Probing Real Economic Growth through Institutional Quality and Fiscal Policy in Pakistan
Abstract
The study examined the effect of institutional development and fiscal policy on real economic growth. It employed Generalized Method of Moments (GMM) technique to deal with potential endogeneity, which may arise in the presence of institutions. Principal Component Analysis (PCA) is used to construct an index of institutional quality. The real economic growth in Pakistan covering the period from1984 to 2020 provides ample evidences that (i) tax rates have negative and insignificant impact 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 and lagged value of GDP also helps in promoting growth (v) trade openness restricts real growth. Accordingly, it is suggested that government should enhance expenditures on social indicators and for that purpose there is need to increase tax to GDP ratio through expanding the tax base; not the tax rate and there is a need to restructure certain main political institutions which help to improve economic growth, accountability, equity, security and transparency.
Downloads
References
Aghion, P., Alesina, A., & Trebbi, F. (2004). Endogenous political institutions. The Quarterly Journal of Economics, 119(2), 565-611.
Akram, M., & Khan, F. J. (2007). Health care services and government spending in Pakistan (No. 22184). East Asian Bureau of Economic Research.
Ali, S., Ahmad, N., & Khalid, M. (2010). The effects of fiscal policy on economic growth: empirical evidences based on time series data from Pakistan [with comments]. The Pakistan Development Review, 497-512.
Arisoy, I. and Unlukaplan, I. (2010). Tax composition and growth in Turkey: An empirical analysis. International Research Journal of Finance and Economics, 59,51 - 61.
Aron, J. (2000). Growth and institutions: a review of the evidence. The World Bank Research Observer, 15(1), 99-135.
Assane, D., & Grammy, A. (2003). Institutional framework and economic development: international evidence. Applied Economics, 35(17), 1811-1817.
Barro, R. J. (1990). Government spending in a simple model of endogeneous growth. Journal of political economy, 98(5, Part 2), S103-S125.
Barro, R. J., & Sala-i-Martin, X. (1992). Public finance in models of economic growth. The Review of Economic Studies, 59(4), 645-661.
Bird, R. M. (2008). Tax challenges facing developing countries. Institute for International Business Working Paper, (9).
Bleaney, M., Gemmell, N., & Kneller, R. (2001). Testing the endogenous growth model: public expenditure, taxation, and growth over the long run. Canadian Journal of Economics/Revue canadienne d'économique, 34(1), 36-57.
Chu, K. Y. (2001). Collective Values, Behavioural Norms, and Rules: Building Institutions for Economic Growth and Poverty Reduction (No. 2001/98). WIDER Discussion Papers//World Institute for Development Economics (UNU-WIDER).
Chuma, I. (2015). The tax rate that optimizes Economic growth in Kenya (1990- 2013).
Dollar, D., & Kray, A. (2003). Institutions, trade, and growth. Journal of monetary economics, 50(1), 133-162.
DRI/McGraw-Hill (1998) An Agenda for Effective Governance. Chapter 5 in Enterprise 2010: Realising Pakistan’s Full Potential. DRI/McGraw-Hill, Lexington, MA, USA.
Engen, E. M., & Skinner, J. (1992). Fiscal policy and economic growth (No. w4223). National Bureau of Economic Research.
Engen, E. M., & Skinner, J. (1996). Taxation and economic growth (No. w5826). National Bureau of Economic Research.
Greif, A., & Laitin, D. D. (2004). A theory of endogenous institutional change. American political science review, 98(4), 633-652.
Hall, R. E., & Jones, C. I. (1999). Why do some countries produce so much more output per worker than others?. The quarterly journal of economics, 114(1), 83-116.
Hansen, L. (1982) Large sample properties of Generalized Method of Moments estimators. Econometrica 50, 1029–1054.
Hare, P. G. (2001). Institutional change and economic performance in the transition economies. Economic Survey of Europe, 77-92.
Hassan, M. (2002). Governance and poverty in Pakistan (No. 2002: 13). Pakistan Institute of Development Economics.
Husain, I. (2018). Why Institutional Capacity Matters, and Where Reforms Should Start. Pakistan’s Institutions: We Know They Matter, But How Can They Work Better, The Wilson Centre
Jütting, J. (2003). Institutions and development: a critical review (Vol. 210). OECD Publishing.
Katz, C. J., Mahler, V. A., & Franz, M. G. (1983). The impact of taxes on growth and distribution in developed capitalist countries: A cross-national study. American Political Science Review, 77(4), 871-886.
Knack, S., & Keefer, P. (1995). Institutions and economic performance: cross‐country tests using alternative institutional measures. Economics & Politics, 7(3), 207-227.
Kneller, R., Bleaney, M. F., & Gemmell, N. (1999). Fiscal policy and growth: evidence from OECD countries. Journal of Public Economics, 74(2), 171-190.
Koester, R. B., & Kormendi, R. C. (1989). Taxation, aggregate activity and economic growth: cross‐country evidence on some supply‐side hypotheses. Economic Inquiry, 27(3), 367-386.
Levine, R., & Renelt, D. (1992). A sensitivity analysis of cross-country growth regressions. The American economic review, 942-963.
Mendoza, E. G., Milesi-Ferretti, G. M., & Asea, P. (1997). On the ineffectiveness of tax policy in altering long-run growth: Harberger's superneutrality conjecture. Journal of Public Economics, 66(1), 99-126.
Ministry of Finance, Government of Pakistan, Pakistan Economic Survey, Islamabad
Nelson Richard, R., & Winter Sidney, G. (1982). An evolutionary theory of economic change. Cambridge Massachusetts, The Belknap Press
North, D. C. (1990). Institutions, institutional change and economic performance. Cambridge: Cambridge University Press
Omri, A., & Chaibi, A. (2014). Nuclear energy, renewable energy, and economic growth in developed and developing countries: A modelling analysis from simultaneous-equation models. Renewable & Sustainable Energy Reviews, 42, 1012–1022
Pakistan, Government of (1999) Strategy for Improving Governance. Islamabad: Planning Commission
Pasha, H. A. (2018). Growth and Inequality in Pakistan. Friedrich Ebert Stiftung.
Rebelo, S. (1991). Long-run policy analysis and long-run growth. Journal of political Economy, 99(3), 500-521.
Rodrik, D. (2008). One economics, many recipes: globalization, institutions, and economic growth. Princeton University Press.
Rodrik, D., A. Subramanian, and F. Trebbi (2002) Institutions Rule: The Primacy of Institutions over Integration and Geography in Economic Development. International Monetary Fund, Washington, D. C. (IMF Working Paper, WP/02/189.)
World Bank (2002) World Development Report 2002: Building Institutions for Markets. Oxford: Oxford University Press.
Copyright (c) 2025 Ayesha Qamar, Ghulam Ghouse, Aribah Aslam, Kashif Habeeb

This work is licensed under a Creative Commons Attribution 4.0 International License.
JQM follows an open-access publishing policy and full text of all published articles is available free, immediately upon publication of an issue. The journal’s contents are published and distributed under the terms of the Creative Commons Attribution 4.0 International (CC-BY 4.0) license. Thus, the work submitted to the journal implies that it is original, unpublished work of the authors (neither published previously nor accepted/under consideration for publication elsewhere). On acceptance of a manuscript for publication, a corresponding author on the behalf of all co-authors of the manuscript will sign and submit a completed Copyright and Author Consent Form.