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Economic
Foreign inflows and economic growth in
growth in Pakistan: some Pakistan

new insights
Muhammad Tahir
Department of Management Sciences, COMSTATS University Islamabad,
Abbottabad Campus, Abbottabad, Pakistan Received 26 January 2020
Revised 12 July 2020
24 July 2020
Ahmad Ali Jan and Syed Quaid Ali Shah 22 August 2020
Department of Management and Humanities, Universiti Teknologi Petronas, 26 September 2020
Accepted 27 September 2020
Tronoh, Malaysia
Md Badrul Alam
Institute of Business Administration, Jahangirnagar University,
Savar, Bangladesh
Muhammad Asim Afridi
Department of Management Sciences, COMSTATS University Islamabad,
Abbottabad Campus, Abbottabad, Pakistan
Yasir Bin Tariq
COMSTATS University Islamabad, Abbottabad Campus,
Abbottabad, Pakistan, and
Malik Fahim Bashir
Department of Management Sciences, COMSATS University Islamabad,
Abbottabad Campus, Abbottabad, Pakistan

Abstract
Purpose – The purpose of this paper is to explore the contending role of important external inflows on the
economic growth of Pakistan economy. The main purpose behind focusing on Pakistan is that it is receiving
significant inflows from different international sources such as International Monetary Fund, World Bank
and Asian Development Bank.
Design/methodology/approach – The study adopted the autoregressive distributed lag cointegration
approach for the purpose of exploring the long-run cointegrating relationship among the variables. As
Pakistan Government had been implementing some major liberalization policies during 1990s, data from 1976
to 2018 is used to estimate the specified models to reflect the impact of the surge of foreign inflows occurring
from that time. In addition, error correction model is estimated for examining the short-run relationships.
Findings – The findings revealed the significant role played by different inflows in accelerating the
economic growth. According to results, in the long run, all inflows, for example, Foreign direct investment
(FDI), debt, official developdment assistance and remittances, have influenced significantly and positively the
economic growth. The two control variables such as inflation and employment level included in the model

Journal of Chinese Economic and

Conflict of Interest/Ethical Statement: The authors declare no conflict of interest. The authors would Foreign Trade Studies
also like to confirm that this paper is an outcome of authors’ own work and was not published © Emerald Publishing Limited
1754-4408
elsewhere neither is considered for publication elsewhere. DOI 10.1108/JCEFTS-01-2020-0005
JCEFTS have also played their expected role in the growth process. In the short run, some of the variables such as
remittances, FDI and inflation rate have lost their significance level while for debt, aid and employment level,
the signs of their coefficients become reversed.
Practical implications – Based on the findings, the study suggests the policymakers of Pakistan economy
to liberalize the economy and attract more inflows from the external sources to accelerate economic growth.
Originality/value – To the best of the authors’ knowledge, this is the first comprehensive empirical study
on the role of foreign inflows in the process of economic growth in the context of Pakistan economy.
Keywords Pakistan, ARDL, Economic Growth, Foreign Inflows
Paper type Research paper

