Capital Inflows And Economic Growth: A Case Study of Pakistan

Abstract

This study examines the effect of capital inflows on Pakistan's economic growth during the period 1990-2023, focusing on three major inflows: Foreign Direct Investment (FDI), Official Development Assistance (ODA), and Personal Remittances (PR). By applying the Autoregressive Distributed Lag (ARDL) bounds testing method, the analysis confirms the presence of a long-run equilibrium relationship between the selected variables. The results show that both remittances and FDI are statistically significant and positively affect long-term GDP growth, highlighting their potential as future sources of stable economic progress. Conversely, ODA is observed to have a negative effect, indicating dimensions of aid dependency, inefficiency, and poor resource utilization. Contrary to expectations, Gross Fixed Capital Formation (GFCF) also reveals a negative long-run relationship with GDP, possibly indicating inherent structural and institutional inefficiencies in capital use. Trade openness is positively linked with growth in both the short and long run. Short-run dynamics also highlight foreign capital's volatility and mixed impact, with remittances consistently contributing positively. These findings emphasize the importance of specific policy reforms, better institutional arrangements, and increased absorptive capacity to channel foreign inflows into sustained and inclusive economic growth.

KEYWORDS:   Foreign Capital Inflows, Economic Growth, Foreign Direct Investment (FDI), Personal Remittances, Pakistan Economy

https://doi.org/10.5281/zenodo.20315763