Proposal
on
Economic growth of Pakistan
Abstract:
The
present study aims to explain what are the factors affecting the economic
growth of Pakistan. Economic growth plays a vital role in the prosperity of any
country. For this study, I took three independent variables education,
financial development and stock market that are directly related with the
economic growth of Pakistan.
Different
hypothesis are formed on the basis of dependent and independent variables. Then
a survey will be conducted by using a questionnaire with the 300 respondent. The
three independent variables have a great impact on dependent variable, economic
growth of Pakistan. All these three independent variables are almost positively
related with economic growth of Pakistan. They have some who directly linked
with it.
Education is generally considered
as a powerful tool in reducing poverty, enhancing economic growth and creating competitive
economy. Results
suggest a positive relationship between several indicators of the stock market
performance and economic growth both directly, as well as indirectly. Thus they
lend support both to the financial intermediation literature as well as to the
traditional growth literature. In terms of financial development it provides an empirical basis
for promoting financial and economic development. It has two important policy
implications, especially for developing countries like Pakistan.
Factors Affecting the
Economic Growth of Pakistan
Introduction:
A country’s economic growth may be defined as a long term
rise in the capacity supply increasingly diverse economic goods to its population;
this growing capacity is based on advancing technology and the institutional
and ideological adjustments that it demands.(Kuznets 1973)
Economically developed countries have been able to reduce
their poverty level, strengthen their social and political institutions,
improve their quality of life, preserve natural environments and achieve
political stability [Barro (1996); Easterly (1999); Dollar and Kraay (2002a);
Fajnzylber, Lederman, et al (2002)].
After the World War II, most of the countries adopted
aggressive economic
policies to improve the growth rate of real gross domestic product (GDP). The neoclassical growth models
imply that during the evolution between steady states; technology, exogenous rate of
savings, population growth and technical progress generate higher growth levels (Solow 1956).
An economy consist of the economic system of a country or other areas
like labor, capital and land resources and the agents that socially take part
in production, exchange, distribution and consumption of goods and services of
that areas. Economic growth is basically the increase of per capita gross domestic
product (GDP) or other measure of aggregate income. Mostly it is measured as
the rate of change in GDP. Economic growth refers only to the quantity of goods
and services produced. Economic growth of any country can be either positive or
negative. In negative economic growth we say that economy is shrinking and it
is associated with economic recession and depression. While positive economy is
opposite to it. (Economywatch.com)
When we talk about a country like
Pakistan, which is the developing country and its economy is the world’s 27th
largest economy based on its purchasing power, economic growth is very
important to it. However, the country remained under developed due to internal
political disturbances and negligible foreign investment, since independence.
With rise in development spending by Islamabad, the country’s poverty levels
reduced by 10% from the year 2001 to 2007. The economy grew between 2004-07 due
to rise in GDP from 5 to 8%. This was largely due to development in industrial
and services sector irrespective of severe electricity shortfalls. However, the
year 2007 witnessed a lot of political and economic instability leading to
depreciation of Pakistani rupee. The growth of the economy was affected once
again during the 2008 global economic recession. Pakistan economic growth faced
serious problems in fiscal year 2009 because of the depressed consumer credit
market, political instability, and slow progress of public sector programmers,
inflation, and reduction in subsidies, security threat, and instability in the
state and energy crisis. Moreover, there was no attention given to the
agriculture sector properly. The exports reduced by 6% percent and imports by
10%. The only thing that became a silver lining was the increment in
remittances by 22%. (Economywatch.com)
In context of my research, I am going to find out
that what are the factors that affecting the economic growth of Pakistan. The basic
purpose is to find out the reason that’s why the economy of Pakistan is fluctuating.
For that purpose I took Economic growth of Pakistan as dependent variable three
independent variables (1) Education (2) Stock market (3) Financial development.
GDP graphs:
Following graphs are showing improving in
purchasing power in last three years and decline in real growth rate in terms
of GDP.
Objective of the study:
The purposes of the study are given below:
1. To
explain the economic growth in context of selected variables.
2. To
analyze how independent variables affecting dependent variable.