1. Introduction
The developing world in general is lacking the required physical capital to accelerate
economic growth. Therefore, countries belonging to the developing world are constantly
trying their best to attract foreign capital inflows from the advanced countries so that to
grow their economies and break the vicious circle of poverty. Foreign capital inflows are
useful for the growth and development of the developing countries as alone domestic
savings are not enough to accelerate investment and therefore, must be complemented by
foreign capital inflows (Ehigiamusoe and Lean (2019). Tahir et al. (2019) also empirically
demonstrated that foreign inflows matters from the perspective of economic growth and
suggested the South Asian Association for Regional Cooperation (SAARC) region countries
to attract more foreign inflows from the advanced countries to influence the long-run growth
positively.
The theoretical support for foreign inflows and growth stems from both “neo-classical”
and “endogenous growth models” which consider capital accumulation and technological
progress important for economic growth and development (Ehigiamusoe and Lean, 2019). In
the seminal paper, Chenery and Strout (1966) highlighted the influence of foreign inflows on
growth from the perspective of developing countries. They considered two different stages
of economic development, one being before reaching the target growth while the other being
after achieving the target growth, where foreign inflows could possibly influence economic
growth through different channels. The developing countries generally lacks capital and
hence their abundant labor force remains idle due to which growth-accelerating activities
such as production of goods and services both for domestic market and international market
are adversely affected. In such circumstances the chances to grow in the long run disappears
significantly. Mowlaei (2018) considered foreign inflows important for economic growth as
they facilitate the transfer of technology and improves foreign reserves for developing
countries. It implies that the foreign inflows are of prime importance for the economic
growth of the developing countries.
Foreign inflows can be categorized into different types such as debt, aid, Foreign direct
investment (FDI) and remittances inflows. Different inflows may be having different
impacts on the economic growth of the host countries owing to their diverse nature.
Different researchers have focused on different inflows while explaining variation in
economic growth across countries. For example, Meyer and Shera (2017) highlighted the role
of remittances while Yiew and Lau (2018) discussed the important role of aid inflows from
the perspective of economic growth. On the other hand, Bermejo Carbonell and Werner
(2018) and Kharusi and Ada (2018) have examined the role of FDI and debt inflows,
respectively, in the growth process of the host countries. Moreover, Tahir et al. (2019) have
simultaneously focused on different foreign inflows and their role in economic growth by
utilizing data of SAARC countries.
 In this paper, our primary aim is to focus on the economy of Pakistan and figure out the Economic
potential role of various inflows in the process of economic growth. The main purpose growth in
behind focusing on Pakistan economy is that it is receiving significant inflows from
different international sources such as International Monetary Fund, World Bank and Asian
Pakistan
Development Bank. To demonstrate the effect of different foreign inflows on growth, the
study considered a time frame spanning from 1976 to 2018, which incorporates 1990s when
Pakistan Government took major initiatives for opening the economy to foreign investors.
Although, there is ample evidence regarding the inflows-growth relationship in literature,
the economy of Pakistan has not, so far, received that much attention of the researchers. In
the context of Pakistan, Shabbir et al. (1992) pointed out that foreign inflows could diminish
domestic savings while contributing to the growth process of the country. Atique et al.
(2004) documented the significant role of FDI in growth of Pakistan in an open trade regime.
Jawaid (2014) attempted to reveal the potential impact of the three different measures of
openness on growth in case of Pakistan. In another study, Jawaid and Raza (2016)
investigated how remittances could impact the economic growth across five major SAARC
economies including Pakistan. In a relatively recent study, Jawaid and Saleem (2017)
analyzed the possible impact of FDI, remittances, and external debt on economic growth in
Pakistan. The researchers also commented that the association between foreign inflows and
economic growth is still inconclusive in the context of Pakistan, meaning that further
studies are required to better comprehend the relationship. More importantly, no other
previous studies examined all the strands of foreign inflows and growth nexus together,
thereby urging a comprehensive study to portray the full scenario in a single framework.
Therefore, this paper is expected to provide detailed empirical evidence on the relationship
between various international inflows and growth, which could undoubtedly enrich the
existing literature of foreign inflows and growth nexus. Given the discussion on the
previous relevant studies in the area of interest, the authors reasonably believe that this
study would significantly differ from the earlier ones in three novel ways. Firstly, this one is
supposed to produce robust estimates by incorporating a comprehensive set of foreign
inflows, which otherwise could have produced misleading results due to omitted variables’
bias. Secondly, the outcomes of the study are supposed to provide different sets of policy
implications for utilizing various foreign inflows toward economic development. Thirdly,
the time span used in this study could arguably capture the potential impact of all the
reform activities initiated by Pakistan Government, since 1990s, to induce economic growth.
Thus, the results of the current study would, therefore, help policymakers of Pakistan
economy a great deal in formulating appropriate policies regarding international inflows.
The remaining part of the paper is structured in the following manner. In Section 2, we
have discussed literature on different inflows and economic growth. Specification of the
empirical model and methodology for estimation are shown in Section 3. Results
are analyzed in Section 4. Concluding remarks and recommendations for policymakers are
presented in the Section 5.

2. Literature review
2.1 Remittances and economic growth
Remittances and their potential relationship with economic growth have been examined in
the literature recently by many researchers. To provide evidence from SAARC countries,
Jawaid and Raza (2016) indicated a negative association between inward remittance flows
and growth for Pakistan while demonstrating a positive association between the two factors
across the remaining four economies of the region. In another study, Jawaid and Saleem
(2017) suggested that inward remittances could positively contribute to the economic
JCEFTS development of Pakistan. For example, Meyer and Shera (2017) highlighted the role of
remittances in the process of economic growth and documented that sometimes they exceed
the FDI flows. Increased remittances are of great importance especially for the developing
economies. The inflow of remittances increases foreign reserves, improves the living
condition of the poor segment of the society. The developing countries in general are,
therefore, relying heavily on the inflow of remittances from the advanced countries. Peprah
et al. (2019) endorsed that remittances could be used as alternative for inefficient credit
market and hence may help domestic entrepreneurs to avoid high lending costs.
However, it is also possible that remittances may be having adverse consequences for the
economic growth of the host countries in some cases. Datta and Sarkar (2014) have
documented that consequences of remittances may be detrimental for the host countries if
they are used unproductively or for conspicuous consumption. They further commented
that remittances make people in the domestic economy dependent on easy money and hence
the labor market adversely affected due to which economy growth deteriorates significantly.
Moreover, the recent study of Anetor (2019) empirically showed that remittances have
impact economic growth negatively both in the short as well as in long run. It implies that
remittances should be used for productive use and hence may be channelized to investment
in the domestic economy to improve economic growth in the long run.

