13 research outputs found
Reforming Institutions: Where to Begin?
Institutions promote growth—this view now holds firm ground. The task then is to ‘engineer’ growth promoting institutions. Endogeneity characterises institutions, for example, groups enjoying political power influence economic institutions but political power itself is a function of wealth. The question then is: what to reform first? History stands witness that generally the societies with extreme inequality and a heterogeneous population tend to evolve institutions that restrict access to economic opportunities for the poor which in turn constrains economic development. On the other hand societies with greater equality and homogeneous population typically enjoy growth-promoting institutions. Institutional reforms should therefore begin with institutions that serve to create or perpetuate inequality and heterogeneity in the society. We argue that the four different kinds of educational systems in operation in Pakistan are a major source of creating and perpetuating inequality and heterogeneity in the population. Access to a single and common educational system will open-up similar opportunities of higher education and job attainment for all the citizens, thereby reducing inequality. Diverse educational systems promote different sets of beliefs while a uniform system forges beliefconvergence in the society that in turn facilitates agreement on a common set of institutional reforms. Therefore it is the educational system that should be the first to reform. We also argue that in Pakistan, unlike some European countries in the 17th century, neither commercial interest nor fiscal constraints can force the de jure power to reform institutions. Typically, large commercial interests in Pakistan have thrived on favours from the de jure power and therefore have no interest in changing the system. Foreign aid eases the fiscal constraints from time to time relieving government of the need to reform institutions. The thought of a revolution of some kind is still a far cry, the society having no such inclination. The alternative then is the gradual approach preferred by North, Acemoglu and Rodrik. This gradual approach suggests the area of educational reforms.Institutional Evolution, Institutional Change, Human Behaviour
Reforming Institutions : Where to Begin?
No society is devoid of institutions but many live with poor institutions. Institutions promote growth. This is a view now held firmly and widely. The task then is to engineer growth-promoting institutions. Endogeneity characterises institutions; for example, groups enjoying political power influence economic institutions, but political power itself is a function of wealth. Given endogeneity, if the task is to design institutional reforms, the question then arises, as to what to reform first. We use the theories of institutional evolution put forth by Douglas North, Darron Acemoglu and Dani Rodrik and the historical experiences of different countries in the context of development (or non-development) of institutions, to determine the starting-point of institutional reforms, if the objective is to design institutional reforms. We argue that in Pakistan, neither large commercial interest nor fiscal constraints can force the de jure power to reform institutions. Typically, large commercial interests in Pakistan have thrived on favours from de jure power, and therefore do not have teeth. Given strategic interests of foreign powers, foreign aid will alleviate the fiscal constraint and the ruler-citizens bargainthough reforming institution in exchange for tax revenue will remain a dream. The country does not seem ready for a revolution either; the thought process that typically precedes revolutions seems to have barely begun. The alternative, that remains, then is the gradualist approach preferred by North, Acemoglu, and Rodrik. Institutional reforms in Pakistan should begin with reform of the educational systemthe introduction of a common educational system for all and sundry up to a certain level. Two reasons make us chose the educational system as the candidate to start the process of institutional reform. First, a common educational system will produce a shared value system which, in turn, will reduce the heterogeneity in the society. Lesser heterogeneity in society will then facilitate an agreement over the minimal set of institutional reforms. Second, politicians being myopic, the de jure power is more likely to concede to the demand for reform of the educational system as compared to the demand to, say, put an end to rent-seeking. The former will affect the de jure power a generation hence, while the latter will affect them today.Institutional Evolution, Institutional Change, Human Behaviour
Pass-through of Change in Policy Interest Rate to Market Rates
This paper examines the pass through of the change in policy interest rate of the central bank of Pakistan to market interest rates. The market rates examined include KIBOR, six month deposit rate and weighted average lending rate. More or less complete pass-through of the change in policy rate to KIBOR is observed within one month. However, the magnitude of change in policy rate to deposit and lending rate is not only low but is slow as well. The pass-through to the weighted average lending rate is 47 percent and occurs with a lag of one to one and half year. The pass-through to the deposit rate is only 16 percent and occurs with a lag of one year. The asymmetry between the magnitude of pass-through to lending and deposit rates has served to increase the interest margin of the banks. The slow pass-through to the lending and deposit rate put limits on the effectiveness of interest rate as a policy tool. The pass-through, and hence the effectiveness of monetary policy will increase if all the lending and deposit rates are floating in nature and are quoted as KIBOR-plus and KIBOR-minus respectively.
