Open AccessConstraints to the Economic Growth of Pakistan: A Three-gap Approach
Author(s) -
Zamir Iqbal
Publication year - 1995
Publication title -
pakistan development review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.154
H-Index - 26
ISSN - 0030-9729
DOI - 10.30541/v34i4iiipp.1119-1133
Subject(s) - constraint (computer aided design) , economics , investment (military) , output gap , capital (architecture) , foreign direct investment , open economy , macroeconomics , section (typography) , limiting , growth model , exchange rate , interest rate , business , mechanical engineering , history , archaeology , politics , political science , advertising , law , engineering
The development of the two-gap model [Chenery and Bruno(1962); Chenery and Strout (1966); Mckinnon (1964); and Weisskopf(1972)] was an important contribution to the literature of economicdevelopment. The two-gap model deals with the interactions between thesavings constraint and the foreign exchange constraint in thedetermination of economic growth in an economy. The savings constraintrefers to the situation when the growth of an economy is limited by theavailability of domestic savings for investment, and the foreignexchange constraint refers to the growth of an economy being limited bythe availability of foreign exchange for importing capital goods. Mbrerecently, there has been increasing interest in the three-gap model,introducing fiscal constraint as a third gap limiting the growthprospects of highly indebted developing economies [Bacha (1990);Solimano (1990) and Taylor (1993, 1994)]. The fiscal constraint isintended to reflect the impact of the availability of resources tofinance the public investment required to support a given level ofpotential output. These constraints are selected for analysis because oftheir direct impact on economic growth of Pakistan. The paper isstructured as follows: Section 2 presents the three-gap model; inSection 3, the economy-wide potential output and capacity utilisation ofPakistan are estimated; in Section 4, the empirical results arediscussed; the conclusions are summarised in Section 5.