This study examines the impact of Economic Policy Uncertainty (EPU) on the consumer confidence index (CCI) in Pakistan. Using a sample from the start of 2012 up to February 2020, a vector error-correction model is used to gauge the impact of EPU on CCI. Our results show that a shock to EPU in Pakistan affects CCI negatively and significantly. The shock persists for a span of more than 20 forecast horizons, informing economic policy makers in Pakistan that sudden changes in the stance without proper communication can deteriorate consumer confidence. This is important as consumer confidence in Pakistan accounts for not only the current economic situation, but expected changes in key macroeconomic variables which is usually a key consideration when forward-looking policies are devised. Our results remain robust to alternate Choleski specifications and lag lengths in the model.
KEYWORDS: Economic Policy, Pakistan, uncertainty, consumer confidence, VECM, IRFs, VDCs.

JEL: E32, H00, H31.

This paper examines the impact of remittances on output volatility through the channel of financial development using data for 158 countries from 1971 to 2017. We estimate the role of financial development by looking at multiple features of financial institutions, such as depth, access and efficiency. We used multiple indicators as a proxy of financial development in the remittance-output volatility nexus and employed System Generalized Method of Moments (GMM) and Fixed Effects Instrumental Variable (FEIV) models. Our findings are robust across specifications. We find a significant positive impact of all indicators of financial development on the remittance-output volatility relationship. The findings suggest that multifaceted financial development is needed for the effective management of output volatility through remittance inflows.
KEYWORDS: Output volatility, remittances, financial developmen, remittance-output volatility nexus.

JEL: C33, F24.

International trade plays a pivotal role in growth and development. The use of ICT is profoundly changing the landscape for international trade and expands opportunities especially for developing countries. The key objective of this study is to investigate the effects of different ICT capacities on the extensive and intensive margins of firm-level exports using micro-data of manufacturing firms operating in selected South Asian countries. We employ the Probit and fractional response models as estimation techniques. Findings of the study reveal that different ICT capacities are positively associated with both the extensive and intensive margins of firm-level exports, and our results are robust to the alternative empirical specifications. These results have important implications for designing the export promotion policies in selected South Asian countries. Hence, policy practitioners in these countries should encourage firms to invest in ICT capacities to boost their export performance.
KEYWORDS: Regional economic integration, ICT, Intensive Margin, Extensive Margin, Manufacturing Firms, South Asia.

JEL: F14, F23, D22.

Predicting the ebb and flow of stock markets is a complex and challenging exercise owing to the disruptive and uncertain behavior of stock prices. The COVID-19 pandemic is an example of an event that, had a drastic impact on global stock markets, due to business activities and trading being severely affected. It is important, therefore, to be able to predict how stock markets behave in a crisis period. We find that stock markets obtain the worst returns in countries where there are higher reported positive cases of coronavirus. This study employs adaptive neuro-fuzzy inference systems (ANFIS), comprising of a controller and the stock market process, to predict the behavior of selected stock indices. After training ANFIS and evaluating the resultant data, we estimate statistical errors and found that 100 training epochs provide marginally better results. To test the accuracy of our results, we used hit rate success and report that the neuro-fuzzy system predicts stock market trends with an average accuracy of 65.84%, an improvement over earlier techniques reported in the literature. Finally, we compute the rate of return using a buy-and-hold strategy and a neuro-fuzzy system, and identify that market indices outperform by employing the proposed method.
KEYWORDS: Stock market index, COVID-19, Neuro-fuzzy, forecasting.

JEL: C53, E17, G11, G12.

With rising growth rates and per capita income levels on the Indian subcontinent, foreign direct investment in the region, especially through mergers and acquisitions, has increased over the past decade. Using transaction data regarding the industry affiliation of the target and acquiring firms, deal size, deal structure, and deal completion rates from a worldwide M&A database compiled by Thomson Reuters’ Financial Services, this article aims to provide contemporary and comparative information on merger and acquisition (M&A) activity in India, Pakistan, Bangladesh, and Sri Lanka over the last decade, 2010-2019. The largest numbers and values of mergers occurred in India. Surprisingly, Sri Lanka had the second largest number of M&A deals, followed by Pakistan and Bangladesh. Pakistan accounted for the second highest transaction value, followed by Bangladesh and Sri Lanka. The Sri Lankan M&A market had a high ratio (60 percent) of Sri Lankan firms acquiring other Sri Lankan firms, while in Bangladesh, non-Bangladeshi companies accounted for ninety-three percent of the value of all large M&A deals. Future trends, important caveats, policy issues, and implications for managers planning M&A deals in the region are presented.
KEYWORDS: Pakistan, Mergers and Acquisitions, transaction data.

JEL: G34.

