The Macroeconomic Analysis of Foreign Capital Inflows in Pakistan

Title: The Macroeconomic Analysis of Foreign Capital Inflows in Pakistan

Subtitle: A Re-Examination Using Vector Error Correction Approach

Abstract: The topic of Foreign Capital Inflows (FCI) to Pakistan got much attention in empirical literature, but the existing literature on FCI about Pakistan mostly used the customary econometric tools like OLS, 2SLS, FIML and 3SLS for analysis. However, we know that most of the macroeconomic variables are non-stationary, which mandates the re-examination of the past studies using new time-series tools like cointegartion and ECM. Thus, the present book re-examines the macroeconomic role of Foreign Capital Inflows (FCI) in Pakistan through applying vector error correction model (VECM) on annual time-series data for the period of 1972-2006.

The present study does not find any evidence for direct positive impact of aggregate FCI on  growth and Investment (capital formation). However, the study finds the positive (complementary) relationship between FCI and domestic saving, thus suggesting an indirect positive impact of FCI on  through supplementing domestic resources. These results seem contradicting i.e. positive relation with domestic savings but negative linkages with investment and growth. However, we can interpret it as that FCI is supplementing the domestic resources and there is a need and justification for FCI in Pakistan due the shortage of domestic savings. But, these inflows of foreign capital are not transforming in the productive investment and thus not boosting economic growth. As this study shows that most of FCI are of non-investment (non FDI) type and are concentrated in the selected non-export-oriented and less-employment-generating sectors. In addition, the present study finds that exchange rate depreciation and current account deficit causes more inflows of foreign capital in Pakistan. While FCI also results in increasing the import of goods and  in Pakistan.

Subsequently, the present study suggests some policy recommendations like: (i) to target and identify the potential sectors for inviting the inflows of foreign capital, (ii) to change in composition of existing FCI, from non-FDI to FDI (investment) forms of FCI, (iii) to diversify the existing FCI from non-tradable and less job-oriented sectors to the tradable (export-oriented) and specially in agricultural-related  sectors, (iv) to mobilize the domestic resources, that will reduce the reliance on foreign assistance, and (v) to control the current account deficit and to stabilize the exchange rate, which will be helpful in reducing the reliance on foreign capital.

Published By: GRIN Publishing - GRIN Verlag GmbH, Marienstr.17, 80331 München (Munich), Germany

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A conversation on migration and development

SUBMITTED BY DILIP RATHA ON MON, 02/01/2010 - 17:40

On People Move

I was recently interviewed by Kanchan Banerjee, the editor of New Global Indian. The interview touched on many interesting aspects of migration and development that may interest you.

(From the New Global Indain, Jan, 2010)

Q- About half a decade ago, you were among the first in the world to figure out the first global tally of remittances, what was the result?

DR-The money that migrants send home turned out to be way larger than I expected, the finding actually stunned experts in the field. Gathered from a trickle of hard-earned cash, believe it or not, remittances are larger than $300 billion a year. Compare that with official aid flows which are just about $100 billion a year.

Q-Today you are a leading figure in the area of Migration and Development. What are the factors that attracted you to work on the two related areas of development in today's inter-connected world?

DR- As a migrant myself, I am deeply interested in the phenomenon of migration and remittances. Before Y2K, I was actually talking with friends about starting a money transfer service to India from the US! The main reason for my interest in migration is that it produces instant poverty corrupt practices. This enables a poor person to hold his/her head high in the society. When migrants send money, it helps not only the immediate family members and friends, but also indirectly the local community. I call remittances 'value-added money' because it is not only the dollar that comes in, each dollar also comes with advice on what to do with it. Also remittances are friends in foul weather they increase when the recipient is facing difficult times. There are about 200 million migrants worldwide, supporting as many if not more people at home. That suggests that remittances may reach almost a tenth of the world's population.

