Abstract
Pakistan significantly contributes to the overall economy of South Asia, but, for many years, it has been facing a severe energy crisis. Despite the robust economic growth and a sharp increase in energy demand, no deliberate efforts have been made to meet the energy demand of the country. Similar to other developing countries, foreign direct investment (FDI) plays a key role in the economic development of this country. Pakistan receives FDI from many countries in various sectors of the economy. This paper aims to highlight the present situation of the power and energy sector of Pakistan (PESP), and empirically analyze the causality among the FDI in the power and energy sector, the energy consumption, and the economic growth of Pakistan for the period 1990–2017. The Johansen co-integration and Granger causality tests were employed to find the causal relationships among the variables of interest in the short-run and the long-run. The sector-wise flow of FDI reveals that the power and energy sector of Pakistan (PESP) has comparatively received a higher amount of FDI than other sectors of the economy in recent years. Furthermore, trends of energy production and energy usage reveal a substantial gap in previous years. The results confirm a positive bi-directional short-run causal relationship between economic growth and energy consumption. The results also reveal the presence of long-run causality in the equation of energy consumption. Considering the current situation of PESP, policy-makers should formulate policies to attain the minimum debt level and discourage loan-based investment. Such policies would be helpful to control the severe energy crisis and increase economic growth.
Highlights
At present, investment appears to be a significant factor in the economic development of any country
Using the ordinary least square (OLS) technique, the Johansen co-integration technique, and vector error correction model (VECM), the results showed a causal relationship between foreign direct investment (FDI) and economic growth in the context of China, Brazil, and India
The debate about the nexus of energy consumption and economic growth was initiated by J Kraft and A Kraft [36], and found the strongest evidence of a relationship between these variables by using data on the United States for the period 1947–1974
Summary
Investment appears to be a significant factor in the economic development of any country. Foreign direct investment (FDI) constitutes the main source of economic growth in developing countries. Over the past few decades, globalization has helped to promote strong economic integration between countries. The developing countries have changed their economic policies by pulling down hurdles in the way of foreign trade and investment. Severe competition exists among developing countries to attract FDI. FDI is helpful for developing countries, such as Pakistan, in many ways. It offers capital to generate positive externalities, such as employment generation, the transfer of technology, managerial skills, productivity gains, research and development, and new ways of production, in the country. Pakistan lies on the radar of foreign investors globally despite different political and economic challenges. Pakistan has adopted investment-oriented policies to create opportunities for foreign investors
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