Book Review

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State ownership of the banking sector was maintained and used to channel funds at lowhave contributed to the rapidly ascending prices of staples.

Special Edition ISSN 1811-5438




    Lahore School of Economics

    Papers presented at

    The Fourth Annual Conference on

    Management of the Pakistan Economy

    Ensuring Stable and Inclusive Growth

    thth24 to 25 April, 2008

     Editors’ Introduction Theresa Thompson Chaudhry

    and Azam Amjad Chaudhry Shahid Amjad Chaudhry The Effects of Rising Food and Ensuring Stable and Inclusive Fuel Costs on Poverty in Growth in Pakistan Pakistan

    Sakib Sherani Rashid Amjad, G. M. Arif and Pakistan’s Macroeconomic Usman Mustafa Situation Does the Labor Market

    Structure Explain Differences Shahid Javed Burki

    in Poverty in Rural Punjab? Industrial Policy: Domestic

    Challenges, Global Imperatives,

    Ali Cheema, Lyyla Khalid and and Pakistan’s Choices

    Manasa Patnam

    Hafeez Sheikh The Geography of Poverty: Unfinished Agenda of Reforms Evidence from the Punjab

    Naved Hamid Sohail Jehangir Malik Rethinking Pakistan’s Rethinking Development Development Strategy Strategy The Importance of

    the Rural Non Farm Economy Riaz Riazuddin in Growth and Poverty An Exploratory Analysis of Reduction in Pakistan Inflation Episodes in Pakistan

    Sajjad Akhtar Ijaz Nabi

    Trends in Regional Inequalities Public Policy Fundamentals for

    in Pakistan: Evidence Since Sustainable and Inclusive

Growth 1998

September, 2008

Lahore School of Economics, Lahore, Pakistan.





    Dr. Azam Chaudhry, Editor

    Dr. Theresa Thompson Chaudhry, Editor

    Ms. Nina Gera, Associate Editor

    Ms. Ayesha Khanum, Assistant Editor

    Editorial Advisory Board Dr. A. Mushfiq Mobarak Dr. Javier Arze del Dr. Rashid Amjad

    Dr. Ahmed Kaleem Granado Dr. Saleem Khan

    Dr. Ahmed Kamaly Dr. Kaiser Bengali Dr. Salman Ahmad

    Dr. Ahmed M. Khalid Dr. Kamal Munir Dr. Sarfraz Qureshi

    Dr. Ajaz Hussain Dr. Khalid Aftab Dr. Sarwat Jahan

    Dr. Akmal Husain Dr. Khalid Nadvi Dr. Sean Corcoran

    Dr. Anwar Shah Dr. Lennart Erickson Dr. Sebastian Eckardt

    Dr. Ashish Narain Dr. Mathew Andrews Dr. Serkan Bahceci

    Dr. Aslam Chaudhry Dr. Michal Jerzmanowski Dr. Shahid Amjad Chaudhry

    Dr. Baoyun Qiao Dr. Moazam Mehmood Dr. Shahrukh Rafi Khan

    Dr. Gwendolyn A. Dr. Munir Ahmad Dr. Sohail Zafar

    Tedeschi Dr. Nasim Hasan Shah Dr. Tariq Siddiqui

    Dr. Inayat Ullah Mangla Dr. Naved Hamid Dr. Umar Serajuddin

    Dr. Irfan ul Haque Dr. Nuzhat Ahmad Prof. Robert Neild

    Dr. Jamshed Y. Uppal Dr. Pervez Tahir Prof. Viqar Ahmed

    Dr. Jan Warner Dr. Phillip Garner

    Editorial Staff: Tele. No: 0092 42 - 5874385

    Telefax: 0092 - 42 - 5714936 E-mail:

    Publisher: Lahore School of Economics, Lahore, Pakistan.

    Correspondence relating to subscriptions and changes of address should be sent to The

    Lahore Journal of Economics, 105-C-2, Gulberg III, Lahore - 54660 - Pakistan

    Instructions to authors can be found at the end of this issue. No responsibility for the

    views expressed by authors and reviewers in The Lahore Journal of Economics is

    assumed by the Editors, the Associate Editor and the Publisher.

    Copyright by: Lahore School of Economics

Special Edition2008


    Contents Special Edition 2008

Editors‘ Introduction i

Ensuring Stable and Inclusive Growth in Pakistan

     Shahid Amjad Chaudhry 1

Pakistan‘s Macroeconomic Situation

     Sakib Sherani 5

    Industrial Policy: Domestic Challenges, Global Imperatives, and Pakistan‘s Choices

     Shahid Javed Burki 23

Unfinished Agenda of Reforms

     Hafeez Sheikh 35

Rethinking Pakistan‘s Development Strategy

     Naved Hamid 47

    An Exploratory Analysis of Inflation Episodes in Pakistan

     Riaz Riazuddin 63

    Public Policy Fundamentals for Sustainable and Inclusive Growth

     Ijaz Nabi 95

    The Effects of Rising Food and Fuel Costs on Poverty in Pakistan

     Theresa Thompson Chaudhry and Azam Amjad Chaudhry 117

Does the Labor Market Structure Explain

    Differences in Poverty in Rural Punjab?

