Foreign Capital Flows and Economic Growth in Pakistan : An Empirical Analysis

Pakistan economy has received large inflows of foreign capital, in shape of foreign debt, FDI and worker's remittances, over the years. The present study is focused on the examination of effects of these flows on economic growth in Pakistan. Johansen cointegration technique and Granger causality test has been used for the analysis for the sample period of 1972-2013. The results reveal negative impacts of these flows on economic growth of the economy in long run. Short run analysis confirmed unidirectional causality running from debt service, FDI, inflation and literacy rate to growth. Causality from domestic investment is not concluded but it run from growth to domestic investment. Bidirectional causality between remittances and growth has been found. The analysis suggests some policy recommendations such as domestic resource mobilization, building of physical infrastructure, financial development, suitable macroeconomic framework for price stability and improvement in human capital for the long run growth of the economy