Impact of Foreign Capital Inflows on Economic Growth in Pakistan

The Two-Gap Model suggests that developing countries must rely on foreign capital inflows (FCI) to fill the import-export gap and the savings-investment gap. This paper examines the impact of FCI — including FDI, external loans and credit, technical assistance, and project and non-project aid — on economic growth in Pakistan. Applying vector error-correction and related cointegration methods to annual data for 1975–2004, the study assesses the short-run and long-run growth effects of each major FCI category. Findings contribute to ongoing debates on aid effectiveness and FDI-growth linkages in a developing country context, with implications for Pakistan’s international capital mobilisation strategy.