A Fresh Assessment of the Underground Economy and Tax Evasion in Pakistan: Causes, Consequences, and Linkages with the Formal Economy

Rise in the underground economy creates problems for the policy-makers to formulate economic policies, especially the monetary and fiscal policies. It is found that if there was no tax evasion, budgets balance might have been zero and positive for some years and we would not have needed to borrow as much as we had borrowed. It is concluded that the impact of the underground economy is significant to the movements of the formal economy, but the impact of formal economy is insignificant in explaining the movements in the underground economy. In the long run, underground economy and official economy are positively associated. It is estimated that the underground economy ranges between Rs 2.91 trillion and Rs 3.34 trillion (54.6 percent of GDP to 62.8 percent of GDP respectively) in 2005 and tax evasion ranges between Rs 302 billion and Rs 347 billion (5.7 percent of GDP to 6.5 percent of GDP respectively) in 2005. Underground economy and tax evasion were increasing very rapidly in the early 1980s but the rate of increase accelerated in the 1990s. It declined in 1999, but reverted to an increasing trend until 2003. It declined again in 2004 and 2005Underground Economy, Tax Evasion

Is Inflation in Pakistan a Monetary Phenomenon?

The paper finds that an increase in money supply over the long-run results in a higher rate of inflation and thus provides support for the quantity theory of money. It establishes that inflation is essentially a monetary phenomenon. However, the money supply does not instantly influence the price levels; the impact of money supply on inflation has a considerable lag of about 9 months. While the study shows that the money supply works through the system in less than a year, it also points out that the system takes rather long to converge to equilibrium if shocks appear in any of the three variables, viz., GDP, money supply, and prices.Growth, Inflation, Money Supply, QTM

Fresh Assessment of the Underground Economy and Tax Evasion in Pakistan: Causes, Consequences, and Linkages with the Formal Economy

Rise in the underground economy creates problems for the policy-makers to formulate economic policies, especially the monetary and fiscal policies. It is found that if there was no tax evasion, budgets balance might have been zero and positive for some years and we would not have needed to borrow as much as we had borrowed. It is concluded that the impact of the underground economy is significant to the movements of the formal economy, but the impact of formal economy is insignificant in explaining the movements in the underground economy. In the long run, underground economy and official economy are positively associated. It is estimated that the underground economy ranges between Rs 2.91 trillion and Rs 3.34 trillion (54.6 percent of GDP to 62.8 percent of GDP respectively) in 2005 and tax evasion ranges between Rs 302 billion and Rs 347 billion (5.7 percent of GDP to 6.5 percent of GDP respectively) in 2005. Underground economy and tax evasion were increasing very rapidly in the early 1980s but the rate of increase accelerated in the 1990s. It declined in 1999, but reverted to an increasing trend until 2003. It declined again in 2004 and 2005.Underground Economy; Tax Evasion

A Fresh Assessment of the Underground Economy and Tax Evasion in Pakistan : Causes, Consequences, and Linkages with the Formal Economy

Rise in the underground economy creates problems for the policy-makers to formulate economic policies, especially the monetary and fiscal policies. It is found that if there was no tax evasion, budgets balance might have been zero and positive for some years and we would not have needed to borrow as much as we had borrowed. It is concluded that the impact of the underground economy is significant to the movements of the formal economy, but the impact of formal economy is insignificant in explaining the movements in the underground economy. In the long run, underground economy and official economy are positively associated. It is estimated that the underground economy ranges between Rs 2.91 trillion and Rs 3.34 trillion (54.6 percent of GDP to 62.8 percent of GDP respectively) in 2005 and tax evasion ranges between Rs 302 billion and Rs 347 billion (5.7 percent of GDP to 6.5 percent of GDP respectively) in 2005. Underground economy and tax evasion were increasing very rapidly in the early 1980s but the rate of increase accelerated in the 1990s. It declined in 1999, but reverted to an increasing trend until 2003. It declined again in 2004 and 2005.Underground economy, Tax Evasion

