Why is Pakistan counted as underdeveloped?

Why is Pakistan counted as underdeveloped?Right now, Rs. 52,941 is the debt which is on the shoulders of each and every Pakistan, where total outer and internal debt Pakistan today accountable is Rupees Nine trillion. Where as in the mid-nineties, the same figure was Rupees 30,000 which was to be borne by each Pakistani citizen. The government of PM Nawaz Shareef came up with an initiative of Qarz Utaro Scheme which somehow gave a relieving shock absorber to the debt servicing piles.Right now in that location is a total financial dichotomy in the country. In these worsening state of affairss, it is again utter that national treasury is facing an additional burden of Rupees 14 billion due to 12 percent increase in soldiers pensions in 2007-20083. On the some other(a) posture of the coin, futuristic look is giving much cynical and gloomy representation as the total external debt is likely to soar by more than 43 per cent over the next five years, to about $73 billion in 2015 -16 from about $50.76 billion early this year4.Though the incapability and impotence of numerous countries to use the provided external supply in terms of advocate or debt, it is only attributed to many other characteristic factors, the insufficient and scarce receptive competence is termed as the rule of thumb applicable in many UDCs as a limitation on the well-organized and proficient utilization of external resources. The sane debt indicators which are commonly practiced in Pakistan areDebt GNP ratioDebt Debt Service LiabilityDebt orthogonal Exchange EarningsCHAPTER IILITERATURE check over(Ashfaq, 2005) in his seek (Aid Effectiveness, Debt Capacity and Debt Management in the Economy of Pakistan) discusses that discrete views are prevailing concerning the usefulness of external avail to the UDCs. As many of the researchers and economist say that help oneself and debt is much useful in lessening the monetary tailback and blockage to enlargement of many developing coun tries like Pakistan, no matter the impression of taking assistance is satisfied or not (for example Cassen 1994, G. Papanek 1972, etc). The ch aloneengers declare that contrary assistance either in terms of aid or debt ceaselessly ca employ disastrous affects on the maturity of the recipient country. A number of gives a moderate point of views on the same debate. The association linking external debt and economic escalation has been spy broadly in recent years. These studies energise mostly focused on the destructive influence of a countrys debt overhang which means the addition of a hold of liability so hefty as to dreadize the countrys ability to pay back its precedent loan.The theme of the research is to see how and to what degree the foreign assistance has and debt affected the economy. It is to analyze the external assistance and resources in terms of its dynamic and fruitful role in the economy and as a bridge of elaborateness and growth or vice versa. The main idea is to check and estimate the effectiveness of foreign air and external debt in the country and the researcher undertake to determine whether further resources linked with external assistance have in point of fact brought some kind of revolution in the economy or the situation is completely opposite of what it should be. The research depart also investigate the position of debt lumber on Pakistan, giving extreme importance assumption on Pakistans competence in debt servicing and its retirement in the light of major riddles in debt management practices creating worst economic shape of the country.( Hayat et al, 2010) discuss in their research ( foreign debt and Economic Growth Empirical evidence from Pakistan) of the known fact to everyone that Pakistan does not enjoy a good repute for aid and external debt. It has almost unrivalled witnesses of significant economic assistance from about each part of the globe. He further argues that Since Pakistans emergence of world map it is fac ing crucial problems in correspondence of payments deficit. To finance this balance of payments deficit and loses, Pakistan is heavily relying on external debt. World Bank classified Pakistan as fearsomely indebted country of southern Asia in 2001.Even though, Pakistan shows a mushroom growth in its economy in the presence of serious economic and highest degree of political in-stability.Although it also showed variability with the passage of beat but the situation at this point in time is worse where the growth rate of gross domestic product is just 2% which was 7% in 2007. The nifty stock of external debt swelled by a broad slide bydown of Rupees 1095.1 billion in FY09, registering a growth of 36.1 percent against 28.9 percent in FY08. As far as debt is related, International Monetary Fund (IMF) debt further damager the condition. The show in debt stock of IMF by US$ 3.8 billion was the major factor for rise in total debt stock during FY09. As discussed earlier, facing se vere balance of