Probing Real Economic Growth through Institutional Quality and Fiscal Policy in Pakistan
Abstract
The current study examined the effect of institutional development and fiscal policy on real economic growth. It employed Generalized Method of Moments (GMM) technique to address the issue of potential endogeneity, which may arise in the presence of political institutions. Principal Component Analysis (PCA) was used to construct an index of institutional quality. The real economic growth in Pakistan covering the period from 1984 to 2020 provides ample evidences that (i) tax rates have negative and insignificant impacts on real economic growth (ii) government expenditures on social indicators helps in augmenting real growth (iii) link between institutional quality and real economic growth is positive but insignificant (iv) increase in investment pushes up real growth as well as lagged value of Gross Domestic Product (GDP) also helps in promoting growth, and (v) trade openness restricts real growth. Accordingly, the study suggested that government should enhance expenditures on social indicators. To fulfill this purpose, there is need to increase tax-to-GDP ratio through expanding the tax base; not the tax rate. Furthermore, there is also a need to restructure certain main political institutions which help to improve economic growth, accountability, equity, security, and transparency.
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