NED UNIVERSITY OF ENGINEERING & TECHNOLOGY

Department of Economics & Finance

E
M
D
DETERMINANTS
OF INCOME
DIVERSIFICATION
IN FLOOD PRONE RURAL
PAKISTAN

Submitted by:
SAIM ALI EC-19056
UMAISA SHANGOOL MUSTAFA EC-20028
MARIBA KHAN EC-20011
 DETERMINANTS OF INCOME DIVERSIFICATION IN FLOOD
PRONE RURAL PAKISTAN

INTRODUCTION:
Pakistan is one of the countries most affected by climate change. Floods threaten the livelihoods of rural
Pakistani families, whose primary source of income is agriculture. Climate change is one of the world's
greatest challenges and one of the most pressing concerns in recent decades. Climate change is
expected to increase the frequency and severity of floods in many nations as river discharges rise with
precipitation. It is common knowledge that flooding has a negative impact on the livelihoods of those
affected. The effect of a flood on profit is lopsidedly more grounded in emerging nations because of their
restricted versatile limit and absence of emotionally supportive network for post-flood restoration.
Consequently, floods are most likely to affect people living in developing nations, particularly the poor in
rural areas.

To protect against external shocks and ensure the long-term viability of the household's income, income
diversification is an important livelihood strategy. That's what expansion infers, rather than exclusively
depending on horticultural pay, the families enhance their pay portfolio into on-ranch and off-ranch
exercises.

EFFECT OF FLOODS ON PAKISTAN’S RURAL AREAS:

Since 2001, Pakistan has seen an increase in the frequency of floods, which have also caused significant
damage to crops and property [6]. Over 880 thousand homes were impacted by a major flood in 2010,
which covered 70,238 km2. Another flood in 2011 affected 21,000 km2, 6,000,000 people, 400 km of
railroad tracks, 16,500 km2 of agricultural land, and 500 km2 of forests [7]. Floods primarily affect the
agriculturally dependent rural population. Farming accounts for approximately 35% of the country's total
workforce, and 61% of rural workers are vulnerable to flooding. Due to its geographical location and low
level of disaster preparedness, the province of Sindh has been one of the most affected [8]. Due to its
greater reliance on agriculture-based sustenance and lack of economic opportunities, district Dadu is
relatively more susceptible to flooding than the other districts that are prone to disasters.

DETERMINANTS OF INCOME DIVERSIFICATION:

Age:

Income diversification strategies can be significantly influenced by age. Younger people may be more
open to adopting new income-generating activities or seeking employment opportunities off the farm,
whereas older people may have limited physical abilities and rely on traditional occupations.

Gender:

In rural communities, the division of labor and access to resources are frequently influenced by gender
dynamics. Different patterns of income diversification may result from women and men having distinct
roles and responsibilities. Women's and men's choice of income-generating activities can also be
influenced by social and cultural norms.

Level of Education:

Diversification of income is heavily influenced by education. Individuals with higher levels of education
are equipped with a broader range of knowledge and skills, increasing their chances of locating a variety
of income sources. People with education may be more likely to work in services, entrepreneurship,
skilled labor, or other non-agricultural fields.

Size of a Home:

A household's labor capacity and resource availability are affected by its size. With more family members
available to participate in various income-generating activities, larger households may be able to
diversify their sources of income. On the other hand, smaller households may have fewer resources for
labor, increasing their reliance on particular sources of income.

DESCRIPTIVE STATISTICS:
Overview of income diversification strategies in flood prone areas:

To mitigate the negative effects of flooding and ensure their economic resilience, households in flood-
prone areas frequently employ a variety of income diversification strategies. An overview of some typical
income diversification strategies that have been observed in such areas is as follows:

Diversification in Agriculture:

Even in flood-prone areas, agriculture continues to be a significant source of income for rural
communities. Households can cultivate multiple crops with varying maturity periods to diversify their
agricultural income and reduce the likelihood of crop failure due to flooding. In order to get the most out
of their land, they might also use intercropping or mixed cropping. Additionally, adopting crop varieties
that are resistant to flooding or drought can assist in minimizing losses during flood events.

Self-employment Outside of Agriculture:

Self-employment outside of agriculture can help households reduce their reliance on agriculture. Small
businesses like tea stalls, handicraft production, food processing, and tailoring services are examples of
this. These activities are less susceptible to the immediate effects of flooding and provide additional
revenue streams.

