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An Empirical Analysis of Pakistan

Research Methodology

Research Approach:

The approach being used is the quantitative research approach. Quantitative research means explaining phenomena by collecting statistical data that are examined using mathematically based methods Aliaga and Gunderson (2002). The quantitative research generally includes numbers, statistics, and proportions, and is very useful for measuring people’s attitudes, their ways of thinking, their emotional and behavioral states Shields et al. (2003).

External Resources and Economic Growth - Part 3 1
Figure 1: External resources and economic growth in Pakistan (1976-2018)

Research Purpose:

The explanatory research purpose is being followed in this research. The explanatory research attempts toward clarifying in what way and why there is an association between two or more features of a phenomenon Kothari (1985).

Data Source:

The data source used from secondary sources (IMF / World Bank) in this research because the information gathered for this research is not the first time knowledge.

Statistical Technique:

The statistical techniques used in this research are the regression analysis and confirmatory factor analysis.

The factor analysis means “the statistical techniques applied when the researcher is interested in discovering which variables in the set form coherent subsets to a single set of variables that are relatively independent of one another”. The variables had been mixed into factors that are linked with each other but largely co-dependent of other subsets Tabachnick and Fidell (2007).

The statistical tool used for the investigation of the relationship between variables is regression analysis. It studies the dependent variable taking into consideration the consequence lying on it by independent variable or variables. It is all about forecasting the future based on facts collected from past Arthur Griffith (2007).

Hypothesis:

As Table 1 shows, if the probabilities of all three variables are greater than 10% in the column of level, so Null Hypothesis (Ho) is accepted and it shows the trend exists in all three variables.
If the probabilities of all three variables are less than 10% in the column of level, so Null Hypothesis (Ho) is rejected and it shows there is no trend that exists in all three variables.

Model:

Advanced economics techniques have been used to estimate the model. Before estimating a model, non-uniformity is tested among variables by using Pesaran (2004) CD test. Because the data sets were integrated into totally different orders, therefore, we tend to applied two robust heterogeneous panel cointegration techniques, i.e., Pedroni (1999, 2004) and Westerlund (2007) to look at the long term relationship between foreign direct investment, remittances, imports, and gross domestic product. The statistics confirmed the robustness of cointegration as a result of the null hypothesis of no cointegration. Hence, it tends to conclude that all variables have a long-run relationship with the GDP.

External Resources and Economic Growth - Part 3 2
Figure 2: Factors of External resources and economic growth in Pakistan

This analysis finds that remittances are a crucial external resource for the economic process of Pakistan. These findings are helpful for the think tanks and policymakers of Pakistan to induce the benefit of the flow of remittances. It’s prompt that the state ought to create a correct channel for remittances by robust financial set-up. Developing countries face major challenges related to foreign capital flows like transaction costs. The transaction cost of remittances is incredibly high in most of the developing nations that hinder the flow of remittances into the country.

External Resources and Economic Growth - Part 3 3
Table 1: Adjustment coefficients (standard error in parentheses)

As per the finding, remittal flow leads to the economic process. Thus its additional prompt that easy financial set-up ought to be developed so as to present ease to the recipient and later it’ll facilitate the govt. Additionally, policymakers have to be compelled to formulate such policies that encourage transparency and take away hindrances and attract users to transfer cash through a correct financial set-up.

Equation:

𝐺𝐷𝑃= 𝛼0 + 𝛼1𝑅𝐸𝑀𝑖𝑡 + 𝛼2𝐹𝐷𝐼𝑖𝑡 + 𝛼3𝐼𝑀𝑃𝑖𝑡 + 𝜖𝑖t

Where GDP is that the Gross Domestic Product, accustomed to live the economic process, REM is that the worker’s Remittances, FDI refers to the Foreign Direct Investment and IMP is that the Imports. The subscript of i is that the variety of cross-sections and t denotes the time during a year.

Data Analysis

Descriptive Statistics:

The statistical techniques used in this research are the regression analysis and confirmatory factor analysis. Table 1 Unit root test results from Eviews for all three variables. First level test with intercept (C) and the level test with trend and intercept (C & T), then 1st difference test with intercept (C) and then 1st difference test with trend and intercept (C & T).

External Resources and Economic Growth - Part 3 4
Table 2: Descriptive statistics of variables (1976-2018)

Table 2 shows the summary statistics of the external resources and economic growth of Pakistan. It shows that the average gross domestic product of Pakistan is 04.94. Whereas the average foreign direct investment is 00.86; remittances are 00.55 and imports are 19.81.

Results:

Unit Root, Cointegration, and Regression Tests:

To test the existence of cross-sectional independence within the information series, we tend to used Pesaran (2004) CD check. It’s additionally a requirement for the second-generation unit root test that the series are crosswise dependent. Table 3 Panel A illustrates the results of the CD test; it confirms that the info series of all the variables are cross-sectionally dependent at 1% significance level. Pesaran (2007) CIPS check is employed to assess the order of the data series.

External Resources and Economic Growth - Part 3 5
Table 3: Panel unit root test

*** denote the rejection of null hypothesis at 1% significance level

Table 3 suggests that all variables aren’t within the same order of integration. Gross domestic product and FDI are stationary at the extent, whereas, remittances and imports area stationary initially distinction at the insignificance level, indicating that every variable incorporates a totally different level of integration. Therefore, for strength, we tend to apply each the Pedroni (1999) and Westerlund (2007) panel cointegration checks to envision the long-term association between the variables.

Conclusion and Recommendations

In this globalized world, it’s vital to work out the external factors that contribute to the economic process, notably in developing nations. As per the expansion literature, foreign direct investment, remittances, and imports measure the three most vital external factors that play a vital role within the developing economies. Previous researches have targeted the individual result of the same external factors on the economic process and South Asian countries. Therefore, this study aimed to research the combined moreover as individual effects of foreign direct investment, remittances, and imports on the economic process of the economy of Pakistan specifically. For this purpose, it tends to use the secondary data with the time period of 1976-2018.

Future studies will be extended this analysis by adding more external factors like aid and external debt which will even be added to the prevailing model. This model has tested specifically in Pakistan and can be extended to other countries as well, like BRICs, G-20 different Asian developing countries.

For Further Reading:

External Resources and Economic Growth – Part 1

External Resources and Economic Growth – Part 2

References

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