Fiscal Strategies for Growth and Employment Generation in Pakistan

Abstract

Good macroeconomic policies can be transformed into good economic performance. Fiscal policies whether public expenditures or revenues can actively be used to improve economic performance by the governments of the developing economies. The study has been constructed to explore the effects of fiscal variables in aggregate as well as in disaggregated form on private investment and economic growth. It covers the period from 1972 to 2007 in the context of Pakistan. Enhancement of private investment and fostering of economic growth in the economy will not only bring macroeconomic stability but also generate employment in the long-run. After establishing the integration order of variables, Autoregressive Distributed Lag (ARDL) approach to co-integration has been employed to find the long-run effects as well as short-run effects. In the first step, existence of long-run relationship has been determined by using bounds testing approach. Long-run coefficients and error correction term has been obtained in the second step. Modified accelerator model and neo-classical model have been used to find the empirical relationship between fiscal variables and private investment. The outcomes under different estimators of the accelerator investment model seem to largely confirm that fiscal variables play some role to stimulate private investment though some of theses variables have been found to be insignificant statistically. The results of the neoclassical model are largely in agreement to those under the accelerator model in terms of signs and significance. Both confirm the hypothesis of crowding-in effects of public investment in different sectors though weak statistically. Further, in order to find the impact of fiscal policy on economic growth, endogenous growth model has been used. The results imply that public expenditures are complementary to economic growth, though with weaker magnitude. Similarly, different components of taxation have weak and mixed effects on economic growth but taxes in aggregate form, though weak, have positive contribution towards economic growth.