The Pakistan Development Review
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Pakistan: Withholdingisation of the Economic System—A Source of Revenue, Civil Strife, or Dutch Disease+?
Full text linkThe paper takes an incisive shot at the systemic inadequacies
that have tiptoed into the economic order of the state over time via the
apparently innocuous mechanism of withholding taxes. Withholding tax—a
legitimate instrument of preponing the state revenues on clearly
identifiable chunks of incomes—has historically been resorted to by most
states, and to that extent it should be normal with Pakistan, too.
However, what has happened in Pakistan is that the tool of withholding
taxation has been used as a source of revenues way too large in scale,
size, scope and intensity. In addition to the pulling forward of tax
collection on clearly demarcated chunks of incomes, a large number of
transactions have also been roped into its nexus and then charged to tax
by presumptivising gross receipts as income—a withholdingisation of the
sorts not only of the tax system but of the entire economic system as a
weighty portion of ubiquitous withholding taxes gets stuck into the
pricing structure of the final goods and services produced in the
economy rendering them price-incompetitive in the international market.
This overwhelming withholdingisation of the economic system, it is
argued, has been brought about by a numb state continually operating
under, using a Freudian framework, the “pleasure principle” instead of
the “reality principle” with political governments complacently choosing
to continue harvesting quick bucks into the exchequer, pushing the
extractive system into a total disarray, the society into burgeoning
civil strife, and the economy to the Dutch Disease effect. JEL
Classification: H1 Keywords: Withholdingisation; Withholding Taxes,
Pakistan Tax System; Federal Board of Revenue; Civil Strife; Dutch
Disease Effect; Cost of Collection; Tax Refor
Competitive Structure and Bank Loan Rate in Pakistan’s Banking Industry
Full text linkThis paper estimates the relationship between loan price and
the number of banks in the corporate loan markets of Pakistan. An
original data set is constructed that includes loan price (interest
rate) and market structure (number of banks) in more than 300
geographical markets across Pakistan. Variation in market structure
(number of banks) along with variation in borrower and lender
characteristics is employed to identify the factors that affect interest
rates in loan markets. The findings based on regression result show that
a competitive structure influences market price as loan rates decline
when the number of banks increase in a market. Although the statistical
evidence goes in favour of the structure conduct hypothesis, the
findings are not robust across various functional forms. The detailed
analysis of the Credit Information Bureau data and institutional details
documented in this paper will be a useful reference for further research
on the Industrial Organisation of Banking in Pakistan. JEL
Classifications: L10, L11 Keywords: Price-concentration, Loan Price,
Industrial Organisation, Bankin
External Debt and Capital Accumulation Nexus: Evidence from Pakistan
Full text linkThe rising public debt burden is a common feature of
developing countries like Pakistan. This study is an attempt to
empirically analyse the external debt and capital accumulation nexus for
Pakistan from 1972 to 2016. The ARDL bound testing technique was
employed to estimate two models which incorporate different indicators
of external debt. Results indicate the existence of a negative
relationship between external debt to revenue ratio and stock of capital
that supports the debt overhang hypothesis for Pakistan. The debt
overhang hypothesis states that large accumulated debt leads to a
decrease in overall capital accumulation in an economy. Similarly, other
indicators of external debt, namely, external debt service to revenue
ratio, external debt to export ratio, and external debt service to
export ratio tend to bring a fall in stock of capital in Pakistan. Based
on its findings, the study suggests the need for better and productive
use of external debt in public sector development projects to foster the
capital accumulation process in Pakistan. JEL Classification: H63; H71;
E24; H63 Keywords: External Debt; Capital Accumulation; Human Capital;
ARDL
Oil Price Shocks, Systematic Monetary Policy and Economic Activity
Full text linkThis study quantifies the impact of oil price shocks and the
subsequent monetary policy response on output for Pakistan. It employs a
quarterly Structural Vector Auto-regression framework for the period
1993–2015. It first discovers that Hamilton’s (1996) Net Oil Price
Increase indicator appropriately reveals most of the oil price shocks
hitting Pakistan’s economy. We find that a contractionary monetary
policy, resulting from the oil price shocks, contributes to significant
output loss in Pakistan. After encountering the Lucas critique, the
present study finds that around 42 percent of the output loss is due to
the ensuing tight monetary policy. This suggests that the central bank
of Pakistan can reduce the impact of oil price shocks by reducing its
intervention in the market. JEL Classification: E1, E3, E5 Keywords: Oil
Price Shocks, Monetary Policy, Structural Vector Autoregressio
Volatility Modelling and Dynamic Linkages between Pakistani and Leading Foreign Stock Markets: A Multivariate GARCH Analysis
Full text linkIt is essential for financial institutions and academicians to
understand volatility spillover and financial market returns. However,
previous studies examined the effects of direct spillover only and
ignored those of the newly emerging stock markets. Therefore, this study
attempts to estimate the time-varying volatility of Pakistani and
leading foreign stock markets. It also tries to explore the direct and
indirect volatility spillover effect between Pakistani and eight leading
foreign stock markets. Daily data were used from nine international
equity markets (KSE 100, NIKKEI 225, HIS, S&P 500, NASDAQ 100, DOW
JONES, GADXI, FTSE 350 and DFMGI) for the period between 2005 and 2016.