2.2 External debt and economic growth

External debt and its potential consequences for the economic growth is indeed very
controversial especially in the developing countries. There is a common perception that
external debt pushes the developing countries into debt-trap and hence the chances of long-run
growth diminish. However, it is also an undeniable fact that developing countries with low
saving rates are forced to obtain external debt to finance their given rate of growth (Ali and
Mustafa, 2012). Chenery and Strout (1966) mentioned that foreign inflows in the form of
external debt are likely to get reduced when a developing country reaches its target economic
growth, thereby failing to exert any influence on economic growth at that stage. However, the
empirical literature on the debt-growth relationship has produced mixed findings. The study of
Kharusi and Ada (2018) demonstrated a significant negative relationship between debt and
economic growth in case of Oman. The authors suggested policymakers to use external debt
for productive process so that to influence economic growth positively. Ali and Mustafa (2012)
also reported a significant negative impact of debt on growth for Pakistan economy. Senadza
et al. (2017) demonstrated a negative debt-growth relationship for SSA region.
In a recent paper, Guei (2019) documented based on findings that debt and economic growth
have no robust relationship in the long run. Ijirshar et al. (2016) provided evidence about the
positive relationship that exists between external debt and economic growth. Moreover,
Mahmoud (2015) focused on the economy of Mauritania and reported that 1% rise in debt will
increase GDP by 30.2%. Similarly, Jawaid and Saleem (2017) also found a positive relationship
between debt and economic growth for the economy of Pakistan. The observed differences of
opinion among the researchers based on empirical findings have motivated us to carry out an
academic exercise using recent data and provide comprehensive understanding about the
potential relationship between debt and economic growth.

2.3 Aid and economic growth

Foreign aid is the primary determinants for the development of countries. According to the
report of WEF (2015), developed countries have extended more than $130bn to official
development assistance (ODA). Further, the report indicated that western donors donated
$4.14tn during the past five decades which is more than seven times the GDP of Nigerian
economy in 2014. The developing countries in general lack enough resources to spend on Economic
various important sectors. Yiew and Lau (2018) also provided some evidence about the growth in
positive aid-growth nexus over a long period of time for a comprehensive sample of 95
economies. Similarly, Fasanya and Onakoya (2012) reported a positive relationship that
Pakistan
exists between aid and economic growth. Moreover, in a recent comprehensive paper about
the inflows-growth relationship, Tahir et al. (2019), provided sound empirical evidence about
the positive relationship between foreign aid and economic growth.
However, some of the researchers have indicated a negative relationship between foreign
aid and economic growth. For example, Mallik (2008) showed that aid inflows are casting
adverse impact on economic growth in the long run. It implies that dependence on foreign
aid for long-run growth process is detrimental. This view is consistent with the findings of
Sothan (2018) who demonstrated that dependence on foreign inflows in the long run is
harmful and hence suggested that policymakers to move from aid dependency. The study of
Charles (2016) has also demonstrated a negative relationship between foreign aid and
economic growth in Cameroon. Therefore, a wise growth strategy would be to focus on
internal determinants to improve economic growth in the long run.
It can be inferred from the mentioned literature, that there is ample evidence about the
positive aid-growth relationship. However, a negative relationship is also demonstrated by
some studies. Rahnama et al. (2017) endorsed the absence of any theoretical or empirical
consensus about the aid-growth relationship in poor countries and concluded that it is still
not clear whether aid promotes or deteriorates growth. Therefore, this study is an attempt to
explore the aid-growth relationship for the economy of Pakistan.

2.4 FDI and economic growth

FDI inflows are important from the perspective of economic growth for the developing
countries. Researchers have, therefore, carried out comprehensive studies on the FDI-growth
relationship during the last couple of decades. The recent research of Tahir et al. (2019) has
confirmed the positive relationship between FDI and economic growth. FDI inflows are the
main driving force behind economic growth as they facilitate the transfer of technology and
further enhance the skills of the labor force. Another study conducted by Jawaid and Saleem
(2017) documented a significant negative impact of FDI on economic growth in the context
of Pakistan. Borensztein et al. (1998) highlighted the role of FDI and endorsed that it
channelizes the transfer of technology and influences economic growth positively. Moreover,
Ullah et al. (2014) showed that FDI inflows have influenced economic growth positively and
significantly. Alfaro et al. (2004) demonstrated that gains from FDI are dependent on the
development of financial markets. Further, they argued that the sole role of FDI in economic
growth is an ambiguous. Similarly, Bermejo Carbonell and Werner (2018) utilized data for
the Spanish economy to identify the impacts of FDI on economic and reported no evidence of
positive FDI-growth relationship.

