- Thursday | 16 Jan, 2020
- Vaqar Ahmed, Ahad Nazir, Maaz Javed, Fatima Khushnud, Asad Afridi, Daheem Hayat, Mujeeb-ur-Rehman
- Research Reports,Project Publications
Introduction Like most developing countries, Pakistan continues to rely on foreign capital inflows as a major source of financing its public and private sector programs. Such inflows could include, but may not be limited to, foreign direct investment, foreign portfolio investment, grants or loans provided by multilateral or bilateral sources. However, in recent past, developing economies continue to face volatility in such inflows owing to financial crises (as seen in late 1990s and 2000s), possibility of escalation in trade wars, volatile commodity prices – all making it difficult for private and institutional investors to make longer term financing decisions. Studies show that in the early 1990s, funding through foreign private sources flowing in the developing countries contributed over 75% of external capital flows. Foreign investment was a major contributing group with its share going from less than 30% to nearly two-thirds of the total external flows by 1998 (UNCTAD, 2003). Although, a decrease in foreign investment was experienced momentarily in the early 2000s, post-2004 witnessed a new trend, i.e. the highest level of accelerated growth in FI in 2007 (UNCTAD, 2008). This pattern was of course disturbed by the global financial crisis, which also brought with it issues threatening balance of payments stability in several economies (Ahmed & O’ Donoghue 2010). Keeping in view the significant contribution of these inflows as a development funding source, understanding their effect on the macro economy and welfare is critical. Policy makers share a common perception that foreign investment remains a key element of economic growth in developing countries. Though foreign investment (and other types of capital inflows) brings about sustained welfare gains for the host country, population in general continues to be questioned by the empirical evidence (United Nations 2002).11 See also: Ahmed and O’ Donoghue (2010b). 8 Relationship between capital inflows and other economic development ingredients such as productivity, technological spill overs, stability of interest rates and inflation, and human-capital have been extensively analysed.2 However, in almost all the studies, results vary, i.e. few studies depict a positive relationship while others report a negative relationship, and still others indicate no relationship at all........