The macro determinants of the drop in Pakistan’s long run GDP growth

Abstract

This paper attempts to address the long-run determinants of trend GDP growth in Pakistan for the years 1973 to 2017. The theoretical framework chosen has been the Keynesian general equilibrium framework of aggregate demand, decomposed into the macro aggregates of consumption, investment, government expenditures, exports and imports (Keynes, 1937). The analytical strategy we have used is to establish first whether there has been a discrete drop in GDP growth at any particular break date. Establishing a break date allows us to define two periods of GDP growth, a higher growth period, followed by a lower growth period. The determinants of GDP growth can then be established, by looking for correlated changes in their behavior between the two time periods. Our findings suggest that high GDP growth in the first phase, pre-1992, is explained by high investment growth. Paired with a Marginal Propensity to Consume in this phase which is low. Making this high GDP growth phase investment led. Low GDP growth in the second phase, post-1992, is now explained by low investment growth. Paired with a Marginal Propensity to Consume, in this phase which is higher. Making this phase consumption-led.