3. Model and methodology

3.1 Empirical model
In this section we intend to specify a model to estimate the impact of various inflows on the
economic growth of Pakistan economy. The role of different inflows is important to speed-
up the process of economic growth. However, the available literature is not enough on the
relationship between the various inflows and economic growth specifically in the context of
Pakistan economy. Therefore, we focus on the role of dominant foreign inflows such as aid,
debt, FDI and remittances in the economic growth process. Unlike the previous attempts,
this study incorporates a wider range of explanatory variables to get a profound
JCEFTS understanding of the possible impact of foreign inflows on economic growth, thereby
reducing the chance significantly of happening omitted variables bias in the model. Also, we
have added two additional control variables such as employment level and inflation rate in
our baseline model to assess their impact on economic growth. However, the model did not
incorporate any measure for export, which was found, in some other studies, critical to
explaining economic growth. As Chenery and Strout (1966) argued that trade deficit due to
low volume of export could not be a restrictive factor in the growth process when the
countries perform below the target growth level. They suggested that the economies should
reduce the investment-saving gap by increasing amounts of foreign inflows until they
achieve the target growth level. Trade deficit could only be restrictive when the countries
are in transition to self-sustaining growth because the countries could not, anymore, reduce
the dependency on foreign inflows without increasing their exports significantly. The
following baseline model is specified for estimation purpose.

lnzgdpt ¼ b 0 þ b 1 lnremt þ b 2 lndebtt þ b 3 lnfdit þ b 4 lnaidt

þ b 5 lnempt þ b 6 lninft þ Ut (1)

In Expression 1, the natural logarithm of real GDP is the dependent variable. The
independent variables include foreign inflows (remittances, debt, aid, FDI) and two control
variables (employment, inflation). Remittances and FDI inflows are expressed as ratios of
GDP and relevant statistics are taken from WDI. Similarly, external debt and aid inflows are
also taken as ratios of GNI and their statistics are collected from WDI. Moreover, data on
two control variables such as employment level and inflation rate are utilized from Penn
World Table and WDI, respectively. Detailed information on the measurement of variables
and data sources can be found in the Appendix Table.

3.2 Estimating methodology

The model specified in the last section needs to be estimated using the suitable methodology
to obtain meaningful and reliable results. Basically, the nature of data is time series and
hence some specific tools designed for such kind of data in the literature shall be utilized.
The main problem with time series data is that it suffers from the unit root problem. The
OLS method of estimation is not appropriate while dealing with data having the unit root
problem. Researchers have developed and proposed efficient testing tools for handling time
series data over the years. Cointegration means the presence of long-run stationary
relationship between non-stationary variables (Tahir, 2020). It implies that although
variables may be non-stationary at level, however, in the long run, there is a possibility of
long-run stationary relationship between them. Klasra (2011) also articulated that
cointegration can be used for detection of long-run relationship. Engle and Grange (1987)
proposed a cointegration approach for the data having unit root problem at level. The test is
designed particularly for handling two non-stationary variables. Similarly, Johansen (1988)
developed a more comprehensive testing procedure for time series data which suffers from
the non-stationary problem. Both the Engle Granger and Johansen testing are requiring the
time series variables to be non-stationary at level and stationary at first difference. However,
sometimes it happens that variables included in specified models are having different order
of integration. To put it differently, some of the variables are stationary at level and some
are non-stationary. Therefore, the two mentioned testing approaches are unable to handle
variables having different order to integration. To tackle the situation where both stationary
and non-stationary variables are present, Pesaran et al. (2001) proposed an alternative
cointegrating approach for time series data which does not require same order of integration Economic
of variables. The autoregressive distributed lag (ARDL) cointegration approach works well growth in
both in the presence of same or different order of integration. Also, the ARDL is a better
choice in case of small time series case studies. Owing to the benefits, we in this paper have
Pakistan
used the ARDL cointegrating approach to estimate the specified Model 1 to extract results.

3.3 The ARDL modeling

The ARDL cointegration has been used by many prominent researchers since its inception
owing to so many benefits. The ARDL modeling approach is capable to handle variables
even if their integration order is not similar. Khan et al. (2019) documented that ARDL
approach can accommodate different lags of both independent and dependent variables.
Further, the ARDL modeling is also suitable to provide reliable results for small time period
studies. Expression 1 can be written in the ARDL framework as given below:
X n1 X n2 X n3
Dlnzgdpt ¼ b 0 þ i¼1
b 1i Dlnzgdp ti þ i¼0
b 2i Dlnrem ti þ b Dlndebtti
i¼0 3i
X n4 X n5 X n6
þ b Dlnfditi þ
i¼0 4i
b Dlnaidti þ
i¼0 5i
b Dlnempti
i¼0 6i
X n7
þ b Dlninfti þ g 1 lnzgdpt1 þ g 2 lnremt1 þ g 3 lndebtt1
i¼0 7i

þ g 4 lnfdit1 þ g 5 lnaidt1 þ g 6 lnempt1 þ g 7 lninft1 þ « t

(2)

In Expression 2, the parameters associated with the lagged terms are basically capturing the
long-run relationships. Similarly, the short-run dynamics in Expression 2 can be captured
through the parameters attached with the difference operators (D). In the ARDL framework,
the presence of long-run cointegrating relationship can be tested by specifying both null and
alternative hypotheses as given below.