payments problems the government had approached the IMF for a US$7.6 billion Stand-By Arrangement (SBA) loan which was approved by the IMF board in November 2008. The IMF has also acceded to government of Pakistans additional request for US$3.2 billion, which has increased the total assistance to $11.3 billion. The bad and declining economic conditions also creates problems in Pakistan foreign exchange reserves. It was $ 14 Billion in June 2007 showing a drastic decline of 75.71% by the mid of 2010 to just $ 3.4 Billion. Prior to the events of September 11, 2001, Pakistans economy was caught in a vicious debt trap. U.S. bilateral aid to Pakistan started in 1951. Pakistan, in total, received a massive amount of $2 billion dollars between 1953 and 1961. On the other side, by the early 1960s, aid reached $400 million per year. At the peak level, we get to know that in the first phase of the same decade, only linked domaind provided fifty percent of the total aid Pakis tan was receiving which covered one third of the outgrowth budget and financed more than half of the import bill. It was the time by 1982, US was givibg $ 5.1 Billion to Pakistan as aid on annual basis.(Ibrahim, 2009) in his research (U.S. aid to Pakistan-U.S. Tax payers have funded Pakistani corruption) discussed the situation getting further worse when sanctions were imposed by the G-8 countries on bilateral and multilateral lending as a consequence of Pakistans nuclear strains in May 1998 and subsequently because of the military coup in October 1999. Pakistan was able to reschedule US $ 3.96 billion of its bi-lateral liabilities through the Paris Club in 2000. The reschedule was, however, on short-term basis and certified on the IMF agreement, which was universe finalized at the time with all its stringent conditionality. The post September 11, 2001, events once again brought Pakistan into the limelight of global geo-strategic interests. The most significant get which Pakist an attained vis--vis its external debt problem was the restructuring agreement with the Paris Club in December 2001. Under the agreement, the debt repayment period was extended to a span of 38 years with a grace period of 15 years. This means that Pakistans debt servicing liabilities leave decline by US $ 2.7 billion between 2002 and 2004 and according to the State Bank the net present value of external debt is expected to decline somewhere between 27 and 43 per cent between 2002 and 2017. All these problems go about by Pakistan are instead alarming and shows a need of taking massive and severe steps to take the position in a governable mode, as further delay will make Pakistan drift her ego into many other financial as well as social issues.(Ahmed, 2010) argued that Pakistan must hold up to pay foreign debt payment and spend the same amount on relief and rehabilitation of people affected from recent flood and act of terrorism. He said that 20 Million populations have got effec ted from the angry flood which are a crucial part of $ 54 Billion foreign debt yet to be paid back with interest. People in Pakistan are already facing unemployment, hunger and worst hardships and the episode of the flood creating massive problems for such a huge number of populations is again devastating. Therefore, Pakistan is greatly unable to service its debt liability. Pakistan spends $ 3 Billion every year on its debt servicing where Pakistans debt-to-gross domestic product ratio has skipped the massive height of 61% this fiscal year. regime is sometimes talking of cutting development budget and reduces subsidies on the call of IMF. The situation according to him is getting more badly where Government is talking about levying flood tax on the paltry people of Pakistan. Despite of taking such steps, Pakistans government should take serious steps in the eradication of such problems by cutting military and capital budgets.(Haider Mullick, 2004) discusses the fact that though Pa kistan has been a front-line ally to The United States for the war on terrorism to ascertain(p) the threats on the US soil but received a sum of $2.4 billion in foreign aid5. He further argues that later the terrorist trys on the WTC on September 11, 2001 many of the rich and developed nations pondered over the fact that foreign aid to UDCs has now turned to a new phenomenon with a blend of new priority and importance unlike previous times. All is due to the reason of such UDCs falling into the haves of radical extremists and fanatics which finance the poor and misuse their status of poverty. It is just due to the Pakistans involvement to help the US and NATO forces to defeat the Taliban regime in Afghanistan and the US are allocating massive aid in an injecting manner similar to 80s. But the end result could become much fierce. There can be a financial dead-lock in the country if the US and NATO move out of the Afghan land in next 10 years. Our system in Pakistan will be so dep endent on the aid and grants that when it will be removed there is a development fear of over all system-collapse. He stresses on the immediate need of autarky and self dependence like India and China.