Lahore School of Economics

The Lahore School of Economics has started its Alumni Club in April 2007. Alumni Reunion for the Karachi Chapter was held at Marriott Karachi on May 10, 2007. Dinner was hosted by the Lahore School in honor of its Alumni. Some of the alumni gave useful suggestions and they appreciated the efforts of the Lahore School in this regard.

Lahore School of Economics Team - 1 (Haider Ali Khan, Ali Muratza and Ahmad Iqbal Chaudhary) reached quarter finals of the All Asians Debating Championship at Chung-Ang University, Seoul, South Korea. They were defeated by RVCE, India on a split decision of 2-1 on the motion that "This house would assasinate Kim Jong Il". The team had a record of 8 straight wins in the tournament and stood as the 5th top team of the competition.

Lahore School of Economics Team 2 (Omer Imtiaz, Farhan Qasim and Khadija Imam) on the other hand were Octo-finalists and broke as the 10th top team ; they were defeated by the last year's champions MMU, Malaysia. The competition was attended by 100 teams representing 28 countries from Asia.

Lahore School of Economics six members debating team left for Seoul, South Korea to participate in the Fourteenth All Asian Intervarsity Debating Championship to be held at Chung-Ang University, from May 6 to 13, 2007.

The Lahore School debating team comprises of Mohammad Ali Murtaza, Ahmad Iqbal, Haider Ali Khan, Farhan Qasim, Omer Imtiaz and Khadija Imam. Sidra Rana is an adjudicator.

Lahore School of Economics’ Third Annual Conference on Management of Pakistan Economy (Economic Reforms: The Road Ahead) concluded on May 3, 2007. A group of distinguished policymakers, academics, and international experts related to economic management presented their papers to the informed gathering. Dr. Ishrat Hussain inaugurated the Conference on May 2, 2007.

Dr. Nadeem ul Haque, Shahid Kardar M. Ashraf Janjua and Dr. Nadeem ul Haq, Javed Masud, Mehak Ejaz, Dr. A R Kamal, Dr. Theresa Chaudhry, Shamyla Chaudhry, Dr. Naveed Hamid. Dr. Shakil Faruqi, Muhammad Arshad Khan, Dr. Abdul Qayum, Fasih-ud-Din, Dr. Naveed Zia Khan, Samina Shabir, Reema Kazmi, Dr. Azam Chaudhry, Kalim Haider and Dr. Eatzaz Ahmad were among the speakers in the annual conference of Lahore School of Economics.

Later, the papers will be published in a special issue of our journal – the Lahore Journal of Economics. Abstract from some of the papers can be read here:

Trade and exchange rate policy (upto 2010)

By M. Ashraf Janjua

This paper is primarily aimed at assessing the significance of exchange rate for Pakistan's foreign trade. It estimates equilibrium real effective exchange rate (ERE) and misalignment of Pak Rupees exchange rate using the annual data from FY78 to FY06. Engle granger co-integration technique is used for the estimation off ERER, depending on various macroeconomic fundamentals as recommended y Edwards (1994). Elbadawi (1994) and Monteil (1997). The results of the study are also used for forecasting ERER and misalignment up to the year 2010. the results of the study reveal that ERE is determined by the variables like a) terms of trade, b) trade openness, c) net capital inflows, d) relative productivity differentials, e) government consumption and f) workers remittances. The error correction term point to the gradual convergence of real exchange rate towards long run equilibrium level which suggests that prevailing Pak rupee exchange rate has not deviated from the ERE and captures trends in the economic fundamentals.

A Structural VAR Analysis of Pakistan’s Textile Exports

Dr. Azam Chaudhry and Kalim Hyder

The objective of this paper is to see how textile exports and manufacturing output are affected by various macroeconomic factors which can vary over time. Though these factors are numerous, we focus on the impact of an income shock in the economies of the Pakistan’s major trading partners, the impact of an increase in exports of Pakistan’s major competitors in area of textiles, the impact of an exchange rate depreciation of Pakistan’s currency with its trading partners, and the impact of an exchange rate depreciation of the currency of Pakistan’s major competitors. The primary goal of the analysis is to see how international macroeconomic factors impact Pakistan’s exports of textiles and if there is an impact of a factor on Pakistan’s exports, what does this imply for Pakistan’s manufacturing sector growth.