H0 : g 1 ¼ g 2 ¼ g 3 ¼ g 4 ¼ g 5 ¼ g 6 ¼ g 7 ¼ 0 (a)

H1 : g 1 6¼ g 2 6¼ g 3 6¼ g 4 6¼ g 5 6¼ g 6 6¼ g 7 6¼ 0 (b)

In the ARDL framework, the presence of cointegration is based on the comparison of

calculated F-test values with the critical values proposed by Narayan (2004). There are three
possibilities about the long-run cointegrating relationship between the dependent and
independent variables. The presence of cointegrating relationship in the long run can be
accepted if the calculated F-test value is greater than the upper bound critical value.
Similarly, the presence of long-run relationship will be rejected if it is found that the
calculated F-test value is lower than the lower bound critical value. Lastly, there would be
inconclusive evidence about the cointegrating relationship if the calculated F-test value lies
between the lower and upper bound critical values.

4. Results and discussion

4.1 Unit root testing
Stationarity checking of particularly of time series variables is indeed important in applied
research. It is because of the fact that OLS would not be able to provide reliable results in the
presence of non-stationary problem. We have therefore, applied the widely used ADF test
JCEFTS both at level as well as at first difference. Results are shown in Table 1 based on the ADF
test.
Results indicated that the unit root problem is associated with majority of the variables
included in Model 1. GDP, remittances, debt and employment are found to be non-stationary
at level. However, all these non-stationary variables become stationary at difference first.
Similarly, aid and inflation rate are stationary both at level and first difference. The order of
variables is therefore, mixed and hence the traditional Johansen multivariate test could not
be used. This different order of variables has motivated us to employ the ARDL
cointegrating approach to extract results from the model.

4.2 Bound testing

In the next step, after identifying the order of integration of variables, we have carried out
the bound cointegration testing. Results are shown in the following Table 2.
Results for the bound test are depicted in Table 2. The results supported the hypothesis
of the presence of long-run relationship among the variables. The null hypothesis of no long-
run relationship is accepted only for one of the equations where the remittances are treated
as dependent variable. The bound test value exceeds the upper critical values at all level of
significance. Therefore, the presence of long relationship will be accepted in the ARDL
framework based on the bound test.
In the ARDL framework, it is necessary to specify the error correction model The ECM
model is helpful in identifying short-run relationships and adjustment speed of the model.
For this purpose, the following ECM is specified.
X n1 X n2 X n3
Dlnzgdpt ¼ b 0 þ b Dlnzgdpti þ
i¼1 1i
b Dlnremti þ
i¼0 2i
b Dlndebtti
i¼0 3i
X n4 X n5 X n6
þ b Dlnfditi þ
i¼0 4i
b Dlnaidti þ
i¼0 5i
b Dlnempti
i¼0 6i
X n7
þ b Dlninfti þ u 1 ECTt1 þ « t
i¼0 7i
(3)

The term (ECT) in expression 3 is the error correction term and it measures the speed of
adjustment of the model. All other variables which are measuring the short-run
relationships between the dependent and independent variables are already explained in the
previous section.

Variables Level Difference Decision

lnzgdpt 2.885 4.095*** I(1)

lnremt 1.605 5.915*** I(1)
lndebt 2.071 4.414*** I(1)
lnfdit 2.625 5.597*** I(1)
lnaidt 5.080*** 7.052*** I(0)
lnempt 2.170 7.707*** I(1)
lninft 4.792*** 7.135*** I(0)
Table 1.
Unit root testing Note: *** represents 1% significance level
Dependent Variables F-Test Decision
Economic
growth in
F (lnzgdpt/lnremt, lndebt lnfdit, lnaidt, lnempt, lninft) 10.735 Co-integrated Pakistan
F (lnremt/(lnzgdpt, lndebt lnfdit, lnaidt, lnempt, lninft) 3.396 Not Co-integrated
F (lndebt/(lnzgdpt, lnremt, lnfdit, lnaidt, lnempt, lninft) 9.912 Co-integrated
F (lnfdit/(lnzgdpt, lnremt lndebt, lnaidt, lnempt, lninft) 18.805 Co-integrated
F (lnaidt/(lnzgdpt, lnremt lndebt, lnfdit, lnempt, lninft) 7.846 Co-integrated
F (lnempt/(lnzgdpt, lnremt lndebt, lnfdit, lnaidt, lninft) 21.554 Co-integrated
F (lninft/(lnzgdpt, lnremt lndebt, lnfdit, lnaidt, lnempt) 50.244 Co-integrated
Critical Values Lower Bound I(0) Upper Bound I(1)
1% 3.60 4.90
5% 2.87 4.00
10% 2.53 3.59 Table 2.
the Bound testing
Note: Authors own calculation from E-views 9.0 results

4.3 Long-run and short-run results

After establishing cointegration among the variables, in the next step we have identified
both long and short-run coefficients of independent variables. Values of coefficients,
standards errors and corresponding T-test values are also presented in the following Table.
Moreover, the error correction terms which measures the speed of adjustment from short run
toward the long-run equilibrium is also shown in the following Table along with its
standard error and T-statistic.
The long-run coefficients of independent variables are shown in the upper part of
Table 3. According to results, all inflows selected for this study have played a noticeable role
in the economic growth of Pakistan. Foreign remittances received by the economy of
Pakistan over the years have impacted the economic growth of Pakistan economy
positively. This finding is in line with that of the earlier studies on the relevant issue

