Impact of Trade Liberalization on External Debt Burden: Econometric Evidence from Pakistan

Pakistan’s leading challenge today is to lessen its debt burden in order to pursue a path that leads towards sustainable and impartial growth for poverty diminution. The consequences of trade liberalization are of growing concern, mainly in the emerging economies with severe brim over effects on their debt situation. The major objective of this paper is to discuss the current external debt problem in Pakistan and analyze how its external debt is interrelated with trade liberalization policies and measures .Using data from the last three decades, this paper investigated whether there exist a momentous relationship between external debt and the trade liberalization variables or not. In this case study ARDL bounds testing approach is employed to investigate the long run relationships and Error Correction Method (ECM) for short run dynamics. After finding the order of integration through implementing the Augmented Dickey Fuller (ADF) and Phillips-Perron unit root tests, our finding suggested a significant long run positive association between external debt and trade liberalization is existed in case of PakistanExternal Debt, Trade Liberalization, ARDL Bounds Testing, Error Correction Method

Financial Development, Energy Consumption and CO2 Emissions: Evidence from ARDL Approach for Pakistan

The paper explores the existence of a long run equilibrium relationship among CO2 emissions, financial development, economic growth, energy consumption, and population growth in Pakistan. ARDL bounds testing approach to cointegration is implemented to the data for 1974-2009. The results confirm a long run relation among these variables. Financial development appears to help reduce CO2 emissions. The main contributors to CO2 emissions however are: economic growth, population growth and energy consumption. Our results also lend support to the existence of Environmental Kuznets Curve for Pakistan. Based on the findings we argue that policy focus on financial development might be helpful in reducing environmental degradation.Financial Development, CO2 Emissions, Cointegration

Devaluation and income inequality: Evidence from Pakistan

The paper examines the impact of nominal devaluation on income distribution in Pakistan. In the empirical model we include economic growth, measured per capita; trade-openness; foreign direct investment (FDI); unemployment and inflation rates which appear well justified in the particular context of the economy of Pakistan. The Auto Regressive Distributed Lag (ARDL) bounds testing approach to cointegration has been employed for the long run relation; and the Vector Error Correction Model (VECM) for the short run dynamics. We also test the Kuznets inverted-U relation between income inequality and economic growth. We find long run relationship among the series; and that nominal devaluation worsens income inequality. Though economic growth appears to deteriorate income distribution, the non-linear link between the variables depicts Kuznets’ (1955) type inverted-U relationship. This is reassuring for Pakistan in the long run. We also find FDI and trade-openness worsens income distribution. Inflation lowers income inequality but unemployment aggravates it in Pakistan.Devaluation, Income Inequality, EKC, ARDL

Does Military Spending Explode External Debt in Pakistan?

This paper explores the effect of military expenditures on external debt in case of Pakistan over the period of 1973-2009. For this purpose, ARDL bounds testing approach is used to examine cointegration between the variables. ADF, P-P and ADF-GLS, Clemente et al. (1998) unit root tests are applied to check the order of integration of variables. OLS and ECM regressions approaches are employed to investigate marginal impact of military spending on external debt in long and short run. Our findings indicate cointegration which confirms long run relationship between military expenditures, external debt, economic growth and investment. The results reveal that a rise in military expenditures increases the stock of external debt. The inverse effect of economic growth on external debt is found and an increase in investment is also increasing external debt in the country. This study invites policy makers to approach the problem of curtailing external debt in innovative ways in case of Pakistan.Military Spending, External Debt, Cointegration

Effect of financial development on agricultural growth in Pakistan: new extensions from bounds test to level relationships and granger causality tests

This study investigates the relationship between financial development and agriculture growth employing Cobb-Douglas function which incorporates financial development as an important factor of production for the period 1971-2011. The ARDL bounds testing approach to cointegration is applied to examine long run relationship between the variables. The direction of causality is detected by VACM Granger causality test and robustness of causality results is tested through innovative accounting approach (IAA). Our findings confirm that the variables are cointegrated for equilibrium long run relationship between agriculture growth, financial development, capital and labor. The results indicate that financial development has a positive effect on agricultural growth. This implies that financial development plays its significant role in stemming agricultural production and hence agricultural growth. The capital use in the agriculture sector also contributes to the agricultural growth. The Granger causality analysis reveals bidirectional causality between agricultural growth and financial development. The robustness of these results is confirmed by innovative accounting approach (IAA). This study has important policy implications for policy making authorities to stimulate agricultural growth by improving the efficiency of financial sector.Agriculture Growth, Financial Development, Cointegration

Money-income Link in Developing Countries: a Heterogeneous Dynamic Panel Data Approach