Employment Not Paid by the Farm:

Another way to diversify one's income is to look for wage work in nearby urban areas or outside the
community. Members of the household, particularly younger people, may migrate for the duration of a
season or for a short time in order to work in construction, manufacturing, services, or other industries.
During flood events, employment outside of agriculture can supplement agricultural income and provide
financial stability.
Remittances:

Remittances from family members who are employed in other regions or countries can significantly
increase household income diversification in flood-prone areas with a history of migration. During and
after floods, remittances reduce the financial burden on affected households by providing a steady
source of income.

METHOD AND METHODOLOGY

• The study examines income diversification in a flood-affected rural district of Pakistan.
• Data from randomly selected households is used, making it the first study of its kind in this
context.
• The Study explores the moderating effect of the education of the household head on the
relationship between determinants and household income.
• Findings indicate that households with more earning members and those headed by educated or
male members are more likely to have diversified income portfolios.
• The moderation analysis reveals that education positively influences the impact of gender and
age of the household head on income diversification.
• Education is particularly significant in the study area, as the results suggest that poverty is not a
significant barrier to diversification strategies in rural Pakistan.

We have designed a simple regression model. The equation can be expressed in mathematical
form as:

Y (Earnings) = β1 +β2 (Education) + β3 (Gender) + β4 (Age) + β5 (Region) + β6 (Provinces) + µ

(standard error)

Dependent Variable: Earnings

Independent Variables: Education, region, gender, four provinces, and age

RESULTS:

After running the regression analysis, we conducted the bivariate analysis in which the
dependent variable was tabulated one by one against each independent variable. The following
tables show the effect of matriculation, intermediate, graduation, masters, and MPhil/PhD on
the earnings of both males and females separately.
Males:

The above table shows the effect of educational attainment on wages of males only from the
data. The result shows that a male with a PhD earns 39435 units of more monthly income than
those who just have primary education. The results for males also show a positive direct
relationship between their education level and monthly incomes.

Females:

The above table shows the results of the relationship between the educational level and the
monthly wages of females in Pakistan. Akin to the males, the results show a direct positive
relationship between the educational level and monthly wages of females. Females who have a
PhD earn 30934 more units of monthly wage compared to those with primary education.
Comparing the analysis of males and females, it can be discerned that increase in monthly
wages due to an increase in the education level for males is more than that of females. We can
see that at almost every level of education males earn more than females except at the
matriculation level. At the matric level, we can see that males earn 2912 more units of monthly
income than males at the primary level. Conversely, females earn 4045 more units of monthly
income than those at the primary level of education, which is more than that of males.

CONCLUSION:

This study investigates the factors that influence income diversification in the predominantly
rural and flood-prone in Pakistan's Sindh province. The findings indicate that households with
multiple earning members and heads of household who are male and educated have, on
average, higher levels of income diversification. The relationship between the household head's
gender and age and income diversification is also positively moderated by the household head's
education.
NED UNIVERSITY OF ENGINEERING & TECHNOLOGY
Department of Economics & Finance

DETERMINANTS OF
EXTERNAL DEBT
A Panel Data Analysis for Oil and Gas Exporting and Importing
Countries

Submitted by:
SAIM ALI EC-19056
UMAISA SHANGOOL MUSTAFA EC-20028
MARIBA KHAN EC-20011
 DETERMINANTS OF EXTERNAL DEBT
A Panel Data Analysis For Oil And Gas Exporting And Importing Countries

INTRODUCTION:
External Debt:

The portion of a nation's debt that is borrowed from commercial banks, governments, or international financial
institutions is known as its external debt. These credits, including interest, should ordinarily be paid in the cash in which
the advance was made.

Due to persistent current account and fiscal imbalances, many developing nations' external debt has increased
significantly in recent decades. This rising weight of outer obligation and high obligation administration installments is
turning into a steady wellspring of concern for these economies.

In recent years, scholars and policymakers have shown a lot of interest in the factors that influence developing countries'
external debt. The majority of previous studies use cross sections or time series, and only a few studies use panel data.

This study involves board information examination for two reasons.

