Manufacturing And Services Sectors As Engines For Economic Growth: A Time Series Econometric Analysis In Pakistan

Abstract

The study aimed at assessing the impact of Manufacturing in terms of Large Scale Manufacturing (LSM_t) and Small Scale Manufacturing (SSM_t) and Services Sector in terms of Gas (G_t), Electricity (E_t), Telephone (T_t) as Communication Services and Vehicle (V_t) as Transport services on economic growth of Pakistan (GDP_t) from 1994-95 to 2020-21. In this regard, Economic analysis was performed by employing econometric techniques and tests i.e Augmented Dickey Fuller (ADF) Test, Ordinary Least Square (OLS) Regression,  Autoregressive Distribute Lags (ARDL) Model, Bound Test,  Error Correction Mechanism (ECM), Variance Inflation Factor (VIF), Heteroscedasticity Test, Lagrange Multiplier (LM) Test, Normality Test, Granger Causality Test, Impulse Response Function and Wald Test. Findings revealed that respective variables (GDP_t, LSM_t, SSM_t, GAS _t, E_t T_t, V_t) were stationary at level I(0), I(1) and I(2) order of integration in the model. OLS regression followed by ARDL indicated positive and significant impact of SSM, GAS and Vehicles and rest of other variables (i.e LSM and Electricity) impacted negative and significant influence on GDP Economic Growth Rate of Pakistan. F-value of Bound Test (4.0) was greater than upper bound critical value revealing long run relationship established between tested variables in the model. The value of Co-integrating equation was negative, depicting speed of adjustment; hence variables will adjust positively towards their long-run equilibrium. No serial correlation, no severe multicollinearity after treatment and normally distributed sample data was witnessed in the model. Findings revealed uni-directional causal relationship between GDP and LSM  (P<0.10), between Vehicles and GDP (P<0.10), between Telephone and LSM  (P<0.10), between SSM and GAS (P<0.05), between Telephone and Electricity (P<0.05) and between Vehicle and Electricity (P<010). Impulse Response Analysis indicated negative as well as positive responses; shock to GDP noticed symmetric impact on Large Scale Manufacturing (LSM_t), Small Scale Manufacturing (SSMt), Gas (G_t), Electricity (E_t), Telephone (T_t) on economic growth of Pakistan in short as well as in long run. Wald test confirmed the significance of independent variables (LSM_t, SSM_t, G_t, E_t) for a model. The study concludes the implications in terms of selected variables of Manufacturing and Service sectors, which influenced economic growth significantly through infrastructural improvement in installing small and large scale manufacturing units, division of labour force, regular and uniform supply of utility services among all segments of society especially in terms of GAS, Electricity, Good Means of Communication and Transports with an aim to  reduce poverty, control inflation and address unemployment in developing economy of Pakistan.