     Rashid Amjad, G.M Arif and Usman Mustafa 139

    The Geography of Poverty: Evidence from the Punjab

    Ali Cheema, Lyyla Khalid and Manasa Patnam 163

Rethinking Development Strategy The Importance of the

    Rural Non Farm Economy in Growth and Poverty Reduction in Pakistan

     Sohail Jehangir Malik 189

    Trends in Regional Inequalities in Pakistan: Evidence Since 1998

     Sajjad Akhtar 205



    Editors’ Introduction

    In April 2008, the Centre for Research in Economics and Business (CREB) at the Lahore School of Economics hosted the Fourth Annual Conference on the Management of the Pakistan Economy on the theme, ―Ensuring Stable and Inclusive Growth.‖ The Centre‘s director, Naved

    Hamid, invited a number of prominent speakers including academics, economists, current and former government officials, and other experts to present a combination of research and policy papers, which can be broadly grouped under two major headings: i) Pakistan‘s macroeconomy and ii)

    Poverty and inequality in Pakistan. These topics were selected because of their timeliness, given the increasing macroeconomic pressures facing the country, in particular those coming from the exchange rate and inflation, and the impacts on poverty that could result. The papers presented at the conference are summarized below:

    i) Pakistan’s Macroeconomy

    Shahid Amjad Chaudhry‘s piece opens the Special Edition with a brief review of the macroeconomy over the last few years, and lays out the major sectoral issues that remain to be tackled, including education, healthcare, energy, poverty, and public investment.

    Next, Sakib Sherani‘s paper appeals to the new government to

    restore fiscal order, because without macroeconomic stability, the government will be limited in its ability to carry out appropriate monetary and fiscal policy. While Mr. Sherani cautions against the type of short term ―relief‖ policies that can damage the macroeconomy further, he argues that macro stability and pro-poor policies can go hand-in-hand, via a broadening of the tax base and rationalization of public expenditures.

    Shahid Javed Burki‘s paper offers policy advice, with an emphasis

    on industrial competitiveness, basing his assessment of the history of industrial policy, and keeping in mind the challenges faced by the country due to the current macroeconomic situation and the globalized economy. He emphasizes the importance of decentralized industrial policy making for the future success of Pakistani industry.

    Hafeez Sheikh‘s paper critically examines economic policies of the last government, and their impacts on economic growth over the past decades. The analysis emphasizes the advantages of privatization and inefficiency caused by unchecked state dominance across all sectors in Pakistan. This paper gives proposals aimed at achieving economic prosperity and growth.


    Naved Hamid‘s paper provides a brief outline of a development strategy for Pakistan that can achieve sustained growth. Based on the current economic conditions the paper analyzes the new drivers of growth and discusses how development strategy today must position itself to take advantage of the changes taking place globally.

    Riaz Riazuddin‘s paper uses a unique method to look at money

    supply, inflation, and growth. By calculating conditional probabilities, he finds that, first, inflation is a monetary phenomenon, and secondly, there is no trade-off between inflation and growth.

    Finally, Ijaz Nabi‘s paper emphasizes the role of the government

    budget in economic growth, and the particular mechanisms that should be implemented in order to make the budget more effective. These include monitoring and evaluation, public information, public-private partnerships, and a streamlined budget cycle.

    ii) Poverty and Inequality in Pakistan

    Theresa Thompson Chaudhry and Azam Amjad Chaudhry‘s paper

    use the PSLM (Pakistan-wide) and MICS (Punjab provincial) data sets to simulate the impact of food and energy price shocks on real incomes, in order to asses the possible impact on poverty levels in Pakistan. They find that food prices have the greatest potential to increase poverty levels, given their importance in household budgets.

    Rashid Amjad, G. M. Arif and Usman Mustafa‘s paper closely

    examine poverty in rural Punjab, using a new data set. Their analysis divides the rural areas into various agro-climactic zones in order to determine the major factors driving poverty in each area. They find the critical factors in poverty inequality to be urbanization, overseas migration and the labor market structure.

    Ali Cheema, Lyyla Khalid and Manasa Patnam‘s paper use the MICS

    to study the geography of poverty at the district level in the Punjab. They find a wide variation in the incidence of poverty across the province, with high levels of poverty in the south, the west, and some central districts. The north has, on average, lower poverty; however the peri-urban areas of Lahore are characterized by both a high level and severity of poverty.

    Sohail Jehangir Malik‘s paper returns to the problem of rural poverty

    and looks at the oft-neglected non-farm sector. In fact, workers in non-agricultural sectors make up over half of the rural poor. Following a detailed description of rural enterprises, he suggests that better access to credit and

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