3. To know
the reasons behind these affecting variables.
4. To
study and analyze the problems of Pakistan’s economy.
Purpose statement:
The purpose
statement of this study is to examine those factors that are affecting the
economic growth of Pakistan. And also to see how these factors affecting the
economic growth, either it has positive effective or negative. It also aims to find
out the relationship between these dependent variable (economic growth of
Pakistan) and independent variables (Education, stock market, financial
development).
Significance of the study:
·
The study will attempt to explain that how
education, stock markets and financial development affecting the economic
growth of Pakistan.
·
It will be helpful for policy makers to make such
economic policies which are worth full for economy.
·
The Government can also take help by this research
before making budgets and other related policies.
·
Government can check and predict where the need is for
improvement and which sector is requiring more attention regarding economic
growth.
·
It will also helpful for future researchers to
research in this sector and can get their required information from it.
·
The study has its own significance that how this
research will apply practically and prove helpful for economists.
Deficiencies
of the previous studies:
This topic is not being
researched by the researcher in Pakistan The previous studies are not done in
the Lahore. The variables which I have selected are not used in Lahore with the
300 respondents before.
Research Questions:
What are the factors that affecting the Economic
growth of Pakistan?
Sub Questions:
1.
Does education affect the economic growth of
Pakistan?
2.
Does stock market affect the economic growth of
Pakistan?
3.
Does financial development affect the economic
growth of Pakistan?
Hypothesis testing:
1.
Hypothesis
on education:
Ho:
There is no effect of education on economic growth of Pakistan.
H1:
There is an effect of education on economic growth of Pakistan.
2.
Hypothesis
of financial development:
Ho:
There is no effect of financial development on economic growth of
Pakistan.
H1:
There is an effect of financial development on economic growth of
Pakistan.
3.
Hypothesis
of stock market:
Ho:
There is no effect of stock market on economic growth of Pakistan.
H1:
There is an effect of stock market on economic growth of Pakistan.
Model:
Education
|
Financial Development Economic growth of Pakistan
|
Stock exchange
Literature Review:
It is
the fact that if the economy of a country is strong then it can become the
strongest nation of the world. We have some examples like China has a very
strong economy; same India is just few points back having strong economy
growth. As we know that economic growth plays a vital role in the development
of any country so there is need to find out what are the major factors that
affecting the economic growth.
I have
selected a topic “factors affecting economic growth of Pakistan”. Pakistan is a
developing country and its economy also needs to develop. In this context I’m
going to find out the factors affecting the economic growth of Pakistan.
For this purpose, I have selected five
variables i.e. education, stock markets, financial development, foreign direct investment
and savings which have a close link with the economy of Pakistan.
1.
Education:
Holy Quran:
“Those who know cannot be like
the ones who do not know. Of course, knowledge and
ignorance are like light And darkness which can never be alike.”
Economic growth of any country is directly
related with educated people and educated system of that country. It has strong
impact on economy especially in tertiary sector. It promotes a productive and
creates opportunities for the socially and economically underprivileged
sections of society. Education is most important
factor affecting the economic growth of a country. If the literacy rate is high
then the productive work activities will be occurring which leads the country
towards development. Education is generally considered as a powerful tool in reducing
poverty, enhancing economic growth, empowering people, improving private
earnings, promoting a flexible and healthy environment and creating competitive
economy. It plays a vital role in shaping the way in which future generations
learn to cope with the complexities of economic growth. (McMahon, 1998)
Educational
institutions are preparing the citizens to be able to participate actively in
all fields of life including economic activities. Education has multidimensional
impacts on the economy of any country. On one side, it influences economic
growth positively and on the other, it reduces poverty and creates such a
social and political environment that attracts investment which is the good
sign for economy. It makes workers more productive, more polite and promotes
reasonable socio economic policies (Madden and Hogan, 1997).
Education
development plays a vital role not only in economic development but in the
overall development process of the nation also. The role of education in
building the efficient and effective labor force is well recognized (McMahon, 1998).
