Constraints to the Economic Growth of Pakistan: A Three-gap Approach

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 economic development. The two-gap model deals with the interactions between the savings constraint and the foreign exchange constraint in the determination of economic growth in an economy. The savings constraint refers to the situation when the growth of an economy is limited by the availability of domestic savings for investment, and the foreign exchange constraint refers to the growth of an economy being limited by the availability of foreign exchange for importing capital goods. Mbre recently, there has been increasing interest in the three-gap model, introducing fiscal constraint as a third gap limiting the growth prospects of highly indebted developing economies [Bacha (1990); Solimano (1990) and Taylor (1993, 1994)]. The fiscal constraint is intended to reflect the impact of the availability of resources to finance the public investment required to support a given level of potential output. These constraints are selected for analysis because of their direct impact on economic growth of Pakistan. The paper is structured as follows: Section 2 presents the three-gap model; in Section 3, the economy-wide potential output and capacity utilisation of Pakistan are estimated; in Section 4, the empirical results are discussed; the conclusions are summarised in Section 5.