Inflation, Income Inequality and Economic

Growth Of Pakistan

Madiha Nawaz
Msc 4th (Morning)
Me-40328
 Introduction
 Pakistan is a developing country, which has experienced
instability in economic growth and price levels. Ours
economy, has faced higher levels of inflation rate and
instability in general price level.
 Higher level of inflation has its undesirable effect on the
poor and household. In Pakistan income distribution is
much uneven. There are less employment opportunities to
encounter the miseries of poverty and income inequality.
There are different arguments about the impact of
inflation.
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 On the other hand; in the current period, there are major
issues being faced by the world. They are economic
growth and unequal distribution of wealth and inflation.
 Inflation is considered to be as a purely monetary
phenomenon that dominance a country’s income
inequality level in different ways.
 Objectives
 To examine relation between inflation and income
inequality.
 To examine how inflation effect on economic growth in
perspective of Pakistan.
 To investigate and analyze how income equality effect
economic growth of Pakistan.
 Literature Review
 (Sharafat Ali Bahauddin Zakariya University Bahadur Campus Layyah 2014) in “Inflation,
Income Inequality and Economic Growth in Pakistan: A Cointegration Analysis. A Time
Series Analysis of Pakistan” used the time series data for the period of 1972 to 2007.
Johansen cointegration approach and vector error correction models were applied for the
long run and short run analysis, respectively. This study concluded that there was negative
relation between income inequality and economic growth in Pakistan.
 (Iqbal 2014) analyzed the relationship between economic growth, income distribution, and
inflation and to test the existence of Kuznets Hypothesis in Pakistan. For this analysis, data
had been collected from WDI for 22 years, from 1980 to 2002. Johnson’s Co-integration
model had been used in this study. Hong (2002) founded the inflation-inequality
relationship. This study include that, there was positive effect of Inflation on GINI
coefficient the income-growth relationship did not affect and U-shaped Kuznets hypothesis
still exists in Pakistan.
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 (Yue 2011) in Income Inequality Economic Growth and Inflation: A Study on KOREA. In
this study, yearly data of GINI coefficient, GDP, and CPI of Korea 1980 to 2002 were
used. For this analysis, Unit root test was applied and also used Error Correction model to
examine the Cointegration movement of the data. Moreover, there was no empirical
evidence to support the existence of long term co integrated movement inflation and
income distribution in Korea.
 (Majeed, 2016) in Economic growth and income inequality Nexus: An Empirical Analysis
for Pakistan. This study explained the impact of income inequality on economic growth of
Pakistan and used the time series data from 1975 to 2013. The data was extracted from
WDI. The empirical findings showed a consistently positive and strongly significant
impact of inequality on growth.
 Model specification

 Econometric Model:

GINI t = 𝛼0 + 𝛼1𝐺𝐷𝑃t + + 𝛼2 INFt + 𝛼3UNt+ 𝛼4TOPPt + µt

 Methodology & Data
 The stationary of the variables were investigated using unit root
tests
 Augmented dickey fuller to examine if the variables are integrated
of the I (1) or I (0)
 ARDL, cointegration and ECM framework was used to study the
long run and short run relationship between selected variables.
 Diagnostics and structural stability tests were used to study stability
of the
 Empirical results and analysis
 Unit root test:
 Augmented Dicky fuller test has been used for checking the stationary of the
variables.
Variable Abbreviation Prob. value Stationarity level
Gross Domestic GDP 0.0044 Level I _0
Product
Inflation INFL 0.0463 Level I _0

Unemployment UNEMP 0.0000 1st Diff I _1

Trade openness OPP 0.0010 Level I _0

GINI INDEX GINI 0.0007 Level I _0

 Results Interpretation

 GINI is at level. The probability value is under 5%.

 Unemployment is at 1st difference. The probability value is under 5%.
 INF is at level. The probability value is under 5%.
 GDP is at level. The probability value is under 5%.
 Trade is at level. The probability value is under 5%.
 Critical Value Of Bound Test
 ARDL Bound test:
 As F-statistics value is greater than both upper and lower bounds, so it indicates long run
relationship between GINI and other Economic variables.
Level of significance Lower bound Upper bound
I(0) I(1)
10% 3.2 4.09

5% 2.45 3.49

2.5% 2.78 3.87

1% 3.29 4.32

F-Statistics 10.71555 K=4

 ARDL long run form:
 The results of ARDL model which indicate that the co-efficient value of GDP is statistically
insignificant in the long run, as the t-value of the GDP is less than 2 which reflects negative
relationship of GINI along with the GDP per capita annual growth rate. The Coefficient
value of INF is statistically significant and positively related to GINI Index in the Long run.