Education sector development in Pakistan has been
faced a number of problems i.e. inadequate physical infrastructure and
facilities, shortage of trained and motivated teachers, and other inadequacies
related to quality and relevance of education. A major drawback has been
under-investment in quality education, resulting in poor supply of services and
adversely impacting enrolment, retention, teacher quality, attendance and
learning achievements. Lack of proper and regular supervision and monitoring
has led to major breakdowns in quality. By overcoming all these problems our
economy can be developed. The role of education cannot be ignored or dishonored
in the development of the competitive, integrated and knowledge based
progressive society at national and international levels. It is an essential
part in the growth of the economy and these institutions serve as the power
house to the country (Saint, 2009).
The significant and direct role of education cannot be ignored in the
development of the country. Poverty and inflation is a big hurdle in the
achievement of the economic development. So knowledge and skills can be taught
to the people to reduce poverty (Tilak, 1994).
The government of Pakistan has set a goal to raise the literacy level
to 85% by the year 2015. The enrollment in the schools and colleges of the
students has increased. There are 230,699 educational institutions in the country.
Low female literacy rate is one of the main causes of the low women’s
participation in the political, economic and social activities. They cannot
achieve their rights and compete for available opportunities in the job market.
This led the market towards male domination (seebons and wobst, 2003).
Studies
confirm that the productivity benefits of education are large-just one
additional year of education can increase productivity in wage employment by 10
percent even after controlling for other factors. Skill development through
education has been identified as a key determinant of comparative advantage and
manufacturing export performance. In Pakistan, it has been shown that districts
with a higher literacy level have a higher level of development (SPDC, 2003).
The importance of education is also discussed by the founder of
Pakistan in the following words, “There is no doubt
that the future of our State will and must greatly depend on the type of education
we give to our children and the way in which we bring them up as future citizens of
Pakistan”
“Quaid-e-Azam Muhammad Ali Jinnah. All Pakistan
Education Conference November 30, 1947 Karachi.”
Stock market:
The stability of market is determined through liquidity of its
securities, which means that how these securities are easily bought or sold in
the market. The liquidity in one way enables the markets to improve the
allocation of capital and enhance prospects of long-term growth. These
indicators complement the market capitalization ratio by showing whether market
size is large or small (Kanasro, 2006).
The role of stock market as part of financial markets in economic
growth process is observed by growth theories. The main interaction between
stock prices fluctuation and real economic activities has been a most
considerable issue in majority of economic studies. In this case, two crucial
questions have become the main focus of attention. First, are stock prices or
share price movements influenced by economic change? Second, to what extent
does the stock market performance as a macroeconomic indicator affect the
economic growth? Stock markets also affect the economic growth in terms of
profitability. Share prices fluctuations play a major role in directing
economic activities in the medium and long term level. Stock prices reflect the
expectation of public towards the future economic activity. (Fama,1990; Ferson and Harvey, 1993;
Cheung and Ng, 1998; Mauro, 2003; Ritter, 2004; Liu and Sinclair, 2008; Shahbaz
et al., 2008).
In other words, the stock market is forward-looking and stock prices
reflect anticipations about future economic activity. On the other hand, there
exist a causal relationship between stock price fluctuation and economic growth
in the short run, indicating that the stock markets act as a leading indicator
of economic growth.
It is also observed that there is
a long-run relationship between stock market development and economic growth
for Pakistan. The results are vigorous that indicates that stock market
development is an important wheel for economic growth of Pakistan. Sometimes we
see bi-directional causality between stock markets development and economic
growth in case of Pakistan in long-run. But in short-run, the causality runs
only one-way, i.e., from stock markets development to economic growth. (Jefferis and Okeahalam, 2000; Nasseh
and Strauss, 2000; Mauro, 2000; Shirai, 2004; Adajaski and Biekpe, 2005; Mun et al., 2008).
