Research Themes

Economic Growth and Development

Access to solar electricity in rural Sindh: Role of payment schedule and planning

Researcher: Farah Said (Lahore School), Jacopo Bonan (Fondazione Eni Enrico Mattei), Giovanna d'Adda (University of Milan), Mahreen Mahmud (University of Oxford) and Massimo Tavoni (Politecnico di Milano)

This research is funded by the IGC and is in collaboration with Eco Energy Finance (EEF). EEF provides solar energy solutions to customers in on-grid areas under a pay-as-you-go monthly repayment scheme. This field experiment will use behavioral measures to investigate individual constraints to repayment and the sustainability of this business model.

Almost 70 million people in Pakistan (35% of the population) do not have access to electricity, as they live in areas, mostly rural, not reached by the grid. Over 75 million (38%), while on-grid, receive low quality energy and experience outages for more than 12 hours per day (IFC, 2015). In spite of the significant benefits of access to electricity, the long-run feasibility of grid expansion for the provision of quality electricity to remote areas is often a concern.

The study is a collaboration with a for-profit company supplying sustainable and efficient solar energy solutions (e.g. lights, fans, mobile chargers, TV) to small businesses in off-grid areas of rural Sindh, to evaluate one market solution to increase access to energy. The product is innovative, as it alleviates credit constraints to adoption and has strong enforcement features: customers' access energy through a pay-as-you-go monthly payment scheme and are disconnected when the credit expires. The study will investigate key determinants of the sustainability of the business model and of product take-up, by looking at the trade-off between discipline and flexibility in repayment schedule. The experiment will be able to explore behavioural underpinnings of two repayment schemes, by testing soft ways to increase the salience of repayment.

Status: Fieldwork ongoing, expected to finish by October 2018.
Expected publication: Dec 2018.

Comparing Demand for Microcredit and Microsaving in a Framed Field Experiment in Rural Pakistan

Researcher: Farah Said (Lahore School), Uzma Afzal (Lahore School), Marcel Fafchamps(Stanford University), Giovanna d'Adda (University of Milan) and Simon Quinn(University of Oxford)

The study is a Randomized Control Trial designed to compare the effectiveness of micro-savings and micro-loans as means for households to manage risk and liquidity. This research is funded by the IGC and is conducted in collaboration with the National Rural Support Programme (NRSP), Pakistan. The research project has also received funding from Department for International Development (DfID) and Economic and Social Research Council (ESRC) to carry out a scaled up version of the study that is currently in the field. Previously a pilot was conducted in one district of Punjab, Pakistan in August 2013.

Status: Fieldwork completed, data analysis under way, preliminary results presented at CSAE 2018.
Expected publication: Sept 2018.

Breaking the cycle. Reducing non-payment for electricity: experimental evidence from Pakistan

This research is funded by the International Growth Centre (IGC). The proposed research tests the effectiveness of behavioral interventions in fostering regular bill payment through a randomised field experiment (RCT) to be conducted in Karachi, Pakistan. The experimental design was defined in partnership with K-Electric (henceforth, KE), a private, vertically integrated electric-energy corporation serving around 23 million residential, industrial and commercial customers in Karachi. In spite of the company's efforts to reduce losses from non-payment of bills, recovery rates still range between 70 and 90%. Energy provision by KE follows a policy of selective load shedding at the feeder level, with the number of hours of outages increasing in the level of losses. Under this policy, the individual decision to pay in full and on time generates a positive externality, in terms of quality of energy provision, on clients living in the same neighborhood. Our proposed interventions will make use of the tools commonly used in tax evasion and energy efficiency studies, i.e. communication to customers in the form of letters, to deliver information on the selective load shedding policy and to make explicit the link between individual repayment decision and neighborhood level quality of energy provision. This will contribute to an exciting recent literature that combines laboratory and field experiments to study how real world outcomes can be explained by underlying preferences and norms.

Status: Piloting expected in May 2018; fieldwork in Sept-Oct 2018.
Expected publication: September 2018; March 2019.

Impact assessment of startup loans to female run micro-enterprises

Researcher: Farah Said (Lahore School), Azam Chaudhry (Lahore School), Giovanna d'Adda (University of Milan), Naved Hamid (Lahore School) and Mahreen Mahmud (University of Oxford)

This study is a Randomized Control Trial to evaluate the socio-economic and welfare impacts of micro-loans to female micro-entrepreneurs. This study looks at whether access to finance leads to female setting up their business and attempts to measure household dynamics faced by borrowers that may act as a constraint on the decision to set up a business. This study was conducted in collaboration with Kashf and the fieldwork completed in October 2016. The project was funded by the International Growth Centre (IGC).

