One of the most pressing issues concerning policymakers today is the choice of an exchange rate regime. Despite the intricacies of this problem, monetary authorities could narrow down their list of options if they were to focus on the following principles: full implementation to ensure credibility and synchronization with domestic realities and economic infrastructure. This paper proposes an optimal exchange rate regime for Pakistan based on a historical study of the outcomes and performance of different monetary stances adopted over the last 40 years.
KEYWORDS: Exchange rate, flexibility, regime, fear of floating, floating, pegging, Pakistan.

JEL: F31, E58, F41, E42, F33.

This paper aims to assess the harmful impacts of exchange rate depreciations on Pakistan’s economy, including impacts on international capital movements, wages, the domestic price level, and development. Devaluation of a currency in terms of foreign currencies or metallic standards was for long considered to be undesirable and, if unavoidable, a sign of failure. Attitudes have since changed and devaluation is thought to bring advantages, especially by making economies more competitive exporters. This paper is intended to show that it has disadvantages that outweigh any supposed advantages, notably its effects on inflation, income distribution, service on foreign debt and incentives. It does so by describing in concrete terms the relations between foreign and domestic prices and the costs of untradeable goods and services that are components of the price of any good in any domestic price index. It also discusses the motives, official and unofficial, that have prompted the monetary authorities of Pakistan to make a practice of regular depreciation of the rupee and to question their justification.
KEYWORDS: Pakistan, exchange rate, depreciation.

JEL: E31, O24.

This paper’s basic premise is that an improvement in Pakistan’s export performance is crucial to raising economic growth. After examining the reasons generally given for Pakistan’s poor export performance, we conclude that the country’s very slow productivity growth was the single most important factor that hurt competitiveness. We argue that a coherent and articulated industrial policy is required to overcome this disadvantage. While the experience of the East Asian economies offers useful lessons, Pakistan’s policy must accord with its own conditions, which are, in many ways, different. The formulation of industrial policy should involve key stakeholders, particularly the private sector. The paper identifies certain factors that should underpin the new industrial policy, notably the changed basis of international specialization and rules governing world trade.
KEYWORDS: East Asia, industrial policy, export performance, productivity.

JEL: F43, L59.

This paper takes a historical perspective to search for the major causes of Pakistan’s stop-go growth cycles and come to the conclusion that, to varying degrees, the foreign exchange constraint provides a major explanation for these cycles of irregular economic growth in the country, particularly since the 1990s.
KEYWORDS: Pakistan, macroeconomic management, foreign exchange, IMF.

JEL: F43.

The textiles industry in Pakistan has failed to fulfill its “historical mission,” whether judged in terms of promoting rapid and sustained economic growth, reducing poverty, or providing employment to young women and so promoting wider social transformation. This paper makes a case for a particular and targeted form of industrial policy that would help the textiles sector learn and upgrade. It argues that those factors commonly seen as constraints to industrial policy—the “China effect,” the global rules of globalization, global value chains, and the problems of energy and education in Pakistan—do need careful consideration, but they are not insurmountable obstacles to industrial upgrading. The key market failure is the risk and uncertainty associated with acquiring and learning to use new technology. The paper explores a number of policy options, reviewing the lessons that cannot be learned from the Republic of Korea and India and one that can from Bangladesh. The latter shows that rapid and sustainable export growth in textiles can be achieved, even in an economy with a weak, corrupt, and unstable form of governance.
KEYWORDS: Pakistan, Korea, Bangladesh, textiles, industrial policy, technological change, upgrading.

JEL: O40, L50.

This paper focuses on a group of Asian countries that have successfully increased exports and found a common industrial strategy. Several key factors emerge from this study. First, countries that have managed to increase their exports focused on doing so in sectors in which they had expertise while slowly developing new export sectors at the same time. Second, high-growth Asian economies have developed their export sectors by making a significant move up the quality ladder and, in particular, moving away from low value-added to higher value-added exports. Third, there is no single economic policy that has worked across Asia; rather, successful exporters have used two or three policies in tandem to boost exports. Fourth, industrial policy has been coordinated with education and training policies to develop both the entrepreneurs and the workforce needed to produce high value-added exports. Finally, the only consistent factor that has an impact on high value-added export growth is domestic credit to the private sector. These results point to the urgent need for a coherent industrial strategy to boost Pakistan’s exports (preferably before future trade agreements are signed, which could otherwise damage potential export sectors).
KEYWORDS: Pakistan, East Asia, industrial policy, quality ladder.

JEL: F10, L50.