Financial
development:
In
economics, the effects of developing financial markets on economic growth have
always been an important issue in ever since. In international literature,
although many studies have been done since 1900s to observe the relation
between financial developing and economic growth, each study had found
meaningful results only for its own period. Even though economists have
accepted effects of financial developing on economic growth, they have not had
the same idea about the direction of causality, which means whether financial
development causes economic growth or economic growth causes financial
development. For instance, Hicks (1969) and Schumpeter (1912) support that
financial developing cause financial growth. In contrast to this opinion,
Robinson (1952) discusses that in the existence of same type of financial
regulations, economic growth creates a demand and financial system gives an
automatic response to this demand which causes financial system development
(Levine,1997).
According
to some economists, financial developing does not explain economic growth well.
Moreover, this relationship is a result of weak and un-powerful effect of
financial system on economic growth. However, some economists, this
relationship is a result of economies, which completed their development cycle
in financial markets with a strong financial system, have bigger growth rate. The relationship between financial
development and economic growth has remained an important issue of debate in
developing economies. A modern financial system promotes investment, which is
the major part of economic growth, by identifying good business opportunities,
mobilizes savings, monitors the performance of managers, enables the trading,
hedging, and diversification of risk, and facilitates the exchange of goods and
services. As a result of all these functions we see a more efficient allocation
of resources, in a more rapid accumulation of physical and human capital, and
in faster technological progress, which in turn feed economic growth. (Boyd and
smith, 1998)
The role of financial development factor in economic growth of Pakistan
is not well researched. This study is an attempt to fill this gap. The
objective of the present study is to examine the relationship between financial
development and economic growth in Pakistan in current situation. We also
examine the structural stability of the finance-growth relationship in the
presence of financial sector reforms which were integral part of the
liberalization process of the economic growth. But Pakistan is trying from the
past one and half decades to reform its financial system. Considered as an
integral part of macroeconomic policy, the financial reforms are expected to
bring about significant economic benefits, particularly through a more
effective mobilization of domestic savings and a more efficient allocation of
resources. Financial development may affect economic growth through a more
rapid capital accumulation or through technology changes. The first channel
shows that enhanced financial systems may attract capital and raise national
savings, thus, increasing both capital formation and growth. The latter channel
shows that enhanced financial systems allocate savings more efficiently. Low
information costs provided by better financial systems may influence the
allocation of resources and productivity growth to construct measures of
economic growth, capital per capita growth, and productivity growth (khan,
qayyum and sheikh, 2005).
Economic
growth of Pakistan:
Economic growth is
the increase in value of the goods and services produced by an economy. It is
conventionally measured as the percent rate of increase in real gross domestic
product, or GDP. As economic growth is measured as the annual percent change of
National Income it has all the advantages and drawbacks of that level variable.
But people tend to attach a particular value to the annual percentage change,
perhaps since it tells them what happens to their pay check.
Pakistan economy, one of largest in South
Asia has been forecast to grow 5.5 percent in 2009. However, it was previously
estimated to be 5.8 percent, as was said by finance ministry in Islamabad.
Economic growth of Pakistan is seen through gross domestic product purchasing power parity, which was
estimated to be $454.2 billion in 2008. Official exchange rate was
approximately $160.9 billion, while real growth rate in 2008 GDP of Pakistan,
as per statistical data was found to be 4.7 percent. GDP per capita income was $2,600 in 2008.
For economic growth of Pakistan, each sector contributes individual amounts to
economy and thereby adding to GDP. Agricultural sector contributes about 20.4
percent to Pakistan GDP. 26.6 percent is added by industrial sector as was
estimated by 2008. 53 percent was received from service sectors during 2008.
The research sector in this study is service sector and it has highest GDP
percentage. It means this sector has major contribution in economic growth.
Relationship between
variables: All the dependent and
independent variables are closely related with each other. The independent
variables like education, stock markets, foreign direct investment, savings and
financial development have strong impact on dependent variable, economic
growth. It has been observed that mostly the relationship between the dependent
and independent variables is positive i.e. economic growth is directly
proportion to education, stock markets, savings foreign direct investment and
financial development. It is clear from studies and researches that literacy
rate has a strong impact on economic growth. Highly educated and skilled
parsons can play better role in development of economy. This case is also
applied in Pakistan. Because the literacy rate is low in Pakistan and there is
need to improve the education standard. In the same way stock markets also play
vital role in economic growth. Stock markets have direct link with the
economical activities. So it has strong effect on economy. In case of Pakistan
the stock markets and price rate are fluctuating which effect the economic
growth. Similarly financial development has also great impact on economic
growth. All the financial activities are directly related with economic growth.
