Sunday, November 25, 2012

Pakistan Offers Higher Economic Mobility Than US, China

A 2012 study of 22 nations conducted by Prof Miles Corak for the Organization for Economic Cooperation and Development (OECD) has found income heritability to be greater in the United States, the United Kingdom, Italy, China and 5 other countries than in Pakistan.

The study's findings, presented by the author in testimony to the US Senate Finance Committee on July 6, 2012, rely on the computation of "inter-generational earnings elasticity" which the author explains as follows:


"(It) is the percentage difference in earnings in the child’s generation associated with the percentage difference in the parental generation. For example, an intergenerational elasticity in earnings of 0.6 tells us that if one father makes 100% more than another then the son of the high income father will, as an adult, earn 60% more than the son of the relatively lower income father. An elasticity of 0.2 says this 100% difference between the fathers would only lead to a 20% difference between the sons. A lower elasticity means a society with more mobility."

Intergenerational Mobility in Pakistan:

Corak calculates that the intergenerational earnings elasticity in Pakistan is 0.46, the same as in Switzerland. It means that a difference of 100%  between the incomes of a rich father and a poor father is reduced to 46% difference between their sons' incomes. Among the 22 countries studied, Peru, China and Brazil have the lowest economic mobility with inter-generational elasticity of 0.67, 0.60 and 0.58 respectively. The highest economic mobility is offered by Denmark (0.15), Norway (0.17) and Finland (0.18).


The author also looked at Gini coefficient of each country and found reasonably good correlation between Gini and intergenerational income elasticity.

 In addition to Corak, there are other reports which confirm that Pakistan has continued to offer  significant upward economic and social mobility to its citizens over the last two decades. Since 1990, Pakistan's middle class had expanded by 36.5% and India's by only 12.8%, according to an ADB report titled "Asia's Emerging Middle Class: Past, Present And Future".

 More evidence of upward mobility is offered by recent Euromonitor market research indicating that Pakistanis are seeing rising disposable incomes. It says that there were 1.8 million Pakistani households (7.55% of all households) and 7.9 million Indian households (3.61% of all households) in 2009 with disposable incomes of $10,001 or more. This translates into 282% increase (vs 232% in India) from 1995-2009 in households with disposable incomes of $10,001 or more. Consumer spending in Pakistan has increased at a 26 percent average pace the past three years, compared with 7.7 percent for Asia, according to Bloomberg.

Mobility Drivers:

The study identified three key drivers of inter-generational mobility: Family, Labor Market and State.

The biggest difference the family makes is in terms of education and training of the children. Growing labor market is important for the availability of better paying jobs, and the state matters because its policies influence access to education and growth of economic opportunities. For Pakistanis, the weakest link here has been the state which has failed to adequately fund education and facilitate economic growth through infrastructure investments. The private sector, the civil society and the international community have, however, stepped in to at least partially compensate for some of the most serious shortcomings of the state.   

Education:

Pakistani parents are taking education more and more seriously and enrolling their children at all levels. According to Harvard University researchers Robert Barro and Jhong-Wa Lee, Pakistan has been increasing enrollment of students in schools at a faster rate since 1990 than India. In 1990, there were 66.2% of Pakistanis vs 51.6% of Indians age 15 and above who had no schooling. In 2000, there were 60.2% Pakistanis vs 43% Indians with no schooling. In 2010, Pakistan reduced it to 38% vs India's 32.7%.




As of 2010, there are 380 (vs 327 Indians) out of every 1000 Pakistanis age 15 and above who have never had any formal schooling. Of the remaining 620 (vs 673 Indians) who enrolled in school, 22 (vs 20 Indians) dropped out before finishing primary school, and the remaining 598 (vs 653 Indians) completed it. There are 401 (vs 465 Indians) out of every 1000 Pakistanis who made it to secondary school. 290 (vs 69 Indians) completed secondary school  while 111 (vs. 394 Indians) dropped out. Only 55 (vs 58 Indians)  made it to college out of which 39 (vs 31 Indians) graduated with a degree.

Labor Market:

Pakistan's employment growth has been the highest in South Asia region since 2000, followed by Nepal, Bangladesh, India, and Sri Lanka in that order, according to a recent World Bank report titled "More and Better Jobs in South Asia".



Total employment in South Asia (excluding Afghanistan and Bhutan) rose from 473 million in 2000 to 568 million in 2010, creating an average of just under 800,000 new jobs a month. In all countries except Maldives and Sri Lanka, the largest share of the employed are the low‐end self-employed.



