Foreign Capital Inflows and Income Inequality in Pakistan

Abstract

This study tries to include all foreign inflows variables and examine their impact on income inequality in Pakistan for the period of 1981 to 2018. ADF test was used to test the stationarity of the data, whereas Johansen co-integration test was employed to establish the cointegrating relation among the variables. Consequently, the findings reveal a long run equilibrium relation of income inequality and the independent variables. Moreover, vector error correction model (VECM) is estimated to find the long run and short run dynamics of the study. The results show that foreign capital inflows containing FDI, aid, debt and inflation have positive and significant effect on income inequality in the long run. While, remittances, GDP and trade openness have a negative and statistically significant impact on income inequality in the long run. In the short run, debt and foreign aid have negative, while inflation has positive and statistically significant effect on income inequality.