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Impact of political stability on the reserves of pakistan

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  • 1. Research Methodology<br />Spring 2011<br />Impact of Political stability on the Reserves of Pakistan: A statistical analysis<br />Submitted by: <br />Kamran Arshad, Imran Khan, Faheem Ullah, Khubaib Raza<br />Submitted to: Dr. Asim Nisar<br />Table of Contents TOC o "1-3" h z u Abstract PAGEREF _Toc292463362 h 4Introduction and Purpose PAGEREF _Toc292463363 h 5Objective PAGEREF _Toc292463364 h 7Scope and limitations PAGEREF _Toc292463365 h 7Hypothesis PAGEREF _Toc292463366 h 8Research Methodology PAGEREF _Toc292463367 h 9Data collection PAGEREF _Toc292463368 h 9Data analysis Method PAGEREF _Toc292463369 h 9XmR Charts PAGEREF _Toc292463370 h 10Results PAGEREF _Toc292463371 h 11Major Historical events in Pakistan’s Politics PAGEREF _Toc292463372 h 14First military era (1958-1971) PAGEREF _Toc292463373 h 14Second democratic era (1971-1977) PAGEREF _Toc292463374 h 14Second military era (1977-1988) PAGEREF _Toc292463375 h 14Third democratic era (1988-1999) PAGEREF _Toc292463376 h 15Third military era (1999 - 2007) PAGEREF _Toc292463377 h 15Fourth democratic era (2008- present) PAGEREF _Toc292463378 h 16Data Analysis PAGEREF _Toc292463379 h 17Process (X) chart PAGEREF _Toc292463380 h 17Moving Range (mR) Chart PAGEREF _Toc292463381 h 17Conclusion PAGEREF _Toc292463382 h 18References PAGEREF _Toc292463383 h 19<br />“Excellence is doing ordinary things extraordinarily well” as said by Booker T Washington, “Excellence is to do a common thing in an uncommon way”.<br />Abstract<br />The purpose of this paper is to study the Impact of Political stability on the Reserves of Pakistan. The analysis is based on the data collected from World Bank on the inflated reserves of Pakistan in last 50 years (1960-2010). We organized a framework that considers environmental factors (political, Military, regional conflicts, Influence of Super Powers etc.) and its impact on one the key financial indicators of Pakistan’s economy; i.e. Pakistan Reserves. The Research analysis shows a strong correlation between these factors and reserves. It also holds up the hypothesis that the political and historical events can affect the financial reserves in statistical terms. <br />Introduction and Purpose<br />The economy of Pakistan is the 25th largest economy in the world in terms of purchasing power, and the 45th largest in absolute dollar terms. Pakistan has a semi-industrialized economy, which mainly encompasses textiles, chemicals, food processing, agriculture and other industries. Growth poles of Pakistan's economy are situated along the Indus River, diversified economies of Karachi and Punjab's urban centers, coexist with lesser developed areas in other parts of the country. <br />The economy has suffered in the past from decades of internal political disputes, a fast growing population, mixed levels of foreign investment, a costly Substantial macroeconomic reforms since 2000, most notably at privatizing the banking sector have helped the economy. GDP growth, spurred by gains in the industrial and service sectors, remained in the 6-8% range in 2004-06 due to economic reforms in the year 2000 by the Musharraf government. <br />In 2005, the World Bank named Pakistan the top reformer in its region and in the top 10 reformers globally. Inflation remains the biggest threat to the economy, jumping to more than 9% in 2005 before easing to 7.6% in 2006. In 2009, following the surge in global petrol prices inflation in Pakistan has reached as high as 22.0%. <br />The central bank is pursuing tighter monetary policy while trying to preserve growth. Foreign exchange reserves are bolstered by steady worker remittances, but a growing current account deficit - driven by a widening trade gap as import growth outstrips export expansion - could draw down reserves and dampen GDP growth in the medium term. <br />Pakistan economic analysis shows that national economy is not exactly in best of health. There are plenty of reasons behind present economic, ongoing confrontation with neighboring India and crisis in energy sector. However, IMF-approved government policies, bolstered by foreign investment and renewed access to global markets, have generated solid macroeconomic recovery the last decade. conditions that Pakistan finds itself in. <br />Paolo Mauro (1994), accounts that any one of the different proxies of political stability that he analyzes is significantly positively correlated with private investment and economic growth. <br />Robert Barro (1991) reports, for a sample of 98 countries in the period of 1960-1985, that growth rates are negatively related to measures of political instability. <br />Edgardo E. Zablotsky (1996) concludes that political stability is a prerequisite for economic growth.<br />Muhammad Younis et al (2008) have provided findings on Asia experience that political stability plays a dominant role in determination of economic growth and sources of capital accumulation. There results also show that the role of political stability in accelerating economic growth is more vital then economic freedom.