In Pakistan, the financial activities in service sector are not progressive but
it has direct link with economic growth. So, all these variables are playing
crucial role in economic growth and in its service sector. The relationship
between them is positive and all these are closely related with each other.
Same the foreign direct investment and savings have a great impact too on the
economic growth.
Conclusion:
It is clear that the relation between the
independent and dependent variables is positive and closely effect the economic
growth of Pakistan.
Theoretical framework:
Education:
According to Dewey:
“No kind of purpose should be set in advance for
education, but instead, education should be regarded as growth”.
Financial development:
According to financial development report
2008:
“Financial
development as the factors, policies, and institutions that lead to effective
financial intermediation and markets, and deep and broad access to capital and
financial services”
Stock market:
According to business dictionary:
“Organized and
regulated financial market where
securities (bonds, notes, shares) are bought and sold at prices
governed by the forces of demand and supply.”
Methodology:
Data
collection & Research design:
In that
research study we will use Quantitative (Positivism) approach. To handle our
defined research easily. A
structured questionnaire would be made to collect data from respondent. This
study will be cross sectional in nature. A survey will be conducted from
different companies in the service industry sector to generalize who the
selected variables are related with each other. The reason to choose
questionnaire is that it will describe a population by providing a quantitative
or numeric description of some fraction of population (the sample) through the
data collection process of asking questions of people. This will enable to generalize
the finding from a sample of responses to a population.
Sampling
Techniques:
Stratified random sampling technique will be used, to
generalize the finding and to ensure equal representation of both the genders
i.e. males and females and also because of different companies in service
industry sector.
Target population:
The target population for this study will be the companies
of service industry (as mentioned above in literature review) and organizations
from both public and private sector of Pakistan from the city of Lahore. The respondent
will be the employees, management and businessmen of organizations with the age
of 25-35.
Sample Unit:
A sample of 300 employees from different
organizations will be used to collect the information. Male respondents are 200
and Female respondents are 100.
Analysis of data:
SPSS software would be used to analyze the data in
addition to other suitable statistical techniques. Then data will be collected
quantitatively .And then data will be coded and finally results will be
generated through SPSS software to analyze data. This
approach is chosen for two reasons:
–
It is closer to the way in which quantitative data
analysis is carried out in real research these days.
–
It helps to equip the researcher with useful
transferable skills.
At
least 300 questionnaires will be conducted from different service industry
organization’s employees and businessmen.
Validity:
The Validity
is an important element for the readers that gives proof of the study more
confidently and in a trusty way. Validity of the study increases the
authenticity of the entire research. It gives the proof of research
that it based on true findings and conclusions. We will
use face validity to measure the
right thing. The face validity along with concurrent validity will be
second-hand in the quantitative phase that emphasizes on what we will see
regarding the answers specified by the respondents at the present time.
Reliability:
The
reliability is an important element to increase the authenticity of the
research. The consistency of the respondents answers will provide that the data
collected will be reliable. For reliability we will use Parallel-form
reliability to check the accuracy of the measurement by using two different
instruments to get the same result which we want and make the personal data of
respondents in confidential from others.
Limitations and Delimitations:
Limitations:
Due to limited availability of resources our research is limited to
limited population size of Lahore. This will limit the findings to be applied
to other cities. Due to limited resources we have selected only 200 respondents
for this study. It also limits the findings to be applied to other industries
and organizations.
Delimitations:
It is a voluntarily research. Any of the general public can be a part
of this project. The scope of the study may focus on specific variables
described in the proposal.