The question whether real money causes real output appears to be important for many economists working in the area of macroeconomics and, has been subjected to a variety of modern econometric techniques, producing conflicting results. One often applied method to investigate the empirical relationship between money and real activity is Granger causality analysis [Granger (1969)]. Using this approach, the causality question can be sharply posed as whether past values of money help to predict current values of output. This concept, however, should be clearly distinguished from any richer philosophical notion of causality [cf. Holland (1986)]. Present paper examines the relationship between money (both M1 and M2) and income (Real GDP) for 15 developing countries using a newly developed heterogeneous dynamic panel data approach.1 Sims (1972) postulated “the hypothesis that causality is unidirectional from money to income agrees with the post war U.S. data, whereas the hypothesis that causality is unidirectional from income to money is rejected”. Since then a voluminous literature has emerged testing the direction of causality.2 Some studies have tested the relationship between these variables and the direction of causality for a particular country using time series techniques [e.g., Hsiao (1979) for Canada, Stock and Watson (1989) for U.S. data, Friedman and Kuttner (1992, 1993) for U.S. data, Thoma (1994) for U.S. data, Christiana and Ljungquist (1988) for U.S. data, Davis and Tanner (1997) for U.S. data, Jusoh (1986) for Malaysia, Zubaidi, et al. (1996) for Malaysia, Biswas and Saunders (1998) for India, and Bengali, et al. (1999) for Pakistan]. Other studies have tested the above on a number of countries, for example Krol and Ohanian (1990) used the data for Canada, Germany, Japan and the U.K. Hayo (1999) using data from 14 European Union (EU) countries plus Canada, Japan, and the United States. More recently Hafer and Kutan (2002) used a sample of 20 industrialised and developing countries. This paper contributes to this later strand of the literature, which it extends in three directions. First, it employed a newly developed panel cointegration technique [Larsson, et al. (2001)], to examine the long-run relationship between money and income. Second, the study performs panel causality test, recently developed by Hurlin and Venet (2001), to explore the direction of causality between the said variables. Third, the important contribution of the present study is to test whether relationship between money and income is homogeneous or heterogeneous across countries

The Long-run Relationship between Real Exchange Rate and Real Interest Rate in Asian Countries: An Application of Panel Cointegration

The role of exchange rate policy in economic development has been the subject of much debate and controversy in the development literature. Interest rates and exchange rates are usually viewed as important in the transmission of monetary impulses to the real economy. In the short run the standard view of academics and policy-makers is that a monetary expansion lowers the interest rate and rises the exchange rate, with these price changes then affecting the level and composition of aggregate demand. Frequently, these influences are described as the liquidity effects of monetary expansion, viewed as the joint effect of providing larger quantities of money to the private sector. Popular theories of exchange-rate determination also predict a link between real exchange rates and real interest rate differentials. These theories combine the uncovered interest parity relationship with the assumption that the real exchange rate deviates from its long-run level only temporarily. Under these assumptions, shocks to the real exchange rate—which are often viewed as caused by shocks to monetary policy—are expected to reverse themselves over time. This study investigates the long-run relationship between real exchange rates and real interest rate differentials using recently developed panel cointegration technique. Although this kind of relationship has been studied by a number of researchers,1 very little evidence in support of the relationship has been reported in the case of developing countries.

Rural-Urban Income Inequality under Financial Development and Trade Openness in Pakistan: The Econometric Evidence

Pakistan is a developing economy, which has adopted Structural Adjustment Programme (SAP) in the form of economic reforms initiated in early 1990s. Economic reforms related to privatisation of state-owned assets, deregulation, confiscation of price controls, trade liberalisation generally and financial reforms (especially to improve quality of financial institutions) particularly. The objective of such reforms was to improve the welfare of society but these reforms never fruited to every livelihood in the country. Perhaps, fruits of economic reforms are eaten up by poor governance, lack of transparency in economic policies, high level of corruption, high burden of internal and external debts and interest rate payments on these debts, weak situation of law and order, and improper implementation of economic policies

Impact of Trade Liberalization on External Debt Burden: Econometric Evidence from Pakistan

Pakistan’s leading challenge today is to lessen its debt burden in order to pursue a path that leads towards sustainable and impartial growth for poverty diminution. The consequences of trade liberalization are of growing concern, mainly in the emerging economies with severe brim over effects on their debt situation. The major objective of this paper is to discuss the current external debt problem in Pakistan and analyze how its external debt is interrelated with trade liberalization policies and measures .Using data from the last three decades, this paper investigated whether there exist a momentous relationship between external debt and the trade liberalization variables or not. In this case study ARDL bounds testing approach is employed to investigate the long run relationships and Error Correction Method (ECM) for short run dynamics. After finding the order of integration through implementing the Augmented Dickey Fuller (ADF) and Phillips-Perron unit root tests, our finding suggested a significant long run positive association between external debt and trade liberalization is existed in case of Pakista