Numerous public announcements are made regularly in Pakistan about moving towards a knowledge economy. These appear to be wishful thinking in the absence of any coherent understanding of the role of technology and its spillovers as major drivers of development and growth as well as lack of clarity about the manner in which science and technology are organized in Pakistan. Pakistan has not really been able to manage the major organizational changes brought about by the techno-information revolution of the 21st century. Its competitiveness is falling, organizational changes are slow and workforce skill levels are inadequate – all of which have stalled productivity and innovation. Pakistan faces a serious risk of deindustrialization unless the dynamics and disruptive nature of modern technology are better understood and embedded as a key pillar of public policy in order to enhance productivity and innovation. This article attempts to define the nexus between technology and entrepreneurship and show how it differs from scientific research. It also examines the role of public policy in promoting productivity growth and entrepreneurship through better policies in technology management.
KEYWORDS: Productivity, growth, public policy, technology, Pakistan.

JEL: O39.

This paper estimates the aftermarket performance of initial public offerings (IPOs) listed on the Karachi Stock Exchange. The evidence confirms that IPOs generate statistically significant abnormal returns in the short run, which indicates that underwriters initially underprice IPOs when analyzed using a short time horizon. However, when using longer time horizons to estimate abnormal performance, the results indicate that IPOs underperform in the long-run. There is an apparent dislocation between the initial valuation set by underwriters and the premium paid by the market for these new issues. The market sentiment that causes this temporary disequilibrium eventually fades and the market reprices the newly issued shares. We conduct an extreme bounds analysis to test the sensitivity and robustness of 16 explanatory variables in determining the long-term performance of unseasoned newly issued shares. The results indicate that the long-term investment ratio, industry affiliation, market-adjusted abnormal returns, financial leverage, return on assets, IPO activity period, the aftermarket risk level of unseasoned issues, and the post-issue promoter’s holdings variables significantly affect IPOs’ aftermarket performance. Theoretically, the overreaction hypothesis, ex-ante uncertainty hypothesis and window-of-opportunity hypothesis best explain IPOs’ aftermarket performance in this study.
KEYWORDS: Initial public offering, underpricing, underperformance, extreme bounds analysis.

JEL: G32, G14, G23.

This study examines the impact of remittances on school enrollment and the level of education attained among children aged 4–15 years in Pakistan. It uses a nationally representative survey, the Pakistan Social and Living Standards Measurement Survey for 2010/11. The migrant network variable at the village level interacting with the number of adults at the household level is used as an instrument for remittances. The results of the IV probit model show that children from remittance-receiving households are more likely to enroll in school. The marginal impact of remittances on school enrollment is larger for girls and for rural households. Hence, remittances help reduce regional and gender disparities in child school enrollment in Pakistan. The IV censored ordered probit model is used to investigate the impact of remittances on children’s grade attainment. The estimated impact is negative and significant, except for urban children, lowering the probability that a child will move to a higher grade.
KEYWORDS: Child education, school enrollment, educational attainment, remittances.

JEL: O15, I25.

This study examines the behavioral aspect of Pakistan’s energy crisis by comparing electricity consumption in the public and private sectors. Specifically, we compare consumption patterns of electricity across a sample of student hostels at two public sector universities and privately run student hostels. In addition, we collect household data for a sample of students at Quaid-i-Azam University (QAU) in Islamabad and compare their average electricity consumption with that of the public sector university hostels. We find that the latter’s average consumption of electricity is significantly higher than among private hostels and households. In assessing the moral hazard problem of the public sector in this context, we test the energy conservation behavior of QAU students and the university administration. The results show that students are largely indifferent to conserving electricity, while the administration pays little attention to the use of energy-efficient lights and equipment.
KEYWORDS: Electricity consumption, public sector, private sector, moral hazard, conservation of electricity, organizational inefficiency.

JEL: H83, D00, D12, D03, D04.

This study uses data envelopment analysis and the Malmquist index to examine the impact of financial sector reforms on the efficiency and productivity of Pakistan’s insurance sector over the period 2000–09. Our results indicate that the sector is cost-inefficient, with an average score of 58 percent – an outcome of the inappropriate use of inputs. The Malmquist productivity index performs better, indicating an improvement in total factor productivity of about 3 percent on average. The second-stage Tobit regression analysis shows that large firms are relatively inefficient from an allocative perspective as they are unable to equate the marginal product of inputs with their factor prices. Furthermore, the results demonstrate that private firms are more efficient than public firms in the nonlife insurance sector. The empirical findings suggest that a more competitive environment, diversified products and innovative technology could improve the productivity of insurance firms in Pakistan.
KEYWORDS:

JEL: D22, C14, G22.