There was a positive, but transitory, impact of the microfinance product on the likelihood of setting up a business but no improvement in household asset holdings or in women's independence when making ordinary household decisions. To provide measures of social and household dynamics these borrowers operate in, this study also made use of lab-in-the-field experiments at the time of the first follow up survey in 2015, with 267 randomly selected RCT participants and male members of their households. Experimental results show that in pairs where women were entrepreneurs, men and women did not hide experiment money from each other. However, husbands of housewives chose to keep more for themselves when this allocation could be kept hidden from their partners. In literature, this is taken as evidence of 'hiding' of resources from the spouse. In addition, men and self-employed women exhibit entitlement over their earnings, whereas housewives do not. These results point towards possibly adversarial dynamics in households where the woman is not working.

Status: Fieldwork completed, data analysis under way, preliminary results presented at SEEDEC 2016, RES 2017, CSAE 2017, CSAE 2018, RES 2018, SEEDEC 2018 (expected).

Dissertation Submission: September 2018

Expected publication: December 2018; March 2019.

Incentivizing Development: A Field Experiment on Third Tier Organizations in Pakistan

Researcher: Hamna Ahmed (Lahore School), Asha Gul (University of New South Wales), Kate Vyborny (Duke University) and Simon Quinn (University of Oxford)

Donors and developing country governments have experimented with alternative ways to deliver services and assistance to communities and to individuals. One such approach is to deliver funding for basic services through non-governmental organisations. Incentive issues have been studied extensively in government bureaucracies. However, similar issues also arise when public spending is channelled through the non-government sector, which may reduce state effectiveness in policy delivery; yet there is very little research on these issues.

In addition, we know very little about how public spending through non-government organisations affects service delivery through the traditional bureaucracy. Under what circumstances does it complement or bolster mainstream public service delivery, providing information or exerting citizen pressure on the government? Under what circumstances does it "let government off the hook," substituting for services that would have been provided by the state?

In this project, we are collaborating with the Pakistan Poverty Alleviation Fund to study these issues. PPAF receives support from both donor and Pakistani government sources, and funds local volunteer-run NGOs across Pakistan to provide public services in a wide range of sectors. We are collaborating with PPAF on a Randomized Controlled Trial with 836 volunteer local NGOs across Pakistan.

As a part of the trial, PPAF is randomly varying the reporting obligations and incentives for those NGOs. The results of the RCT and related analysis on a rich panel dataset on these NGOs, their communities and local government offices will help shed light on how monitoring and incentives can be improved in the NGO sector; how the staff of a complex organization (PPAF and its partners, who disburse the funds and support the local NGOs) respond to and manage new information; and on the relationship between publicly-funded NGO sector and traditional state institutions.

Institutional capacity as an organizational challenge: pilot results from a field experiment in Pakistan

Researcher: Hamna Ahmed (Lahore School), Asha Gul (University of New South Wales), Kate Vyborny (Duke University) and Simon Quinn (University of Oxford)

Large organizations, such as firms or bureaucracies, are often structured as complex hierarchies. Theory suggests two features of an organizational hierarchy may matter for its performance: information flow within the hierarchy; and divergent preferences of the members of the hierarchy. However, we have limited empirical evidence on how either affects organizational capacity and performance.

In this study, we shed light on these issues through a novel field experiment involving a large donor organization and over 800 recipient community organizations across Pakistan. The design allows us to test how each part of a large, complex organization (the donor) responds to new information on performance (of recipient organizations) on key performance indicators, and how the responses of both donor and recipients to new information and incentives relate to organizational characteristics of theoretical importance, including divergence of preferences between members of the organization; communication costs between parts of the organization; and decentralization of decision making authority.

Rent-seeking, Government Size and Economic Growth

Researcher: Dr. Waqar Wadho (Lahore School) and Umair Ayaz (Lahore School)

The researchers explored the relationship between government size and economic growth in an endogenous growth model with human capital and an unproductive capital which facilitates rent-seeking.

With exogenous as well as endogenous time discounting, we find a non-monotonic relationship between the size of government and economic growth. We find that with very high (low) discounting, there is a unique low (high) growth equilibrium, regardless of the size of government. For the intermediate range of discounting, there are multiple equilibria and the growth outcome depends on the size of government.

