Foreign Capital Inflow and Economic Growth: A Dual Gap model for Pakistan Economy

Abstract

The purpose of the study is to explore the relationship between ‘Foreign capital inflow’ and the economic growth in the framework of Dual gap approach. For this, ARDL bounds Co-integration approach is applied as econometric methodology to examine the short run dynamics into the long run equilibrium. Two models are established in which GDP growth is a dependent variable while Gross domestic saving, Foreign direct investment, Exports,Imports, CPI and Telephone lines as physical infrastructure, are taken as independent variables for the time period of 1976 to 2011. The results suggest that Foreign private inflow in the form of FDI has been supplementing the Domestic Savings in a good macroeconomic environment represented by positive impact of Inflation on growth rate. The inclusion of Export sector in the model has Replaced the ‘Foreign private investment’ and impact of FDI has become negative on GDP growth in the existence of poor macroeconomic condition represented by negative association between Inflation and GDP growth.