Abstract
This paper focuses on assessing the impact of Dutch Disease on economic growth of Pakistan. In the first step, Dutch Disease is detected and then examines its link with economic growth. Annual time series data from 1981 to 2016 is used for analysis from World Development Indicators (2016). Generalized Method of moment (GMM) is used for estimation as it addresses the endogeneity and hetroscadasticity problems in the data. The estimation of Dutch Disease at an aggregate and sector level provide evidence for hindrances to economic growth in Pakistan which is the main objective of the study. The results showed that Dutch disease is harmful for industrial sector which impede output and employment generation process and hence economic growth.
Highlights
Dutch disease is a phenomena when increase in natural resource abundance or foreign inflows which leads to appreciation in real effective exchange rate (REER) first
The econometric methodology will be separated into two parts, where the first part is to examine the effect of foreign financial inflows on REER and the resources reallocation effect of Dutch disease by using sectoral analysis on the output of tradable and non-tradable sectors whereas the second part is to observe the aggregative as well as the sectoral impact of productivity with REER appreciation
Standard deviation of of Terms of Trade (TOT), Trade Openness (TROP) and Government expenditure is lowest during the same period
Summary
Dutch disease is a phenomena when increase in natural resource abundance or foreign inflows which leads to appreciation in real effective exchange rate (REER) first. Cordon and Neary (1982) explained the idea as “adverse effect of non-booming (natural resources) sector to booming (agriculture & industrial) sector. Booming sector includes existed available resources e.g. mining and non-booming involved agriculture and industrial sectors. These booming and non-booming sectors are called as traded sector. Real exchange rate appreciation reduces the value of imported goods and domestic goods become expensive. This boosts the import expenditure and exports may be reduced and lead to contraction in the tradable sector. Dutch Disease becomes harmful for economic growth of the country
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