(Martin, 2009) writes in his research about Pakistan Capital Crisis that Pakistans government has reached to an agreement with the International Monetary Fund (IMF) for a sum of $ 7.6 B in the form of loans followed by massive hefts of impositions on the economy of Pakistan. Despite of the huge sum, Pakistans financial dichotomy still persists and the state has requested additionally for a sum of $ 4.5 billion. He states that Pakistan badly affected capital situation is affecting the nations over all economic efficiency and performance leading towards socio-political havoc. He further extends his job to the debt burden Pakistan is getting in such monetary and socio-economics problems that it will become very difficult for a common Pakistani to win bread for his family. He discusses ab out different research groups which have recently issued reports on the prevailing circumstances in the country that further recommends on the actions that the United States can do to help an improved economic system. He indicates the role of Congress that may consider many of the recommendations and take severe actions to increase in USs non-military assistance and physical composition of reconstruction opportunity zones in the country. It is barely on the mercy of time which will show the effectiveness of what such recommendations will realise prosperity or disaster. The US is interested in a firm and established democratic Pakistan which can act as a front-line ally to the US interests in Afghanistan and South Asia. The US wants to assist Pakistan on the basis of regional and global terrorism which is the major threat to the US after September 11, 2001. Now, the US think-tanks are meditative over the fact that a financial stalemate in the country will might weaken multilateral endeavors to soothe South Asia and restrain the growing emergence of Islamic extremism so there is an immediate need of capital assistance in a rapid and quick way.(Momani, 2004) discusses the Triad foc using on Pakistan, The IMF and The U.S. War on Terrosism. She argues the basic question that did The U.S intrude to approve the final payout of Pakistans IMF as a prize to support the United States war on terrorism? It is a rule of thumb that The IMF has been always politicized to attain foreign policy objectives which are important to the U.S. It is a matter of fact that Pakistans loans approval was immediately given after 9/11 attacks by the IMF but was scheduled for the approval by the executive board of IMF. The overall situation gets clumsy as there are strong and positivist linkages of the United States influence inside the ending makings of The IMF to strongly correlate objectives getting success in the end- Exactly what The United States have been doing to all Under develo ped countries (UDCs) across the globe. Although there are weak evidences present of the USs influence in the case of Pakistan but the writer argues that The United States all the way wanted to take a credit for the approved payment by the IMF to the country, getting General Musharraf as a front line ally to attack Afghanistan.(Hameed et al , 2008) discuss how external debt and aid is deteriorating the fiscal and monetary policies of Pakistan. In their research that even in short run or long run the likenessship between debt shamble and economic growth is always negative in the Pakistans history until now. It is clear to every one that debt and debt servicing responsibilities always bring negative productivity as far as labor and capital is concerned. Now, the relationship is causal to the fiscal deficit in the country. When there is a problem in the labor and productivity, there is always a negative impact on the taxation base. On the other make pass there are severe problems pre vailing as people always look to avoid or evade taxes. The researchers also focused on the need of cutting the above mentioned expenditures drastically so that there should be an adequate cushion given to the injured fiscal structure of the country. They also stressed on the reality that debt service relation tends to affect negatively gross domestic product and thereby the rate of economic growth in the long-run, which, in turn, reduces the ability of the country to service its debt. Now tax being the foremost and crucial part of the fiscal structure as revenue plays a very important element as far as the capital, development and military expenditures are in question. The researchers claim that external debt is not good for a country in general and Pakistan particularly after a certain limit as piles of interest has to be returned back which further deteriorate the fiscal structure of the country.