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Title: Impact of Trade Liberalization and FDI on Economic Development in Pakistan: A Human Development and Sustainability Perspective
Authors: Ali, Liaqat
Keywords: Economics
Issue Date: 2019
Publisher: Shaheed Zulfikar Ali Bhutto Institute of Sciences & Technology, Karachi.
Abstract: Like many other developing countries, Pakistan has not only liberalized its trade but also adopted liberal policy for foreign direct investment (FDI) inflows. Evidence shows that despite comparatively satisfactory average economic growth, Pakistan’s performance in economic development indicators is still not encouraging. Several studies have focused on the contribution of trade and FDI in economic growth of Pakistan. However, there is dearth of studies that analyze and provide conclusive evidence of the impact of trade liberalization (TL) and FDI on economic development, particularly regarding human development (human well-being) and sustainability. With intention to fill this gap in literature, the prime objective of this study is to investigate impact of trade liberalization and foreign direct investment on broader human centered view of economic development in Pakistan. The study uses annual data, covering the period from 1972 to 2015. This study would generally provide a unique contribution to the literature of economic development for developing countries and particularly for Pakistan. Taking inspiration from Sen’s ‘capability’ approach, this study uses human development index (HDI) as proxy of economic development. To achieve stated objectives of the study, eleven models are specified. Four models reveal impact of trade liberalization’s proxies (trade volume and per capita trade) on human development index (HDI) while in two models impact of FDI on HDI is examined. Two models disclose effect of economic globalization index on HDI and rest of the models demonstrate impact of trade liberalization and FDI on environment. Augmented Dickey-Fullers (ADF) test is applied to identify the unit root problem. In order to obtain stated objectives, Auto Regressive Distributed Lag (ARDL) bound testing technique is used to find out long run (LR) associations. Statistical soundness of the specified models and estimated coefficients is checked by residual diagnostic tests and stability diagnostic tests. Variance inflation factor (VIF) is used to check multicollinearity. Results of all specified models, using ARDL technique, reveal robust long run relationship between dependent and explanatory variables, and adjustments of short deviations from equilibrium in the long- term. The long-run coefficients indicate that, in the long run, trade v liberalization (TL) has statistically significant positive impact on HDI (with and without income component) in all specifications. Based on findings, the study supported broader or ‘globalist’ argument for positive impact of trade liberalization on non-income development indicators via income as well as without income component. The results of FDI-HDI models advocate long run relationship between dependent and independent variables in the models. Estimated coefficients illustrate positive and statistically significant impact of FDI on development indicators in the SR and LR. FDI has positive impact on HDI with income and excluding income component. This depicts that FDI influences non-income development indicators by means of income as well as without income component just like trade. Control variable, real GDP has significant positive impact on HDI in both short and long run, whereas, inflation as proxy of macroeconomic stability, exerted negative impact particularly in the short run. When the people are considered a long-lasting real wealth of a country, then economic development must be sustainable. Environment sustainability is one of the key factors to secure quality of life for current and future generations. Debate over the impacts of trade liberalization and FDI on economic development cannot be settled until we get a wellfounded understanding of how trade and FDI affect environment quality in a developing country. Accordingly, for the impact of trade and FDI on the sustainability of economic development in Pakistan, using carbon dioxide (CO2) emissions as proxy of environment quality (increase in CO2 harms environment quality), this study investigated trade, FDI and environment nexus. The results of Trade-CO2 and FDI-CO2 models disclose robust longterm relationship between dependent and explanatory variables, and adjustments of short deviations from equilibrium in the long-run. Findings of study endorse ‘pollution haven’ hypothesis in Pakistan, indicating that trade and FDI aggravate environment quality through carbon dioxide emissions. Results show that economic expansions and fossil fuel energy consumption (control variables) deteriorate environmental quality. Based on empirical results, study suggests that policy makers should have more trade and FDI friendly policies in conjunction with growth enhancing and macroeconomic stability policies to achieve the dream task of developmental goals in Pakistan. Nevertheless, in context of empirical findings, the study implies that pursuing pro trade liberalization and vi foreign direct investment friendly strategies for economic expansion and development, professionals and government of Pakistan should also take care of environmentally sustainable economic development. Move towards sustainable economic development path will not occur overnight, but it is crucial if we are to secure long-term human focused economic development and make Pakistan economy resilient to dangers in future.
Gov't Doc #: 19013
Appears in Collections:PhD Thesis of All Public / Private Sector Universities / DAIs.

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