A variety of stylized facts about exporters have emerged in the new literature on international trade based on firm-level data. These include low levels of export participation among firms; small shares of export sales in firm revenue; larger firms; and higher levels of productivity, skill, and capital intensity among exporters. In this paper, we seek to examine the extent to which these stylized facts fit the experience of firms in Pakistan, using two cross-sections of firm-level data—the Census of Manufacturing Industries (CMI) 2000/01 for Punjab and the World Bank Enterprise Survey dataset (2006/07) for all Pakistan. We find similar levels of export market participation but very large shares of export sales in firm revenue for those who do, compared to the US sample studied by Bernard, Jensen, Redding, and Schott (2007). We also find, as do many other studies, that exporters exhibit significantly higher total factor productivity (TFP) and are larger in terms of employment than nonexporters. Exporters’ TFP was 150 percent higher than non-exporters before we controlled for firm size. Considering the eight largest sectors (which comprise more than 80 percent of the CMI Punjab), with a few exceptions, exporters had higher labor productivity and offered higher compensation to workers, but used more capital per worker and more imported inputs. The government’s recent emphasis on developing the readymade garments sector is well placed: more than half the apparel producers in the CMI Punjab 2000/01 were exporting—and nearly all of their output (93 percent). The capital-labor ratio and use of imported inputs was modest. Exporters were relatively large employers with 400 workers on average and offered significantly higher compensation than nonexporting firms. A greater understanding of firm dynamics could be gained if the CMI were to resume collecting data on firm-level exports (not collected since 2000/01) and if this data were linked across years so that firm performance could be measured over time.
KEYWORDS: Pakistan, export, firm, sales, revenue, Census of Manufacturing Industries (CMI).

JEL: F10, L60.

This paper describes the level of compliance with quality standards in relation to Pakistan’s top export product categories. With greater competition, innovations in technology, and stricter measures of quality being enforced, Pakistan needs to adopt a holistic, systematic approach to not just meeting, but also exceeding, international quality standards and certifications for its exports. Focusing on rice and textiles, we identify which compliance-related gaps need to be filled to ensure the sustainable growth of high-quality exports to major global markets. The study outlines the key dimensions of international quality standards as well as specific standards and requirements for textiles and rice, examines the quality assurance infrastructure in Pakistan, and presents policy recommendations.
KEYWORDS: Global quality standards, exports, compliance, Pakistan.

JEL: P45, L15, Q18, Q27.

This paper makes the case for a vigorous policy thrust to support investment-led growth. Pakistan’s economy has not maintained a sufficient level of capital formation to sustain growth over the long term. Two thirds of current growth is driven by consumption and not investment: this needs to be turned around. The government needs to put in place an investment regime that motivates and induces industry to invest, innovate, and reinvest. Foreign direct investment can play an important role in strengthening the country’s investment rates. There is also need for deliberate polices to boost technological capabilities in the enterprise sector. In this context, East Asia – which successfully created a dynamic process of capital formation and technological learning that upgraded its productive capacity and underpinned export success – holds important lessons for Pakistan.
KEYWORDS: Investment, technology, industry, Pakistan.

JEL: F21, O38, O53.

The textiles and garments (T&G) sector accounts for almost 50% of Pakistan’s exports and is the largest component of manufacturing. T&G sector, because of recent favorable developments for the industry in Pakistan and the expected future changes in the international trade structure for the sector, has the potential to play an important role in expanding Pakistan’s exports. In addition, garments manufacturing is the least energy and capital intensive industrial activity and thus resonates with Pakistan’s resource endowment to generate economic growth and employment. Garment manufacturers have tried to overcome the constraints arising from the energy shortages and adverse security and country risk perceptions by investing in power generation, upgrading IT, developing design and R&D capability. Punjab Government’s focus on garments as a central plank of its industrial strategy has also helped. However, this paper argues that for the sector to fully realize its potential, government policies that shape the incentive structure faced by the industry need to be re-aligned In this regard, the most important is Pakistan’s import policies and customs procedures that discourage the import of materials such as synthetic yarn and fabric, technical textiles and specialized trimmings and accessories needed by exporters to move up the value chain, and a significant bump up in the growth trajectory will only take place if import policy and custom procedures are substantially reformed. This paper focuses on the following themes: First, structural changes and trends in T&G exports; second, the associated constraints to growth of the garments sector; and third, to highlight some of the steps taken by the industry leaders in terms of policy reforms and by firms, particularly with regards to managing resources to enhance competitiveness.
KEYWORDS: Pakistan, exports, textiles, garments, international trade, growth, global value chain.

JEL: F13, O10, O14, F10, L50, L10, L25, L60, L67.

