and that the average capacity utilization, as measured by load factor, is higher for private IPPs than for public plants. After controlling for observables, the results show that, for a large part of the system, private plants produce electricity at a lower unit fuel cost than utility-owned public plants. The low efficiency of public plants is likely a result of the lack of operational maintenance and routine repairs. We find that the average fuel price (PRs per MMBTU) is lower for public plants and utility-owned private plants compared to nonutility-owned private plants which is mainly due to the composition of the fuel mix used for power generation. We also find that (i) the partial effect of fuel price changes on the average unit cost is higher for private plants than for public plants and (ii) on average, private plants use relatively expensive fuels compared to public plants. On an average fuel cost comparison, the private sector plants may be better base load plants than public sector plants, though the private sector plants may not be being used as base load plants because of the higher tariffs they change.
KEYWORDS: Cost function, utility-owned public plants, load factor, productive efficiency.
JEL: D22, D24, L94.
The Impact of Corporate Governance and Ownership Structure on Earnings Management Practices: Evidence from Listed Companies in Pakistan
Kamran and Attaullah Shah
Published:July - Dec 2014
This study analyzes the impact of corporate governance and ownership structure on earnings management for a sample of 372 firms listed on the Karachi Stock Exchange over the period 2003–10. We estimate discretionary accruals using four well-known models: Jones (1991); Dechow, Sloan, and Sweeney (1995); Kasznik (1999); and Kothari, Leone, and Wasley (2005). The results indicate that discretionary accruals increase monotonically with the ownership percentage of a firm’s directors, their spouses, children, and other family members. This supports the view that managers who are more entrenched in a firm can more easily influence corporate decisions and accounting figures in a way that may serve their interests. This finding is consistent with prior research evidence on the role of dominant directors in expropriating external minority shareholders in Pakistan. Further, our results indicate that institutional investors play a significant role in constraining earnings management practices. We do not find any evidence that CEO duality, the size of the auditing firm, the number of members on the board of directors, and ownership concentration influence discretionary accruals. Among the control variables, we find that firms that are more profitable, are growing, or have higher leverage actively manage their earnings, while earnings management decreases with the age of the firm. The results are robust to several alternative specifications.
KEYWORDS: Corporate governance, earnings management, ownership structure, discretionary accruals, KSE, Pakistan.
JEL: G32, G3, M4.
Value-at-Risk and Expected Stock Returns: Evidence from Pakistan
Javed Iqbal and Sara Azher
Published:July - Dec 2014
This study investigates whether exposure to downside risk, as measured by value-at-risk (VaR), explains expected returns in an emerging market, i.e., Pakistan. We find that portfolios with a higher VaR are associated with higher average returns. In order to explore the empirical performance of VaR at the portfolio level, we use a time series approach based on 25 size and book-to-market portfolios. Based on monthly portfolio data for October 1992 to June 2008, the results show that VaR has greater explanatory power than the market, size, and book-to-market factors.
KEYWORDS: Value-at-risk, emerging market, Fama-French factors.
JEL: G32, C32.
An Impact Assessment of Expected Future Turmoil Risk on FDI: A Panel Data Analysis of Developing Countries
Published:July - Dec 2014
This paper uses foreign direct investment (FDI) data from 39 developing countries for the period 2002–11 to explore whether the expected future turmoil risk of a country plays a significant role in determining FDI. It concludes that countries for which the expected future turmoil risk is very high are likely to have lower FDI inflows than countries for which the expected future turmoil risk is low, keeping all other factors constant. The results also illustrate that GDP per capita, democratic accountability, religious tension, and FDI inflows in the previous period are important determinants of FDI in developing countries.
KEYWORDS: Political risk, foreign direct investment, expected future turmoil risk.
JEL: F23, C33, C23, F21.
