Foreign Capital Inflows and Growth in Pakistan

Abstract

Developing countries have low levels of savings and investment. As a result most developing countries have to rely on Foreign Capital Inflows (FCI) to generate sufficient saving in order to achieve high levels of growth. Pakistan is one of those countries that rely heavily on external flows to supplement their savings and accelerate economic growth. The objective of this study is to find out the effect of FCI on the growth performance of Pakistan and vice versa. As the growth rate and FCI are expected to affect each other simultaneously, the Simultaneous Equation Model is applied on the aggregate time series data for the years 1970–71 to 2000–2001 for FCI, GNP and Savings. A positive and statistically significant relationship appears between FCI and growth. Further, it can be seen that Foreign Direct Investment (FDI) in FCI is highly significant and has contributed positively in the country's economic growth. The optimal policy which follows from these results is to bring changes in the composition of FCI and preferably to encourage FDI in order to enhance economic growth with the high growth level further affect FCI positively.