Volatility in Discretionary Public Spending and Economic Growth: A Cross Country Analysis

Volatility in discretionary public spending has diverse implications for the overall economic performance of economies. In this study, we examine the impact of volatile non�systematic discretionary public spending on economic growth. By employing cross-country data of 74 developed and developing economies, we find that volatility in non-systematic discretionary public spending has an adverse impact on economic growth. In particular, such impact is severe in the case of less developed economies. Our findings are robust to the problem of endogeneity. In order to ensure the accuracy of the results, we conduct sufficient sensitivity analysis by incorporating a bunch of potential control variables. In most of the cases, the results with regard to the policy volatility remain intact. This suggests that effective spending rules, i.e. permanent numerical limits, should be imposed on budgetary aggregates to restrain governments from the volatile use of discretionary spending. JEL Classification: H3; H5 Keywords: Volatility in Discretionary Public Spending, Economic Growth, Effective Spending Rul

Bangladesh and Pakistan: The Great Divergence

There was a time when Bangladesh lagged behind Pakistan in the quality of life measured by any of its major indicators, except for adult literacy and schooling of children. But it is a different story today. Bangladesh is ahead of Pakistan in almost every respect. I intend to present the facts (data) to support this proposition first and then explore the reasons for the great divergence. I am far more certain about the evidence than I am of my explanation since some of it is guesswork, though hopefully not too off the mark

Economic & Cultural Distance & Regional Integration: Evidence from Gravity Model Using Disaggregated Data for Pakistan

This study applies generalised gravity models to analyse Pakistan’s bilateral trade flows at commodity level using both panel as well as cross-sectional data estimation techniques. The empirical findings indicate that distance and size of the economy are the major determinants of commodity trade flows. For many commodities, real exchange rate, trade preferences, being landlocked, technological differences and market size are vital factors, which boost bilateral trade flows. Remarkably, there is an inverse relationship between bilateral trade flows and a common border. As far as regional trading blocs are concerned, the results show that ASEAN is a potentially significant destination for Pakistan’s commodity trade. The findings illustrate that in the case of SAARC trading partners, the potential of trade has not materialised. For the purpose of robustness of our results, we have also used agricultural and non-agriculture related trade costs. Estimates indicate that trade costs between Pakistan and its trading partners are highly significant and negatively related to commodity trade flows, while other empirical findings confirm the robustness of the results. Keywords: Gravity Model, Commodity, Regional Integration, ASEAN, ECO, OIC, SA

Exchange Rate Misalignment and Economic Growth in Pakistan: The Role of Financial Development

This study endeavours to examine empirically how real exchange rate (RER) misalignment affects economic growth in Pakistan. In this regard, we have not only estimated the direct impact but also the indirect impact of misalignment on economic growth by using the financial development channel. We have used time series data ranging from 1980 to 2016 to carry out the empirical analysis. After testing the time series properties of the selected variables, we computed long run equilibrium RER later used to calculate RER misalignment. Finally, we estimated the impact of misalignment on per capita economic growth, both direct and indirect. Our results reveal an adverse impact of RER misalignment on economic growth. However, we report that financial development helps in minimising the adverse impact of RER misalignment, though not fully eliminating it. Based on the empirical findings, the study suggests that exchange rate policies need to be managed more cautiously. Moreover, the financial sector development needs to be strengthened which may help in fully alleviating the adverse impact of RER misalignment on economic growth. JEL Classification: F31, GOO, O47 Keywords: Real Exchange Rate Misalignment, Financial Development, Economic Growth, FMOL

Corruption, Tax Evasion, and Economic Development in Economies with Decentralised Tax Administrative System

This theoretical paper looks into joint determination of corruption and development where there is a decentralised bureaucratic setup in a multi-tiered system: tier one bureaucrats and tier two bureaucrats. Corruption takes place at two levels, firstly when tier one bureaucrats collude with households for tax evasion, and secondly when tier one and tier two bureaucrats collude to hide corruption. This paper determines that at high levels of corruption, there is low development, and at a low incidence of corruption, there is high development. This paper postulates that for a developing country like Pakistan, low tax collection due to poor institutional decentralisation leads to low economic growth and development. JEL Classifications: E02, E26, E42 Keywords: Corruption, Tax Evasion, Economic Growt

Unravelling Water Use Efficiency in Sugarcane and Cotton Production in Pakistan

The present Policy Viewpoint explores water use efficiency between the two competing cash crops of the Kharif season, sugarcane and cotton. It is concluded that the sugarcane crop consumes about 3.5 times more water than the cotton crop. Moreover, one litre of water used in cotton production generates about 4 times higher monetary benefit at both the farm gate and at the processing stage. Sugarcane alone consumes about 42 percent of the total annual household water demand of Pakistan. Keywords: Cotton, Sugarcane, Water Use Efficiency, Water Pricing, Pakista

Analysing the National Tariff Policy

What is the role of import tariffs in a modern economy? Tariffs may seem an easy source of revenue, but they do have real consequences for the economy. The use of tariffs makes imported goods more expensive. It can be used as a means to prevent the exchange rate from fully adjusting to market value reducing incentives for export while increasing incentives for import substitution. Tariff policy can thus affect the product mix of country, including its direction of industrialisation, which in the complex globalised world of today determines its place in the global value chain

Demographic Changes and Economic Growth in Pakistan: The Role of Capital Stock

Pakistan has experienced a decrease in population growth since the early 1990s leading to an increase in the ratio of working age population, known as demographic dividend. The demographic dividend may lead to higher savings and investments, which spurs economic growth. Given this postulation, the study is the first of its kind to analyse the impact of demographic variables on economic growth through physical capital for Pakistan from 1960 to 2014. In this regard, the demographic change is captured by taking four alternate measures, namely population growth, young age dependency ratio, old age dependency ratio and working age population ratio. In order to examine the channel effect, first the direct impact of demographic changes on physical capital is estimated. Later, the impact of demographically induced capital stock on economic growth is estimated. By using the FMOLS technique, the study concludes that the total negative impact is highest in the case of old age dependency, which means that higher old age dependency is the most threatening demographic change for economic growth. The least harmful demographic change is young age dependency. Moreover, the empirical findings highlight the importance of capital stock as the mediating channel in the demographic change and economic growth relationship. The study recommends effective long- term policies to increase youth employment and to enhance savings for maximising the benefits of demographic dividend. JEL Classification: J11; O47 Keywords: Direct and Indirect Impact, Demographic Transition, Demographic Age Structure, Capital Stock, FMOL

Creativity in Schools: A 21st Century Need

Creativity is a skill that the labour market in the coming decade will demand (Csikszentmihalyi, 2006). Students in the 21st century need to be educated in a way that they can tackle the challenges of today’s ill-defined lives; to this end, creativity is the epitome resource and an attribute to address individual, social, and global problems. Though discipline and content may differ, creativity is required everywhere (Beghetto, 2010)

Doing Development Better: Analysing the PSDP

The Pakistan Institute of Development Economics (PIDE) organised a conference on the development policy of Pakistan with a focus on planning and public investment policy. At the Conference, a PIDE study entitled, Doing Development Better1 was launched and discussed. The key findings of the conference are listed below