With endogenous time discounting, the growth outcome is path dependent and depends on the level of inherited human capital. However, there is only one stable growth regime and the economy endogenously switches to it. When the institutional constraints on rent-seeking are not extremely high, the stable regime is the one in which there is a high-growth equilibrium for a smaller size of the government and for larger size, both the high-growth and the low-growth equilibrium coexist. When the institutional constraints on rent-seeking are extremely high, there exists only a unique high-growth equilibrium irrespective of the size of government. Furthermore, economies with bigger size of the government and/or with poor quality institutions will take longer to endogenously switch to this stable growth regime.

Published Article: W. Waqar; A. Umair. (2018). "Government size and economic growth in an endogenous growth model with rent-seeking", Wiley Journal of Economics & Politics, Volume 30, Issue 1, pages 151-179.

Exchange Rate Management and Economic Growth: A Brewing Crisis in Pakistan

Researcher: Naved Hamid (Lahore School) and Azka Sarosh Mir (Lahore School)

In this research it is argued that Pakistan has had a consistently overvalued exchange rate and the policy with regards to management of the exchange rate has undergone a significant change in recent years. It was showed that prior to March 2013, the policy target of the exchange management was stability of the real effective exchange rate. However, during the tenure of the current government, the policy target for exchange rate management seems to have been stability of the nominal exchange rate against the US dollar. As the currencies of Pakistan's major trading partners (UK, Europe and China) have depreciated against the dollar during this period, the real effective exchange rate has appreciated by over 20 percent since the time that the current policy makers took office. Overvaluation in general and the recent reversal in the exchange rate management policy in particular have had an adverse impact on exports and the manufacturing sector. This not only has serious negative consequences for the long term, growth of the economy, but has greatly increased the short-term risk of a balance of payments crisis.

Published Article: The Lahore Journal of Economics, Volume 22: SE (September 2017): pp. 73-110. Link to the Article:

Business Confidence Surveys of the Business Community in Lahore

In March 2015, the Lahore Chamber of Commerce & Industry (LCCI) and the Lahore School of Economics signed a Memorandum of Understanding, which established a link between academia and the business community. As part of this collaboration, the Innovation and Technology Centre of the Lahore School (headed by Azam Chaudhry) and the LCCI has conducted three annual business confidence surveys (starting in 2015) to understand the perceptions of the business community regarding the prevailing economic conditions and the level of innovation being done.

Link to the 2017 Report:
http://admissions.lahoreschool.edu.pk/econdevice/downloads/Business%20Confidence%20Survey%202017.pdf

Link to the 2016 Report:
http://admissions.lahoreschool.edu.pk/econdevice/downloads/LSE%20and%20LCCI%20business%20confidence%20-%20report%202016%20v9.pdf

Link to the 2015 Report:
http://admissions.lahoreschool.edu.pk/econdevice/downloads/Analysis%20-%20Business%20Confidence%20Survey%202015%20V2%20Final.pdf

The Diversification and Sophistication of Pakistan's Exports: The Need for Structural Transformation

Researcher: Uzma Afzal (Lahore School, current PhD. candidate, University of Nottingham), Maha Khan (Lahore School; current PhD. candidate, The University of York)

While export diversification is considered to foster export growth and enhance GDP growth rates, this diversification has not translated into higher exports for Pakistan. In addition to diversification, the country must undergo a structural transformation of its exports to upgrade to a more sophisticated export basket. This entails shifting its comparative advantage from primary to manufactured exports and, further, from a labor-intensive to a more capital-intensive productive structure.

In order to explain Pakistan's paradoxical situation, this paper analyzes Pakistan's orientation in the 'product space' as it affects the process and rate of structural transformation. In addition, we assess the sophistication of Pakistan's exports based on their complexity and technological sophistication. Our analysis refutes the traditional argument that diversification leads to greater exports and faster economic development. It also shows that the bulk of the country's productive capabilities are concentrated in the periphery of the product space, which is very weakly connected to the tightly packed industrial core. The export basket is neither complex nor technologically sophisticated, producing low-tech undifferentiated products. It seems that Pakistan is left with few nearby options for structural transformation, leaving it without a path to other, more sophisticated areas in the core of the product space.

We argue that accelerating the process of structural transformation will require revisiting industrial policy, strengthening the country's institutions and strategic collaboration between the public and private sectors.