(Hashmi, 2009) worked on the reflections of Pakistans economy due to the war on terror . On the other hand she also focused on the mutual relationship between the fiscal discrepancies and Pakistans involvement in the War on terror as an ally of the United States. As matter of fact, Pakistan was a heaven for most of the world most renowned investors which always saw Pakistan as plaza where huge piles of profits are present. There were and still ate many latent demands which people want in their life. Consequently, many of the Multinational companies and other world class organizations were interested in setting up crinkle in Pakistan and importing the raw material in the field of textiles and other serve into their own countries. With the invasion of NATO and US troops in Afghanistan, the situation was worse than ever before in the history of Pakistan. All of a sudden all the investors from Pakistan flew away taking all their capital and investment out of the country. Stock markets crashed as due to the war in Afghanistan, all the foreign investors were afraid of lo osing their huge chunks of virtues the virtues which in the end makes Pakistan generates heavy amounts of taxes being used as revenue for the state. There is a worse fiscal and monetary gridlock in the country after facing much socio-economic and political instability.(Burki, 2008) applies the political economic analysis of decision making processes in the donor country to the special case of US aid to Pakistan. Pakistan is not an extremely poor country but nevertheless, it is among the 5 major recipients of foreign aid. Over the last decades, Pakistans aid receipts show considerable shifts for which no obvious development related reasons can be provided. This calls for explanations related to reasons other than developmental efficiency which require a closer look at decision making processes on the donor side. Looking at the United States as the single most important bilateral donor, we draw upon earlier analyses of the effect of lobbying on congressional decision making. Numerous studies, like Coughlin (1985), Tosini and Tower (1987), Harper and Aldrich (1991), Marks (1993) and Baldwin and Magee (1998) empirically tested the possibleness of domestic lobbies affecting congressional voting style with respect to US trade policy. A more recent study by Gawanda et al. (2004) also includes the effect of lobbies working for foreign principals, e.g., for foreign governments and foreign business groups. As a result, the external assistance Pakistan has been given was all on the basis of political interests of the donor countries and show minimal or negligible rise in the economic and fiscal structure of the country. Over the years, the sums of aids and external debts have been getting a sky-high increase but the monetary situation is worse since 1947. He argues that there is a negative relation of aid and foreign debt with the economic uplift of a country, especially in Pakistan where the situation is quite different due to its involvement in war on terror, prevai ling corruption, and no productivity due to energy crisis, Minimum subsidies and The IMFs impositions on the poor Pakistani. Results from otiose use of the money show that unidirectional causality runs from the foreign exchange constraint to the budget deficit and then from the budget deficit to the external debt stock. Bi-directional causality was observed between foreign exchange requirements and the external debt stock.Chapter III3.0 Theoretical FrameworkCHAPTER IVMETHODOLOGY AND CHOICE OF ANALYTICAL TECHNIQUE4.1 interrogation typecastIn order to conduct my research study the most suitable data I have gathered is secondary in nature collect from reliable and consistent data sources and no primary data has been collected, hence my study will be referred to as secondary research.4.2 Data type reservoir PeriodData type is purely secondary in nature as no primary data has been acquired.Reference period for my research is from 1995-2009Research Hypothesis4.3.1 Basic Research Hy pothesisFirst HypothesisHo External aid and debt has a negative correlation with the GDP growth in Pakistan from 1995-2009HA External aid and debt has a despotic correlation with the GDP growth in Pakistan from 1995-2009Second HypothesisHo Economic growth will not be continual by rising external debt and foreign aid to PakistanHA Economic growth will be continual by rising external debt and foreign aid to Pakistan4.3.2 Statistical HypothesisGrants as a component part of GDPH0 To test the dead reckoning that Grants as a destiny of GDP has no negative on External debt as a region of GGPH01=0H1 To test the assumption that Grants as a constituent of GDP has negative impact on External debt as a division of GGPH110Foreign Direct InvestmentH0 To test the conjecture that FDI as a plowshare of GDP has insignificant no negative on External debt as a voice of GDPH02=0H1 To test the guesswork that FDI as a lot of GDP has negative impact on External debt as a percentage of GDPH120D ebt ServicingH0 To test the conjecture that Debt servicing as a percentage of GDP has no positive impact