The report says that nearly a third of workers in India and a fifth of workers in Bangladesh and Pakistan are casual laborers. Regular wage and salaried workers represent a fifth or less of total employment.

Analysis of the labor productivity data indicates that growth in TFP (total factor productivity) made a larger relative contribution to the growth of aggregate labor productivity in South Asia during 1980–2008 than did physical and human capital accumulation. In fact, the contribution of TFP growth was higher than in the high‐performing East Asian economies excluding China.

Summary: 

The experience of OECD nations shows that construction of a large and vibrant middle class is an absolutely essential pre-requisite for a prosperous and democratic society.  In spite of all of its current difficulties, Pakistan's middle class is growing as evident from data coming from a variety of sources ranging from ADB and the World Bank to University researchers and Euromonitor consumer research firm.  More enlightened leadership in Islamabad can help accelerate this process by focusing greater attention to raising more revenue and increasing public investment in education, health care and infrastructure.

Related Links:

Haq's Musings

Economic Mobility Across Generations

Upward Social and Economic Mobility in Pakistan

Pakistan GDP Grossly Underestimated, Shares Highly Undervalued

Investment Analysts Bullish on Pakistan

Precise Estimates of Pakistan's Informal Economy

Pak Consumer Boom  Fuels Underground Economy

Rural Consumption Boom in Pakistan

Pakistan's Tax Evasion Fosters Aid Dependence

Poll Finds Pakistanis Happier Than Neighbors

Pakistan's Rural Economy Booming

Pakistan Car Sales Up 61%

Resilient Pakistan Defies Doomsayers

Land For Landless Women in Pakistan

Pakistan's Circular Debt and Load-shedding

Hypermart Pakistan

Tuesday, November 20, 2012

Confident Pak Judiciary Challenges Military's Top Brass

Buoyed by unprecedented success against the top members of the executive branch, the men in robes are now boldly taking on Pakistani military's top brass--both past and present.

Earlier this year, Pakistan Supreme Court removed a democratically elected prime minister who had the support of two-thirds majority in Pakistan's parliament. The top judges then forced the current prime minister to write a letter to Swiss authorities to re-open corruption cases against several members of the ruling party as well as the head of state President sif Ali Zardari himself.

More recently, the Islamabad High Court judges have accepted a petition from a member of the Rawalpindi Bar Association challenging the three year extension granted in 2010 to Chief of Army Staff General Ashfaque Parvez Kayani by former Prime Minister Yousuf Raza Gilani. In addition, a Supreme Court bench headed by Chief Justice Iftikhar Chaudhry has ordered the government to act against a former Chief of Army staff (COAS) General Aslam Baig and a former Director of Inter-Services Intelligence (ISI) Lt. General Asad Durrani in what is now known as the Asghar Khan case.

All of these events appear to be part of a huge power play by the top judges to assert themselves in competition with other institutions of government.  In fact, Justice Chaudhry has stated a very ambitious agenda when he said that he sees his court as the “final arbiter and protector of Constitution”, and he seems to be in a hurry to get there. This statement by the Chief Justice was a pointed rejection of General Kayani's earlier statement that said: “No individual or institution has the monopoly to decide what is right or wrong in defining the ultimate national interest.”

Rawalpindi Bar Association has jumped in the middle of this power struggle with a strong resolution attacking General Kayani personally by raising questions about his brother's work as a military contractor. While smaller than Karachi and Lahore Bars, the Rawalpindi Bar is believed to be close to senior judges. It is suspected to have far right connections with radical organizations like Hizb-ut-Tahrir which has been actively seeking to recruit sympathizers and supporters in Pakistani military.

It's not uncommon for various institutions to seek greater power in a transition period before a healthy and workable balance is achieved.  Almost every democracy has seen such an evolution.

The great danger here is that, if any one institution overplays its hand,  there could be uncontrolled chaos and a power vacuum. Such power vacuum could then be exploited by militant groups which would not hesitate to seize power and put an abrupt end to the whole democratic experiment in Pakistan. Such a development will elicit a strong response from the international community including the US and China. And it will almost certainly scuttle any hope of democracy in Pakistan for a very long time.

Let's hope good sense prevails to help maintain gradual but sustainable progress toward a democratic order in which all institutions can learn to co-exist and serve the best interest of the people of Pakistan.  

Here's a video clip of a discussion I recently joined on this subject:





Related Links:

Haq's Musings

Judicial Coup in Islamabad

Pakistan's Familygate and Mediagate Scandals 

Justice Iftikhar Chaudhry in No Angel!