Ethical consideration:
Ethics
are considered as the most important element while collecting data from the
respondents. Developing this proposal as well as during the
complete research process, ethical issue will be deeply and wholly kept in
consideration since the introduction of research problem statement till
Writing and disseminating the whole research. The
individuals, from whom the data will be collected, will be well briefed about
the research topic and its implementation on real time basis. Their identities
will be kept secret from the others and it will ensured to them that the
information collected from them will only be used for the research purpose. A
consent form will be sent to the respondents that will encourage them to
provide accurate and appropriate information regarding the proposed research
topic, on which the signatures of both the researchers and the respondents will
be given, kept secret. The respondents will feel themselves confident and
protected in giving their opinions. That will be the basis of the authentic
findings. Signatures and data which provided by respondents will be kept
confidential. Elements of consent form include the following:
Ø The
right to participate voluntarily and the right to withdraw at any time.
Ø The
purpose of research, so that individual understands the nature of research and
its likely impact on them.
Ø Signatures
of respondent’s researchers agreeing to these provisions.
Ø
Permission to come will be taken.
Ø
Respondents will be informed about research.
Ø
Researcher will leave research sites undisturbed.
Ø
All the information provided by the respondent will
kept in strict confidence.
Ø
All the information provided would be held in
strict confidence.
Ø
Individual will not be coerced into participation.
References:
1.
Kuznets.S, 1973, modern economic growth, the American economic review,
vol. 63, p#247-258
4.
McMahon, W. (1998), Education and growth in East Asia. Economics of
Education Review, Volume 17(2), pp. 159-172.
5.
Saint, W. (2009), Tertiary education and economic growth in sub-Saharan
Africa. The World Bank Report. Retrieved April 29, 2009, from www.bc.edu/bc_org/avp/soe/cihe/newsletter/Number
54/p14_saint.htm.
6.
Tilak, Jandhyala B. G. (1994), Education for Development in Asia. Sage
Publications
7.
Seebens, H. and P. Wobst (2003), The Impact of Increased School
Enrollment on Economic Growth in Tanzania. Bonn: Center for Development
Research.
8. Atje, R., and B. Jovanovic. 1993.
"Stock Markets and Development." European Economic Review, Vol. 37:
632-640.
9. Hicks, J.A. 1969. A Theory of
Economic History. Clarendon Press (Oxford, U.K).
10. Levine, R. (1997). Financial
development and growth: Views and agenda. Journal
of Economic Literature, 35, 688-726.
11. Lesmond, D. (2005). Liquidity of
emerging markets, Journal of Financial
Economics, 77,
411-452.
12. Annual Reports of State Bank of
Pakistan (Various issues).
13. Am. J.
Applied Sci., 7 (2): 265-269, 2010.
15. Stock market and economic growth
Causality test. Asi. Soc. Sci., 4: 86-92.http://www.ccsenet.org/journal/index.php/ass/articl e/view/1605.
16. Pakistan
Economic and Social Review Volume 48, No. 1 (Summer 2010), pp. 39-60.
17. Abbas, Q. and J. F. Peck (2007),
Human capital and economic growth: Pakistan, 1960-2003. Retrieved from www.cardiff.ac.uk/carbs/econ/workingpapers/ papers/ E2007_22.pdf.
18. Government of Pakistan (2010), Pakistan
Economic Survey 2009-2010.
Islamabad: Finance Division, Economic Advisory Wing.
19. Barro R. (1991). ‘Economic growth in
a cross section of countries’, Quarterly Journal of Economics, 106, 407-442.
20. Khan.A, qayyum and sheikh.S, financial
development and economic growth, The
Pakistan Development Review 44 : 4 Part II
(Winter 2005) pp. 819–837
21.
Boyd,
J.H., Smith, B.D., 1998. The evolution of debt and equity markets in economic
development. Economic Theory 12, 519–560.
23.
Robinson,
J., (1952), The Generalization of the General Theory , The Rate of Interest and
Other Essays, London, Macmillan, Page 69-142
24.
Hicks,
J. , (1969), A Theory of Economic History, Oxford , Clarendon Press
25.
Levine,
R. , (1997), Financial Development and Economic Growth: Views and Agenda ,
Journal of Economics Literature, Vol.35
26.
Schumpeter,
J. , (1911), The Theory of Economic Development , Harvard University Press,
Cambridge
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