Volatility in Discretionary Public Spending and Economic Growth: A Cross Country Analysis

Volatility in discretionary public spending has diverse implications for the overall economic performance of economies. In this study, we examine the impact of volatile non�systematic discretionary public spending on economic growth. By employing cross-country data of 74 developed and developing economies, we find that volatility in non-systematic discretionary public spending has an adverse impact on economic growth. In particular, such impact is severe in the case of less developed economies. Our findings are robust to the problem of endogeneity. In order to ensure the accuracy of the results, we conduct sufficient sensitivity analysis by incorporating a bunch of potential control variables. In most of the cases, the results with regard to the policy volatility remain intact. This suggests that effective spending rules, i.e. permanent numerical limits, should be imposed on budgetary aggregates to restrain governments from the volatile use of discretionary spending. JEL Classification: H3; H5 Keywords: Volatility in Discretionary Public Spending, Economic Growth, Effective Spending Rule

Understanding Business Cycle Fluctuations in Pakistan

Notwithstanding the level of improvement in understanding the complexities of an economy, it is now well accepted that the ultimate incidence of various policy interventions leads to varied outcomes in terms of magnitude and persistence depending upon the structure of the economy. The objective of the present study is to disentangle the relative contributions of various exogenous and domestic shocks that contribute to business cycle fluctuations in Pakistan. The study is based on the New-Keynesian Open economy model, which is an extended version of (Gali & Monacili 2005). Keating’s two-step approach (1990, 2000) is employed to capture the dynamic behaviour of the variables of interest. Impulse response functions, along with forecast error variance decomposition analyses, are used to gain useful insights into the understanding of the transmission mechanism of policy and non-policy shocks. It is observed that fiscal policy does matter, at least in the short-run. The interest rate shock leads to the exchange rate appreciation thereby confirming the exchange rate puzzle. In response to adverse supply shocks, the Monetary Authority responds with a monetary contraction that prolongs the recessionary periods. Furthermore, it has a limited power to control inflation as inflation in Pakistan stems from supply-side factors as well as fiscal dominance. JEL Classification: C32, E52, E62, F41 Keywords: Open Economy, New Keynesian Model, Rational Expectations, Exchange Rate Puzzle

External Debt and Capital Accumulation Nexus: Evidence from Pakistan

The 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.

Exchange Rate Misalignment and Economic Growth in Pakistan: The Role of Financial Development

This study endeavours to examine empirically how real exchange rate (RER) misalignment affects economic growth in Pakistan. In this regard, we have not only estimated the direct impact but also the indirect impact of misalignment on economic growth by using the financial development channel. We have used time series data ranging from 1980 to 2016 to carry out the empirical analysis. After testing the time series properties of the selected variables, we computed long run equilibrium RER later used to calculate RER misalignment. Finally, we estimated the impact of misalignment on per capita economic growth, both direct and indirect. Our results reveal an adverse impact of RER misalignment on economic growth. However, we report that financial development helps in minimising the adverse impact of RER misalignment, though not fully eliminating it. Based on the empirical findings, the study suggests that exchange rate policies need to be managed more cautiously. Moreover, the financial sector development needs to be strengthened which may help in fully alleviating the adverse impact of RER misalignment on economic growth. JEL Classification: F31, GOO, O47 Keywords: Real Exchange Rate Misalignment, Financial Development, Economic Growth, FMOLS

Assessing the Role of Money versus Interest Rate in Pakistan

We have empirically examined the role of monetary aggregate(s) vis-à-vis short-term interest rate as monetary policy instruments, and the impact of State Bank of Pakistan’s transformation into the latter on their relative effectiveness in terms of inflation in Pakistan. Using indicators of ‘persistent changes’ in the underlying behaviours of variables of interest, we found that broad money consistently explains inflation in (i) monetary (ii) transitory and (iii) interest rate regimes. Though its role has receded while moving from the transition to the interest rate regime, the interest rate instrument seems to be positively related to inflation, a phenomenon commonly known as price puzzle. In light of these findings, we recommend that the role of money should not be completely de-emphasised. JEL Classification: E31, E52. Keywords: Monetary Policy Instruments, Price Puzzle, ARDL, Pakistan

The Economic Analysis of Law in Pakistan

One of the most important functions of law is to assign rights and liabilities in such a way that disputes do not arise. The failure to prevent disputes in a society indicates that the structure of the law is inefficient. Since the focus of law and economics is on efficiency (see Box 1) and how people respond to incentives, one way to carry out the economic analysis of the law is to use the framework of market capitalism. Driven by the idea of the invisible hand, the fundamental point of capitalism is that individuals should be able to use their capital freely, without the state’s interference. It implies that individuals’ legal ability to move capital should be frictionless.

Katy Gardner and David Lewis. Anthropology and Development: Challenges for the Twenty-First Century. London: Pluto Press. 2015 (Second Edition). 240 page. Price £24.99

The book entitled Anthropology and Development: Challenges for the Twenty�First Century by Gardner and Lewis (2015) is the second edition of their previous book entitled Anthropology, Development and the Post-Modern Challenge, which was published in 1996. This second book incorporates recent issues that emerged since the first edition was released two decades ago. As the world keeps on changing, there are always new pressing issues that exert a significant influence upon development work to which an anthropological perspective has much to contribute.

Doing Taxes Better: Analysing the PSDP

The Pakistan Institute of Development Economics (PIDE) organised a conference on the development policy of Pakistan with a focus on planning and public investment policy. At the Conference, a PIDE study entitled, Doing Development Better1 was launched and discussed. The key findings of the conference are listed below:

Analysing the National Tariff Policy

What is the role of import tariffs in a modern economy? Tariffs may seem an easy source of revenue, but they do have real consequences for the economy. The use of tariffs makes imported goods more expensive. It can be used as a means to prevent the exchange rate from fully adjusting to market value reducing incentives for export while increasing incentives for import substitution. Tariff policy can thus affect the product mix of country, including its direction of industrialisation, which in the complex globalised world of today determines its place in the global value chain.

Doing Taxes Better: Simplify, Open and Grow Economy

Taxes have been the cornerstone of IMF-led adjustment programs for Pakistan for over four decades. During this period, long term growth and productivity have declined while the tax policy has become more contentious and fragmented. Measures multiply as unrealistic targets are chased with mini budgets every quarter. The following arose from a high-level conference arranged by PIDE to outline future directions in tax policy.