Public-Private Investment and Economic Growth in Pakistan: An Empirical Analysis

This study has attempted to evaluate the inter-relationship among the three macro-variables, namely public and private investment and GDP growth both in the long and short run with reference to Pakistan economy for the period of 1972–2011. We have tried to pinpoint the important determinants of each variable, using the standard econometric techniques. Long run relationship between the variables is specified by using method proposed by Johansen and Juselious (1990). Based on the results of the long-run co-integration parameters short run error correction model is used to estimate the short run relationship between the variables. As expected, the GDP growth has a strong positive relationship with public and private investment and there is a two-way causality between GDP and investment. The public investment is affected by the level of GDP, inflation and exchange rates. Likewise, private investment is affected by inflation and exchange rates, the lending rate, besides the level of GDP. The general negative theoretical relationship between public and private investment is confirmed in the context of Pakistan economy, i.e. public investment exerts a “crowding-out” effect on private investment at large. This is because public investment has primarily been financed in the past through internal and external borrowing. The government revenues collected through taxation has little contribution in promoting public investment.