Exploring the Sources of Economic Growth in Pakistan

Introduction
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

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.
2

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. Years for the said period would be used as cases.
So we have 45 cases.

Source of the Data:

http://www.esds.ac.uk/international

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.
5

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

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

Gross
capital
GDP growth
formation
(annual %)
(annual %
growth)
45
45

Exports of
Official
Inflation,
goods and
exchange rate Domestic credit
consumer
services
(LCU per to private sector
prices
(annual %
US$, period
(% of GDP)
(annual %)
growth)
average)
45
45
45
45

5.489
4.875
11.854
140.518
1.809
0.354
84.128
-24.096
60.032
0.915
4.875
10.268

5.473
5.156
2.468
6.093
0.125
0.354
10.885
0.468
11.354
3.853
5.156
7.401

6.941
5.746
12.691
161.061
0.393
0.354
56.548
-17.582
38.966
-2.025
5.747
13.798

7.719
6.362
5.426
29.441
1.646
0.354
27.180
-.5165
26.663
4.273
6.362
10.053

21.361
13.117
18.574
344.990
1.082
0.354
57.165
4.762
61.927
6.722
13.117
31.105

24.082
24.646
3.348
11.208
-1.337
.354
17.586
12.200
29.786
22.425
24.646
25.970

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

Conclusion:
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.

References:
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.