Supreme Court Voids NRO

Sunday, November 18, 2012

Pakistan's GDP Grossly Underestimated, Stocks Highly Undervalued

Even with the run-up (in KSE-100), Andrew Brudenell, manager of the HSBC Frontier Markets fund (HSFAX) in London, says Pakistan is one of the cheapest markets he follows, at about seven times earnings. He notes that earnings growth has kept pace with the market. The firms, he adds, are typically cash-rich, boast strong return on equity levels in the 20% range, and pay good dividends. In Pakistan, the informal, cash-based economy for goods and services is larger than the formal economy.  Barron's, November 17, 2012

Growing gap between dismal official economic statistics and consumption boom coupled with strong corporate profits in Pakistan is a challenge for many analysts around the world. Most believe that Pakistan's GDP is, in fact, much larger and growing faster than the government data indicates.

Informal Economy Estimates:

 M. Ali Kemal and Ahmed Waqar Qasim, economists at Pakistan Institute of Development Economics (PIDE), have published their research on estimates of the size of Pakistan's informal or underground economy.

Kemal and Qasim explore several published different approaches for sizing Pakistan's underground economy and settle on a combination of  PSLM (Pakistan Social and Living Standards Measurement) consumption data  and mis-invoicing of exports and imports to conclude that the country's "informal economy was 91% of the formal economy in 2007-08". Here are the figures offered by the authors for 2007-8:

1) Formal Economy: Rs. 10,242 billion= $170 billion (using Rs.60 to a US dollar)
2) Informal Economy: Rs. 9,365 billion = $156 billion
3) Total Economy (Sum of 1 & 2): Rs. 19,608 billion = $326 billion

Assuming that the ratio of formal and informal economy remained the same in 2011-12, here are the figures for Pakistan's total economy as of the end of last fiscal year which ended in June, 2012 :

1) Formal Economy: $210 billion
2) Informal Economy: $191 billion
3) Total Economy: $401 billion
Hypermart Lahore

Naween Mangi of Businessweek in her piece titled "The Secret Strength of Pakistan's Economy" described how Pakistan's informal cash-based economy evades government's radar, illustrating it with the story of a tire repair shop owner Muhammad Nasir. Nasir steals water and electricity from utility companies, receives cash from his customers in return for his services and issues no receipts, pays cash for his cable TV connection, and pays off corrupt police and utility officials and local politicians instead of paying utility bills and taxes.

Karachi Stock Market:
Comparing Karachi and Mumbai Share Indexes


A string of strong earnings announcements by Karachi Stock Exchange listed companies and the Central Bank's 1.5% rate cut have helped the KSE-100 index exceed 16,000 level, a gain of 42.1% (33.2% in US dollar terms) year to date. In spite of this run-up in KSE-100, Andrew Brudenell, manager of the HSBC Frontier Markets fund (HSFAX) in London, remains bullish on Pakistani equities, according to Barron's. Pakistan is one of the cheapest markets he follows, at about seven times earnings. He notes that earnings growth has kept pace with the market. The firms, he adds, are typically cash-rich, boast strong return on equity levels in the 20% range, and pay good dividends.

Conclusion: 

While Pakistan's public finances remain shaky, it appears that the country's economy is in fact healthier than what the official figures show. It also seems that the national debt is much less of a problem given the debt-to-GDP ratio of just 30% when informal economy is fully comprehended. Even a small but serious effort to collect more taxes can make a big dent in budget deficits. My hope is that increasing share of the informal economy will become documented with the rising use of technology. Bringing a small slice of it in the tax net will make a significant positive difference for public finances in the coming years.

Related Links:

Haq's Musings

Investment Analysts Bullish on Pakistan

Precise Estimates of Pakistan's Informal Economy

Pak Consumer Boom  Fuels Underground Economy

Rural Consumption Boom in Pakistan

Pakistan's Tax Evasion Fosters Aid Dependence

Poll Finds Pakistanis Happier Than Neighbors

Pakistan's Rural Economy Booming

Pakistan Car Sales Up 61%

Resilient Pakistan Defies Doomsayers

Land For Landless Women in Pakistan

Pakistan's Circular Debt and Load-shedding

Hypermart Pakistan

Thursday, November 15, 2012

Impact of Obama's Re-election on Pak-US Ties

Polls indicate that Mitt Romney would be elected US president on Nov 6, 2012 if Israelis and Pakistanis had their way.  Most foreign policy analysts, however, believe that such an outcome would not result in any fundamental US policy shift for the two disgruntled nations.

Why Romney?

