Debt Accumulation and Its Implications for Growth and Poverty

Rising levels of debt and debt servicing, falling rates of investment, declining growth rates of output and employment, and sharp increase in poverty sum up the disappointing performance of Pakistan’s economy over the last decade. By the end of the fiscal year 2001, external debt had increased to $30 billion, and the ratio of external debt and the present value of debt servicing stood at 64.0 and 80.0 percent of GDP respectively. Even though the ratio of debt servicing to export earnings and debt servicing to total foreign exchange earnings have declined because of debt rescheduling, still they were 37.4 and 23.3 percent, respectively, in 2000-01. Prior to debt rescheduling, the two ratios were 55.4 and 34.9 percent in 1997-98. The average growth rate of GDP has been less than 4 percent, with a declining trend, and unemployment rate has increased from less than 5 percent to 7.8 percent over the last decade. The real wages have fallen, and one-third of the population is unable to meet its nutritional requirements. While a number of factors including the inconsistency of the economic policies of successive governments, Structural Adjustment and Stabilisation Programmes of the IMF, and corruption have been responsible for this state of affairs, debt accumulation to alarming proportions is also a major cause of such performance.

Institutional Change, Growth, and Poverty Levels in Pakistan

It is now well-recognised that institutions matter in the growth process both directly and indirectly. Well-functioning institutions lead to higher investment levels, better policies, increase in social capital stock of a community, and better management of ethnic diversity and conflicts [see for example North (1990, 1994); Jutting (2003); Rodrik, et al. (2002); Dollar and Kray (2002); World Bank (2002); Aron (2000); Chu (2001) and Frischtak (1995)]. That the decay of institutions has led to poor governance—and the urgent need for improved governance in Pakistan particularly—has been well-documented in DRI/McGraw-Hill (1998); Pakistan (1999) and Hassan (2002). Transparent, participatory, and efficient working of institutions ensures correct priorities and appropriate policies; their effective and efficient implementation results in high growth, better income distribution, and alleviation of poverty

Financing Economic Development

We understand that both the level as well as the composition of investment play a crucial role in the economic development process. However, it needs to be understood that investment contributes to the growth process by increasing the productive capacity, improving the technology, and enhancing the competitiveness of an economy. And when it is supplemented with investment in the social sectors, it also results in human development. The demand for investment depends on strong macroeconomic fundamentals comprising stability of exchange rates, fiscal prudence, feasible structure of financial market, including the regulatory and supervisory framework and the size and quality of the securities and bond markets, and continuity of a consistent investment policy.1 Two types of capital formation may be distinguished, viz., physical capital and human capital. Since there are significant differences between private and social profitabilities in the social sectors, an optimal level of investment in human resources would depend on the perception of and the decisions taken by the policy-makers to bridge the gap between the two types of profitabilities. Nevertheless, implementation of an investment decision, whether related to physical or social investment, is contingent on the availability of sufficient domestic and external investible resources.

Regulatory Framework in Pakistan

Until the mid-1970s, governments all over the world (especially in the developing economies), intervened in markets on the pretext of market failure arising from externalities, decreasing cost industries, and equity considerations for maximising social welfare. In Pakistan, where the private sector has played a dominant role, except probably for the 1970s,1 private sector activities have all along been regulated through various types of controls and regulations on entry and exit, prices, credit, foreign exchange, imports, investments, etc. These regulations were imposed with a view to ensuring that private sector allocations were in accordance with the national priorities [see Pakistan (1983-84)]. However, the objectives were rarely realised and, in fact, these regulations have been responsible for red-tapism and corruption. On the grounds of government failure, privatisation and deregulation policies are being practised almost everywhere in the hope that they would help in efficient allocation of resources and higher levels of productivity. Considerable regulatory reforms have also been effected in Pakistan over the last two decades. Investment and import licensing have been withdrawn, most of the foreign exchange restrictions have been removed, capital market regulations have been simplified, price controls have been lifted, and interest rates have been deregulated. However, there is considerable room for further regulatory reforms. Similarly, various public enterprises in the manufacturing and financial sectors have been privatised, telecommunication, airlines, and energy firms have been partially divested, and the government has an ambitious privatisation programme of divestiture in various other fields. The main force behind the process of privatisation is the need to address the problems of mismanagement of resources, overstaffing, inappropriate and costly investments, poor quality of services, and heavy losses of various public enterprises.

Volatility Spillover Between the Stock Market and the Foreign Exchange Market in Pakistan

Our paper examines the volatility spillover between the stock market and the foreign exchange market in Pakistan. For long run relationship we use Engle Granger two step procedure and the volatility spillover is modelled through bivariate EGARCH method. The estimated results from cointegration analysis show that there is no long run relationship between the two markets. The results from the volatility modelling show that the behaviour of both the stock exchange and the foreign exchange markets are interlinked. The returns of one market are affected by the volatility of other market. Particularly the returns of the stock market are sensitive to the returns as well as the volatility of foreign exchange market. On the other hand returns in the foreign exchange market are mean reverting and they are affected by the volatility of stock market returns. There is strong relationship between the volatility of foreign exchange market and the volatility of returns in stock market

Poverty-reducing or Poverty-inducing? A CGE-based Analysis of Foreign Capital Inflows in Pakistan

