BULLISH MARKETS, BEARISH EXPORTS: AN EMPIRICAL INQUIRY INTO PAKISTAN’S ECONOMIC DIVERGENCE

Abstract

This paper explores structural reasons for the discord between the economic fundamentals of Pakistan and the performance of the Pakistan Stock Exchange (PSX), focusing on the country's export sector. The author conducts a thematic analysis of the market, the macroeconomic and institutional frameworks, and identifies a ‘Dual Economy’ phenomenon. Although the PSX index shows a bullish trend, the driving PSX index construction constituents are non-export-oriented sectors (i.e. banking, energy, and fertilizers). These sectors are further driven by nominal market distorting variables (i.e. inflation and currency depreciation). The author argues that market growth is entirely liquidity driven. It has created a highly speculative market, rather than one that promotes industrial upgrading and export competitiveness. The author examines the institutional preoccupations of the bias towards the stability of the capital markets over the development of the real economy, regulatory capture, and the high costs of production on the export-oriented and SME sector, and argues that these created conditions that allow the capital market to function as an isolated financial loop. Therefore, the author argues that the PSX does not contribute to Pakistan's sustainable development. The author argues that unless the PSX is reformed to allow for export-linked capital market incursion, and the present speculative trading is restructured to allow for productive investment, the PSX will continue to be a narrow economic indicator of wealth for the elite of the country, and will offer little to the country’s economic resilience over the long run.