Switching Costs and Economic Efficiency in Sialkot's Surgical Goods Industry

Theresa Thompson Chaudhry

The empirical analysis carried out in this paper supports the existence of switching costs among the Sialkot surgical instrument producers, even though it is an industrial cluster where manufacturers have access to a multiplicity of suppliers. Nearly 50% of firms in the sample said that they would reject an untried supplier offering a lower price. The decision to reject a prospective new supplier offering a 10% discount was positively related to the complexity of the input and measures of relational contracting and negatively related to a belief in informal contract enforcement mechanisms. Trust in formal contract enforcement mechanisms (local courts) did not have a significant impact in any of the specifications.

The major results were supported by regression results for the probability that firms would be willing to abandon their current supplier and switch completely to purchasing an input from the prospective supplier offering a 10% discount. The informal enforcement and relational contracting measures lost significance in the regressions for the decision to switch to the new discount supplier, pointing to an interpretation of the results that firms that feel constrained by social ties to suppliers are less likely to switch, and firms that do not feel these constraints (and rely on professional ties through business networks) feel more free to leave their current suppliers.

The results of this paper support the conjecture that manufacturers face higher switching costs when they are connected to their suppliers through social ties. This lends further supports the conclusions of Mookherjee (1999), Ilias (2001), and Banerjee and Munshi (2000) that difficulties in transacting often lead firms in developing countries tend to rely on family members and close knit networks in their business dealings. Relational contracting and informal contract enforcement mechanisms have positive effects in that they may help reduce one source of inefficiency (imperfect contract enforcement), they often create others in their place.

SAARC Monetary Union: A Distant Dream

By Farooq Rasheed and Eatzaz Ahmad

We analyzed nine indicators in different time spans to evaluate the success of the formation of a currency union in the SAARC region. On the overall time span basis only terms of trade and world relative terms of trade were showing signs for supporting the idea of a common currency which is not at all sufficiently the purpose. Even both types of terms o trade used in our analysis are not being supported by the real exchange rate indicator as it has remained divergent among the SAARCH members. Considering the most recent span of time again the aim o a single currency is not seem viable as we found that only the cases of CMR and both categories of TT were exhibiting statistically significant negative beta values. Thus on the whole it is not a right time to have a common currency in the SAARC.

Financial sector restructuring in Pakistan

By Muhammad Arshad Khan and Sajawal khan

In this paper an attempt has been made to review the financial restructuring process and its importance for economic growth and macroeconomic stability. The main focus is on the financial restructuring efforts undertaken by the government of Pakistan since 1990/ we also analyze the impacts of financial restructuring by using various financial indicators. The overall results suggest that financial industry in Pakistan showing remarkable and unprecedented growth. Unlike 1990 the performance of financial sector is much better today. After the successfully completion of first generation of reforms the introduction of second generation of reforms are required which helps further strengthen the financial system and transform the benefits of the first generation of reforms to common man.

Determinants of Female Labor Force Participation in Pakistan: An Empirical Analysis of PSLM (2004-05) Micro Data

By Mehak Ejaz

This paper seeks to identify major determinants of female labor force participation in Pakistan specifically with reference to the rural and urban areas. Limited dependent variable technique such as Probit and Logit models are utilized to capture the probabilities of explanatory set of variables in determining female labor force participation. This investigation is continued by using the data taken from PSLM (Pakistan Social and Living Standards Measurement Survey 2004-05) regarding individual and household characteristics of female between the ages of 15-49. Empirical results suggest that age, education attainment and marital status have significant and positive effect on female labor force participation (FLFP). Greater the probability of women belonging to nuclear family and having access to vehicle, she would more likely to participate in economic activities whereas a large number of children and availability of home appliances reduces the probability of FLFP and vice versa. The result implies that reducing the burden of females regarding child care and facilitating in attaining education would leads to higher labor force participation rate for female in Pakistan.

Globalization Challenges and the Changing Role of the State

By Javed Masud

Globalization has led to a paradigm shift in the global economic power structure as well as in the trading and investment scenario.This has serious implications for all nations and provides new challenges and opportunities emanating from the global competitive environment. The extent of benefits that each country derives would depend largely on how quickly a country can come to terms with these permanent changes. The paper explores how Pakistan has responded to these challenges at the government level and, in particular, how the role of the state needs to be reviewed and changed for ensuring that we do not lag behind regional competitors.

