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External Sector and Economic Growth of Pakistan: A Time Series Analysis

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Author Affiliations

  • 1Scholar of Economics, University of Sargodha Lahore Campus, Lahore, PAKISTAN
  • 2 School of Economics, Bahauddin Zakariya University, Multan, PAKISTAN
  • 3 Department of Economics, Ghazi University, Dera Ghazi Khan, PAKISTAN

Int. Res. J. Social Sci., Volume 4, Issue (10), Pages 25-31, October,14 (2015)

Abstract

The purpose of the present study is to explore the impact of the indicators of external sector such as trade openness, foreign direct investment and external debt on economic growth of Pakistan by employing ARDL approach on time series data over the period of 1980 –2013. Some control variables i.e., education, labor force participation and physical capital have also been included in the model because they have a key role in explaining the economic growth as suggested by various growth theories. To check long run dynamics we used ARDL approach and to find out short run dynamics we used error correction model (ECM). The study concluded that there exists a long run as well short run relationship between indicators of external sector and the economic growth. Foreign direct investment and trade openness positively affect economic growth while the external debt negatively effects economic growth of Pakistan. The variable physical capital has significant positive impact on economic growth in long run and insignificant negative impact in short run, while education and labour force participation rate have significant positive association with economic growth in short as well as in long run. It is suggested that gross domestic product can be increased with the increase in education/skills, labour force participation, trade openness and foreign direct invest. External debt inhibits economic growth of Pakistan. Government and higher authorities should formulate such policies that enhance the level of openness, physical capital, foreign direct investment, education and labour force participation for sustained economic growth of Pakistan.

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