Published Article: The Lahore Journal of Economics, Volume 21: SE (September 2016): pp. 99-127.

A Partial Langrangian Approach to Solving Dynamic Models of Economic Growth

Researcher: Azam Chaudhry and Rehana Naz (Lahore School)

Researchers are developing a new approach termed as a discount free or partial Lagrangian method for construction of first integrals for dynamical systems of ordinary differential equations (ODEs). It is shown how one can utilize the Legendre transformation in a more general setting to provide the equivalence between a current value Hamiltonian and a partial or discount free Lagrangian when it exists. As a consequence, they develop a discount factor free Lagrangian framework to deduce reductions and closed-form solutions via first integrals for ODEs arising from economics by proving three important propositions. The approach is algorithmic and applies to many state variables of the Lagrangian. In order to show its effectiveness, they apply the method to models, one linear and two nonlinear, with one state variable. They obtain new exact solutions for the last model. The discount free Lagrangian naturally arises in economic growth theory and many other economic models when the control variables can be eliminated at the outset which is not always possible in optimal control theory applications of economics.

Article Published: "A partial Lagrangian method for dynamical systems, " A. Chaudhry, R. Naz and F. M. Mahomed, Nonlinear Dynamics, May 2016, Vol. 84, Issue 3, 1783-1794.

Corruption, Tax Evasion And The Role Of Wage Incentives With Endogenous Monitoring Technology

Researcher: Waqar Ahmerd Wadho (Lahore School)

The importance of high salaries to circumvent bureaucratic corruption has been widely recognized in the policy debate. Yet, there appears to be much reluctance when it comes to the implementation. In this paper, we evaluate the common conviction that efficiency wage can be used as an incentive device to eliminate malfeasance in the government and its cost-effectiveness. Our focus remains on one branch of the government, that is, tax department, which may comprise corruptible tax inspectors who cause tax compliance problems. We explore for a budget balancing government that when it will launch anti-corruption strategy and would it be cost effective to offer wage incentives to combat corruption. Apart from efficiency wage, we add reservation wage (outside option) and capitulation wage (a wage less than outside option) in the basket of wage strategies for the government. We have an endogenous monitoring technology, which depends on government's audit intensity and the number of corrupt tax inspectors. Furthermore, we add the role of rule of law through the cost of laundering bribe income.

Endogenous monitoring technology implies that equilibrium level of corruption not only depends on public remuneration scheme but also on the level of audit intensity and the number of other corrupt tax inspectors. For wage incentives to be a viable anti-corruption strategy, it must be accompanied by a non-zero audit intensity. When government offers efficiency wages and capitulation wages, there is a unique equilibrium where all tax inspectors stay honest and all are corrupt, respectively. For reservation wages, the equilibrium depends on the monitoring technology. For a higher audit intensity, all tax inspectors stay honest, and for a lower audit intensity, all corruptible tax inspectors are corrupt. For the intermediate levels of audit intensity, there are multiple equilibria. Depending on the proportion of corrupt tax inspectors, corruptible tax inspectors can be corrupt or can stay honest.

Since auditing is costly and the effectiveness of monitoring depends on the number of other corrupt tax inspectors, there are situations where government is eventually better-off (in terms of revenues) giving up against corruption. Our results suggest that government is better-off either completely eliminating corruption or accepting corruption by offering wages lower than the market wage. This implies that offering tax inspectors a wage premium or even equal to private sector wage and not solving the moral hazard problem is sub optimal in terms of net revenues. Governments can increase their net revenues either by reducing government wages to a level below the outside option and not auditing tax inspectors or by raising audit intensity up to the level where no one has incentive to be corrupt. This suggests that Ukraine's wage strategy of capitulation wages seems optimal than those of for example Pakistan, India, or Latin America where there are public wage premiums but corruption levels are as high as those of Ukraine and tax to GDP ratio is low. When it is optimal to deter bribery, the government can do this either through incentive-based strategy (carrot/stick mix) or through monitoring. Which of these two is optimal depends on cost of auditing, level of dishonesty, tax base, and reservation wage. The role of efficiency wages decreases in societies with higher proportion of dishonest agents. In these societies, wage incentive schemes become prohibitively expensive and the government would opt for a monitoring-based anti-corruption strategy when auditing is less costly, and a capitulation wage policy when auditing is more expensive.

Published Article: Economic Inquiry (ISSN 0095-2583) Vol. 54, No. 1, January 2016, 391-407.

