Modelling Trade, Investment, Growth and Liberalisation: Case Study of Pakistan

This study develops an econometric model to examine the impact of tariffs liberalisation on industrial productivity and economic growth in Pakistan. The model is estimated using annual data over the period 1972–2011. To measure trade reform policy, an index for trade liberalisation is constructed. We apply channel analysis to quantify the direct and indirect impacts of trade liberalisation on the industrial productivity in Pakistan. Our result suggests that trade liberalisation promotes industrial productivity through its favourable effects on private industrial investment, manufactured exports and capital goods imports. The direct contribution of trade liberalisation to industrial productivity is 30.49 percent, while the indirect contributions of trade liberalisation through its impacts on private industrial investment, manufactured exports and capital goods imports are 31.71 percent, 18.9 percent and 18.9 percent respectively. In overall term, the impact of liberalisation on industrial productivity is 0.164 percent which implies that an increase in trade liberalisation increases industrial productivity by 0.164 percent. The impact of trade liberalisation on manufactured exports and capital goods imports is 0.18 and 0.17 percent respectively, which implies that technological capability of exports and imports occupies 17-18 percent of the overall channels impact on industrial productivity.