The Macroeconomic Analysis of Foreign Capital Inflows in Pakistan
Subtitle:A Re-Examination Using Vector Error Correction Approach
Abstract:
The topic of Foreign Capital Inflows (FCI) to Pakistan got much attention in empirical literature, but the existing literature on FCI about Pakistan mostly used the customary econometric tools like OLS, 2SLS, FIML and 3SLS for analysis. However, we know that most of the macroeconomic variables are non-stationary, which mandates the re-examination of the past studies using new time-series tools like cointegartion and ECM. Thus, the present book re-examines the macroeconomic role of Foreign Capital Inflows (FCI) in Pakistan through applying vector error correction model (VECM) on annual time-series data for the period of 1972-2006.
The present study does not find any evidence for direct positive impact of aggregate FCI on GDP growth and Investment (capital formation). However, the study finds the positive (complementary) relationship between FCI and domestic saving, thus suggesting an indirect positive impact of FCI on GDP through supplementing domestic resources. These results seem contradicting i.e. positive relation with domestic savings but negative linkages with investment and growth. However, we can interpret it as that FCI is supplementing the domestic resources and there is a need and justification for FCI in Pakistan due the shortage of domestic savings. But, these inflows of foreign capital are not transforming in the productive investment and thus not boosting economic growth. As this study shows that most of FCI are of non-investment (non FDI) type and are concentrated in the selected non-export-oriented and less-employment-generating sectors. In addition, the present study finds that exchange rate depreciation and current account deficit causes more inflows of foreign capital in Pakistan. While FCI also results in increasing the import of goods and services in Pakistan.
Subsequently, the present study suggests some policy recommendations like: (i) to target and identify the potential sectors for inviting the inflows of foreign capital, (ii) to change in composition of existing FCI, from non-FDI to FDI (investment) forms of FCI, (iii) to diversify the existing FCI from non-tradable and less job-oriented sectors to the tradable (export-oriented) and specially in agricultural-related manufacturing sectors, (iv) to mobilize the domestic resources, that will reduce the reliance on foreign assistance, and (v) to control the current account deficit and to stabilize the exchange rate, which will be helpful in reducing the reliance on foreign capital.
Published By: GRIN Publishing - GRIN Verlag GmbH, Marienstr.17, 80331 München (Munich), Germany
NOTE: This Book is not only helpful for the study of Foreign Capital (Foreign Aid + FDI + Foreign Portfolio Investment)but it is useful to learn Vector Error Correction Model (VECM) and Johansen Cointegration Technique. this study serve as a manual which explains the step by step method of Vector error-correction model and Johansen co-integration using e-views with practical example of FCI.
My Research Paper "Impact of FCI on Economic Growth in Pakistan" is Published in the Journal of Independent Studies and Research, Volume 5, Issue 1, January 2007.
ABSTRACT:
The Two-Gap Model suggests that the Poor countries have to rely on the foreign capital inflows (FCI) to fill the two Gaps: Import-Export Gap and the Savings-Investment Gap. There are many forms of the foreign capital inflows like FDI (Foreign Direct Investment), External loans & Credit, technical assistance, Project & non-project aid etc. So, UDC (including Pakistan) have to rely on the Foreign aid, foreign Debt FDI and portfolio investments. The role of these external resources (FCI) always remains questionable. This paper analyzes the impact of the foreign capital inflow on GDP Growth in Pakistan during 1975-2004.
Mahatir Muhammad?s ?Case of Asia? is a good book to understand how practically poverty can be eradicated within few decades from a poor country. Although he expressed his concerns about the setbacks to the Economies of East Asian Countries in late 1990s, but on the whole, he showed his satisfaction over the achievements of his [...] Read More at http://www.ideasdesk.com/
FOREIGN DIRECT INVESTMENT IN PAKISTAN
FOREIGN DIRECT INVESTMENT:
Foreign direct investment (FDI) is the movement of capital across national frontiers in a manner that grants the investor control over the acquired asset. [1]
FDI distincts from portfolio investment where by the movement of Capital is across the boarder but there?s no such control over the assets. Firms, incorporated [...] more details on http://www.ideasdesk.com/