on External debt as a percentage of GDPH03=0H1 To test the hypothesis Debt Servicing as a percentage of GDP has positive impact on External debt as a percentage of GDPH130 pile DeficitH0 To test the hypothesis that Trade Deficit as a percentage of GDP has no negative impact on External debt as a percentage of GDPH04=0H1 To test the hypothesis that Trade Deficit as a percentage of GDP has negative impact on External debt as a percentage of GDPH140Fiscal DeficitH0 To test the hypothesis that Fiscal Deficit as a percentage of GDP has no negative impact on External debt as a percentage of GDPH05=0H1 To test the hypothesis that Fiscal Deficit as a percentage of GDP P has negative impact on External debt as a percentage of GDPH150Saving Investment GapH0 To test the hypothesis that Saving- Investment Gap as a percentage of GDP has no negative impact on External debt as a percentage of GDPH06=0H1 To test the hypothesis that Saving- Investment Gap as a percentage of GDP P has negative impact on External debt as a percentage of GDPH1603.4.1 covariant reference list unfree VariableExternal Debt as a percentage of GDP (Malik, 2010)Independent VariablesFiscal Deficit as a percentage of GDP* (Ashfaq, et al 1999)Foreign Direct Investment as a percentage of GDP* (Azam et al, 2009)Balance of Payment as a dower of GDP* (Loser, 1977) and (Malik et al, 2010)Exchange rate fluctuation (Mahmood et al , 2009)Capital Flight (Chipalkati , Rishi 2009)Foreign Aid as a percentage of GDP* (Miles B. Cahill, Paul N. Isely)Saving-Investment Gap percentage of GDP (Malik, 2010)Debt Servicing percentage of GDP* (Clement, et al, 2009)Trade Deficit as a percentage of GDP* (Mohammad, 2010)Grants excluding technical assistance percentage of GDP* (Befekadu Degefe )* as a percentage of GDP is used to gauge the variables in concord to economic growth of PakistanInformation gathering and sampling proceduresData SourcesThe data sources for my research study are as followsWDIData reliability and internal unityWDI is a renowned database developed by World Bank. The data from WDI is completely reliable to be used in the research.3.4.4 Data analysis tools and techniquesMultiple retroflection To measure the increasing effect of independent variables on the dependent variable and to obtain a single regression toward the mean line for all variables, which will be further used in hypothesis testingGranger Causality The researcher would like to identify whether variation in a variable will enclose an impact on changes other variablesScatter Plots Such plots will also be used for graphical representation of data.4.1 Statistical AnalysisGrants and External DebtDependent Variable External Debt as a Percentage of GDPIndependent Variable Grants excluding technical assistance as a percentage of GDPIn this relation, the result is significant at 15% level. Keeping all other variables cons tant, one Dollar change in External debt as a percentage of GDP creates negative 3.83 Dollars in Grants excluding technical assistance (as a percentage of GDP). This is because in many underdeveloped part of the world, Grants excluding technical assistance is used to finance much governmental expenditure. Also, such grants are also used in debt servicing. As a special case, Pakistan has been using such grants in the same manner. This is because Pakistan has been a key ally to The United States of America for War against Terrorism. The country has been paying much in the form of deficits in each governmental tool. Hence, the lesser Grants given to Pakistan, more piling of external debt will be apparent.T-stat for 1 comes out to be 1.156 where T-Critical is 1.108 at 15% significant level. In this way, the research tends to baulk H0, where Hypothesis isH0 To test the hypothesis that Grants as a percentage of GDP has no negative impact on External debt as a percentage of GGPH01=0H1 To test the hypothesis that Grants as a percentage of GDP has negative impact on External debt as a percentage of GGPH110Grants and External DebtDependent Variable External Debt as a Percentage of GDPIndependent Variable Grants excluding technical assistance as a percentage of GDPIn this relation, the result is significant at 15% level. Keeping all other variables constant, one Dollar change in External debt as a percentage of GDP creates negative 3.83 Dollars in Grants excluding technical assistance (as a percentage of GDP). This is because in many underdeveloped parts of the world, Grants excluding technical assistance is used to finance much governmental expenditure. Also, such grants are also used in debt servicing. As a special case, Pakistan has been using such grants in the same manner. This is because Pakistan has been a key ally to The United States of America for War against Terrorism. The country has been paying much in the form of deficits in each governmental tool. Hence, the lesser Grants given to Pakistan, more piling of external debt will be apparent.As the regression equality is = 35.0 3.83 1 