The economic growth is a complex phenomenon, which involves several factors. One of the major areas of research in economics has been to identify these factors. There is ample literature on the subject matter. These factors differ from country to country. Due to the different socioeconomic conditions the factors of economic growth may be different in the cases of developing and developed countries. The growth of developing countries is not stable. If these factors can be identified, it can help to accelerate growth by focusing on the major leading sources of growth. Economy of Pakistan has registered a growth rate of 5.32%, 6.30%, 3.96%, and 3.34% during 1970-1980, 1981-1990, 1991-2000, and 2001-2003 respectively. Overall average for the said period is 5.03%. This trend is both important and significant for Pakistan. It is because this almost five percent growth rate is accompanied by growth in the capital stock which approximates around 17 to 18 percent of the GDP. This accumulation of resources shows a trend, that incremental capital-output ratio (COR) is low in Pakistan than a number of East Asian, South Asian and Latin American countries. Existence of this situation justifies a detailed study of the factors, which are responsible for the moderate growth rate with low capital accumulation. The study is organized as follows: Section two throws light on the theoretical illustration of the relations between economic growth and factors to be explored in this study. Section three presents a brief review of literature. Section four contains empirical methodology and data. Empirical results are discussed in section five. Section six concludes the study.
1. Growth of Gross Capital Formation and Economic Growth. Capital formation is a process of addition to capital stock through successive doses of investment. This has direct impact on economic growth which is multiple times, through multiplier effect. The rate of capital formation accounts for a large part of economic growth. Gross fixed capital formation also called capital investment is categorized under three main heads: machinery & equipment, construction & works and transport equipment [Eng and Ping (2004)]. Krkoska (2001) defined gross capital formation in much detail as “investments in land improvements (fences, ditches, drains, and so on); plant, machinery, and equipment purchases; and the construction of roads, railways and the like, including commercial and industrial buildings, offices, schools, hospitals and private residential dwellings”. Since investment is a component of GDP any increase in it directly adds to the capital stock of an economy. That is to say this addition to capital stock adds to the output generating capacity of an economy. Further, as investment is a process of longer gestation so the capacity to generate more is spread over the future as well.
2. Growth of Exports and Economic Growth.
Feder (1983) explained that exports raises the economic growth in many ways e.g. greater capacity utilization, economies of scale, incentives for technological improvement and pressure of foreign competition leading to more efficient management. In the above backdrop, marginal factor productivities are expected to be higher in export industries than in non-export industries. In the cross-sectional analyses regarding the productivity differential, Feder (1983) and Ram (1987) found that such productivity differentials exist for the developing countries. Yet, these differential coefficients were insignificant for developed countries in Feder (1983). Feder (1983) worked on the lines of Keesing (1967, 1979) and investigated the effects of export activities on the economy. He observed that development of efficient and competitive management, improvement in production technology and methodology, increase in competitiveness; along with...