The impact of the policy reform on economic performance has
been one of the stifling issues in development economics in the recent
years. Since the middle 1970s, there has been considerable progress in
the trade reform in the most developing countries, turning from an
import substitution strategy to export-oriented approach. Pakistan also
follows export-oriented policies. Pakistan’s trade pattern and trade
policy have been moving towards fewer and fewer controls, tariffs rates
have come tumbling down. Export-led-growth hypothesis (ELG) suggests
that due to positive correlation between export and growth, therefore,
export-oriented policies contribute to economic growth. Thus,
international trade and development theory suggests that export growth
contributes positively to economic growth. On the basis of this
framework, most empirical work on the effects of export promoting
strategy followed in developing countries evaluated openness with trade.
Empirical research about the effect of this liberalisation process has
treated export as principal channel for growth. The relationship with
exports and growth, grounded in endogenous growth theory, has been
tested for Pakistan [Khan (1995); Ahmad, Butt, and Alam (2000) and Akbar
(2000)].
Foreign Direct Investment (FDI) as a growth-enhancing
component has received great attention of developed countries in general
and less developed countries in particular in recent decades. It has
been a matter of great concern for many economists that how FDI affects
economic growth of the host country. In a closed economy, with no access
to foreign saving, investment is financed solely from domestic savings.
However, in open economy investment is financed both through domestic
savings and foreign capital flows, including FDI. The investments in
form of FDI enable investment-receiving (host) countries to achieve
investment levels beyond their capacity to save.
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