<br />Mitchell A, Seliyson and John Passe- Smith (1998) have summarized the findings of some studies which relate economic growth and political regimes. Their study calls for further work. The influence political regimes wield on economic growth depends on the level of democracy a country enjoys. In Africa and Middle East countries, it has been found, democracy positively influences economic growth. Brazil failed to achieve success in economic liberalization due to the political reforms and democracy development. In Egypt, success of reforms has been credited to the political strength of the bourgeoisie. Greater democracy is thought to hinder growth by raising the pressure for immediate consumption, which reduces investment. Critics argue that dictatorship is better suited to transferring resource from consumption to investment<br />Objective<br />The objective of this paper is to study the impact of political and military actions on the economy of Pakistan in statistical terms. Specifically this paper will serve as a guideline for identifying the key reasons for the economic downfall and its dependency on the political and military stability in the region. <br />Scope and limitations<br />A non-reactive study with longitudinal analysis of Pakistan Inflated Reserves for the years 1960 to 2010. Other financial indicators are not a part of this study, even though they might give detailed picture of the economy. <br />Statistical methods will be used to interpret these figures. This will help us to highlight the significance of this data. These results will be interpreted and analyzed to find the impact of politics, and the events that contributed to the highs and lows. <br />It will not be feasible for us to mention all the historical events corresponding with the data in this study. We will only mention significant events or events that could have a positive or negative effect. Therefore historical events will limit our study as we cannot have a directly correlation. <br />Hypothesis<br />The emphasis of this research is to find and identify any impact on the reserves and then providing evidence through the politics and historical events. Here we can define two variables for this study; the reserves and politics.<br />Therefore the hypotheses are:<br />H0: The political and historical events can affect the financial reserves of Pakistan.<br />H1: The political and historical events are independent of the financial reserves of Pakistan<br />Research Methodology<br />Data collection<br />The data used in this study is taken from the World Bank’s online data repository for the period of 1960 to 2010. This data collected contains Pakistan reserves and inflation rates figures for this time. <br />Data analysis Method<br />Traditional scientific inquiry consists of four interrelated stages: (1) Problem Definition, (2) Data Gathering, (3) Data Analysis, and (4) Data Interpretation. Statistics are used in the data analysis and interpretation stages of an inquiry. The appropriate use of statistics depends upon a basis knowledge of their capacities and limitations. Fortunately, one need not be a statistician to take advantage of this important tool of scientific inquiry.<br />The general purpose of statistical analysis is to provide meaning to what otherwise would be a collection of numbers and/or values. The "meaningfulness" of data derives from the clarity with which one specifies the problem or questions being addressed (Stage 1 of the inquiry process) and the precision with which pertinent information is gathered (Stage 2).<br />Statistical procedures fall loosely into three general categories: <br />
    • Descriptive
    • 2. Associative
    • 3. Inferential
    Descriptive statistics portray individuals or events in terms of some predefined characteristics. Associative statistics seek to identify meaningful interrelationships between or among data. Inferential statistics seek to assess the characteristics of a sample in order to make more general statements about the parent population, or about the relationship between different samples or populations. <br />In Our Study we will use Associative statistics to identify meaningful interrelationships between Pakistan Reserves and key environmental factors that affected Pakistan in last 50 years<br />XmR Charts<br />One of the most widely used control charts is the XmR chart, first developed by Schwartz.  This chart is particularly useful when there is only one observation in each time period.  <br /> <br />The purpose of constructing any control chart, including XmR chart, is to see if the variation is due to chance or to changes in the process.  Every process exhibits some variation in outcomes.  Controlled variation is stable and consistent over time. This variation is due to chance or inherent features of the process.  