Variables Coefficients Standard Errors T-Test

Long Run
lnremt 0.247*** 0.077 3.199
lndebtt 0.782*** 0.221 3.535
lnfdit 0.313*** 0.072 4.315
lnaidt 0.393*** 0.127 3.076
lnempt 3.551** 1.761 2.015
lninft 0.205** 0.090 2.285
CONSTANT 10.781 5.632 1.915
Short Run
ECT(1) 0.381** 0.127 2.986
lnremt 0.028 0.025 1.136
lnebtt 0.231*** 0.063 3.657
lnfdit 0.001 0.016 0.095
lnaidt 0.050*** 0.014 3.591
lnempt 0.846*** 0.287 2.940
lninft 0.016 0.008 1.869 Table 3.
Long-run and short-
Note: ***, ** stands for 1% and 5% level of significance run results
JCEFTS (Muhammad and Ahmed, 2009; Meyer and Shera, 2017; Jawaid and Saleem, 2017). However,
to be in contrast to the finding of the current study, the inverse association between inward
remittances and growth has been documented in another study conducted in Pakistan
(Jawaid and Raza, 2016). The underlying reason for this contradictory finding could be the
different time span, 1975–2009, considered by the study. The Pakistan Government with the
help of the corresponding ministries and the central bank inaugurated Pakistan Remittance
Initiative (PRI) at the end of 2009 with a view to facilitating smooth and convenient flow of
remittances (Pant, 2011). This initiative along with some recent preferential investment
outlets for non-residents Pakistani citizens might have contributed economic growth
positively, which has been properly reflected in our recent study unlike the earlier study
conducted by Jawaid and Raza (2016). Remittances are the key to economic growth as
mentioned in the literature and hence the policy makers of Pakistan economy shall take
further steps to facilitate the outflow of workers especially to Middle East to increase the
inflow of remittances.
The inflow of external debt to Pakistan economy has influenced economic growth
positively and significantly. External debt remained controversial as far as its impact of
growth is concerned in Pakistan, however, the current study revealed its significant positive
role with economic growth. Policy makers are therefore, suggested to utilize the debt
received from donor agencies for revenue generating projects to repay both principal
amount and rate of interest. The theoretical underpinning of debt and growth comes from
the study of Chenery and Strout (1966), which suggested that external debt could be
considered as a binding factor for economic growth when developing countries strive hard
to achieve their target growth level by enhancing investments. The study argued that the
countries at this stage could boost up the economic growth by employing the external debt
in different promising projects. The positive debt-growth relationship found is also
consistent with Jawaid and Saleem (2017) and Ijirshar et al. (2016) and in contradiction with
the result of Kharusi and Ada (2018). Debt received should not be diverted toward
unproductive projects as in that case debt becomes a burden and hence the economy suffers.
In other words, it is not the level of debt rather its utilization that matters from the growth
perspective. Therefore, policy makers of Pakistan economy and other developing countries
in general are suggested to be cautious in using the debt received. Effective utilization of
debt no doubt would contribute to the economic growth process as suggested by Kharusi
and Ada (2018).
It is also inferred from the results that aid inflows have also played a decisive role in
improving the economic growth of Pakistan economy. Aid inflows remained one of the key
sources for the economy of Pakistan over the years and hence policy makers are advised to
use it effectively. Yiew and Lau (2018) also provided some evidence about the positive aid-
growth nexus over a long period of time for a comprehensive sample of 95 economies. The
developing countries such as Pakistan where the domestic capital is not enough are,
therefore, heavily relying on foreign inflows such as aid inflows. However, relying solely on
foreign aid inflows is not a wise strategy from the perspective of economic growth in the
long run. Sothan (2018) demonstrated that dependence on foreign inflows in the long run is
harmful and hence suggested policy makers to move from aid dependency. The study of
Moyo and Tsakata Mafuso (2017) showed that the economy of Zimbabwe entered to crisis
when the aid inflows were stopped. The donor agencies and organization are, therefore,
recommended to keep on increasing the aid inflows to the developing countries to break the
existing vicious cycle of poverty and improve their overall economic growth and
development.
 The obtained results also confirmed the significant positive role of FDI inflows in the Economic
economic growth. FDI inflows are the main driving force behind economic growth especially growth in
in the developing countries like Pakistan. Developing countries indeed lacks essential
Pakistan
domestic capital required for the growth process and hence FDI inflows complement
domestic investment. Results about the positive FDI-growth relationship are consistent with
the findings of Makki and Somwaru (2004). They further commented that FDI inflows
facilitate transfer of technology from developed to developing countries, stimulate domestic
investment and further enhance human capital and institutions. However, the finding is in
contrast with that of Jawaid and Saleem (2017), which indicates a negative association
between FDI and economic growth. One of the plausible reasons for the opposite result could
be the different proxy for economic growth used by the study. The authors considered real
GDP instead of log difference of real GDP, thereby failing to capture the dynamic nature of
economic growth, which might have resulted in the negative association between FDI and
economic growth. However, the benefits of FDI mentioned in the literature and based on the
findings of current study, policy makers of Pakistan are suggested to provide supportive
environment for FDI inflows. The law and order situation need to be improved as it is
directly related with the confidence of the investors. Increased FDI inflows would influence
the growth substantially.
The two control variables used in the model have played their expected role in the
economic growth of Pakistan economy. Employment level has casted positive and
statistically significant impact on economic growth. Employment level of the labor force
is equally important for the production process and hence consequently, economic
growth would be positively affected. Similarly, inflation rate has influenced economic
growth negatively and significantly which is line with our prior expectation. Higher
inflation in the economy gives rise to uncertainty and hence all stakeholders are unable to
play their due role in improving economic growth (Tahir and Azid, 2015). Therefore,
policy makers are required to create more employment opportunities and control rising
inflation.
The short-run results reported in the bottom part of Table 3. The results indicated that
in the short run, statistical significance and direction of relationship altered for some of
the variables. Remittances, FDI inflows and inflation rate have lost their statistical
significance even though their coefficient signs remained the same. It implies that in the
short run, remittances received are mostly spent for consumption purposes. Also, foreign
investors sometimes shift their investment to other profitable destinations if their
expectations are not met in the host countries in the short run. Therefore, it is possible
that FDI inflows may not be having any significant positive impact on economic growth
in the short run. Further, FDI inflows are basically having long term impacts and hence
this could be one of the main reasons why we could not get a statistically significant
impact in the short run. Moreover, the impact of inflation rate on economic growth is
again negative but statistically insignificant in the short run. It implies that temporary
ups and downs in inflation rate are not inevitable and therefore, are not detrimental for
growth.
Similarly, in the short run the other three variables such as debt, aid and employment
have maintained their significance level, but their coefficient signs reversed. Debt and aid
inflows by nature are the long-run drivers of economic growth and hence in the short run
their impacts on growth may not be always positive. Similarly, in the short run owing to
multiple reasons, both aid and debt inflows if used unwisely may influence economic growth
negatively. Similarly, employment level of the labor force in the short run may affect
JCEFTS economic growth negatively because of lack of essential skills and experience required to
produce goods and services.
Lastly, the error correction term presented in Table 3 shows that it possesses a negative
coefficient and is also statistically significant. The coefficient of ECT is 0.38 which
indicates that the adjustment speed from the short run toward the long run is approximately
38% which is indeed reasonable.