Bangladesh has experienced phenomenal growth in its readymade garments (RMG) sector and become the world’s second-largest RMG exporter after China. Given the country’s robust position in this context, many observers expected that the SAFTA revisions under Phase II – which allowed Bangladesh’s apparel products duty-free and quota-free access to the Indian market – would lead to a surge in Indian imports of apparel and RMGs. However, this did not materialize. This study analyzes Indo–Bangladesh trade in RMGs in order to determine the underlying reasons for this anomaly. Using Balassa’s concept of revealed comparative advantage, the study establishes the strong comparative advantage enjoyed by Bangladesh though the results also show a lack of effective trade complementarity between the two countries. Overall, the findings suggest that India enjoys economies of scale in RMG production – as Bangladesh’s competitor, India has artificially maintained a secure regime through a combination of domestic export incentives and nontariff measures to restrain imports.
KEYWORDS: Bangladesh, India, comparative advantage, liberalization, RMGs, SAFTA.

JEL: F14, F15, F13.

Although numerous studies have explored the relationship between education and women’s health-seeking behavior, the role of education – and the pathway through which it affects health-seeking behavior – remains unclear. We use data from the Pakistan Demographic Health Survey for 2006/07 on women aged 15–49 who had given birth at least once in the last three years to determine which socioeconomic factors affect maternal healthcare use, and how the effect of women’s own education is transmitted to their health-seeking behavior. We implement two estimation techniques: (i) a two-step instrumental variable linear probability model, in which women’s exposure to mass media is used as an instrumental variable for their health knowledge; and (ii) a community fixed effects model. The results of the analysis indicate that predisposing factors – such as women’s level of education, their children’s birth order, their spouse’s level of education, type of occupation, and empowerment – are important determinants of maternal health-seeking behavior in Pakistan. The results also confirm the important role played by women’s own health knowledge, independent of their education, on their maternal healthcare use.
KEYWORDS: Maternal health, education, health knowledge, instrumental variable analysis, mass media exposure, Pakistan.

JEL: C26, I15, I29.

This study employs the Richardson model to investigate the presence of an arms race between Pakistan and India during the period 1972–2010. Using the generalized method of moments approach, we find that the grievance term for the Pakistan model is positive while that for India is negative. Both countries’ defense spending in the previous period is negatively related to the change in their own defense spending due to the economic or administrative incidence of an arms race. Moreover, the defense or reaction coefficients in the specified model determine the presence of an arms race between the two countries. The signs of these coefficients are positive in accord with the classical Richardson model, suggesting that an arms race does indeed exist between Pakistan and India.
KEYWORDS: Arms race, defense spending, generalized method of moments, grievance term, reaction coefficients, Pakistan, India.

JEL: C45, H56.

Islamic mutual funds and socially responsible mutual funds are two similar asset classes that incorporate negative screens in their portfolio selection process to filter out stocks that fail to meet certain ethical, social, environmental, and/or religious standards. This study uses a single-factor capital asset pricing model and an adjusted sample consisting of 224 Islamic funds and 573 socially responsible funds to examine their excess risk-adjusted returns, market volatility, and systematic risk. It also gauges the market-timing abilities of the fund managers concerned in relation to both Islamic/socially responsible and conventional market indices. While there are some differences in the risk factors of Islamic funds and socially responsible funds, both are associated with lower risks and have the same market-timing ability.
KEYWORDS: Islamic mutual funds, capital asset pricing model, returns, systematic risk, market volatility.

JEL: G19.

The objective of this study is to identify the significant determinants of firms’ dividend policy across different sectors in Pakistan. Using data on 75 companies listed on the KSE 100 index for the period 2005 to 2010, we find that profitable firms tend to give higher dividends than loss-making firms. Firm size has a negative relationship with the dividend payout ratio and dividend yield, indicating that, the larger the firm, the more likely it is to retain cash to pay off its liabilities. Growth in sales is positively related to dividend yield, whereby an increase in sales leads to higher profitability and higher dividend payments. Ownership concentrated within institutions (such as banks and insurance companies), the management/family, and individuals has a negative impact on the payout ratio. Institutional owners are more likely to retain excess cash and thus omit dividends, individual owners prefer capital gains to dividends given the tax deduction, and management- or family-owned firms avoid dividends, which lead to increased agency problems. Finally, the market-to-book ratio is negative and highly significant: firms with better growth opportunities rely on internal financing more than on generating external funds.
KEYWORDS: Market to book, market cap, dividend payout, ownership structure, Pakistan.

JEL: G32, G30, G35.