The Growth and Employment Impacts of the 2008 Global Financial Crisis on Pakistan
Mirajul Haq, Karim Khan and Ayesha Parveen
Published:July - Dec 2014
This study examines the impact of the 2008 global financial crisis on economic growth and employment in Pakistan. We conduct a time series analysis of quarterly data for 1997–2011, applying the autoregressive distributed lag bounds-testing approach and an unrestricted error correction model. Our analysis suggests that the impact of the crisis was transmitted primarily through two channels—the financial sector and trade—with a corresponding negative effect on economic growth and employment. Of the two channels, the magnitude of the trade effect is larger than that of the financial sector.
KEYWORDS: Financial crisis, financial stress, economic growth, cointegration.
JEL: O16, C51, C43, O4.
The Correlates of Educated Women’s Labor Force Participation in Pakistan: A Micro-Study
Muhammad Zahir Faridi and Ayesha Rashid
Published:July - Dec 2014
This study attempts to determine the factors that affect educated women’s decision to participate in the labor force. Based on a field survey conducted in the district of Multan, we find that a number of factors have a positive and significant impact on women’s decision to work. These include women who fall in the age groups 35–44 and 45–54, the coefficients of all levels of education, the presence of an educated husband, marital status, family structure, and family expenditure. The presence of an educated father, being an educated married woman, location, distance from the district headquarters, the husband’s employment status and income, and ownership of assets significantly reduces women’s labor force participation. The results of the earnings equation show that variables such as women who live in an urban area and their level of education and experience are associated with a substantial increase in earnings with each additional year. The number of children has a negative and significant impact on women’s earnings. The hours-of-work model shows that age and the number of completed years of education have a positive effect on working hours, while the number of dependents and the number of hours spent on household activities have a negative effect on working hours.
KEYWORDS: Human capital, labor force participation, earnings function, time allocation, Punjab, Pakistan.
JEL: D00, J21.
Over the last few years, the Pakistani economy has faced a variety of challenges which has led economic managers to focus more on immediate problems at the expense of long term structural issues. The purpose of the Lahore School’s Tenth Annual Conference on the Management of the Pakistan Economy was to help policy makers take a step back and look at some of the critical issues that Pakistan needs to face if it is to achieve growth in the medium to long term. Thus the central theme of the conference was ‘Pakistan in the Global Economy – Opportunities and Challenges’ and a range of key structural issues was discussed by a variety of experts. What made the conference unique was that many of these issues have not been discussed and debated thoroughly before in the Pakistani context. Some of the highlights of the conference were Asma Khalid’s (from the State Bank of Pakistan) extremely insightful analysis of the parallel foreign exchange market in Pakistan (which has not been analyzed in depth before) as well as the call by many of the presenters for a well-formulated industrial policy in Pakistan. Similarly, the conference also focused on some key export sectors (such as garments) as well as strategies for improving Pakistan’s export competitiveness and diversifying exports. Finally, some of the participants noted that in a rush to access new markets, Pakistan must tread carefully when agreeing to trade agreements with potentially large trading partners. As Pakistani policy makers sit and decide on economic strategies, it is absolutely critical that they pay very close attention to these issues.
KEYWORDS: Pakistan, economy, Pakistan, policy.
Pakistan’s Parallel Foreign Exchange Market
This paper seeks to describe and analyze the parallel foreign exchange (FX) market in Pakistan. The very nature of this market implies that there is little formal documentation or data to describe it, and so any assessment will be, by definition, subjective. However, parties that transact in the parallel market are familiar with parts of it, on which basis this paper aims to give a comprehensive picture of the structure and evolution of this market in Pakistan. We start with a brief historical perspective, which flags the importance of workers’ remittances to the country and explains how the bulk of this inflow is transacted through the hundi/hawala network (informal moneychangers). We then place this network within the context of the larger FX market and show how it interfaces with the interbank market. We also discuss how many hundi/hawala agents have evolved into formal exchange companies and list the various sources and uses of FX transacted in the kerb market. The conclusion spells out the importance and resilience of the parallel FX market, the need to push toward full amalgamation with the formal FX market, and the key role of workers’ remittances in Pakistan’s macro-economy.
KEYWORDS: Pakistan, foreign exchange, informal economy, hundi/hawala, macro-economy.
JEL: F31, E44.