4.4 Diagnostic testing

In this section we focused on running different diagnostic tests to see that the estimated
models are free from any contending econometric issues. The ARDL modeling requires the
estimated models to be free from serial correlation, heteroscedasticity, functional form
problem. Similarly, the normality assumption must also not be violated to obtain reliable
results in ARDL framework. All the mentioned tests are conducted, and results are depicted
in the following Table 4.
Results of different diagnostic tests are showed in the above Table 4. The statistics and
associated p-values have confirmed the absence of serious econometric issues. It could be
seen from the results that the specified model is free from the serial correlation problem as
we are unable to accept the presence of serial correlation problem based on the LM test.
Similarly, the White test (1980) rejected the presence of heteroscedasticity associated with
the estimated model. Further, the normality of data is confirmed by the Jarque–Bera statistic
and its probability value. Lastly, the functional form is error-free as the Ramsey test is
insignificant statistically.

4.5 Stability analysis

Stability of residuals is important in ARDL Modeling. For this purpose, we have employed
the CUSUM and the square of CUSUM tests. Graphs of both the tests are plotted as given
below in Figure 1 and 2 respectively.
The graphs showed that both the estimated lines are lying within the critical lines at 5%
level of significance. Therefore, it could be said that the results reported earlier are reliable
and stable and hence could be used for policy formulation.

5. Conclusions and recommendations

5.1 Concluding remarks
This paper investigated the role of external inflows in the economic growth of Pakistan
economy. Empirical data ranging from 1976 to 2018 is collected from reliable sources to
estimate the specified model for analysis. The ARDL modeling approach is used to highlight
the long-run cointegration relationship while the error correction modeling is carried out to
capture the short-run dynamics. Appropriate diagnostic checking is conducted to avoid
econometric issues.

