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The Effect of Trade Liberalization on Expenditure Structure of Pakistan

Ahmad, Khalil and Ali, Amjad and Yang, Michael (2022): The Effect of Trade Liberalization on Expenditure Structure of Pakistan.

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Abstract

Demand-side public policy paly a risk-reducing role for imperfect sectors of the developing economies through public investment during liberalization. Public sector investment, composition, and structure play an important role to determine the comparative advantage for the productive sector. This study explores the effect of trade liberalization and trade tax revenue on the expenditure structure of Pakistan from 1975 to 2019. The Autoregressive Distributed Lag approach has been used for examining the long-run co-integration among the expenditure structure and trade liberalization and the Error-Correction model is used for short-run dynamics of the concerned variables. The empirical result shows that trade tax revenue has a positive impact on expenditure structure in long run but not in the short run. Trade liberalization, budget deficit, and defence expenditure have a negative association with expenditure structure. The underground economy has also a negative impact on expenditure structure but the most surprising result of political stability shows negative relation with expenditure structure. With more political stability in Pakistan, the share of non-development expenditure is higher as compared to development expenditure during trade liberalization.

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