• First, due to the rapid shifts in the global macroeconomic environment over the past few years, the panel data
approach seems to be the most popular because it lets you control time-specific events that are linked to
borrowing abroad.
• Second, an aggregate set of data was used in the majority of previous studies. This study aims to investigate the
determinants of external debt in a sample of oil and gas exporting and importing nations because it is believed
that determinants of external debt may vary across economies.

For a variety of reasons, the study focuses on nations that import and export oil and gas. First, oil and gas exporting
nations typically have high incomes, whereas oil and gas importing nations typically have low incomes and are heavily
indebted. Second, the oil and gas sending out nations have surplus in their ongoing record while oil and gas bringing in
nations are confronting a deficiency in their ongoing record. Thirdly, a lot of countries in both categories have a lot of
external debt, and the World Bank lists many of them as "highly indebted poor countries" (HIPC). The results of this study
will be extremely helpful in developing their strategy for reducing external debt.

MODEL SPECIFICATION:
Following model is used to explore the determinants of external debt in oil and gas exporting countries

EDit=∝0 +∝1 GDPit+∝2 CABit+∝3 GGRit+∝4 GGEit+∝5 INFit+∝6 POI Lit+∝7 RESit+∝8 INVit+μit

Where,

ED = Gross external deb

GDP = Gross domestic product

CAB = Current account balance

GGR = General government revenue

GGE = General government expenditure

INF = Inflation rat

 POIL = Price of oil

RES = Foreign exchange reserve

INV = Gross capital formation

The parameters ∝2 , ∝4 , ∝5 are expected to be positive while ∝1 , ∝3 , ∝6 , ∝7 are expected to be negative. The sign of
∝8 is an empirical issue. The μit is the error term.

The determinants of external debt of oil and gas importing countries is estimated using following model.

EDit=β0 +β1 GDPit+β2 TBit+β3 GGRit+β4 POILit+β5 REDit+β6 FDIit+β7 GDSit+β8 INVit+ωit

Where,

ED = Gross external deb

GDP = Gross domestic product

TB = Trade balance

GGR = General government revenue

POIL = Price of OIl

RED = Interest on external debt

FDI = Foreign direct investment

GDS = Gross domestic savings

INV = Gross capital formation

The parameters β2 , β4 , and β5 are expected to be positive. The parameters β1 , β3 and β7 are expected to be negative.
The sign of the parameters β6 and β8 is an empirical issue. The ωit is the error term.

GRAPHICAL REPRESENTATION:
Figure 1: Trends in external debt of oil and gas exporting countries

Figure 2: Trends in external debt of oil and gas importing countries

Estimation result:
Table 1: Cross correlation matrix for oil and gas exporting countries, (2004-2013)
ED GDP CAB GGR GGE INF POIL RES INV
ED 1
GDP −0.155 1
CAB −0.183 0.750 1
GGR 0.187 0.078 0.330 1
GGE 0.556 −0.016 −0.052 0.667 1
INF 0.191 0.029 −0.136 −0.035 0.114 1
POIL −0.124 0.301 0.246 0.032 0.003 0.055 1
RES −0.162 0.756 0.717 0.194 0.115 −0.073 0.215 1
INV 0.011 −0.100 −0.037 −0.201 −0.267 −0.194 −0.163 0.056 1

Table 2: Cross correlation matrix for oil and gas importing countries, (2004-2013)
ED GDP TB GGR POIL RED FDI GDS INV
ED 1
GDP −0.362 1
TB −0.181 0.501 1
GGR 0.131 −0.320 −0.237 1
POIL 0.079 0.208 −0.172 0.096 1
RED 0.685 −0.294 −0.202 0.215 −0.116 1
FDI 0.435 −0.396 −0.423 0.311 −0.153 0.328 1
GDS −0.126 0.271 0.837 −0.002 −0.118 −0.231 −0.112 1
INV 0.196 −0.402 −0.257 0.437 0.065 −0.012 0.573 0.290 1

The cross correlation of various variables for oil and gas exporting and importing nations is shown in
Tables 1 and 2. In countries that export oil and gas, Table 1 demonstrates that GDP, CAB, the price of oil,
and foreign exchange reserves have a negative correlation with external debt, whereas government
expenditure, revenue, inflation, and investment have a positive correlation with external debt. According
to Table 2, GDP, trade balance, and domestic savings have a negative correlation with external debt for
oil and gas-importing nations, whereas government revenue, the price of oil, interest on debt, FDI, and
investment have a positive correlation with external debt. In essence, these preliminary correlations
suggest that the relationship between external debt and macroeconomic variables is typically weak.
However, according to economic theory, there is a negative relationship between economic growth and
external debt in both regions.
Model Estimation Results:

Table 4: Model estimation results

Oil and gas exporting countries Oil and gas importing countries
Variable Coefficien t-statistic P Variable Coefficien t-statistic P
t t
Constant 50.434 1.427 0.156 Constant 47.422 2.713 0.008
GDP −0.131 −3.742 0.000 GDP −0.159 −2.72 0.007
6
CAB 0.933 3.111 0.002 TB 5.607 4.490 0.000
GGR −2.758 −3.198 0.002 GGR −1.538 −2.38 0.019
3
GGE 4.041 5.183 0.000 POIL 0.240 1.878 0.063
INF 1.344 2.825 0.006 RED 19.083 8.523 0.000
POIL −0.179 −1.993 0.049 FDI 1.750 2.622 0.010
RES −0.113 −3.388 0.001 GDS −5.157 −4.20 0.000
4
INV −0.682 −1.702 0.092 INV 5.352 4.320 0.000
Adjusted-R² 0.52 F-Statistic 16.90 Adjusted-R² 0.60 F-Statistic 22.92
DW Statistic 0.45 P (F- 0.00 DW Statistic 0.58 P (F- statistic) 0.00
statistic)

The estimation results for both groups of countries are given in Table 4.

• Theoretically, if a country has more income, it may not require external funding and reduce the
chances of borrowing. On the other hand, a higher income is an indicator of credit worthiness
and may get more loan, resulting higher borrowing and debt. Essentially in both models the
coefficients of GDP variable are negative and highly significant, which highlight the effectiveness
of economic growth in reducing external debt in the region.
• The coefficients of variable CAB and TB represent the predicted positive sign and these are
statistically significant. This suggests that increase in current account or trade deficit will
stimulate external debt in the region.
• There is an important role of general government revenue (GGR) and expenditure in external
debt. Increase in government expenditure has a positive effect on external debt if local markets
are shallow. On the other hand, an increase in government revenue, reduces the need for
further borrowing.
• The international price of oil is also playing an important role in external debt of oil and gas
exporting and importing countries. As expected, the coefficient of POIL is negative for oil-gas
exporting countries but positive for oil-gas importing countries. This shows that an increase in
international price of oil is expected to reduce the external debt of oil and gas exporting
countries but worsen the debt burden in oil and gas importing countries.
• An increase in the inflation rate put the pressure on exchange rate and to maintain the fixed
rate, these countries need foreign exchange, which can be met through foreign borrowing that
may result in accumulation of external debt.
• The effect of investment on external debt is very high in the region. This effect is more in oil and
gas importing countries compare to oil and gas exporting countries. The investment is affecting
 external debt positively in oil and gas importing countries, and negatively in oil and gas exporting
countries.
• The domestic saving has expected negative effect on external debt of oil and gas importing
countries. Since oil and gas importing countries have very low saving rate, this force the m to
borrow abroad extensively. The increase in domestic saving will decrease their external debt by a
large amount.

• An increase in reserve, may indicate an enhanced ability to manage the debt, which may result
increase borrowing to build up reserves.

The validity of these results are confirme by comparing them with the results obtained in the previous
studies, using different estimation methods and different sample sizes. The two models’ results are good
based on the adjusted-R2 and F-statistic. The explanatory power of all models is between 50% and 60%

CONCLUSION:
In this study, the determinants of external debt are explored in oil and gas exporting and importing
countries. The results from the study confirmed that the determinants of external debt, and their effects
are different in oil and gas exporting and importing countries. The panel data estimation results for oil
and gas exporting countries show that increased economic growth, foreign exchange reserves, GGR,
price of oil, and domestic investment are the important factors in reducing external debt. The current
account deficit, GGE and inflation are accumulating external debt of these countries

The estimation results of oil and gas importing countries are slightly different than the oil and gas
exporting countries. The increase in economic growth, GGR, and gross domestic savings (GDS) are
important factors in reducing external debt in oil and gas importing countries. The increase in trade defi
it, international price of oil, interest payment on external debt, FDI and domestic investment are
resulting in higher external debt in oil and gas importing countries.