2.89 2 1.87 3 + 0.581 4 + 3.10 5 0.133 6T-stat for 1 comes out to be 1.156 where T-Critical is 1.108 at 15% significant level. In this way, the research tends to reject H0, where Hypothesis isH0 To test the hypothesis that Grants as a percentage of GDP has positive impact on External debt as a percentage of GGPH01=0H1 To test the hypothesis that Grants as a percentage of GDP has negative impact on External debt as a percentage of GGPH110Grants and External DebtDependent Variable External Debt as a Percentage of GDPIndependent Variable FDI as a percentage of GDPH0 To test the hypothesis that FDI as a percentage of GDP has positive correlation with External debt as a percentage of GDPH02=0H1 To test the hypothesis that FDI as a percentage of GDP has negative correlation with External debt as a percentage of GDPH120As the regression equation is = 35.0 3 .83 1 2.89 2 1.87 3 + 0.581 4 + 3.10 5 0.133 6It states that negative change of $ 2.89 in FDI (as a percentage of GDP) adds $ 1 External Debt (as a percentage of GDP. Hence, lesser the FDI, more is the external debt.On the other hand t-stat for 2 is 1.824 where T-Critical is 1.108 at 15% significant level. Since t-stat is greater than t-critical, the researcher tends to reject the null hypothesis which states that FDI (as a percentage of GDP) as a negative correlation with external debt (as a percentage of GDP)Debt Servicing and External DebtDependent Variable External Debt as a Percentage of GDPIndependent Variable Debt Servicing as a percentage of GDPH0 To test the hypothesis that Debt servicing as a percentage of GDP has positive correlation with External debt as a percentage of GDPH03=0H1 To test the hypothesis Debt Servicing as a percentage of GDP has negative correlation with External debt as a percentage of GDPH130As the regression equation suggests = 35.0 3.83 1 2.89 2 1.87 3 + 0.581 4 + 3.10 5 0.133 6A negative change of $ 1.87 in Debt Servicing as a percentage of GDP adds $ 1 External Debt (as a percentage of GDP). Hence, lesser the debt retirement is, the more is the external debt piling is seen in Pakistan (1995-2009)On the other hand t-stat for 3 is 1.442 where T-Critical is 1.108 at 15% significant level. Since t-stat is greater than t-critical, the researcher tends to reject the null hypothesis which states that Debt Servicing (as a percentage of GDP) as a negative correlation with external debt (as a percentage of GDP).Trade Deficit and External DebtDependent Variable External Debt as a Percentage of GDPIndependent Variable Trade Deficit as a percentage of GDPH0 To test the hypothesis that Trade Deficit as a percentage of GDP has a positive correlation with External debt as a percentage of GDPH04=0H1 To test the hypothesis that Trade Deficit as a percentage of GDP has a negative correlation with External debt as a percentage of GDPH140Th e regression equation suggests that = 35.0 3.83 1 2.89 2 1.87 3 + 0.581 4 + 3.10 5 0.133 6$ 0.581 change in Trade Deficit (Trade deficit increases i.e. Importsexports) as a percentage of GDP creates a positive change of $ 0.581 External debt as a percentage of GDP. Hence, greater the trade deficit is, the more is external debt evident in Pakistan (1995-2009)On the other hand t-stat for 4 is 1.311 where T-Critical is 1.108 at 15% significant level. Since t-stat is greater than t-critical, the researcher tends to reject the null hypothesis which states that Trade Deficit (as a percentage of GDP) as a negative correlation with external debt (as a percentage of GDP).Grants and External DebtDependent Variable External Debt as a Percentage of GDPIndependent Variable Fiscal Deficit as a percentage of GDPH0 To test the hypothesis that Fiscal Deficit as a percentage of GDP has no negative impact on External debt as a percentage of GDPH05=0H1 To test the hypothesis that Fiscal Deficit as a percentage of GDP P has negative impact on External debt as a percentage of GDPH150The regression equation suggests that = 35.0 3.83 1 2.89 2 1.87 3 + 0.581 4 + 3.10 5 0.133 6$3.10 change in Fiscal Deficit (i.e. Government Revenues Government Expenses)as a percentage of GDP creates a positive change of $ 1.00 in Pakistans external debt. Hence, greater the fiscal deficit is, the more is external debt is in Pakistan during 1995-2009.On the other hand t-stat for 4 is 1.834 where T-Critical is 1.108 at 15% significant level. Since t-stat is greater than t-critical, the researcher tends to reject the null hypothesis which states that Fiscal Deficit (as a percentage of GDP) as a negative correlation with external debt (as a percentage of GDP).Saving Investment Gap and External DebtDependent Variable External Debt as a Percentage of GDPIndependent Variable Saving Investment gap as a percentage of GDPH0 To test the hypothesis that Saving- Investment Gap as a percentage of GDP has pos itive correlation on External debt as a percentage of GDPH06=0H1 To test the hypothesis that Saving- Investment Gap as a percentage of GDP P has negative correlation