Explaining Pakistan’s Long-Run Growth

This book explains the behaviour of output and its growth over time. It does so by deliberating over a choice among three fundamental models—the Samuelson-Swan-Solow neoclassical model, the Harrod-Domar model and the Keynesian model—to choose one fit for purpose. The criteria for goodness of fit are some mathematical properties of growth models. The model chosen for meeting these properties is the Keynesian model, which is a bit better on all these counts.

The chosen Keynesian model of aggregate demand has been used to explain the observed behaviour of Pakistan’s long-run growth of gross domestic product (GDP). Pakistan’s GDP growth over the long run between 1973 and 2019 is marked by a statistically significant hiatus at approximately 1992. Pre-1992, GDP growth on trend approximated 6 percent per annum. Post-1992, it drops on trend to approximately 4 percent per annum. Applied to the hiatus in Pakistan’s GDP growth after 1992, this model shows that pre-1992, high GDP growth is explained by high investment growth, paired with a low marginal propensity to consume (MPC), while post-1992, lowered GDP growth is explained by lower investment growth paired with a higher MPC. Thus, Pakistan’s higher GDP growth pre-1992 was investment-led while its lower GDP growth post-1992 has been consumption-led.

The book then traces the causality of these trends in investment and consumption to a falling trend in public investment. This is linked to an increasingly austere regulatory policy environment, while private investment fails to step in and maintain aggregate investment.