Impact of Export Subsidies on Pakistan’s Exports

Throughout Pakistan’s history, policy has sought to promote exports through government support and incentives. The government machinery is geared to export promotion especially through direct and indirect subsidies. Surprisingly, these policies have been continued without serious examination. This paper makes a first attempt to evaluate these policies by estimating the impact of two such schemes—export financing and rebate/refund schemes—on export performance. Our analysis shows that, over the long run, the export financing scheme had a negative effect on exports while the rebate/refund scheme affected exports insignificantly. Subsidy schemes clearly do not seem to work, yet they have been retained for many years.Rebate, Duty Drawback, Export Financing, Exports, Trade, Exchange Rate, Co-integration, Vector Error Correction, Pakistan

Shorter Notices

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Naeem ul Haque. Transforming the Inchoate Duty of Samaritanism into an Obligation. Islamabad, Pakistan: Innovative Development Strategies. 2014. 302 pages. Pak Rupees 600.00

“Transforming the Inchoate Duty of Samaritanism into an Obligation” is the last book of Naeem ul Haque’s life. It is edited by Uzma Cheema and Nina Gera and published by the Innovative Development Strategies (IDS), Islamabad. The book contains seven chapters. Chapter 1 introduces the purpose of the book and the issues discussed in it. Chapter 2 deals with the challenges of global poverty, while Chapter 3 links poverty with the changes in international law, mostly associated with aid and grant to developing countries. Chapter 4 defines the official development assistance (ODA) and discusses the history and issues related to it. In addition to that, Chapters 5 and 6 throw light on the various cases for and against the aid. The last chapter of the book, Chapter 7, discusses the transactional efforts to transformational outcomes

M. Ashraf Janjua. History of the State Bank of Pakistan (1988–2003). State Bank of Pakistan. 976 pages. Hardback. Price not given. M. Ashraf Janjua. History of the State Bank of Pakistan (1988–2003) Supplement. State Bank of Pakistan. 352 pages. Hardback. Price not given.

History of the State Bank of Pakistan is a series beginning with two volumes published first in 1992 and 1994. The former covered the 1948–60 period and the latter the years from 1961 to 77. M. Ashraf Janjua then wrote the next two volumes covering the years 1977–88 and 1988–2003. The third volume, pertaining to the years 1977–88, was reviewed by A. R. Kemal (PDR, 42:2, pp.161–166). That volume contains not only the major developments in the monetary and real sectors during the eleven-year period but also traces the developments since Independence

Allan H. Meltzer. Why Capitalism? USA: Oxford University Press. 2012. 145 pages. US $ 21.95. Hardbound.

Why Capitalism? is written in response to the popular belief of “end of capitalism” that emerged in the aftermath of the 2008 financial crisis. In this book, the author criticises the anti-capitalism claim advocated by numerous writers who welcomed regulated markets and essential government intervention at the time of recession to fix the problems, which free markets cannot resolve by itself. While praising capitalism, the author argues that the success of capitalist system was inevitable over the last half decade in most of the countries. He believes that democracy along with capitalism is the best system since people, by their voting rights, choose their own tax rates and way of redistribution of wealth. Furthermore, according to him it is the only system, which faced many challenges, but not only survived but came out stronger and dominated the world. Theoretically, the author’s arguments, in this book are very attractive but in practice give rise to several questions

The Determinants of Food Prices: A Case Study of Pakistan

Controlling prices is one of the major tasks for the macroeconomic policy-makers. The recent oil price hike that shifted the policy towards biofuels and some natural calamities increased food prices around the world. This paper analyses the demand- and supply-side factors that affect food prices in Pakistan. Long-run relationship is analysed using the Autoregressive Distributed Lag Model (ARDL) for the period 1970 to 2008. The result indicates that supplyside factors (subsidies and world food prices) have a significant impact on food prices , whereas demand-side factors, such as money supply, are the main cause of the increase in food prices in the short as well as the long run. The error correction is statistically significant and shows that market forces play an active role to restore the long-run equilibrium.Food Prices, ARDL Approach, Pakistan