Understanding and Addressing Rural Poverty in Pakistan: Oxford University- Lahore School Collaboration

Researcher: Naved Hamid, Azam Chaudhry, Theresa Chaudhry, Hamna Ahmed, Asha Gul, Uzma Afzal and Farah Said (Lahore School), Marcel Fafchamps (University of Oxford), Simon Quinn (University of Oxford), Kate Vyborny (Duke University), and Muhammad Haseeb (University of Warwick)

With funding from the British Academy and the Lahore School of Economics, researchers at Oxford and CREB have completed the 3-year collaborative program on the Economics of Rural Poverty in Punjab. The collaboration has led to several joint academic projects between the two institutions. The collaboration has now far exceeded the scope originally planned, leading to new joint projects that have continued beyond the end of the grant. This project was completed in 2014.

The collaborative work includes research on the following topics:

a. Patron-Client Relationships and Rural Development in Pakistan
How do social networks and local "patrons" affect household wellbeing and access to public services? Patron-client relationships, or vertical social relationships in which individual powerful "patrons" have multifaceted relationships with "clients", are said to be key features of both markets and politics in many developing country settings, including rural Pakistan. But how do these relationships work in practice and how do they affect the delivery of government goods and services?

These questions were explored by Azam Chaudhry (Lahore School), Muhammad Haseeb (Lahore School/University of Warwick) and Kate Vyborny (Duke University/Lahore School) initially with data collected from the Lahore School's Privatization in Education Initiative (PERI) survey and then with the new survey under this project. The researchers have developed several research papers analyzing these data, which examine questions including how local context affects the patron-client relationship, how political connections affect targeting of government programs, and whether different types of program design make programs for the poor more robust to the influence of patronage. The researchers have presented this work in Lahore at the Lahore Economic Development Research Seminar Series (LEDRS) and at International Food Policy Research Institute (IFPRI), AIMS-Manila and Duke University as well as at seminars and conferences in Oxford, Ottawa and Paris and will submit papers for publication soon.

b. Learning about Flood Risk: Evidence from a Field Experiment in Pakistan
Farah Said, Uzma Afzal (Lahore School) and Ginger Turner (The Wharton School) investigated how individuals learn about flood risk through the experience and observation of flood events. The study tested the theory that individual risk perceptions and preferences could change with disaster experience, even when controlling for variation in initial asset constraints and losses. The aim was to improve on previous studies by matching game choices with survey data that included questions on expectations, asset, information sets, and timing by complementing surveys with experimental design.

A main contribution of this study was to improve the identification of individual loss measures, to test whether variation in flood damages at an individual level can explain differences in observed risk aversion changes. This research was particularly innovative in the Pakistan context, where there has been little work to date on behavioral economics. Findings on behavioral changes have been published in the followings:
Said, F; Turner, G. and Afzal, U. "Risk Taking and Risk Learning after a Rare Event: Evidence from a Field Experiment in Pakistan", Journal of Economic Behavior & Organization 118, 167 - 183, (2015).

Turner, G., Said, F. and Afzal, U., "Microinsurance Demand after a Rare Event: Evidence from a field experiment in Pakistan". The Geneva Papers on Risk and Insurance - Issues and Practice 39, 201 - 223, (2014).

Turner, G., Said, F., Afzal, U., Campbell, K. "The Effect of Early Flood Warnings on Mitigation and Recovery during the 2010 Pakistan Floods". A. Singh and Z. Zommers (Eds.), Preventing Disaster: Early Warning Systems for Climate Change. London: Springer (2014).

Said, F, Turner, G. and Afzal, U. "Attitudes towards Risk in the Wake of a Rare Event: Evidence from Pakistan", CREB Working Paper No. 02-14, (2014).

c. Evaluating the Impact of Punjab's Girls Stipend Program
The government of Punjab, starting in 2004, offered a conditional cash transfer (CCT) of Rs. 200 per month, to girls in class 6 to 8 with minimum 80 percent attendance, in order to increase the educational attainment of girls in districts with less than 40 percent literacy. The program was later was extended up to grade 10.

Using two rounds of data collected, a 2009 survey of urban and rural households in Punjab (supported by NSF and the Lahore School of Economics) and a 2013 survey of only rural households (supported by the British Academy and the Lahore School of Economics), Amar Shuja and Theresa Chaudhry (Lahore School) are analyzing the impacts of this CCT on enrollment and marriage outcomes by means of triple difference-in-differences approaches, comparing eligible girls to their non-eligible elder sisters younger siblings in both stipend and non-stipend districts.