Foreign capital inflows (FKI) help an economy by financing the imbalance between income and expenditure. However, their impact on poverty in the recipient economy is a controversial issue. In this study, we examine the impact on poverty in two different scenarios (1) labour is homogeneous (2) labour is heterogeneous. The Computable General Equilibrium model for Pakistan is used to conduct simulations in order to assess the impact of an increase in foreign capital on poverty both in the presence and in the absence of trade liberalisation. Several interesting results emerge from the study. First, FKI tends to reduce poverty in the presence as well as in the absence of trade liberalisation when labour is homogeneous. However, poverty reduction appears to be larger in the presence of trade liberalisation. Second, when labour is differentiated according to qualification and is assumed to be sector-specific, in the absence of trade liberalisation a higher proportion of benefits of FKI accrue to skilled labour and poverty increases by all measures for both urban and rural households. In the presence of trade liberalisation, FKI benefits unskilled labour more, and poverty is decreased irrespective of the choice of poverty indicatorsCapital inflow, Poverty, Pakistan

Remittances, Trade Liberalisation, and Poverty in Pakistan : The Role of Excluded Variables in Poverty Change Analysis

This study attempts to assess the impact of two shocks - trade liberalisation and a decline in remittances from abroad- on poverty in Pakistan using a CGE framework. It is found that tariff reduction in the absence of a decline in remittances reduces poverty, as measured by the head count, poverty gap, and severity ratios (FGT indicators) in both the rural and urban areas of Pakistan. In terms of welfare, all households appear to gain. The results show that the gain in welfare is larger for urban households than for rural households. We conclude from this that trade liberalisation reduces the gap between urban and rural households. In a second set of experiments, it was found that trade liberalisation in the presence of a decline in remittances reduces welfare in urban households but rural household still show an increase over the base year. According to all FGT indicators, poverty increases in urban households but not in rural households. The combined stock is more harmful to households in the urban areas than in the rural areas. However, this welfare gain and poverty reduction in the presence of trade liberalisation only. Aggregate statistics show that the negative impact of remittance decline dominates the positive impact of trade liberalisation in urban areas. On the other hand, in the case of rural areas, the positive impact of trade liberalisation dominates the negative impact of decline in remittances. It shows that the decline in remittance inflows is a major contributory factor in explaining the increase in poverty in Pakistan.This study attempts to assess the impact of two shocks - trade liberalisation and a decline in remittances from abroad- on poverty in Pakistan using a CGE framework. It is found that tariff reduction in the absence of a decline in remittances reduces poverty, as measured by the head count, poverty gap, and severity ratios (FGT indicators) in both the rural and urban areas of Pakistan. In terms of welfare, all households appear to gain. The results show that the gain in welfare is larger for urban households than for rural households. In addition, poverty reduces by a larger percentage in urban households than in rural households. We conclude from this that trade liberalisation reduces the gap between urban and rural households. In a second set of experiments, it was found that trade liberalisation in the presence of a decline in remittances reduces welfare in urban households but rural household still show an increase over the base year. According to all FGT indicators, poverty increases in urban households but not in rural households. The combined stock is more harmful to households in the urban areas than in the rural areas. However, this welfare gain and poverty reduction in the presence of trade liberalisation only. Aggregate statistics show that the negative impact of remittance decline dominates the positive impact of trade liberalisation in urban areas. On the other hand, in the case of rural areas, the positive impact of trade liberalisation dominates the negative impact of decline in remittances. It shows that the decline in remittance inflows is a major contributory factor in explaining the increase in poverty in Pakistan.Trade Liberalisation, remittance, poverty, households

Remittances, Trade Liberalisation, and Poverty in Pakistan: The Role of Excluded Variables in Poverty Change Analysis

This study attempts to assess the impact of two shocks-trade liberlisation and a decline in remittances from abroad-on poverty in Pakistan using a CGE framework. It is found that tariff reducation in the absesnce of a decline in remittances reduces poverty, as measured by the head count, poverty gap, and severity ratios (FGT indicators) in both the rural and urban areas of Pakistan. In terms of welfare, all households appear to gain. The results show that the gain in welfare is larger for urban households than for rural households. We conclude from this that trade liberalisation reduces the gap between urban and ruralhouseholds. In a second set of experiments, it was found that trade liberlisation in the presence of a decline in remittances reduced welfare in urban households but rural households still show an increase over the base year. According to all FGT indicators, poverty increases in urban households but not in rural households. the combined shock is more harmful to households in the urban areas than for households in the rural areas. However, this welfare gain and reduction in poverty level in rural households in less than the welfare gain and poverty reduction in the presence of trade liberlisation only. Aggregate statistics show that the negative impact of remittance decline dominates the positive impact of trade liberlisation in urban areas. On the other hand, in the case of rural areas, the posve impact of trade liberlisation dominates the negative impact of a decline in remittances. It shows that teh decline in remittance inflows is a major contributory factor in explaining the increase in poverty in pakistan.Trade, Remittances, Poverty, Pakistan

Volatility Spillover between the Stock Market and the Foreign Market in Pakistan

Our paper examines the volatility spillover between the stock market and the foreign exchange market in Pakistan. For the longrun relationship we use the Engle Granger two-step procedure and the volatility spillover is modelled through the bivariate EGARCH method. The estimated results from cointegration analysis show that there is no long-run relationship between the two markets. The results from the volatility modelling show that the behaviours of both the stock exchange and the foreign exchange markets are interlinked. The returns of one market are affected by the volatility of the other market. Particularly, the returns of the stock market are sensitive to the returns as well as the volatility of the foreign exchange market. On the other hand, returns in the foreign exchange market are mean-reverting, and they are affected by the volatility of stock market returns. There is a strong relationship between the volatility of the foreign exchange market and the volatility of returns in the stock market.Stock Market, Forex Market, EGARCH, Volatility Spillover, Stock Market Returns, Foreign Exchange Return, Pakistan