No abstract
Domestic resource mobilization is one of the key determinants of sustained economic growth. Pakistan's perfonnance with regard to domestic resource mobilization has been poor despite maintaining a respectable economic growth rate. Why is the savings rate so low in Pakistan? In this paper we analyse the household savings behaviour in Pakistan, using micro level data of the Household Income and Expenditure Survey (HIES) for the year 1984-85. Three different non-linear savings functions attributed to Keynes, Klein, and Landau are estimated separately for the urban and the rural households, using the Ordinary Least Squares (OLS) technique. It is found that the average income and saving of an urban household are considerably higher than those of overall Pakistan or a rural household. However, contrary to the general belief, it is found that the propensity to save of the rural households is much higher than that of their urban counterparts. The dependency ratio and the various categories of education are found to have a negative influence on household savings. No systematic relationship is found between savings and the employment status and occupation of the household head. It is found, however, that saving increases with age but tends to decline when the age crosses a certain limit - a finding consistent with the Life Cycle Hypothesis.
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A notable development in recent years in Pakistan's economic scene has been the sharp pickup in the rate of inflation. In particular, Pakistan has experienced sustained intlation (changes in the CPI) hovering between 11.0 to 13.0 percent range during the last three years (1993-94 to 1995-96). The persistence of inflation at double-digit rates over the three successive years has attracted considerable attention of academics and policy-makers. Not surprisingly, one of the thorniest issues in Pakistan's policy arena today is how to put inflation under effective control.Recent studies on inflation in Pakistan I broadly agree on the key factors influencing the rate of inflation, namely, the growth in money supply, the supply side bottlenecks, the adjustment in government-administered prices, the imported inflation (exchange rate adjustment), escalations in indirect taxes, and inflationary expectations. However, these studies do not concur on the relative importance of each of these factors as determinants of inflation. While Nasim (1995) and Hossain (1990) find money supply as the principal factors underlying the rising inflation rate in Pakistan, others suggest that food prices followed by government administered fueVenergy prices and indirect taxation are the primary impetus for the upward inflationary spira1.2 In fact, Naqvi et al. (1994); Hasan et at. (1995) and Bilquees (1988) accord relatively less importance to money supply as a factor influencing the rate of inflation but in no way recommend a relatively easy monetary policy.
Exchange rate policy to improve external competitiveness has now become the centre piece of any adjustment effort. It is expected that a nominal devaluation will result in expenditure switching, increased production of tradeable, higher exports, and in an improvement of the external accounts of the country in question. Recently, the traditional stabilisation packages, and especially their devaluation component, have come under attack by a number of authors.! It has been argued that devaluation can be counterproductive because exports and imports are relatively insensitive to price and exchange rate changes, especially in developing and semi-industrialised countries.2.3 If the price elasticities of imports and exports are sufficiently low, the trade balance expressed in domestic currency may worsen. Grubel (1976) has argued that a country's persistent payments imbalances can be due only to faulty monetary policy and cannot be corrected by either devaluation (exchange rate policy) or the use of fIscal policy. In a recent article, Miles (1979) claims to have provided the requisite evidence to support Grubel's argument. Miles (1979) shows that devaluation does not improve the trade balance but improves the balance of payments. This results implies that the improvement comes through the capital account.
The relationship between export expansion and economic growth has been examined extensively during the last two decades in the context of the suitability of the alternative development strategies. The decade of the 1970s witnessed an emerging consensus in favour of export promotion as development strategy. Such a consensus was based on the following facts. First, higher export earnings working through alleviating foreign exchange constraints may enhance the ability of a developing country to import more industrial raw materials and capital goods, which, in turn, may expand its productive capacity. Secondly, the competition in export markets abroad may lead to the exploitation of economies of scale, greater capacity utilisation, efficient resource allocation, and an acceleration of technical progress in production. Thirdly, given the theoretical arguments mentioned above, the observed strong correlation between exports and economic growth was interpreted as empirical evidence in favour of export promotion as a development strategy. The empirical evidence in favour of export promotion rests on the general approach where real growth is regressed on contemporaneous real export, growth and the significance of the export growth coefficient supports the proposition that export growth causes output growth. Balassa (1978); Feder (1982); Fosu (1990); Kavoussi (1984); Tyler (1981) and Ram (1985) have followed such an approach.1 Khan and Saqib (1993), on the other hand, examined the relationship between exports and economic growth by constructing a simultaneous equation model comprising equations for exports and economic growth. They found a strong association between export performance and GDP growth for Pakistan, and that more than 90 percent of the contribution of exports on economic growth was indirect in nature.
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