Economic Effects of the Recently Signed Pak-China Free Trade Agreement

By Samina Shabir and Reema Kazmi

Factor endowments and cross country differences create regional disparities among states. The disparity in sizes between the Chinese and Pakistani economy can lead to creation of trade patterns that can positively or negatively impact the latter’s economy. The present paper attempts to analyze the pros and cons of forming a Free Trade Agreement (FTA) with China given the size, structure and trade patterns of Pakistan’s existing economy. It also indulges the crucial questions of: Can a formation of FTA with China benefit Pakistan? Will trade liberalization under FTA with a neighboring country like China spur Pakistan’s trade and growth? So looking at trends and trade patterns of Pakistan, the potential of Pakistan’s existing economy is analyzed to enhance interregional trade and export diversification by further deepening cooperation with China. In the light of this analysis the paper also outlines a number of recommendations to extract maximum benefit for Pakistan’s economy from this recently signed FTA with an old economic partner China.

Both the authors are currently doing their PhD from Pakistan Institute of Development Economics (PIDE), but currently are on leave and are working as Consultants in Debt Policy Coordination Office/Economic Adviser’s Wing, Ministry of Finance, Government of Pakistan which are both headed by Dr. Ashfaque H. Khan (Economic Adviser to Ministry of Finance). Both authors possess extensive background in international trade and have written numerous papers and various chapters of Economic Survey of Pakistan 2004-05 & 2005-06, during their academic as well as their professional careers, in related fields. The later author also writes frequently for “The News” and “Pakistan Observer” and has more than ten full length articles to her name.

POVERTY ALLEVIATION IN SOUTHERN PUNJAB: AN ANALYSIS

By Imran Sharif Chaudhry and Shahnawaz Malik

Poverty alleviation has been one of the main objectives of development programs in many developing countries of the world for the last several decades. A considerable research has been done on the issue of poverty alleviation and its long run social and economic effects in developed as well as in developing countries. A major objective of the study is to present the profile and trends of rural poverty, and empirical analysis of the factors to alleviate rural poverty in Southern Punjab. The study is significantly based on the primary source of data collected from a village of Bahawalpur district consisting of 120 households in December 2006. A Logit regression model is used to analyze the factors of probability of being in poverty. According to the results, poverty is wide spread all over the Southern Punjab as compared to the other parts of the province but has declining trend. Moreover rural poverty can be alleviated by lowering the household size, persons per room and dependency ratio; and by improving the education, female labor force participation, household participation rate, population of livestock, physical assets and household’s access to market specially in remote areas based on empirical data analysis. Finally it is concluded that governments (central, provincial and local) should pay special attention to basic infrastructure and market access facilities beside some other socio-economic and demographic variables to alleviate rural poverty in many remote areas in Southern Punjab.

FINANCIAL SECTOR REFORMS AND THEIR IMPACT ON EFFICIENCY OF BANKS: A CASE OF PAKISTAN

By Abdul Qayyum, Usman Ahemd and Muzhar Iqbal

Pakistan’s banking sector faced with several problems and difficulties. The main problems faced by the sector are: Most of the financial assets are owned by Nationalized Commercial Banks (NCBs), which suffer from highly bureaucratic approach, overstaffing, and unprofitable branched and poor customer services, and banks have a high ratio of non-performing loans; Banking industry faces a high tax, which affects its profitability and attractiveness for new entrants; there is a proliferation of banks; Agriculture, housing sector are underserved and have limited access to credit; and the banks have typically focused on trade and corporate financing with narrow range of products and have not diversified into consumer and mortgage financing for which there is ample unsatisfied demand.

Given the state of the banking sector, Pakistan started the macro economic and financial sector restructing program under guidance of the International Monetary Fund (IMF) in 1996. The World Bank and Japanese government also co-financed the banking sector adjustment loan (BSAL) to support this effort of the government. The main goal of the program was to improve the efficiency in financial markets through separating ownership and management, and strengthening the accountability mechanism. Reforms process can be grouped into two phases 1997-2001 to 2001 onward mainly related to the Bad loans; Recovery of non-performing loans; Retrenchment of surplus staff and closure of over-extended branches; Privatizing of Banks; Introduction of international accounting standards and strengthening prudential regulation; and Establishment of banking courts.