Diagnostics Null Hypothesis F-test Conclusion

LM Test (Serial Correlation H0: No Serial Correlation 3.286 (0.175) Don’t reject H0
ARCH Test (Heteroscedasticity) H0: No Heteroscedasticity 0.695 (0.762) Don’t reject H0
Table 4. Jarque–Bera (Normality) H0: Residuals are Normally Distributed 1.967 (0.373) Don’t reject H0
Diagnostic checking Ramsey Test (Functional Form) H0: Functional Form is Correct 0.204 (0.674) Don’t reject H0
 8 Economic
6 growth in
Pakistan
4

–2

–4

–6

–8
2014 2015 2016 2017 2018
Figure 1.
CUSUM 5% Significance
CUSUM test

1.6

1.2

0.8

0.4

0.0

–0.4
2014 2015 2016 2017 2018
Figure 2.
CUSUM of Squares 5% Significance
CUSUM of squares

The obtained results are interesting. All inflows toward Pakistan economy selected for this
study have played their expected role in promoting the economic growth. Remittances, aid,
debt and FDI have positively and significantly influenced economic growth in long run. In
terms of magnitude, the impact of debt on economic is highest followed by foreign aid
inflows. Debt inflows remained controversial as far as their role in economic growth is
concerned in Pakistan economy. Therefore, the results of this study are indeed eye-opening
for policy makers. Policy makers are only suggested to utilize the foreign aid and debt
efficiently on revenue generating projects. The two control variables such as inflation rate
and employment level have also played their expected negative and positive role in growth
respectively. In the short run, some of the variables such as remittances, FDI and inflation
rate have lost their significance level owing to different reasons. Similarly, debt, aid and
JCEFTS employment level have maintained their significance level in the short run, however, the
signs of their coefficients are reversed.

5.2 Policy recommendations

 We recommend policy makers to keep in mind the following points while
formulating policies for attracting foreign inflows.
 The authorities of Pakistan economy are suggested to take appropriate policy
measures to increase foreign inflows. For examples, the policy makers shall take
steps to make necessary arrangements and send the growing labor force to different
profitable destinations such as the Middle East to enhance the inflow of remittances.
The increasing flows of inward remittances could consolidate the country’s foreign
reserve, which could subsequently help the economy pay for its imported capital
goods. The country should leverage inward remittances to contribute to economic
growth until it achieves self-sustaining growth level. More importantly, to attract
expatriate Pakistanis, the policymakers should facilitate many potential investment
outlets including remittance bonds, and manufacturing plants, with preferential tax
benefit, in Export Processing Zones (EPZs) etc.
 The country should make the external investment policy more liberal especially for
Greenfield projects, as these new ventures are associated with substantial amount of
foreign inflows compared to brownfield projects. In addition, Domestic financial
systems need to be developed and facilitative to attract FDI inflows by financing a
portion of the Greenfield projects. The policymakers should facilitate FDI in
horizontal integration to exert positive externalities in some other businesses in the
domestic market. Corruption should also be controlled so that foreign investors may
have confidence while investing in Pakistan.
 The results rejected any negativity that may exist about the debt-growth
relationship. Therefore, the obtained debt from donor agencies shall be used for
productive projects so that to achieve higher economic growth and payback the
principal amount and accumulated rate of interest on time and with ease. To be
specific, the external debts should be utilized in different promising projects such as
digital technology-based businesses such as e-commerce, e-learning and e-health. By
investing external debts into such types of thriving sectors, the government is likely
to contribute in developing human capital in future. In addition, the country should
also think of flourishing some other light engineering industries like leather
industry for efficient utilization of external debts.
 Aid inflows which are one of the main drivers of economic growth and human
development. The country should be concerned about employing foreign aids in
developing human capital such as technological and other specialized skills and some
critical physical infrastructure, which ultimately could be capitalized in attaining
sustainable economic growth. Aid inflows shall not be wasted for unplanned and
politics-driven projects. Further, improvement in sectors with the help of aid inflows
shall be shared with international community so that future inflows could be increased.
 Finally, favorable macroeconomic environment for all stakeholders in the form of
low inflation rate is necessary and hence shall be ensured. Moreover, employment
opportunities for the growing labor force are also needed to increase production and
consequently improve economic growth.
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Appendix Economic
growth in
Pakistan
Variables Measurement Source

Economic Growth Natural Logarithm of real GDP WDI

Foreign Aid Net ODA received (% of GNI) WDI
External Debt External debt stock (% of GNI) WDI
Remittances Personal remittances received (% of GDP) WDI
FDI inflows Foreign direct investment (Net inflows % GDP) WDI Table A1.
Inflation Growth rate of CPI WDI Variables and data
Employment Number of people employed (Millions) Penn World Tables sources

Variables lnzgdpt lndebt lnfdit lnremt lnaidt lninft lnempt

lnzgdpt 1 0.623 0.735 0.168 0.833 0.113 0.986

lndebt 0.623 1 0.303 0.482 0.572 0.050 0.709
lnfdit 0.735 0.303 1 0.362 0.570 0.183 0.664
lnremt 0.168 0.482 0.362 1 0.100 0.062 0.060
lnaidt 0.833 0.572 0.570 0.100 1 0.132 0.836
lninft 0.113 0.050 0.183 0.062 0.132 1 0.119 Table A2.
lnempt 0.986 0.709 0.664 0.060 0.836 0.119 1 Correlation Matrix

Corresponding author
Muhammad Tahir can be contacted at: tahirm@cuiatd.edu.pk

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