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'Some Current Approaches to Climate Adaptation May Bypass Local Institutions'

SUBMITTED BY TOM GRUBISICH ON SUN, 01/31/2010 - 11:02

On Development Marketplace

Carbon dioxide -- the chief cause of manmade global warming -- doesn't park itself only in the atmosphere over major emitting countries.  So, obviously, the response to climate change requires global action.  But drought, storms, flooding, and rising sea levels demand climate adaptation tailored to circumstances that will var

y by region and even locality.  For example, farmers in one part of southern Zambia may have to respond with a hybrid maize seed that differs significantly from what needs to be planted in another part of that climate-besieged food bowl.  The issue in southern Zambia is not just more intense drought, but how it can, and does, vary in intensity even within one region.  Dry weather may be so severe in one area that farmers there may have to give up maize cultivation and plant an entirely different crop.

Such fine-tuned local adaptation can't come primarily out of ministries of the national governments of developing countries trying to cope with the mounting adverse impacts of climate change on people and resources.  It requires local institutions to meet the capacity gap.  But national governments aren't collaborating that closely with civil society at the community level.

This from the new book Social Dimensions of Climate Change(World Bank, 2010):

"It is unfortunate that some current approaches to adaptation planning and financing may bypass local institutions.  The current push to formulate national adaptation plans of action [NAPAs] seems to have missed the opportunity to propose adaptation projects for community- and local-level public, private, or civic institutions."

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Apply Now for Tech Awards

SUBMITTED BY TOM GRUBISICH ON FRI, 01/29/2010 - 10:53

On Development Marketplace

The Tech Awards, a signature program of the Tech Museum of Innovation in San Jose, CA, honors innovators from around the world who are applying technology to address humanity’s most urgent challenges.

In partnership with Santa Clara University’s Center for Science, Technology, and Society, 15 Laureates are selected annually and $50,000 is awarded to one Laureate in each category: Environment, Economic Development, Education, Equality, and Health.

Individuals as well as nonprofit and commercial organizations are eligible. Anyone may submit a nomination. Self-nominations are accepted and encouraged.

Deadline for nominations is March 31. Deadline for final applications is May 5.

This year’s Laureates will be honored during a week of activities in Silicon Valley leading up to The Tech Awards Tenth Annual Gala on Saturday, Nov. 6, 2010.

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Gross Domestic Product Not Sole Indicator of Progress

SUBMITTED BY JOE QIAN ON  End Poverty In South Asia

What is Happiness? Many of us equate it with money. However, since 1972, the kingdom of Bhutan under the leadership of its former King, Jigme Singye Wangchuck has measured its developmental success not solely through the economic lens of Gross Domestic Product (GDP) but also through a more complete approach known as Gross National Happiness (GNH). Its laurels were based upon the original four pillars of sustainable development, preservation and promotion of cultural values, conservation of the natural environment, and good governance.

These indicators have become increasingly important over the last three decades as it became apparent that blindly pursuing economic expansion has created growing pains in a number of countries. GNH has appeared to be very successful in Bhutan, a nation the size of Switzerland with a population of around 700,000. With initiatives such as maintaining at least 60% (currently 72%) of the land for forests and conservation, while maintaining 165 indigenous mammal species such as the rare snow leopard, Bhutan also has a fast growing economy.

Government spending on health and education is the highest in the region at 18% and Bhutan boasts a GDP growth rate of 21.4% and a per capita income level that is almost twice as much as much as India’s, although it was much poorer as recently as the 1980’s. Independent sources also seem to echo these sentiments as Business Week magazine rated Bhutan theworld’s 8th happiest country.

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Does South Asia Run the Risk of Rising Inflation?

SUBMITTED BY ELIANA CARDOSO ON  End Poverty In South Asia

I am old enough to remember the days when Latin America was the land of inflation. Hyperinflation in Bolivia, Brazil and Argentina made the news in the 1980s and early 1990s. At that time, Asia was seen as immune to the Latin disease. Since then, much water has gone under the bridge. Inflation came under control in the majority of Latin American countries. Today the median inflation rate in South Asia is more than twice the size of the median inflation rate in Latin America and the Caribbean. (See chart below)

Should South Asia’s policymakers look at this information and wonder whether they are doing something wrong?

In general, the recipe for hyperinflation is the monetizationof budget deficits in countries afflicted by political instability or conflict. Even if the threat of mega inflation is far removed from the South Asia scenarios, the combination of big budget deficits and loose monetary policy seems to be present in some countries of the region.

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