Caste, Social Exclusion and Education in Rural Punjab: World Bank and CREB joint Research Initiative

Researcher: Tayyaba Tamim (Lahore School) and Rehan Jamil (World Bank)

This funded research was in collaboration with the World Bank and Lahore School of Economics. They used a multiple case study design and mixed methods approach to capture in-depth processes by which caste-based social exclusion shapes the educational opportunity for the marginalized castes in rural Punjab. Three villages were selected from the PERI 2011 data based on geographical spread (North, south and Centre of Punjab), caste and religious complexity and lowest school enrollment.

Each village was taken as a case. Amartya Sen's capability approach to human development was used to evaluate educational opportunity in the space of capabilities and opportunities, in combination with forms of social exclusion identified by (Whitley, 2005), while Pierre Bourdieu's social critical theory provided the analytical toolkit. Data from 105 interviews with low and high caste parents of (10 -16 year old children) and school heads along with questionnaires, revealed that the caste-based social exclusion stemming from socioeconomic dimension refracted into active and passive forms of institutional exclusionary processes at macro and micro levels, across temporal, spatial and social planes on the one hand; and unfavorable inclusion of the low castes in their own groups, on the other hand; forcing the poorest and most excluded castes to self-deselect themselves from accessing educational opportunity. This project was completed in 2013.

The results of the study were published as:
CREB working paper "Caste, Social Exclusion, and Opportunities for Education in Rural Punjab", CREB Working Paper No. 01-15, (2015).

Tamim, T. and Tariq, H. "The Intersection of caste, social exclusion and educational opportunity in rural Punjab", International Journal of Educational Development, 43, 51-62 (2015).

Two other papers from the same study are in the pipe line: 'Factors affecting low - caste parents' choices for schooling their children: case study of a village in southern Punjab'; 'Caste, social capital and education in rural Punjab'.

A Partial Hamiltonian Approach for Current Value Hamiltonian Systems

Researcher: Azam Chaudhry and Rehana Naz (Lahore School)

Researchers are developing a partial Hamiltonian framework to obtain reductions and closed-form solutions via first integrals of current value Hamiltonian systems of ordinary differential equations (ODEs). The approach is algorithmic and applies to many state and costate variables of the current value Hamiltonian. However, they apply the method to models with one control, one state and one costate variable to illustrate its effectiveness. They explain their approach with the help of a simple illustrative example and then apply it to two widely used economic growth models: the Ramsey model with a constant relative risk aversion (CRRA) utility function and Cobb Douglas technology and a one-sector AK model of endogenous growth are considered. They show that their approach can be used to deduce results given in the literature and also to find new solutions.

Published Article: "A Partial Hamiltonian Approach for Current Value Hamiltonian Systems," with R. Naz and F. M. Mahomed in Communications in Nonlinear Science and Numerical Simulation, Vol. 19, Issue 10, Oct. 2014, 3600-3610.

Reviewing Pakistan's Import Demand Function: A Time-Series Analysis, 1970-2010

Researcher: Zunia Saif Tirmazee Lahore School) and Resham Naveed (Lahore School)

There has been a tremendous rise in Pakistan's level of imports over the last few years, especially following the liberalization regime of the 1990s. In addition, the economy has experienced a rise in foreign exchange reserves and economic growth. However, as a result of its limited export profile, Pakistan's trade deficit has worsened. In light of these circumstances, it has become essential to determine which factors explain the abrupt variations and continuous growth in imports for Pakistan. This paper has tried to do so by empirically estimating the determinants of imports in the long run and short run using a VECM. Our main findings indicate that there is a long-run equilibrium relationship between import demand and real GDP, relative prices, the terms of trade, and foreign exchange reserves availability, signifying the relevance of additional determinants for the conventional import demand equation.

These findings obviously have implications for the trade balance. The import volume would rise significantly if real income were to increase, and that too at a rate higher than the rate of growth of real income, thus causing the trade balance to deteriorate. To prevent this, exports must grow in tandem with imports. With a stagnant export growth rate and a very high import growth rate, the trade balance will keep worsening. Foreign exchange reserves are also statistically significant, affecting import demand both in the short run and the long run. Moreover, import demand is elastic with respect to foreign exchange reserves availability. Omitting such an important variable can cause the misspecification of the model and overemphasize the influence of the other variables included.