It is essential that policymakers consider cyclical changes in output. Monthly industrial production is one of the most important and commonly used macroeconomic indicators for this purpose. However, monthly estimates of industrial production are not available for Pakistan. Instead, policymakers rely on a large-scale manufacturing (LSM) index that accounts for only 10 percent of GDP. Another limitation of this index is that it accounts primarily for private sector industry, leaving out the direct public sector presence in industrial production. Economic policymakers rely heavily on the LSM index to gauge economic activity in Pakistan. In this study, we compute a new industrial production index (IPI) that extends to the whole industrial sector in Pakistan, incorporating additional information that the LSM index misses. Post-estimation, we build seven econometric models reflecting conditions in the real, financial, and external sectors to estimate year-on-year changes in the new IPI. Our results show that the root mean square error of the ARDL model reflecting financial conditions is lowest of the models tested, which included AR, VAR, and BVAR, across all horizons.
KEYWORDS: Economic indicator, industry studies, econometric forecasting, Pakistan.

JEL: L600, C80, C530.

Expanding home-ownership poses a fundament financial challenge arising out of the long-term nature of the asset, which calls for the development of institutions and markets to facilitate the flow of long-term funds. Development of the secondary mortgage market would alleviate classical maturity mismatch and liquidity issues. The public sector can provide an enabling environment with sound macroeconomic policies, corporate governance, rule of law, and enforceability of contracts. This study draws policy implications using the empirical evidence on the determinants of mortgage depth and penetration across countries. A large part of the variation in these two dimensions across countries is explained by the level of their financial development. Development of long-term sources of funds intermediated through specialized institutions seems particularly important, as we find that the development of pension funds, which are a source of long-term funding, is strongly associated with mortgage market development. Monetary and macro-economic stability, as indicated by a low and stable rate of inflation, appears to be a strong predictor of mortgage market development. We also detect a positive relationship between the degree of competition in the financial sector and mortgage market development.
KEYWORDS: House financing, mortgage markets, securitization, affordable housing, Pakistan.

JEL: G21, G28, G50.

This study investigates the impact of various fiscal policy instruments on the income inequality of Pakistan using an Auto Regressive Distributed Lag (ARDL) model on annual data. We find that direct taxes reduce income inequality, measured using the Gini index, while indirect taxes increase disparities. As the major portion of tax revenues are indirect taxes, the current tax regime of Pakistan does not achieve income redistribution. Similarly, development expenditures have significantly reduced income inequality, likely through the creation of employment opportunities. On the other hand, the overall fiscal deficit increases income inequality, due to a rising public debt financed by (regressive) indirect taxes. This study suggests that in the case of Pakistan, where direct taxes are low, a large shadow economy exists, and weak tax administration prevails, an increase in development expenditures and broadening of the tax base of direct taxes should be the main fiscal policy tools for income redistribution. Moreover, persistent high fiscal deficits in the long run should be avoided. Finally, governments should reduce educational inequalities and promote democratic values in the country in order to promote greater fairness in distribution of income.
KEYWORDS: Fiscal policy, Gini index, taxes, development expenditures, ARDL, Pakistan.

JEL: E62, D63, H27.

Emerging research in empirical economics posits a question on the relation between underlying risk preferences and reflective cognitive ability. In an experimental setting, a preliminary sample of 260 participants undergo a series of incentivized choice experiments to elicit risk preferences and a Cognitive Reflection Test (CRT) to obtain estimates of their reflective ability. We sidestep potential biases by using a Fechner error specification along with a contextualized version of the utility function. Individuals who are more likely to avoid risky outcomes have significantly lower scores on the CRT. The analysis validates a prominent relationship spanning the economics and psychology literature and suggests a potential direction of causal inference for future research.
KEYWORDS: Risk, cognitive reflective ability, behavioral economics, Pakistan.

JEL: C36, C91, D81.

Pomegranates are one of the most important fruits in the Kandahar province of Afghanistan, which is famous for its pomegranates around the world. Pomegranates play a vital role in the socio-economic life of those who grow them. This study empirically analyzed the value chain of pomegranate production in Kandahar using primary and secondary data. Primary data was collected from 200 pomegranate growers in the Dand, Panjwai, and Daman districts of Kandahar province. These growers were selected using a random sampling method and the data was collected using a structured, pre-tested questionnaire. The secondary data was collected from traders, local collectors, and exporters of pomegranates involving 30 pomegranate selling companies. The value chain analysis shows that from the main four chains of pomegranate production (farmer, collector, trader, and exporter), the main actors are the exporters who process pomegranate and add the greatest value by investing in marketing, shipment, and warehousing and receive highest profit margin among the stakeholders. Exporters of pomegranates to Europe earn an average of 66 Afghani per kg. The next greatest beneficiaries are the growers or farmers who earn an average of 23 AFN on each kg. Local collectors who buy pomegranates from farmers earn the least, at an average of 13 AFN per kg over the costs of processing and transportation.
KEYWORDS: Production, labor, cost, profit margin, farmers, Afghanistan.