Uncontrolled variations are points outside the limits and these observations cannot be due to chance. They represent a change in the process that is affecting outcomes. <br /> <br />Control charts are also used to visually tell a story. Any control chart, including XmR chart, has a set of common elements:  <br />X-axis shows time periods <br />Y-axis shows the observed values <br />UCL line shows the Upper Control limit <br />LCL line shows the lower control limit <br />Values outside the control limits mark statistically significant changes and may indicate a change in the underlying process. We have implemented the XmR chart for the data analysis<br />Results<br />The following table contains the Calculated Inflated reserves in US dollors for last 50 years<br />S NoYearReserves In US$ (Millions)InflationYearly InflationCompound InflationInflated Reserves In US$ (Millions)XMoving Range In US$ (Millions)mR11961261.303.201.0357.0014,893.8121962269.32(0.08)1.0055.2314,875.1418.6731963307.83(1.31)0.9955.2817,015.582,140.4341964254.235.041.0556.0114,239.352,776.2251965230.343.881.0453.3212,282.651,956.7061966208.453.871.0451.3310,700.251,582.4071967165.498.631.0949.428,177.872,522.3881968258.391.901.0245.4911,754.843,576.9791969332.931.141.0144.6514,863.863,109.02101970194.534.311.0444.148,586.986,276.88111971198.505.241.0542.328,400.52186.46121972323.806.211.0640.2113,020.584,620.06131973590.2815.541.1637.8622,348.749,328.16141974688.5025.441.2532.7722,560.71211.97151975563.0024.041.2426.1214,707.107,853.61161976684.1411.861.1221.0614,408.52298.58171977715.709.091.0918.8313,475.59932.93181978795.949.031.0917.2613,737.01261.421919791,144.056.591.0715.8318,108.804,371.792019801,567.779.061.0914.8523,281.985,173.182119811,455.329.911.1013.6219,816.313,465.672219821,812.789.371.0912.3922,457.252,640.942319832,682.855.271.0511.3330,388.117,930.852419841,610.439.651.1010.7617,327.1313,060.982519851,429.444.531.059.8114,025.813,301.312619861,464.873.291.039.3913,749.93275.892719871,440.844.521.059.0913,093.31656.622819881,192.699.621.108.6910,369.842,723.462919891,302.258.591.097.9310,328.9540.893019901,046.436.451.067.307,643.692,685.273119911,219.7913.061.136.868,369.99726.303219921,523.7910.061.106.079,248.05878.063319931,995.458.701.095.5111,003.901,755.853419943,715.8312.891.135.0718,851.547,847.643519952,527.5413.871.144.4911,358.927,492.623619961,307.468.371.083.955,159.906,199.033719971,794.5113.381.133.646,534.831,374.943819981,625.687.531.083.215,221.221,313.623919992,117.475.861.062.996,324.721,103.504020002,087.1724.891.252.825,888.98435.744120014,218.137.891.082.269,529.533,640.554220028,795.802.461.022.0918,417.938,888.4043200311,815.604.441.042.0424,146.495,728.5544200410,718.177.751.081.9620,972.903,173.5945200511,109.367.031.071.8220,174.95797.9446200612,878.0210.461.101.7021,851.511,676.5647200715,798.077.651.081.5424,267.792,416.274820089,024.0116.261.161.4312,876.5511,391.2449200913,606.1222.741.231.2316,700.053,823.50<br />Table 1: Pakistan reserves 1960 to 2009; X and mR <br />Process (X) Chart <br />Chart 1: Process (X)<br />Chart 2: Moving Range(mR)Moving Range (mR) Chart <br />Calculated Values for XmR Chart<br />
    • Process Average X=14439.59
    • 4. Upper Control Limit (UCL)=23563.59
    • 5. Lower Control Limit (LCL)=5315.59
    • 6. Average mR =3430.08
    • 7. Upper Range Limit=11216.35
    Major Historical events in Pakistan’s Politics<br />First military era (1958-1971)<br />The Dominion was dissolved on 23 March 1956 and replaced by the Islamic Republic of Pakistan, with the last Governor-General, Iskandar Mirza, as the first president.<br />Just two years later the military took control of the nation.Field Marshal Ayub Khan became president and began a new system of government called Basic Democracy with a new constitution,by which an electoral college of 80,000 would select the President. <br />A nationwide uprising in 1969, General Ayub Khan stepped down from office, handing power to General Yahya Khan, who promised to hold general elections at the end of 1970. <br />On 27 March 1971, Major Ziaur Rahman, a Bengali war-veteran of the East Bengal Regiment of the Pakistan Army, declared the independence of East Pakistan as the new nation of Bangladesh on behalf of Mujib.<br />Discredited by the defeat, General Yahya Khan resigned and Bhutto was inaugurated as president and chief martial law administrator on 20 December 1971.<br />Second democratic era (1971-1977)<br />In 1973, Parliament approved a new constitution, and Pakistan, for the first time, was declared Parliamentary democracy. In 1974, Pakistan was alarmed by the Indian nuclear test, and Bhutto promised to his nation that Pakistan would also have a nuclear device "even if we have to eat grass and leaves."<br />Elections were held in 1977, with the Peoples Party won but this was challenged by the opposition, which accused Bhutto of rigging the election process. General Muhammad Zia-ul-Haq took power in a bloodless coup and Bhutto was later executed, after being convicted of authorizing the murder of a political opponent, in a controversial 4-3 split decision by the Supreme Court.<br />Second military era (1977-1988)<br />In the 1980s, as the front-line state in the anti-Soviet struggle, Pakistan received substantial aid from the United States as it took in millions of Afghan (mostly Pashtun) refugees fleeing the Soviet occupation. <br />The influx of so many refugees - the largest refugee population in the world - had a heavy impact on Pakistan and its effects continue to this day. <br />Zia lifted martial law in 1985, holding non-partisan elections and handpicking Muhammad Khan Junejo to be the new Prime Minister, who readily extended Zia's term as Chief of Army Staff until 1990. <br />Zia dismissed the Junejo government on several charges in May 1988 and called for elections in November 1988.