Publications by Author: Khwaja, Asim

We estimate the impact on pilgrims of performing the Hajj pilgrimage to Mecca. Our method compares successful and unsuccessful applicants in a lottery used by Pakistan to allocate Hajj visas. Pilgrim accounts stress that the Hajj leads to a feeling of unity with fellow Muslims, but outsiders have sometimes feared that this could be accompanied by antipathy toward non-Muslims. We find that participation in the Hajj increases observance of global Islamic practices such as prayer and fasting while decreasing participation in localized practices and beliefs such as the use of amulets and dowry. It increases belief in equality and harmony among ethnic groups and Islamic sects and leads to more favorable attitudes toward women, including greater acceptance of female education and employment. Increased unity within the Islamic world is not accompanied by antipathy toward non-Muslims. Instead, Hajjis show increased belief in peace, and in equality and harmony among adherents of different religions. The evidence suggests that these changes are more a result of exposure to and interaction with Hajjis from around the world, rather than religious instruction or a changed social role of pilgrims upon return.

The lack of "social capital" is increasingly forwarded as an explanation for why communities perform poorly. Yet, to what extent can these community-specific constraints be compensated? I address this question by examining determinants of collective success in a costly problem in developing economies—the upkeep of local public goods. One difficulty is obtaining reliable outcome measures for comparable collective tasks across well-defined communities. In order to resolve this I conduct detailed surveys of community-maintained infrastructure projects in Northern Pakistan. The findings show that while community-specific constraints do matter, they can be compensated by better project design. Inequality, social fragmentation, and lack of leadership in the community do have adverse consequences but these can be overcome by changes in project complexity, community participation and return distribution. Moreover, the evidence suggests that better design matters even more for communities with poorer attributes. Using community fixed effects and instrumental variables offers a significant improvement in empirical identification over previous studies. These results offer evidence that appropriate design can enable projects to succeed even in “bad” communities.

The inability of developing countries to absorb and retain capital has long puzzled observers. The unanticipated events of 9/11 simultaneously led to a surge in capital flow into Pakistan, and an increase in aggregate demand. Yet despite rising deposit to loan ratios and precipitous fall in cost of capital, banks showed remarkable hesitancy to expand firm credit. We use quarterly firm-level data on debt capacity limits on all actively borrowing firms in Pakistan to show that debt capacity constraints led to the limited absorptive capacity of financial sector. Consistent with debt capacity hypothesis, “financial slack” positively predicts credit growth, and this predictability shoots up immediately following 9/11. This financial slack effect is stronger within industries receiving larger demand shocks, stronger within smaller firms, and completely absent for firms that do not face debt capacity constraints due to ex-ante lax regulation. A number of tests show that our results are unlikely to be driven by unobserved firm quality or expected changes in loan demand. Tentative estimates put the economy wide costs of these debt capacity constraints at 2.3% of GDP.

With an estimated one hundred and fifteen million children not attending primary school in the developing world, increasing access to education is critical. Resource constraints limit the extent to which demand based subsidies can do so. This paper focuses on a supply-side factor—the availability of low cost teachers—and the resulting ability of the market to offer affordable education. We use data from Pakistan together with official public school construction guidelines to present an Instrumental Variables estimate of the effect of government school construction on private school formation. We find that private schools are three times more likely to emerge in villages with government girls’ secondary schools. In contrast, there is little or no relationship between the presence of a private school and pre-existing girls’ primary, or boys’ primary and secondary schools. Moreover, there are twice as many educated women and private school teachers’ wages are 18 percent lower in villages that received a government girls’ secondary school. In an environment with poor female education and low mobility, government girls’ secondary schools substantially increase the local supply of skilled women. This lowers wages for women in the local labor market and allows the market to offer affordable education. These findings highlight the prominent role of women as teachers in facilitating educational access and resonates with similar historical evidence from developed economies—the students of today are the teachers of tomorrow.

Developing countries are marked by the prevalence of informal business networks. Many believe that these networks facilitate information sharing, trade, and contractual enforcement in weak institutional environments. However estimating network benefi…ts remains difficult due to data limitations, and identi…fication concerns. This paper uses ownership data on all (but the very small)private …firms in Pakistan to construct business networks involving 100,000 …firms. We link two …firms together if they have a director in common, and document the presence of a super-network in the economy. It comprises 5% of all …firms, is over a 100 times larger than the next largest network and obtains more than half of all bank credit. We then investigate the economic value that membership to the super-network brings by exploiting entry (exit) of …firms over time into the network. We identify the causal effect of network membership through a number of tests, including instrumenting network membership with “incidental” entry/exit of …firms. Network membership increases total external fi…nancing by 16.5%, reduces propensity to enter …financial distress by 9.7%, and better insures fi…rms against industry and location shocks. When forming new banking relationships, entering …firms are also more likely to select banks that already have existing relationships with adjoining …firms. We also …find that consistent with theories of strategic network development, benefi…ts of memberships are stronger when …firms connect through more powerful network nodes.

This paper provides a detailed description of the shape and financial importance networks amongst the universe of firms in an emerging economy where a network link is defined as board interlocks i.e. two firms share a common director. We do so by making use of a novel dataset from Pakistan that includes information on all the 140,000 firms borrowing from formal financial markets over a four year period. We find that a significant fraction of firms, upto one-third, have board interlocks with other firms. More interestingly, while firm networks typically range from networks of 2 to 100 firms, there exists a single very large network—the "super-network"—that comprises of almost 10,000 firms and is more than a hundred times the size of the second largest network. This super-network plays a disproportionately important role in financial markets: Although comprising 7% of firms, over 55% of all formal lending goes to firms in this super-network. Moreover, super-network firms have access to a greater number of lenders, default less and appear to be insured against adverse shocks in the economy. The super-network is robust to different definitions of firm linkages and over time. Moreover, a closer examination reveals that there are no important nodes (directors or firms) in the super-network and that is a very robust and diffuse network—eliminating important nodes (either singly or in clusters) does little to disrupt the network. This suggests that in addition to what one normally thinks of as business groups—a closely coordinated group of firms—more loosely yet very stably knit firm networks may also play an important role in emerging economies.