Overall and Sectoral Sustainability Analysis of Pakistan Economy through Genuine Savings

Abstract

The study analyzes weak wealth sustainability of Pakistan’s economy by sectors and overall from 1971 to 2012 through the impact of genuine savings and value added approaches. On average the overall economy is sustainable due to adequacy of national savings but not sustainable due to domestic savings. Genuine savings and value added both give the same estimates. Since savings are one of the most important components of the wealth accumulation, therefore the study also estimated saving function of the overall economy in order to identify the determinants of the function and thus the determinants of wealth accumulation. Vector error correction model has been specified for analysis of saving function. The study also analyzes sectoral sustainability of the economy. The study categorizes the economy into three sectors; agriculture, industry and services. Sectoral savings data are required to check sectoral sustainability of the economy through the impact of genuine savings. The data are not available and it is difficult to decompose the overall savings series into the sectoral savings. Therefore, the study uses value-added approach to genuine savings to check the sectoral sustainability. The approach isolates the sector and provides comparison of the net value added along with the consumption of the economy/sector. The economy/sectors is/are sustainable when net value-added is greater than or equal to the consumption. The study uses D for all negative indicators of the economy/sector. Therefore D is the sum of all natural resource depletion and costs of air and water pollutions. The study derived the D and consumption for economy/sector and subtracted D from the value added of economy/sector to get what the study called genuine value added of the economy/sector. The agriculture sector is not sustainable even in single period of the analysis; values of genuine savings are negative throughout the period of analysis and the values are increasing in negative Page 8 of 158 dimension with respect to time reflecting large depletion of the wealth. On average industrial sector of the economy is sustainable, genuine savings of the sector are negative from 1971 to 1972 and then 1977 and 1978 and positive in the rest of the years. Service sector of the economy is sustainable; the values of genuine savings of the sector are positive throughout the period of analysis. The role of agriculture sector in national wealth accumulation is negative. The service sector contribution in national wealth accumulation is positive. The role of industrial sector on average over the period of analysis is positive. The relationship between D and value added is positive in the long run but there is no short run causality running from value added to D in each sector.