Pakistan's Economic Growth Restraints: The Three-Gap Model

Abstract

Almost all the developing economies are confronted with three gaps which are termed as foreign exchange, savings-investment and fiscal gap. These gaps constrain the economic growth. Pakistan is also one of such developing economies and substantially facing three gaps in its economy. In order to observe the effect of these gaps on economic growth, we have used time series data ranging from 1980 to 2019. In the foreign exchange constrained growth findings show that an increase in investment opportunity, growth rate of potential GDP and a stable exchange rate will reduce the current account deficit there by increasing the growth rate of potential GDP. In the saving constrained growth findings show that an increase in tax revenue will increase the public savings reducing the saving-investment gap which will accelerate the potential GDP's growth rate. In the fiscal constrained growth finding show that public investment crowds in private investment, as private investment increases tax revenue will increase thereby reducing the fiscal gap. Higher tax revenue and public borrowing increase the growth rate of potential GDP.