We have shown this empirically by estimating two separate models for import demand: a conventional import demand function, to which we then added other variables of import demand. Import demand is inelastic with respect to relative prices, even though relative prices have a negative impact on import demand. The small coefficient implies that Pakistan's export market is noncompetitive: despite the rising prices of imports, this has not led to a significant substitution of exports for imports. This effect marks the inability of the domestic market to provide substitutes that can compete with imports. Finally, the coefficient of the terms of trade is positive and greater that 1. This means that a favorable change in the terms of trade (i.e., an increase in the price of exports) should help domestic consumers buy more imports for each unit of exports. However, this may also imply a worsening trade balance if exports fall because they have become relatively more expensive.

Our estimates of the elasticity of import demand with respect to the terms of trade are greater than 1, suggesting that an increase in the price of imports should lead to a fall in imports at a rate greater than the rate at which the terms of trade improve. For Pakistan, however, even with the constant devaluation of the rupee, a fall in the price of exports and a corresponding rise in the price of imports have not improved the trade balance.

Again, this has to do with the nature of imports. Without suitable substitutes to control import growth, the trade deficit will not improve. Our post-1980s analysis reveals that Pakistan's imports-to-GDP ratio was falling at a time when those of other rapidly growing developing countries (which are now far ahead) were increasing. Import growth is an essential development that takes place alongside economic growth. Pakistan's trade balance is the mirror image of its imports, implying that any variation in the balance of trade comes mostly from imports. Policy propositions to reduce imports and improve the trade balance are, therefore, common.

The real concern, however, is to improve the trade balance without having to reduce imports. If recovery is to come from anywhere, it must come from the export side, given the nature of Pakistan's imports and the fact that it is not self-sufficient in producing what it currently has to import.

Published Article: The Lahore Journal of Economics, 19: SE (September 2014): pp. 371-393.

Analyzing Pakistan's Trade Opportunity with Turkey

Researcher: Asha Gul (Lahore School; PhD. candidate, University of New South Wales)

Pakistan and Turkey undoubtedly have a strategically important and economically lucrative relationship. While Turkey could become a bridge between Asia and Europe, Pakistan shares borders with two large, densely populated economies and could become a gateway to energy-rich Central Asia.

However, given their present trade structures and volumes, Pakistan needs Turkey more than the other way around. 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 intra industry 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.

Published Article: The Lahore Journal of Economics, Volume 19: SE (September 2014): pp. 349-370.

An Impact Assessment of Expected Future Turmoil Risk on FDI: A Panel Data Analysis of Developing Countries

Researcher: Mahvish Faran (Lahore School; PhD candidate Sheffield Univertsity)

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.

Published Article: The Lahore Journal of Economics, Volume 19: 2 (Winter 2014): pp. 101-128.

Pakistan's Growth Spurts and Reversals: A Historical Perspective

Researcher: Rashid Amjad (Lahore School)

This research 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.

The main conclusion of the paper is that the Pakistan economy has not performed to its potential and this reflects both poor short- to medium term macro-economic management and the emergence of serious structural constraints which have resulted amongst others in recurring balance of payment crisis. The country has been fortunate in that favorable external developments in the form of a manifold increase in remittances and some positive internal developments have kept the economy afloat and in the process generated sufficient dynamism such that extreme poverty has continued to decline.

A glaring message which does emerge from our historical analysis is that a binding constraint has been the foreign exchange constraint which especially in the last two and a half decades has been responsible for the economy's poor performance. While the manifold increase in remittances in the last decade and a half need to be welcomed they cannot substitute for Pakistan's continuing poor export performance. This again is an area which has been analyzed many times earlier and with hindsight on what has worked and not worked. This conference, with its focus on improving Pakistan's export performance, offers us an opportunity to come up with workable and doable policy solutions to help remove and initially ease the foreign exchange constraint which continues to throttle economic growth.

Published Article: The Lahore Journal of Economics, Volume 19: SE (September 2014): pp. 91-104

Patterns of Export Diversification: Evidence from Pakistan

Researcher: Hamna Ahmed (Lahore School) and Naved Hamid (Lahore School)

This research 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.

The objective of this study was to assess the degree of traditionality across all export industries in Pakistan, to analyze the degree of structural change that has occurred in the export sector since 1972, and to explore the determinants of medium-term structural change in the export sector.