JEL: D4, D46.

Given the importance of food industries in Pakistan, this study analyzes their cost structure by estimating the transcendental logarithmic cost function. The study also considers elasticity of substitution along with own-price elasticity and cross-price elasticity. Four factor inputs, i.e., labor, capital, energy, and materials, are used to estimate the cost function. The results indicate that materials account for the highest share of the cost. The elasticity of substitution of materials for capital and energy is also weak. The own-price elasticities indicate that the demand for materials is least responsive to a change in its own price while the demand for other inputs varies with price. The cross-price elasticities show that labor, capital and energy are substitutes for each other. The output elasticity of cost demonstrates the presence of economies of scale.
KEYWORDS: Translog cost function, elasticity of substitution, cross-price elasticity, Allen’s partial elasticity.

JEL: D24, Q11.

The study attempts to seek evidence on regional economic integration in driving labor productivity convergence in low- and middle-income East Asian states towards Japan, the country assumed to be the regional technology leader. The labor productivity convergence of low- and middle-income East Asian countries towards their rich neighbor is modelled against their national levels of innovation, technology spill-overs from the regional economic leader and their productivity differential with the frontier country. The hypothesized relationship is empirically verified for seven East Asian states, using a robust econometric approach. The time-series test estimates under Error Correction Representation yield absolute support in favor of valid productivity convergence occurring between Japan and its low-and middle income neighbors. However, panel data estimates generated with better statistical power outperform the time-series test findings and these results reject the significance of Japan as the regional productivity growth driver for its regional developing states.
KEYWORDS: Regional economic integration, productivity convergence, growth spill-over, time-series error correction model, panel cointegration estimators.

JEL: H3, E620, F15.

Neoclassical price theory, and its extension to IMF country advice, argues that balance-of-payments crises such as Pakistan’s are better resolved by depreciating the exchange rate, making exports cheaper and imports dearer. We argue that a partial equilibrium analysis of just the tradeable goods market on the current account side ignores the capital market on the capital account side, where an increase in outflows allows no equilibrium value for the exchange rate, through a phenomenon dubbed ‘depreciationary expectations’, akin to inflationary expectations. This phenomenon will not allow the exchange rate to settle at an equilibrium level, leading to a vicious downward cycle. In such a case, capital controls may well be needed to counter the downward cycle, allowing a return to growth.
KEYWORDS: Balance of payments, exchange rates, equilibrium analysis, Pakistan.

JEL: D51, F38.

This paper examines patterns of export creation and diversion by analyzing Pakistan’s trade agreements at the two-digit industry level for all 88 export-oriented industries. We compare the net change in exports with nine free trade agreement (FTA) partners and the top 15 partners with most-favored nation (MFN) status. We find that 45 industries account for USD4.1 billion in export creation across all Pakistan’s FTA partners. Here, net exports increase after FTAs with both FTA and MFN partners. Conversely, export diversion worth USD137 million occurs in 10 industries with all FTA partners as net exports to FTA partners rise while net exports to MFN partners fall. In the same manner, we find that net exports in 33 industries declined by USD500 million with FTA and MFN partners. The total net exports addition after FTAs was USD3.5 billion or, on average, USD350 million annually, accounting for about 1.4 percent of Pakistan’s total annual goods exports. On average, Pakistan has successfully created exports in half its export-oriented industries, although highly subsidized industries exhibit either export diversion or a net decline with both MFN and FTA partners. A difference-in-difference analysis shows that exports to China and Mauritius rose significantly while the remaining seven FTA partners did not have a significant increase in exports after the FTAs were implemented. In view of these findings, we suggest revisiting the policy of export subsidies.
KEYWORDS: Free trade agreements, export creation, export diversion, industries.

JEL: F14, F1, F68.

The Chinese yuan is poised to become an international currency and play a major role in global finance which will have significant consequences for countries, like Pakistan, which have recently seen large inflows of the Chinese capital. This paper presents empirical evidence of the evolving nature of the yuan, as reflected in the statistical distribution of the exchange rate, with a particular focus on the period after the initiation of Belt and Road Initiative (BRI) projects. We observe that the currency’s empirical distribution exhibits tell-tale characteristics of a managed currency. Over time, though the yuan’s statistical properties have converged towards those of other hard currencies, they still remain distinct. We find that there is a long-term trend of increasing correlations over time as indicated by the Dynamic Conditional Correlations (DCC), which is pronounced in the post BRI period. Furthermore, the yuan is increasingly being influenced by other major currencies in the recent periods, indicating increasingly integration of the currency in global foreign exchange markets. This article discusses the implications of the rise of the yuan for the management of Pakistan’s foreign currency reserves and exchange rate: it should be driven by the yuan’s evolving convertibility, credibility and liquidity.
KEYWORDS: International currency, global finance, Pakistan, yuan.

