Determinants of Economic Growth in Pakistan: A Time Series Analysis

Abstract

This research evaluates the determinants of economic growth for Pakistan. The research tries to analyze the nature of causality between economic growth (GDP), foreign direct This research aims to calculate the simultaneous impact of foreign direct investment (FDI), Agriculture Rate (AGRI), energy consumption (EC) and trade openness (TO) on economic growth of Pakistan (GDP), for the period of 1976-2015. The study tries to analyze the nature of causality among economic growth (GDP), foreign direct investment (FDI), Agriculture Rate (AGRI), energy consumption (EC) and trade openness (TO). The ADF unit root test is used to determine the order of integration of variables. While Johansen (1988) and Johansen and Juselius (1990) maximum likelihood estimation approach is applied to check the co-integration and finally VECM is used to check the short run correlations. Diagnostic test, impulse response function, variance decomposition and granger causality are also used to check autocorrelation and causality among those variables. The result shows that there is affirmative impact of agriculture, energy consumption, trade liberalization and FDI on GDP. Moreover, in short run TO, AGRI and EC have positive impact on economic growth, but FDI has negative impact on GDP. Though, the block of exogeneity tests shows that the granger causality runs from GDP, TO, FDI, EC and AGRI growth rate. Only Agriculture growth rate (AGRI) and energy consumption (EC) are significant.