To understand why Pakistanis expressed a preference for Romney over President Barrack Obama, let us review some of the ostensible reasons for it:

1. Most Pakistanis hoped that Romney would stop  CIA-operated drone attacks in FATA. The facts is that Romney, in response to a question during the presidential debate on foreign policy, said as follows: “I believe we should use any and all means necessary to take out people who pose a threat to us and our friends around the world. And it’s widely reported that drones are being used in drone strikes, and I support that and entirely.”

2. There is a common perception among Pakistanis that Republicans in the White House are better for them. This perception is based on cold-war era policies that brought significant US aid to Pakistan during early 1960s under President Dwight D. Eisenhower, and 1980s under President Ronald Reagan and 2000s under President George W. Bush.



This perception is not valid now because President Obama, a Democrat, has tripled US aid to Pakistan from $738 million in 2008 to $2.108 billion in 2012.

US Troops Withdrawal: 

Now that President Obama has been re-elected, it is almost certain that US will withdraw most of its troops by 2014 as planned.

Beyond 2014, all the signs indicate that the US will continue to be engaged militarily, economically and diplomatically in the region. Part of the motivation will be to try and deal with potential threats to the American homeland from possible resurgence of Al Qaeda and its affiliates in Afghanistan and Pakistan. But the other part is the more ambitious effort to maintain US economic and diplomatic power and influence in Asia.



The US military involvement will be mostly in the form of drones and special operations. It is quite possible that the Americans may increase the frequency and intensity of CIA-operated drone attacks and joint special operations (JSOC).

President Kennedy Receiving President Ayub at Andrews AFB
 L to R: Ayub Khan, Nasim Aurangzeb, Jackie Kennedy, John F. Kennedy






New Great Game:

On the diplomatic front, the US will maintain close ties with Pakistan's political, military and intelligence establishment regardless of who holds power after the upcoming elections in 2013. Rhetoric on either side  may change from time to time but the US aid  flow and Pakistani cooperation will not. As Romney said and Obama seemed to agree during the foreign policy debate that “it’s not time to divorce a nation on Earth that has 100 nuclear weapons and is on the way to double that at some point."

In addition to the continuing US pressure to act in FATA, Pakistan is also being pressed by its other friend China to crack down on the Taliban because the Chinese also feel threatened by the Pakistan-based Taliban militants for their alleged support and sheltering of  Chinese Uighur Muslim militants who are waging war against the Chinese government in Xinjiang province.

 On the economic front, both China and the United States have significant long-term interests in Pakistan, as does Russia, because of its strategic location as a transit country. Some see the growing US-China competition in Central Asia as the start of a New Great Game for power and influence in the Asian continent. This Game will present Pakistan with its greatest challenge and the greatest opportunity in the 21st century.

The Chinese see the value of access to the Arabian sea as the shortest route for trade in and out of Western China to develop and stabilize its restive Xinijiang province.  A number of Chinese companies are working on building roads such as the Karakoram Highway and other infrastructure for this purpose.

US Pivot to Asia:


Re-elected President Obama is making his first major foreign trip to ASEAN summit in Cambodia.  As part of President Obama's "pivot to Asia" to check China's rise, the Americans have a strong competing interest in creating a new silk route in Asia that bypasses China. Americans envision such land route extending from resource rich Stans in Central Asia to resource hungry South Asia and Southeast Asia region via Afghanistan, Pakistan and India.  The expected energy flow for energy-hungry Pakistan and the potential annual transit fees worth billions of dollars from this trade route are part of the US sponsored incentives for Pakistan to help stabilize the situation in Afghanistan. The first example of this effort is the American push for TAPI--Turkmenistan-Afghanistan-Pakistan-India gas pipeline.

Summary:
  
There are two important messages for Islamabad coming from Washington and Beijing: 1) Both US and China have a common interest in defeating the militants operating from Pakistan's FATA region even as the two great powers compete in a high-stakes game to dominate Asia. 2)  Obama will follow through on his plans to withdraw ground troops from Afghanistan by 2014 but still continue to be engaged there for a variety of short-term and long-term goals in Central and South Asia and the larger Asian continent. 

Here's a recent video discussion on the subject in which I participated:




Related Links:

Haq's Musings 

Malala Moment: Pakistan's Cowardly Politicians
 
Pakistan 2013 Election Predictions 

Can Pakistan Say No to US Aid?

Obama's Pakistan Connections

Seeing Bin Laden's Death in Wider Perspective

Imran Khan in Silicon Valley

Appeasement in Swat

ISI Rogues-Real or Imagined?

Daily Carnage in Pakistan

King's Hypocrisy

India's Guantanamos abd Abu Ghraibs

Obama McCain Debate on Pakistan Policy