Impact of Trade Liberalization on Economic Development in Pakistan: A Co-integration Analysis

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Abstract

This study examines impact of trade liberalization on economic development in Pakistan using ARDL bound testing technique over the period of 1972 to 2015. Taking inspiration from Sen’s ‘capability’ approach Human Development Index (HDI) is used as proxy of economic development. Findings reveal that in the long-run trade liberalization has significant and positive impact on HDI (with and without income component) in all specifications. GDP growth has significant positive impact on HDI in both short and long run, whereas, inflation exerted negative impact in the short run only. Based on empirical findings, we reject anti-trade liberalization argument in favor of both standard argument and broader argument for positive impact of trade liberalization on development in Pakistan. The study suggests that policy makers should have more trade friendly policies in conjunction with growth enhancing and inflation targeting policies to achieve the dream task of development as an explicit prime macroeconomic objective in Pakistan.