<br />Third democratic era (1988-1999)<br />From 1988 to 1999, Pakistan through constitutional amendments was reverted back to Parliamentary democracy system, and Pakistan was ruled by elected civilian governments, alternately headed by Benazir Bhutto and Nawaz Sharif, who were each elected twice and removed from office on charges of corruption. <br />Economic growth declined towards the end of this period, hurt by the Asian financial crisis, and economic sanctions imposed on Pakistan after its first tests of nuclear devices in 1998.<br />The next year, Pakistani backed Kargil attack threatened to escalate to a full-scale war.<br />Third military era (1999 - 2007)<br />On 12 October 1999, Sharif attempted to dismiss army chief Pervez Musharraf and install Inter-Services Intelligence (ISI) director Ziauddin Butt in his place, but senior generals refused to accept the decision.[91] In a coup, the generals ousted Sharif's administration and took over the airport.[11] He arrested Sharif and those members of his cabinet who took part in this conspiracy. <br />The general elections were held in October 2002 and the centrist, pro-Musharraf Pakistan Muslim League (Q) (PML-Q) won a majority of the seats in Parliament. <br />While economic reforms undertaken during his regime yielded positive results, proposed social reforms were met with resistance. Musharraf faced opposition from religious groups who were angered by his post-9/11 political alliance with the United States and his military support to the American led 2001 invasion of Afghanistan. <br />On 27 December 2007, Benazir Bhutto was leaving an election rally in Rawalpindi when she was assassinated by a gunman who shot her in the neck and set off a bomb.<br />A general election was held in Pakistan, according to the revised schedule, on 18 February 2008,). Pakistan's two big and main opposition parties, the Pakistan Peoples Party (PPPP) and the Pakistan Muslim League (N) (PML (N)), won majority of seats in the election and formed a government. <br />On 18 August 2008, President Pervez Musharraf announced in a televised address to the nation that he had decided to resign after nine years in office.<br />Fourth democratic era (2008- present)<br />In the presidential election that followed President Pervez Musharraf's resignation, Asif Ali Zardari of the PPP was elected President of Pakistan. Zardari's government is facing the formidable challenges of a war next door, a never-ending territorial dispute, and ever-present internal political bickering.<br />Data Analysis <br />Process (X) chart <br />
    • During the period 1965-1972 we have 7 data points out of 8 below the average, this appears to because of the two wars (1965 & 1971) and its after effects.
    • 8. During the period 1973-1984 we have seen all the data points above the average, this appears to because of the following factors:
    • 9. New Constitution of Pakistan that lead to political stability
    • 10. US aid for support in Afghan war
    • 11. Year 1983 has the highest inflated reserves value in the history of Pakistan; this may be due to extensive US foreign aid.
    • 12. The period 1985-2000 saw all data points below the average except for the year 1994, this appears to be because of the political instability and post afghan war effects.
    • 13. 1994 appears to be an exception in this period, this may because of the extensive listing of public companies in stock exchange in the previous three years (around 42%). This resulted in increased level of confidence in overseas Pakistanis which caused more remittances.
    • 14. The Political stability appears to be the reason for consistent growth and stability of Reserves in the period 2002-2007
    • 15. In 2008 the reserves are minimum in last mentioned period (2002-2008), the key again appears to be political instability and judicial crisis that resulted in major fall in foreign remittances.
    Moving Range (mR) Chart<br />
    • The reserves have the maximum growth in the following four years:
    • 16. 1973 – Pakistan appearing as leading Islamic state in Islamic countries
    • 17. 1983 – Afghan war support from US
    • 18. 2002 – Pakistan became the front line state for war on terror which resulted in foreign support
    • 19. Due to political instability and power shifting to democratic-political forces there is a major fall in reserves and foreign remittances in 2008.
    Conclusion<br />The political instability and other social events are seen to have an effect on the country’s reserves. It has become evident that there is a link between the two variables. An association is seen between the political factors and the increase and decrease of the reserves. <br />At macro level this study fits in with the socio-economic factors of Pakistan. This study can help the country’s leadership to be more aware of the political factors and there economic impacts. <br />Another outcome is that the study needs to be made more detailed and broader, in order to full capture the economic state. The other important indicators of economy need to be identified and studied to present a true picture of Pakistan’s economy. <br />References<br />
    • Edgardo E. Zablotsky, Political statbility and economic growth. A two way relation, 1996
    • 20. Muhammad Younis, Xu Xiao Lin, Yahya Sharahili, Santhirasegaram Selvarathinam, Political Stability and Economic Growth in Asia, 2008
    • 21. Mauro, Paolo. Corruption, Country Risk and Growth, paper presented at the XII Latin American Meeting of the Econometric Societ, Venezuela, August 1994.
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