This paper examines historical trends in the diversification of exports in Pakistan, using the Hirschman index to quantify the degree of export diversification. We analyze the structure of exports through the lens of ‘traditionality,’ for which we construct industry-specific, average cumulative export experience functions, i.e., a traditionality index of all 2-digit export industries in Pakistan from 1972 to 2012. This is useful in distinguishing between traditional and nontraditional export industries. We also study the degree of structural change in the export sector since 1972 by recalculating the traditionality index based on five-year interval periods. The cross-industry variance of this index is then used to calculate the structural change index. Periods for which the index values are low are interpreted as periods during which the export industries experienced uniform patterns of export growth (and thereby no structural change). Periods for which the index values are high are interpreted as periods during which the export industries experienced varied patterns of growth, thus undergoing structural change. Finally, we explore the determinants of structural change in exports by looking at variables such as GDP growth, export growth, the real exchange rate, the growth rate of world trade, trade liberalization, and the degree of product concentration in the country’s export base.
KEYWORDS: Pakistan, export, growth, trade.

JEL: F40.

Pakistan and India have not yet normalized trade relations and gained the full benefits of bilateral trade despite significant developments to this end since 2011. Pakistan has yet to reciprocate the most-favored-nation status granted by India. This study investigates the benefits of trade liberalization between the two countries by studying the global competitiveness of Pakistan’s industrial sector from a policy perspective. We construct a revealed comparative advantage index for manufacturing products (HS 2-digit level) for Pakistan, India, and China for the period 2003–12, and then identify the changing patterns of comparative advantage for Pakistan. We find that 18 industries should be protected upon liberalizing trade with India. These industries are termed ‘vulnerable’ as they have moved from either borderline competitiveness to becoming uncompetitive or vice versa. Additionally, the excessive concessions granted to China in its free trade agreement with Pakistan and the resistance to opening up trade with India may have resulted in inefficient trade, i.e., imports from a less competitive partner and exports to a less lucrative market. We aim to establish a direction for further research to determine the ex ante impact of trade with India on the economy via a change in the production levels of these vulnerable industries, given the impact of free trade with China and the availability of Chinese substitutes.
KEYWORDS: Pakistan-India trade, revealed comparative advantage, manufacturing exports, trade liberalization.

JEL: F10, F11, F12.

Growing economic cooperation between the Pakistani and Turkish governments—manifested in the recently proposed preferential trade agreement (PTA)—has served to strengthen the historically good relations between both countries. This paper explores the trade relationship between Pakistan and Turkey in an attempt to analyze the potential gains for Pakistan under the proposed PTA. We evaluate potential trade opportunities using descriptive statistics and three trade indices: a trade complementarity index, export similarity index, and intraindustry index. Our findings suggest that Pakistan’s trade surplus with Turkey, strong export similarities, and intra-industry trade would allow greater opportunities for firm synergies between the two countries. This, in turn, would help Pakistan achieve greater value addition and a broader market base for its exports. The Government of Pakistan should, therefore, lobby strongly for the proposed PTA (which might later evolve into a free trade agreement) and leverage the agreement in such a way that Pakistan can maximize its potential benefits.
KEYWORDS: Preferential trade agreement, Pakistan, Turkey, trade complementarity index, export similarity index, intraindustry trade index.

JEL: F14, F15, F13.

This paper investigates the conventional import demand function for Pakistan using time-series data sourced from the World Development Indicators for the period 1970 to 2010. Using a vector error correction model and impulse response functions, we show that, for the given period, relative prices and income lose their significance as long-run determinants of import demand. This indicates the need for additional determinants. We compare the residuals of the conventional import demand function with those of a model that includes the terms of trade and foreign exchange availability (in addition to the conventional parameters) as determinants of import demand, and find that the latter largely resolves much of what is nondeterministic in the former model. The paper also explores the peculiar trend of a falling imports-to-GDP ratio (from the 1980s to the 2000s), which is unusual for a developing country. In a subsidiary regression analysis for this period, we argue that falling net capital inflows explain this persistent fall in the imports-to-GDP ratio. The recovery thereafter, when Pakistan started catching up with other developing economies, may have been responsible for the 2008 balance-of-payments crisis.
KEYWORDS: Pakistan, import demand function estimation, capital inflows, balance of payments.

JEL: F140.

With growing global and regional economic integration, Pakistan, too, is actively seeking to enhance regional economic cooperation; it has entered into various regional and bilateral trade agreements that encompass trade policies ranging from import substitution to export promotion. However, the country’s imports remain concentrated in a few product categories as well as in terms of origin. Despite several regional trade agreements, Pakistan has not been able to source its imports from regional trading partners. This stems from constraints relating to trade facilitation, regulatory frameworks, and physical infrastructure. Our empirical analysis shows that, while changes in real income and import prices have a significant effect on import demand in the long run, variations in the domestic price level do not. If Pakistan is to grow at 7–8 percent per annum as envisaged in official development plans, it will continue to experience strong growth in imports to meet its rising industrial and consumer needs. Pakistan needs to develop a strategy to use regional integration schemes as a platform for enhancing trade ties in both imports and exports. This will ensure greater trade and investment links with its regional trading partners, helping to lower the transaction costs of trade and boosting economic growth.
KEYWORDS: Pakistan, import demand, regional integration.