Variable Coefficient Standard Error T-Statistics Probability

GDP -0.063069 0.176933 -0.181632 0.8506

INF 0.523381 0.108156 3.951023 0.0013

UNEMPLOYM 0.051523 0.001289 0.419362 0.0109

ENT
TOPP 0.000468 0.091759 2.344511 0.0318

C -13.49167 1.977910 -3.76938 0.0000

 ARDL Short run form
 The value of ECM co-efficient is -0.782952 which is negative and significant.
This negative and significant coefficient of error correction model indicates the
speed of adjustment from disequilibrium to equilibrium.
 The lagged ECM value indicates long run relationship between variables as it’s
coefficient is significant and between 0 and -1 which means speed of adjustment
back to equilibrium after shocks is 78%

Variable Coefficient Std.Error t-Statistics Prob.

D(GDP(-1)) -0.290040 0.002437 -2.887790 0.0113

D(TRADE(-1)) 0.019943 0.003238 3.653796 0.0013

D(INF) -0.17253 0.03678 -3.514522 0.0531

D(UNE) 0.048734 0.067977 0.43841 0.0484

CoinE(-1) -0.782952 0.007620 -6.08385 0.0000

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R-squared 0.917657 Mean dependent var 0.01974

Adjusted R-squared 0.863302 S.D. dependent var 1.456678

S.E. of regression 0.432712 Akaike info criterion 2.682418

Sum squared resid 3.660261 Schwarz criterion 2.386132

Log likelihood -11.28173 Hannan-Quinn criter. 1.827956

Durbin-Watson stat 2.075736

 Diagnostics and stability tests

Breusch-Godfrey serial correlation LM test: (No Autocorrelation)

F-statistic 2.707112 Prob. F(2,33) 0.0616

Obs*R-squared 2.644146 Prob. Chi-Square(2) 0.0576

 Diagnostics and stability tests
 CUSUM and CUSUM of squares: Model overall structurally stable
20
15
10
5
0
-5
-10
-15
-20
1985 1990 1995 2000 2005 2010 2015

CUSUM 5% Significance
Graph of the CUSUMSQ

1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
1985 1990 1995 2000 2005 2010 2015

CUSUM of Squares 5% Significance

Policy recommendation

1. It is recommended here for the policy makers and government should control inflation to trim down
income inequality.
2. Government must revise tax policy, because indirect taxes cause high inflation due to which income
distribution become unfair. Direct taxes should be employed in those people who have larger income.
3. Policy makers should also focus on the issue of unemployment to reduce the income inequality.
4. Policy makers should implement regulation and program that will alleviate inequality in income
distribution and government should reduced government spending on final goods and services so to
achieve higher growth rate.
5. The macroeconomic policy to stimulate sustainable growth ,generated employment but with stable
price level would more suitable.
6. The government economic policies should be focus on the redistribution of income through
progressive taxation.
Conclusion

 In this research, we have examined the Inflation, income inequality and economic growth
of Pakistan by measuring the impact of control by altering the impact of Inflation, GDP,
Trade, and Unemployment.
 Here, GINI is kept as dependent variable, and GDP, inflation, Unemployment and trade
openness are the Independent variables.
 . First of all, we have applied the unit root test to check that weather the dependent and
independent variables are stationary or not.
 After that, ARDL test is been applied for the short run and long run results. The result
indicates that there is negative relation between GINI and GDP there is negative relation in
long run and statistically insignificant
 . For the existence of Kuznets U-shaped inverted in long run Cointegration was used and
this study adds that with the positive effect of Inflation on GINI coefficient the income-
growth relationship do not affect and U-shaped Kuznets hypothesis still exists in Pakistan.
 By increase in inflation it hinders income distribution and it is in line with results of the
previous studies.
 Therefore, it is recommended here for the policy makers and government should control
inflation to trim down income inequality.
Thank you