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Crowding-out Hypothesis in a Vector Error Correction Framework: A Case Study of Pakistan

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  • Kalim Hyder

    (Social Policy and Development Centre, Karachi.)

Abstract

Under the umbrella of the IMF stabilisation programmes, Pakistan has pursued a policy of fiscal consolidation since 1988. A look at the budget deficit from 1988 onwards reveals that the policy has only been marginally successful. Even this fragile accomplishment of the Fund-based programme has been achieved at a much greater cost: the reduction in budget deficit has only been materialised because of the curtailment of development expenditure component of total fiscal outlays [Social Policy and Development Centre (2001)]. Economic theory suggests that development expenditure component of fiscal outlays, which also equals net investment by the public sector,1 has a significant relationship with both the rate of private investment and economic growth. If public investment increases, fewer funds will be available for private investment. Competition will thereby drive the interest rates up leading to lower level of private investment. Neo-classicals believe that this process will only result in a redistribution of gross national between the public and the private sector and the rate of economic growth will remain intact. On the other hand, Keynesians argue that the multiplier effect of higher public spending will be larger as compared to the induced negative effect of reduced private investment on the rate of economic activity and, therefore, gross national product will increase.

Suggested Citation

  • Kalim Hyder, 2001. "Crowding-out Hypothesis in a Vector Error Correction Framework: A Case Study of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 40(4), pages 633-650.
  • Handle: RePEc:pid:journl:v:40:y:2001:i:4:p:633-650
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    References listed on IDEAS

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    Cited by:

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    2. Ibrar Hussain & Zahoor Khan & Muhmmad Rafiq, 2017. "Compositional Changes in Public Expenditure and Economic Growth: Time Series Evidence from Pakistan," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 9(1), pages 1-20, March.
    3. Syed Ammad & Sabihuddin Butt & Shaista Alam, 2012. "Fiscal Responsiveness, Persistence and Discretion: A Case Study of Pakistan," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 15(45), pages 227-244, September.
    4. Syed Ammad Ali & Qazi Masood Ahmed & Lubna Naz, 2016. "Public spending on human capital formation and economic growth in Pakistan," Asia-Pacific Development Journal, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), vol. 23(1), pages 1-20, June.
    5. Kalim Hyder & Qazi Masood Ahmed, 2004. "Why Private Investment In Pakistan Has Collapsed And How It Can Be Restored," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 9(1), pages 107-125, Jan-June.
    6. Syed Ammad & Qazi Masood Ahmed, 2014. "Dynamic Effects of Energy Sector Public Investment on Sectoral Economic Growth: Experience from Pakistan Economy," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 53(4), pages 403-421.
    7. Sajad Ahmad Bhat & Bandi Kamaiah, 2021. "Fiscal policy and macroeconomic effects: structural macroeconometric model and simulation analysis," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 23(1), pages 81-105, June.
    8. Ghulam Rasool Madni, 2014. "Role of fiscal policy for private investment in Pakistan," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 7(2), pages 139-152, September.
    9. Matthew McCartney, 2018. "The China-Pakistan Economic Corridor (CPEC): Considering Contemporary Pakistan through Old-Fashioned Economics and Historical Case Studies," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 23(2), pages 19-48, July-Dec.
    10. H.R.A. Chamini Thilanka & J.G. Sri Ranjith, 2018. "The Impact of Public Debt on Private Investment: Sri Lankan Experience," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 8(8), pages 1-20, August.

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