JEL: F31, F39.

We examine the impacts of a sustainable urban transport initiative, the first Bus Rapid Transit System launched in Lahore, Pakistan in year 2013. We measure the socio-economic and environmental impacts of the BRT using a questionnaire-based survey that collected information on customers’ travel purpose, travel frequency, travel time, mode access, previous travel mode choices (pre-BRT) and travel mode choices at present. We estimate that, on average, a BRT passenger saves about 46 minutes per day on a single trip. However, the modal shift from personal automobiles to the BRT system is found to be only 4 percent, i.e., significantly less than the shift found in other worldwide BRT systems. Moreover, we estimate the reduction in the number of private vehicles on roads, total distance travelled in km and associated travelling costs and, subsequently, the reduction in the carbon emissions. We conclude that the Lahore BRT transit system needs to be expanded to other parts of the city.
KEYWORDS: Urban transport, Bus Rapid Transit System, travel time saving, vehicle costs saving, environmental emissions reduction, Lahore, Pakistan.

JEL: R49.

We compare Pakistan's energy consumption structures to selected East Asian economies with a view towards ensuring an adequate supply of power for economic catch-up and, at the same time, meeting the greening goals envisioned by the United Nations Framework Convention for Climate Change. The evidence shows that Pakistan relies significantly less on non-renewable energy to meet its energy demands compared to China, Japan, South Korea, Malaysia, and Thailand, while its dependence on fossil fuels has been rising rapidly. Using data for Pakistan from 1960 to 2015, we deployed panel co-integration and Granger causality tests to analyse selected East and Southeast Asian countries before exploring what it will take for Pakistan to develop its renewable energy (RE) sector. The evidence shows that catching up economically with these countries through rapid GDP per capita growth will exacerbate Pakistan’s current energy imbalance, thereby aggravating greenhouse gas (GHG) and carbon dioxide (CO2) emissions. We argue that Pakistan enjoys strong endowments to avert this problem, and hence, it should strategically focus on the development of RE resources, especially solar and wind energy, but only after taking account the relevant costs
KEYWORDS: Renewable energy, thermal energy, economic growth, hazardous emissions, Pakistan.

JEL: Q41, Q49.

We test the technical efficiency, measured by the degree of integration, of agriculture markets for five crops in the Punjab province of Pakistan using daily wholesale market prices from the Agriculture Management Information System (AMIS). We find that potato, onion and mango markets are well integrated both horizontally and vertically, with the speed of price adjustment in most cases (mango is the exception) being very rapid. We also find that kinnow and basmati rice markets are both vertically fairly well integrated. Furthermore, we find that trends in cropping patterns over the period 2000 to 2014 are in line with the changing market demand and government price interventions. The reforms introduced by the Punjab Agriculture Marketing Regulatory Authority (PAMRA) Act 2020, aimed at increasing competition in agriculture markets, have the potential to significantly improve economic efficiency.
KEYWORDS: price transmission, Agricultural prices, market integration, market efficiency, agriculture marketing.

JEL: Q110, Q111, Q113, C110.

This article studies the supply and demand of major Pakistani crops. We estimate supply elasticities using a Nerlovian partial adjustment process and demand elasticities using the Deaton and Muellbauer Almost Ideal Demand Systems (AIDS). We use secondary data from various Household Integrated Economic Surveys and Agricultural Statistics of Pakistan. Our estimated supply elasticities with respect to price lie between 0.1 and 0.5 for all crops. Pulses tend to have higher elasticities than traditional crops such as wheat and rice. Demand elasticities with respect to price tend to be inelastic, with the exception of poultry and fruit which appear to be luxury items. Pulses are income inelastic, implying that consumption may not rise significantly as per capita incomes and that the introduction of yield enhancing varieties will lead to lower prices
KEYWORDS: Supply, demand, major crops, elasticity, Pakistan.

JEL: Q11, Q19.

This article empirically examines the effects of foreign aid on economic freedom while considering the mediating role of political institutions. We contribute to the literature in two ways. First, we provide an empirical analysis of how different types of foreign aid affect the economic freedom of the receiving country. Second, we provide evidence regarding how political institutions mediate the foreign aid/economic freedom relationship. We use IV and GMM techniques to test a model using data from 40 developing countries covering the time period 1985 to 2016. Our analysis yields three main findings. First, democratic and politically stable countries enjoy more economic freedom. Second, foreign aid’s net effect is to reduce economic freedom, whether we consider official development assistance (ODA) or net official assistance (NOA). Finally, economic freedom increases with both types of foreign aid if the receiving country’s political institutions are more democratic and/or durable.
KEYWORDS: Balance of payments, panel data, economic freedom, Foreign aid, political institutions.

JEL: F35, P48, Do2, C23.