The univariate GARCH and GJR models were employed for analysing
volatility, and the multivariate GARCH Diagonal BEKK model was used to
explore direct and indirect volatility spillover effects. In order to
analyse the volatility spillover effect during and after the global
financial crisis period, the data were categorised into two periods:
between 2005 and 2009 and between 2010 and 2016. The Chow break-point
test was also employed to identify structural breaks in return series
due to global financial crises. Direct and indirect spillover effects
were found between KSE100, S&P 500, NASDAQ 100, DOW JONES and DFMGI.
Keywords: Volatility, Spillover, Equity Market, Financial Crisis and
GARC
Moral Hazard, Monitoring and Punishment: Evidence from a Field Experiment
Full text linkThe existing literature establishes that there exists
inefficiency in energy consumption in Pakistan. In particular, with
regard to electricity consumption, the problem of moral hazard is
prevalent in the public sector. In this study, we observe this aspect by
focusing on the behaviour of consumers once they are held liable to
monitoring with the associated punishment mechanism. By providing
evidence from a field experiment, we make three conclusions. First,
individuals respond to both the monetary and non-monetary punishments.
Alternatively, with the introduction of punishments, they reduce moral
hazard with respect to electricity consumption. Second, the habitual
violators of rules reform their behaviour after they are made
accountable for their actions. Third, if appropriate monitoring systems
along with the associated punishment mechanism are introduced, we can
have beneficial effects in terms of resolving the energy crisis on the
aggregate level. JEL Classification: H83, D12, D00, D03, D04 Keywords:
Moral Hazard, Monitoring, Punishment, Electricity Consumption, Public
Secto
The Effects of Agglomeration on Socio-economic Outcomes: A District Level Panel Study of Punjab
Full text linkThis paper examines the variation of agglomeration across
districts over time in Punjab and analyses the effects of agglomeration
on socio-economic outcomes in terms of social inclusion and efficiency
of firms at the district level in Punjab. Earlier studies in this regard
faced multiple problems since they used cross-sectional data. To bridge
the gap, a newly constructed panel data from CMI is used. Factor
Analysis technique is used to analyse socialinclusion variable, in
addition to some other control variables as well. Data Envelopment
Analysis (DEA) with bootstrap technique (performed in R) is used to
calculate district-wise firm efficiency. The study argues that
agglomeration is a logical consequence of China Pakistan Economic
Corridor (CPEC) through an increase in the economic activity in various
districts of the province. The results show that district agglomeration
has a positive effect on the average district-wise efficiency of firms
and has a positive statistically significant relation with social
inclusion. Interesting implications arise from results, setting up
clusters in urbanised rather than highly urbanised areas under CPEC can
be a game changer for the economy of Pakistan especially Punjab since it
has significant potential positive effects on the economy of Punjab. JEL
Classification: D62, I38, L52, R13 Keywords: Agglomeration, CPEC, Social
Inclusion, Factor Analysis, Data Envelopment Analysis, Efficienc
Sources to Finance Fiscal Deficit and Their Impact on Inflation: A Case Study of Pakistan
Full text linkTheoretically, fiscal deficit is inflationary but the sources
of financing fiscal deficit may differ in terms of their impact on
inflation. Question arises that what should be the least inflation cost
source of financing? This study attempts to answer this question and
explore the long run relationship among the sources to finance fiscal
deficit and inflation. In so doing, the estimations have been done in
four stages on the basis of categorisation of the deficit financing
heads. In the first stage it has been tested that fiscal deficit along
with money supply are inflationary. In the second stage fiscal deficit
is bifurcated into two components, domestic borrowing and external
borrowing for fiscal deficit. In the third stage, domestic borrowing is
further divided into two heads, bank and non-bank borrowing. While in
the fourth and last stage, bank borrowing is further categorised into
two parts, borrowing from scheduled banks and central bank, and non-bank
borrowing which comprises borrowing from National Saving Scheme for
budgetary support. The Johansen Cointegration Technique is used for the
first stage of estimation, while Auto Regressive Distributed Lag Model
is employed for the rest of the three stages. The study finds that there
is a long run relationship among sources of financing fiscal deficit and
inflation. Inflation is positively affected by domestic borrowing, bank
borrowing and borrowing from central bank, while central bank borrowing
is more inflationary in nature. Consequently, fiscal deficit should be
financed through external sources, non-bank and scheduled bank
borrowings. JEL Classification: H62, H74, E31 Keywords: Deficit, State
and Local Borrowing, Inflatio
School Quality and Parental Schooling Decisions for Their Children: Public and Private Schools in Rural Pakistan
Full text linkThis study uses the Pakistan Rural Household Survey 2004-5
(PRHS), a rich set of households and school data, to examine parents’
schooling decision in rural Pakistan. Nested logit regressions are used
to quantify the determinants of child school attendance. The analysis
confirms that the greater the number of schools (public or private) in
the local communities the higher is the attendance. Lower school
attendance of boys seems to be the outcome of lower school quality more
than it is for girls. A marginal increase in school quality correlates
with increased school attendance in government schools more than in
private schools. Nearly all school quality variables including control
for number of schools in a community stand insignificant for girls. This
shows that other factors might be of more importance than school quality
of local schools for girl’s low attendance in rural Pakistan. Besides,
parental education, especially mother’s education, and household income
have strong positive impact on child school attendance. The greater the
number of children in the household the lower is the child school
attendance. Credit constraint seems not to be problematic as the
estimated effect is statistically insignificant. The size of landholding
seems to be important only in the case of girls schooling. JEL
Classification: I21, I25, D13, C25 Keywords: Demand for Schooling,
Public Education, Private Education, Pakista