Our results suggest that the current export base continues to be fairly traditional as is evident from the fact that the least traditional industries accounted for less than a tenth of total exports in 2012. Moreover, the results highlight two main factors that may be critical for the export sector to undertake structural change and become more dynamic in the future. The first of these pertains to a more liberal trade policy stance by the government; the second relates to the country's ability (as given by GDP growth) to successfully expand in the future.

However, the effectiveness of both measures-a more liberal trade policy regime and a sustained drive toward growth-will likely also depend on the availability of complementary fundamentals such as a supportive business environment, a trade-enabling regulatory framework, good governance with the rule of law, and political and macroeconomic stability.

Published Article: The Lahore Journal of Economics, Volume 19: SE (September 2014): pp. 307-326.

Financial Crisis and Migrant Remittances: Effects on Growth and Poverty in Selected South Asian Countries

Researcher: Azam Chaudhry, Naved Hamid and Mahreen Mahmud (Lahore School)

With a grant from South Asia Network for Economic Institutes (SANEI), researchers from the Lahore School of Economics empirically investigated the effects of the global financial crisis on remittance growth and national income in Bangladesh, Sri Lanka and Pakistan. This project was completed in 2011. Findings of the study have been published in: Mahmud, M., and Hamid, N. "Migrant Remittances to South Asia: Determinants and Effect on Growth". In M. K. Mujeri, and M. Wahiduddin (Eds.), Adjusting to Global Economic Volatility. The Case of South Asia. New Delhi: Academic Foundation (2014).

Microinsurance in Pakistan: Progress, Problems, and Prospects

Researcher: Theresa Thompson Chaudhry (Lahore School) and Fazilda Nabeel (University of Sussex)

Microinsurance in Pakistan is still in its nascent stages. More than half of the current microinsurance policies in effect in Pakistan are offered through the Benazir Income Support Program (BISP), with the remainder provided in conjunction with microcredit services offered by various microfinance institutions (MFIs), microfinance banks, nongovernment organizations, and rural support programs (RSPs).

The policies offered by the microcredit sector are mainly creditlife policies, which cover loan balances in the event of the borrower's death. In addition, some lenders-principally the RSPs-offer small health insurance policies covering the hospitalization of the borrower and (sometimes) their spouse.

As catastrophic health expenses and deaths in the family are among the most important economic stressors that households face, it makes sense that microinsurance should first make inroads in these areas. It is difficult to say what impact microinsurance has had in Pakistan, since few rigorous evaluations have been undertaken to date.

What we do know is that utilization has been low, explained by providers as limited client awareness of the benefits and coverage. In the short to medium term, microinsurance outreach can be expanded by offering health microinsurance (HMI) coverage to microcredit borrowers' entire households, and by offering HMI to all community members within an RSP, rather than only microloan borrowers and their spouses.

Partnering with mobile phone operators for automated, digital payments can also significantly expand potential customer volume while reducing transaction costs. HMIs might also be combined with health savings accounts that households can use to pay for medications and outpatient services not covered by HMI plans. Provinces could also leverage the existing database of poverty scorecards implemented by BISP to channel partially government-subsidized microinsurance policies toward poor households just above the BISP threshold.

Published Article: The Lahore Journal of Economics, Volume 18: SE (September 2013): pp. 335-374.

Patronage in Rural Punjab: Evidence from a New Household Survey Dataset

Researcher: Azam Chaudhry (Lahore School) and Kate Vyborny (Duke University)

The intervention of local elites is often cited as an impediment to policy implementation in many developing countries. In this research, we present initial results from an original primary household dataset from eight tehsils of rural Punjab, Pakistan. We examine descriptive statistics on patron-client interaction and correlations between household characteristics and that relationship.

The study raises some key findings. First, households report connections with a range of officials; they interact most heavily with local officials, but a large number of households also report interacting with their provincial and national politicians.

Second, many households report receiving active assistance both from local officials and from provincial and national politicians in accessing certain state services, in particular in applying for national identity cards.

Third, households report links with many patrons outside their own biraderi or clan. Fourth, vulnerable households, such as landless and female-headed households, appear less likely to interact with and less likely to receive assistance from patrons, suggesting that patronage activity could increase the inequality of outcomes.

Fifth, better-off households appear more likely to assist patrons in a range of areas. Finally, local officials and politicians had tended to recommend candidates in the last election, and rural households were strongly convinced that their vote was not secret from their patrons or officials. This is possibly consistent with patronage-based politics and bloc voting.

Published Article: The Lahore Journal of Economics 18: SE (September 2013): pp. 183-209.

RESEARCH