Reforming Institutions: Where to Begin?
No society is devoid of institutions but many live with poor institutions. Institutions promote growth. This is a view now held firmly and widely. The task then is to ‘engineer’ growth-promoting institutions. Endogeneity characterises institutions; for example, groups enjoying political power influence economic institutions, but political power itself is a function of wealth. Given endogeneity, if the task is to design institutional reforms, the question then arises, as to what to reform first. We use the theories of institutional evolution put forth by Douglas North, Darron Acemoglu and Dani Rodrik and the historical experiences of different countries in the context of development (or non-development) of institutions, to determine the starting-point of institutional reforms, if the objective is to design institutional reforms. We argue that in Pakistan, neither large commercial interest nor fiscal constraints can force the de jure power to reform institutions. Typically, large commercial interests in Pakistan have thrived on favours from de jure power, and therefore do not have teeth. Given strategic interests of foreign powers, foreign aid will alleviate the fiscal constraint and the ruler-citizens bargain—though reforming institution in exchange for tax revenue will remain a dream. The country does not seem ready for a revolution either; the thought process that typically precedes revolutions seems to have barely begun. The alternative, that remains, then is the gradualist approach preferred by North, Acemoglu, and Rodrik. Institutional reforms in Pakistan should begin with reform of the educational system—the introduction of a common educational system for all and sundry up to a certain level. Two reasons make us chose the educational system as the candidate to start the process of institutional reform. First, a common educational system will produce a shared value system which, in turn, will reduce the heterogeneity in the society. Lesser heterogeneity in society will then facilitate an agreement over the minimal set of institutional reforms. Second, politicians being myopic, the de jure power is more likely to concede to the demand for reform of the educational system as compared to the demand to, say, put an end to rent-seeking. The former will affect the de jure power a generation hence, while the latter will affect them today.Institutional Evolution, Institutional Change, Human Behaviour
Procyclical Monetary Policy and Governance
Weak governance adversely affects firm’s net worth and consequently the value of its collateral. This negative impact on the collateral reduces the external credit available for importing inputs constraining potential output. As a result, a stronger procyclical monetary policy stance is adopted for protecting the exchange rate and hence arresting the degradation in the collateral constraint.Collateral Constraints; Governance; Monetary Policy
Reforming Institutions: Where to Begin?
Institutions promote growth—this view now holds firm ground.
The task then is to ‘engineer’ growth promoting institutions.