This study develops a methodology for the comparative analysis of industry-specific export incentives. The impact of different export incentives extended to the textiles sector in India, Pakistan, and Bangladesh is analyzed using industry-level data for the years 2001–11. Our findings show that Bangladesh operates a highly export-oriented regime – of the three countries, the value of its export incentives is highest. The study suggests that, in order to maintain its competitiveness in textile exports, Pakistan needs to enhance its export incentives, particularly for value-added textiles.
KEYWORDS: Exports, export incentives, fiscal incentives, exchange rate, textiles sector, Pakistan.

JEL: F13, L50, F00.

This study evaluates a Punjab Government development project titled “Customized Lending Program for Furniture Cluster at Chiniot.” The project was implemented by the Punjab Government’s Small Industries Corporation at a total cost of PRs 40 million: the sum of PRs 100,000 was loaned to 400 small and medium furniture manufacturers in Chiniot, to be repaid in 22 equal monthly installments with a grace period of two months. The socioeconomic impact of the loan was determined from data collected through a survey. Overall, the project was deemed unsuccessful: on average beneficiaries’ income fell due to negative factors such as power outages and the fact that uniform loans were made to small and larger manufacturers.
KEYWORDS: Punjab development project, Chiniot, impact evaluation, furniture industry, microfinance, Pakistan.

JEL: O10.

As the Pakistani economy has stabilized over the last few years, the focus has turned towards restarting economic growth. This is a challenging task because of the structural problems faced by the economy as well as the global economic slowdown. This means that Pakistan’s policymakers must move beyond the traditional growth strategy of export led growth and think of ways of expanding the country’s manufacturing base. Keeping this in mind, the organizers of the Eleventh Annual Conference on the Management of the Pakistan Economy chose the topic of “Pakistan as a Regional Manufacturing Hub – Prospects and Challenges.” The objective of the conference was to provide academics and policy makers with new ideas on growth strategies in the context of a changing global environment.
KEYWORDS: Pakistan, budget deficits, Pakistani economy, circular debt.

JEL: N/A.

Professor Robert Wade, Professor of Political Economy and Development at the London School of Economics, delivered the keynote address for the 11th Annual Conference on the Management of the Pakistan Economy. This is a talk about the dramatic change in the understanding of what constitutes “development” that occurred in the West and in much of the developing world after the mid 1980s. Before that time it was widely understood that development meant rising overall “prosperity” and that heavy investment in infrastructure and in industry were key drivers. After the mid 1980s the content of development came to be “extreme poverty reduction”, “humanitarian assistance”, “primary school education”, “primary health care”, “anti-corruption”. Why this change? I argue that it was due to several factors: (1) the end of the Cold War, and the resulting change in the geopolitical strategy of Western states led by the US; (2) the increasing strength of “post-materialist” values in developed countries and their translation into the content of Western development thinking (eg World Bank, USAID, DfID); (3) business interests in the West; and (4) continued Western control of inter-state organizations that are meant to be organizations for the world (eg World Bank). There are now small signs of change in favor of investment in production and infrastructure, thanks partly to the recent emergence of inter-state “by- pass” organizations not controlled by Western states (such as the New Development Bank, the Asia Infrastructure Investment Bank).
KEYWORDS: Development, production, western countries, policy.

JEL: O29.

In this paper we explore how development finance institutions (DFIs) helped to promote industrial growth with active role of public sector in emerging market economies – Korea, China, India, Malaysia, Brazil, Mexico, Turkey. The DFIs provided long-term credit financing which led to structural transformation of their economies. These countries have succeeded in spectacular fashion at this transformation over the past four decades but Pakistan did not; why? There has been an endless debate concerning the role of the public sector vis-à-vis the private sector in promoting economic growth and it continues in the present. I begin by asserting that historically public sector has been in the forefront in starting and sustaining economic growth. This not a leap of faith, rather this has been the experience of most emerging economies. They have gone through reforms, liberalization and structural adjustment, ushering in market-based policy regime and opening up foreign trade and capital flows. Within this framework, the role of DFIs has been exemplary, an assessment I reach based on published researched evidence but from field experience in the East Asian economies during 1980s, where newly established industries, in part supported by World Bank (WB) funded DFI lending, nurtured industrial transformation. When the industries of advanced countries began leaving in droves, pressure mounted to end industrial financing. It is a fascinating saga. We need to discover why Pakistan did not succeed in achieving the same industrial transformation the occurred in emerging economies. This failure occurred in spite of similar types of DFI lending over a long period and an almost manic devotion of government to the role of public sector. Reforms and privatization is still going on; but industrial transformation remains as elusive as ever.
KEYWORDS: Industrial growth, development finance institutions, economic development, Pakistan.

JEL: O10.