JEL: F13, E64.

This paper traces the evolution of “discriminatory” international trading arrangements: (i) regional trade agreements (RTAs), which offer their members better access to each other’s markets; and (ii) preferential trade agreements (PTAs), which offer developing and least developed countries (LDCs) nonreciprocal access to certain markets. The number, coverage, and depth of RTAs have increased tremendously in the last 25 years, potentially leading to even deeper integration among dynamic economies. However, countries on the margin of RTA activity may be in danger of not benefitting from the growth in international trade. The number of countries offering PTAs has also increased with many developing countries now providing LDCs with nonreciprocal market access. This significant level of RTA and PTA activity raises serious challenges for countries such as Pakistan, which remain on the margins. Efforts to rectify this should, in the short term, focus on negotiating RTAs with selected countries to build the required capacity for such negotiations and improve Pakistan’s visibility on the RTA landscape. The country must aggressively seek and defend nonreciprocal market access under PTAs, with particular focus on such GSP schemes as offer additional benefits. Medium-term actions should aim to improve competitiveness by investing in infrastructure, energy, and human resources; adopting a coherent and supportive macroeconomic policy framework; and improving law and order. This will help Pakistan enter into and benefit from RTAs with dynamic economies while substantially reducing its dependence on PTAs.
KEYWORDS: Pakistan, WTO, regional trade agreements, preferential trade agreements, GSP.

JEL: F13, F40.

Recognizing that trade facilitation has contributed significantly to reducing costs and time in cross-border trade, World Trade Organization (WTO) members adopted the new Trade Facilitation Agreement (TFA) at the last ministerial conference in Bali. WTO members are now gearing up to implement the commitments ensuing from the TFA in accordance with the special and differential treatment stipulated for developing countries. This paper assesses the impact of the TFA on Pakistan’s national trade policy and shows how the process of policy formulation in Pakistan should be adjusted so that the agreement can be promptly and correctly implemented on a sustainable basis.
KEYWORDS: Pakistan, world trade organization, trade facilitation agreement (TFA).

JEL: F13, F40.

Regional trade has been an important factor in the economic success of many countries. Within most trading blocs, intra-regional trade comprises 40 percent or more of each member country’s individual trade. However, for the regional arrangements of which Pakistan is a member, intra-regional trade accounts for less than 5 percent. Pakistan’s strategic location is its greatest asset, but it has not leveraged this to its advantage. Although it was a relatively forward-looking country until the mid-1960s its policies have not been favorable to promoting trade and economic development since then. While other successful developing countries have espoused liberal trade regimes since the 1980s—resorting to protectionism only on a selective basis—Pakistan continues to rely on import substitution policies. Clearly, the country needs to revisit its regional and global trade policies.
KEYWORDS: regional trade, Central Asia, regional trade routes, ports, Gwadar.

JEL: F10, L50.

The objective of this study is to understand why parents in rural areas of Punjab, Pakistan, choose to send their children to private schools when free public schools are available. The study utilizes the Privatization in Education Research Initiative (PERI) school choice dataset compiled by the Lahore School of Economics in collaboration with the Punjab Bureau of Statistics. These data provide rich information on parents’ perception of their child’s school relative to alternative schools he or she could have attended. The findings suggest that parents’ perceptions play an important role in school choice. In particular, their perceptions of school quality and employment opportunities emerge as key determinants of private school choice. Additionally, expenditure on and access to private schooling relative to public schooling as well as the socioeconomic status of the household have a significant impact on parents’ probability of choosing a private school for their child.
KEYWORDS: School choice, public vs private, rural Punjab, Pakistan.

JEL: A19, H13, R20.

This study investigates the impact of domestic and foreign currency-valued exchange rate volatility on the export and import demand functions with reference to Pakistan’s trading partners. We use GARCH-based exchange rate volatilities and the least-squares dummy variable technique with fixed-effects estimation to measure the volatility impact on both demand functions. The study evaluates a series of exchange rates from 1970:01 to 2009:12 to compare the long-run impact of volatility with that of the short run. The results show that, when Pakistan employed the US dollar as the vehicle currency with its trading partners, volatility discouraged both imports and exports. In contrast, both the import and export demand functions remained unaffected by volatility distortions when Pakistan traded with its developing partners using bilateral exchange rates valued in domestic currency terms. In policy terms, this implies that Pakistan should opt for direct domestic currency when trading with middle- and low-income countries.
KEYWORDS: GARCH models, foreign exchange markets, volatility, panel data, fixed-effects model, international financial markets, foreign exchange policy, trade, Pakistan.

JEL: C53, F1, F31, C23, G15, F44, O24.