Endogeneity characterises institutions, for example, groups enjoying
political power influence economic institutions but political power
itself is a function of wealth. The question then is: what to reform
first? History stands witness that generally the societies with extreme
inequality and a heterogeneous population tend to evolve institutions
that restrict access to economic opportunities for the poor which in
turn constrains economic development. On the other hand societies with
greater equality and homogeneous population typically enjoy
growth-promoting institutions. Institutional reforms should therefore
begin with institutions that serve to create or perpetuate inequality
and heterogeneity in the society. We argue that the four different kinds
of educational systems in operation in Pakistan are a major source of
creating and perpetuating inequality and heterogeneity in the
population. Access to a single and common educational system will
open-up similar opportunities of higher education and job attainment for
all the citizens, thereby reducing inequality. Diverse educational
systems promote different sets of beliefs while a uniform system forges
beliefconvergence in the society that in turn facilitates agreement on a
common set of institutional reforms. Therefore it is the educational
system that should be the first to reform. We also argue that in
Pakistan, unlike some European countries in the 17th century, neither
commercial interest nor fiscal constraints can force the de jure power
to reform institutions. Typically, large commercial interests in
Pakistan have thrived on favours from the de jure power and therefore
have no interest in changing the system. Foreign aid eases the fiscal
constraints from time to time relieving government of the need to reform
institutions. The thought of a revolution of some kind is still a far
cry, the society having no such inclination. The alternative then is the
gradual approach preferred by North, Acemoglu and Rodrik. This gradual
approach suggests the area of educational reforms. JEL classification:
D02, D03, P16 Keywords: Institutional Evolution, Institutional Change,
Human Behaviou
Pass-through of Change in Policy Interest Rate to Market Rates
Monetary policy has been aggressively used by the central Bank
of Pakistan, in this decade, first to bolster growth and then to contain
rampant inflation. Despite the sufficiently tight monetary policy that
has remained in vogue in recent times, the inflation is still around 20
percent. This has raised questions about the effectiveness of monetary
policy. One possible reason for the lesser effectiveness, if not
failure, of monetary policy in taming inflation could be that in recent
times, inflation was primarily supply driven and that the monetary
tightening was in part offset by fiscal expansion, on the back of heavy
bank borrowing by the government. However one cannot rule out the
possibility that market imperfections might have also impeded the
effectiveness of monetary policy in taming inflation to the desired
extent. Incomplete and slow pass through of changes in policy interest
rate to deposit rate and lending rate is a kind of imperfection that
constrains the effectiveness of monetary policy. This study examines the
pass through of policy interest rate to different market rates. Monetary
theory predicts that the change in policy interest rate influences the
cost capital which in turn influences consumption, savings, investments,
and hence output. However if the impact of the change in policy rate on
the cost of capital is less than one for one or if the change in policy
rate fails to influence the cost capital immediately then the impact on
output would become visible only with a certain lag and the impact would
be less than one for one. This implies that if for example only 70
percent of the change in policy rate is passed on to cost of capital,
then to manage an increase of 100 basis points in cost capital the
policy rate should be raised by 143 basis points. This example serves to
emphasise that for effective monetary management knowledge of the
magnitude of passthrough of policy rate and the lag structure with which
the policy rate influences cost of capital is important. Substantive
empirical evidence confirms that changes in policy interest rate are
transmitted to the output with a certain lag and that the pass-through
of changes in policy rate to output or to other elements of the
transmission channel may be less than one for one. Given the policy
implications of the information, on the magnitude of pass through and
the lag structure with which the policy rate influences different market
rates, this Paper seeks to measure the pass-through of the changes in
six month Treasury bill rate to six month KIBOR, six month weighted
average deposit rate and weighted average lending rate. The study is
focused on Pakistan
Procyclical Monetary Policy and Governance
Weak governance adversely affects firm’s net worth and consequently the value of its collateral. This negative impact on the collateral reduces the external credit available for importing inputs constraining potential output. As a result, a stronger procyclical monetary
policy stance is adopted for protecting the exchange rate and hence arresting the degradation in the collateral constraint
What Determines Private Investment? The Case of Pakistan
This study is an attempt to analyse the determinants of private investment in Pakistan over the period 1972-2005. The ARDL co-integration approach is employed to check the existence of a long-run relationship as well as short-run dynamics of investment. The results show that most traditional factors have little or no impact on private investment. These results may support the idea that non-traditional factors such as quality of institutions, governance, entrepreneurial skill, etc., are prerequisites for private investment to flourish. We find partial support for the accelerator principle and the crowding-out hypothesis in the case of Pakistan. However, the hypothesis that the volume of the funds is as important as the cost of the funds used in financing private investment and the McKinnon-Shaw hypothesis are not verified in the case of Pakistan