Balance of Payments Constrained Growth in Pakistan - Implications for Development Policy

This study examines relevance of Thirlwall’s Law (1979) for Pakistan which states that in the long run no country can grow faster than the rate consistent with balance of current account, unless it can finance ever-growing deficits. Descriptive analysis shows that worsening of external sector balances leads to slowdown in growth rate. Different estimations of growth rate using ARDL regression analyses also suggest that Pakistan’s long run growth is at least partly BOP constrained. Major factors for this constraint are stagnant primary structure of exports, relatively inelastic demand for imports and deteriorating terms of trade. Relaxing external constraint requires structural transformation; however, political economy of stabilization process results in stability without reforms and thus leads to vicious cycle of crises. It is argued that dynamic manufacturing sector is key to long-term development; and Pakistan should pursue comparative advantage it is in consonance with historical global experiences of successful developments.