Income Inequality, Investment, Public Expenditures and Economic Growth: The Case of Pakistan

Purpose: This study investigated the quadrilateral relationship between economic growth, income inequality, public expenditures and investment in the context of Pakistan by using a consistent time series data set from 1980-2009. Methodology: The study employed autoregressive distributed lag (ARDL) model (also called bounds testing approach) and innovation accounting techniques including impulse response function and variance decomposition analysis for robust inferences. Findings: The results show that there is a significant and positive relationship between investment and economic growth, while income inequality and government expenditures both have a negative relationship with Pakistan’s economic growth. The results of impulse response function illustrate that income inequality has a devastating impact on government expenditures and income, while a shock to income inequality has a positive impact on investment for the next ten year period. The results of variance decomposition analysis show that government expenditures is the contributor that least influences economic growth, while income inequality will largely influence economic growth for the next ten year period. Recommendations: This study has a unique distinction in a current scenario, as its examined the inter-temporal (forecast) relationship between income inequality, economic growth, total investment, and public expenditures for the next ten year period.