After being among the earliest countries to embark on the East Asian path, Pakistan fell away but was still among the ten fastest growing economies of the world during 1960–90. However, the seeds for the subsequent economic and technological malaise were also sown in that period. This paper provides an overview of recent theoretical and empirical work on industrial policies – more accurately labeled learning, industrial and technology (LIT) policies – and examines their implications for Pakistan. These include a selective, more sharply focused approach than the comprehensive agendas of reforms that have become common. Substantial islands of success with industrial policies have emerged in a variety of institutional and governance settings, different from those of the original East Asian developmental states. They offer valuable lessons. Raising the abysmally low level of investment in Pakistan is a requirement as well as an outcome and an instrument of industrial policies. This argues for a revival of development finance to stimulate investment as well as to direct it towards selective targets. How to mitigate the risks of this and other instruments of industrial policy to get the risk–reward ratio right is another concern of the paper. An important target of such policies should be the technological upgrading of existing industries. There is enormous scope for doing so, with international comparisons suggesting that Pakistani manufacturing does poorly – both in terms of variance in productivity between firms within an industry as well as in introducing new technologies and products. Whilst the constraints of the politics–governance–security/terrorism nexus are beyond the scope of the paper, their salience cannot be underestimated.
KEYWORDS: Industrial policies, learning, technology, industrialization, development finance, Pakistan.

JEL: L60, L52.

Pakistan and India were part of that wave of economic liberalization among developing countries from the late 1980s. This paper is about one aspect of that failure to ‘produce the economic magic’, in Pakistan. Pakistan substantially liberalized its international trade after the late 1980s, and contrary to some views managed its exchange rate in an exceptionally clear sighted and prudent manner. In response, Pakistan never experienced sustained and rapid export led-growth. In fact so disappointing was the performance of exports that Pakistan’s degree of integration with the world economy was little higher in 2015 than it had been in 1990. This paper first examines the exciting promise followed by the lackluster performance of trade liberalization. It establishes evidence that the exchange rate was managed in a way that should have helped a more liberalized trading regime contribute to economic growth. The paper explores wider evidence linking trade liberalization to economic growth and argues that the positive relationship is at best only a contingent one. Those contingent factors that have failed to support the positive link between trade liberalization and economic growth in Pakistan are investment, tax revenue, and upgrading/learning.
KEYWORDS: Trade liberalization, exchange rate, exports, Pakistan.

JEL: F19, O49.

The problems that afflict Pakistan’s manufacturing sector are widely known. It is also recognized that the current state of affairs must change, but there is little agreement as to what that might entail. The lack of consensus on required actions and policies can be traced back to the end of the era of rapid industrialization in the late 1960s and subsequent withering away of the “developmental state” as Pakistan could then be characterized. The industry’s woes tend to be attributed to import substitution and high protection, with the policy implication that the country must further open up and liberalize. The paper questions this proposition and argues for a fresh approach to industrial policy, exploring what this might involve.
KEYWORDS: Manufacturing, industrial policy, Pakistan.

JEL: L52.

While “deindustrialization” is now considered normal for developed countries, recent trends show that many developing countries have seen their share of manufacturing employment peak at far earlier levels of income than in advanced countries. This new occurrence, which blocks off the main avenue for a country to catch up with more advanced economies, has been called “premature deindustrialization.” As a result of stagnation in manufacturing since 2007, Pakistan is on the brink – if not already in the process – of premature deindustrialization. This paper focuses on (i) growth trends in manufacturing and the economy, (ii) developments in the context of premature deindustrialization in Pakistan, and (iii) the change in the country’s structure of industry. We adapt and apply the industrial sophistication index developed by Lall, Weiss, and Zhang (2005) to the Pakistan Standard Industrial Classifications in the Census of Manufacturing Industries. The structure of industry in Pakistan, Sindh, and Punjab is mapped from 1990–99 to 2005/06 (2010/11 for Punjab) on the basis of a sophistication index score. Our analysis substantiates the conclusion that Pakistan’s industrial structure has stagnated, drawing on analyses of export data in other studies. It also indicates that our finding of modest upgrading in the industry sector on the basis of an intuitive division of industries into low-technology and high-technology industries may have been too optimistic. Revitalizing manufacturing growth will require Pakistan to once again adopt a proactive industrial policy to address the constraints and weaknesses of the manufacturing sector.
KEYWORDS: industrialization, premature deindustrialization, manufactures, manufacturing, structural change, growth, exports, sophistication of production.

JEL: F1, O14, L60, O25.

Despite the consensus that new firms have a significant economic and socioeconomic impact, there is very little empirical evidence to support this claim in the Pakistani context. In this paper, we start by looking at how new firm entry varies across districts in Punjab over time. We then look at how the establishment of different types of firms across these districts has affected district-level socioeconomic outcomes in the province. We find that firm entry has a positive impact on economic outcomes such as employment and enrollment, and that this impact can vary by the scale of the firms that enter.
KEYWORDS: Firms, entry, Punjab, Pakistan.

JEL: O47, M13.