In September 2000, Pakistan requested the World Bank to help revive it implementation program, focusing on bank privatization as the next critical step in the process. Therefore, the World Bank continued to support this structural adjustment in the banking sector, and approved a US$300 million credit for the Pakistan Banking Sector Restructuring and Privatization Project. The banking 2nd generation reforms project program focused on: Reducing the cost structure of he state-owned banks for efficiency and to facilitate their sale; complete privatization of partially privatized banks; Liberalizing bank branching policy; Reducing tax on banks; Facilitating loan collateral foreclosure; integrate national savings scheme to the financial markets; Discontinuance of the mandatory placement of foreign currency deposits by the commercial banks; and Strengthening the central bank to play a more effective role as a regulator of banking sector.

Following the guideline provided in the programme the State bank of Pakistan has initiated a large number of reforms. These reforms include; Privatization of NCBs, Corporate Governance, Capital Strengthening, Improving Asset Quality, Consumer Financing, Legal Reforms, Prudential Regulations, E-Banking, Credit Rating, reduction of Corporate Taxation and Human Resource development. These reforms will go a long way in further strengthening the Banking sector but a vigilant supervisory regime by the State Bank of Pakistan will help steer the future direction.

Doha Round’ Baggage: Implications for Economic Reforms in Pakistan and other Southern Countries

By Naheed Zia Khan

This study is based on the premise that agriculture remains the key issue in all reform efforts of Pakistan and the Doha Round of trade talks has a strategic significance for the second round of country’s farm sector reforms. It is argued that although there are differences among the individual developing countries, the majority have a comparative advantage in agricultural production and removing farm sector export subsidies and, trade-distorting, domestic subsidies is their common concern. The evidence is provided to support the view that the Uruguay Round negotiations on agricultural subsidies are not a done deal because, although signed by the members, the Agreement on Agriculture is not ‘ratified’ by the developed countries’ recent farm bills which continue to defy economic logic and the WTO. On the other hand, the evidence provided from Pakistan shows that developing countries’ governments are not fighting the farmers’ cause since they are poorly managing the agricultural policy and overdoing the Uruguay Round ruling on reducing farm subsidies and increasing trade liberalization. The analysis shows that although the developed countries stand to gain far more from the liberalization of trade in agricultural commodities than that of the developing countries, the handful of developed countries’ farmers are the stumbling block to the regeneration of world trade. It is argued that for alleviating the world poverty, the developed countries need to demonstrate their willingness to gradually remove both the absolute value of subsidies provided to their farmers and the tariff, and non-tariff barriers that protect agriculture. Finally, the author maintains that at world trade forums, the developing countries have exhibited poor representation due to the lack of leadership.

Monetary and Fiscal Policies

By Shahid Kardar

With inflation still hovering around 8%-despite the monetary tightening over the last two years, a fiscal deficit threatening to cross 4.2% of the GDP and the reversal of the current account surplus into a large deficit that could touch 5.5% of the GDOP there are understandably fears that the macroeconomic stability achieved after a long and hard struggle, with a fair sprinkling of luck thrown in by the events of 9/11, has been lost. These macroeconomic imbalances are inducing pressures and new challenges for sustaining the present healthy rates of economic growth.

At a time when monetary policy was the easiest to handle, thanks to the surfeit of liquidity and the abundance of cheap money in the financial system (from donors in the form of aid and from overseas Pakistanis in the form of remittances), the State Bank did not perform its principal duty of controlling inflation with distinction. Inflation soared not simply because of the oil and food price inflation but largely because of loose monetary policy1. The State Bank allowed a huge increase in money supply, well above the rate justified by the expansion in the economy. Resultantly, Pakistan has the dubious distinction of having the highest inflation rate in this region; inflation has also been outpacing that of its trading partners and competitors. A good part of the problem of inflation has been fuelled by the consumption (private and public consumption) and investment boom of recent years, well beyond the production capacity of the economy (a gap of almost 4% of the GDP). The widening current account deficit is a classic sign of overheating and excessive demand buildup as domestic output fails to keep pace with surging demand facilitated by easier availability of credit, especially in the form of consumer financing.