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Exploring the Sources of Economic Growth in Pakistan

The economic growth is a complex phenomenon, which involves several factors. One of the major areas of research in economics has been to identify factors of economic growth. There is ample literature on the subject matter. These factors differ from country to country. If these factors can be identified, it can help to accelerate growth by focusing on the major leading sources of growth. Economy of Pakistan has registered a growth rate of 5.32%, 6.30%, 3.96%, and 3.34% during 1970-1980, 1981-1990, 1991-2000, and 2001-2003 respectively. Overall average for the said period is 5.03%1. This trend is both important and significant for Pakistan. It is because this almost five percent growth rate is accompanied by growth in the capital stock which approximates around 17 to 18 percent of the GDP2. This accumulation of resources shows a trend, that incremental capital-output ratio (COR) is low in Pakistan than a number of East Asian, South Asian and Latin American countries.3 Existence of this situation justifies a detailed study of the factors, which are responsible for the moderate growth rate with low capital accumulation.

Research Question:
What are the sources which affect the GDP growth rate in Pakistan?

Objective of the Study:

The objective of this study is to explore the determinants of GDP growth in Pakistan. In this study time series data on six variables would be used to investigate the dependence of GDP growth rate on all other five variables.

Variables and Their Definitions4:

Dependent Variable: Growth rate of gross domestic product (GGDP): This variable is used as economic growth rate. Market prices in the terms of local currency are used to measure annual percentage growth rate of GDP. Year 2000 is the base year to measure the aggregates in the terms of U.S. dollars. GDP is measured as the sum of gross value added by all domestic producers of Pakistan economy including product taxes and excluding subsidies for the product. Independent Variables:
1 2

Calculated using the data from WDI mark 2007 For further study see khan (2006) 3 For details see Limam and Miller (2004) 4 Definitions of the variables correspond to the World Bank national accounts data.

1. Growth rate of gross capital formation (GGCF): Aggregates of this variable are measured in the terms of U.S. dollars, using 2000 as the base year. Gross capital formation includes expenditures on increases in the fixed assets of Pakistan economy adding net changes in the inventories level. 2. Growth rate of exports of goods and services (GEX): Aggregates of this variable are measured in the terms of U.S. dollars, using 2000 as the base year. Exports of goods and services include the value of merchandise, freight, insurance, transport, travel, royalties, license fees, and other services excluding the labor and property income and transfer payments. 3. Inflation rate (INF): This variable is measured by the consumer price index, which shows the annual percentage change in the value of a fixed basket of goods and services. The Laspeyres formula of consumer price index is used. 4. Exchange rate (EXR): Exchange rate is the units of local currency relative to the U.S. dollar. This variable is calculated as an annual average based on monthly averages. 5. Domestic credit to private sector as percentage of GDP (DCPV): This variable measures the financial resources such as loans, purchases of nonequity securities, and trade credit etc provided to the private sector.5

Description of Cases:
A sample period of 45 years has been selected for this study for the period of 1961-2005 with annual frequency. cases. So we have 45 cases. Years for the said period would be used as

Source of the Data:

Quality of the Data:

Quality of the data is up to the mark. No value of any variable is missing. Data source is reliable. All of the independent variables have the theoretical explanations of the effects on the economic growth.

The Definitions of last three independent variables correspond to the International Financial Statistics of International Monetary Fund.

Descriptive Analysis:
We used the scatter diagrams to show the relationship between dependent and independent variables. Table of summary statistics is also included in the report to display the overall picture of the variables.

Justification of the Method:

Keeping the objective of the study in mind, scatter diagrams present the idea about the relationship between dependent and independent variables.

Table 1 Summary Statistics

Gross Exports of Official Inflation, capital goods and exchange rate Domestic credit GDP growth consumer formation services (LCU per to private sector (annual %) prices (annual % (annual % US$, period (% of GDP) (annual %) growth) growth) average) 45 45 45 45 45 45 0 5.489 4.875 11.854 140.518 1.809 0.354 84.128 -24.096 60.032 0.915 4.875 10.268 0 5.473 5.156 2.468 6.093 0.125 0.354 10.885 0.468 11.354 3.853 5.156 7.401 0 6.941 5.746 12.691 161.061 0.393 0.354 56.548 -17.582 38.966 -2.025 5.747 13.798 0 7.719 6.362 5.426 29.441 1.646 0.354 27.180 -.5165 26.663 4.273 6.362 10.053 0 21.361 13.117 18.574 344.990 1.082 0.354 57.165 4.762 61.927 6.722 13.117 31.105 0 24.082 24.646 3.348 11.208 -1.337 .354 17.586 12.200 29.786 22.425 24.646 25.970

No of Valid Observations Missing Mean Median Std. Deviation Variance Skewness Std. Error of Skewness Range Minimum Maximum Percentiles 25 50 75

Table 1 shows the summary statistics of the variables used in the study. These summary statistics reflect the overall picture of the variables. All the variables have the positive growth rates on average. Only domestic credit to private sector shows the negative skewness. All of the other variables are slightly positively skewed. Among all the variables official exchange rate shows the maximum value of standard deviation which shows the large variability in the exchange rate of Pakistan currency during the study period.

Scatter Diagrams:
Figure 1 Figure 2

Figure 3

Figure 4

Figure 5

Figure 1 shows the relationship between GDP growth and the growth rate of gross capital formation. The diagram reflects the positive effect of the growth of gross capital formation on the GDP growth. The effect of the growth of exports of goods and services on GDP growth is also positive as shown in figure 2. Figure 3 does not reveal any effect of inflation rate on the GDP growth. Figure 4 shows that the effect of official exchange rate of local currency per U.S. dollar on the GDP growth is little bit negative. The effect of domestic credit to the private sector as the percentage of GDP on the GDP growth is positive. Positive effect of independent variable means any increase in independent variable would raise the value of dependent variable too, whereas it would happen reciprocally if the effect of independent variable on the dependent variable is negative. From the above analysis we conclude that gross capital formation, domestic credit to private sector, export growth of goods and services and official exchange rate are the important factors of economic growth of Pakistan.

Khan, Safdar Ullah (2006). Macro Determinants of Total Factor Productivity in Pakistan, SBP Research Bulletin Volume.2, Number. 2, 2006.

Limam, Y. R. and Miller, S. M. (2004), Explaining Economic Growth: Factor accumulation, Total Factor Productivity Growth, and Production Efficiency Improvement, University of Connecticut Working Paper, 20.