Foreign Capital Inflows and Growth in Pakistan: A Simultaneous Equation Model

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Equation ModelForeign Capital Inflows and Growth in Pakistan: A Simultaneous

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Foreign Capital Inflows and Growth in Pakistan / 207

SOUTH ASIA ECONOMIC JOURNAL, 6:2 (2005)Sage Publications New Delhi Thousand Oaks LondonDOI: 10.1177/139156140500600203

∗ Bushra Yasmin is Lecturer in Economics, Fatima Jinnah Women University, Rawalpindi, Pakistan.Email: [email protected]

Foreign Capital Inflows and Growth in Pakistan:A Simultaneous Equation Model

BUSHRA YASMIN∗

Developing countries have low levels of savings and investment. As a result mostdeveloping countries have to rely on Foreign Capital Inflows (FCI) to generatesufficient saving in order to achieve high levels of growth. Pakistan is one of thosecountries that rely heavily on external flows to supplement their savings and acceler-ate economic growth. The objective of this study is to find out the effect of FCIon the growth performance of Pakistan and vice versa. As the growth rate and FCIare expected to affect each other simultaneously, the Simultaneous Equation Modelis applied on the aggregate time series data for the years 1970–71 to 2000–2001 forFCI, GNP and Savings. A positive and statistically significant relationship appearsbetween FCI and growth. Further, it can be seen that Foreign Direct Investment(FDI) in FCI is highly significant and has contributed positively in the country’seconomic growth. The optimal policy which follows from these results is to bringchanges in the composition of FCI and preferably to encourage FDI in order toenhance economic growth with the high growth level further affect FCI positively.

( JEL classification: F43) Keywords: Economic growth, foreign capital inflows, trade liberalization.

1. Introduction

The role of Foreign Capital Inflow (FCI) as a major external source for enhancinggrowth in developing countries has been of interest both theoretically andempirically. Foreign Capital Inflow includes Foreign Direct Investment (FDI)by multinational corporations, foreign portfolio investment in the form of stock,bonds and notes and public or official bilateral and multilateral development

at GEORGIAN COURT UNIV on December 4, 2014sae.sagepub.comDownloaded from


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assistance called foreign aid. Foreign aid further includes grants and concessionloans. Over the years the composition of capital inflows has changed from grantsand soft loans to hard loans and FDI.

Foreign Capital Inflow is mainly the product of the post-World War II era. Itsroots lie in the Marshall Plan under which USA transferred billions of dollars toWestern European countries so that they could rebuild their economies whichhad been destroyed during the war. During the fifties the main goal of the eco-nomies was rapid growth of output and income with the help of Foreign CapitalInflow. During the sixties and seventies the stress on growth was replaced withincome redistribution and poverty alleviation, meeting basic needs and rural de-velopment. In the eighties and early nineties agencies like the World Bank andthe International Monetary Fund (IMF) focused on macroeconomic stabilizationand structural adjustment as goals of aid/loan, as demonstrated by Gillis, Roemerand Snodgrass (1996). Moreover, after the debt crises of the early eighties, thedeveloping countries stressed the need of FDI and the portfolio component ofFCI being non-debt creating sources. Hence the flow of foreign capital has overtime increased at the global level with fluctuating dimensions.

2. Literature Review

The relationship between FCI and growth has received much attention and a lotof literature has been produced both for and against the role of FCI in economicdevelopment. The impact of FCI on growth is an area of controversy both intheoretical and empirical terms. According to relevant literature, FCI augmentsdomestic resources, promotes growth and reduces poverty of the recipient coun-try. On the other hand, FCI may distort domestic savings, increase the debt burdenand may distort the labour market in the country.

Four major approaches to the relationship between FCI and growth in de-veloping countries are identified as Neo-classical, Dependencia, Bargaining andStructuralist schools of thoughts. According to the first approach FCI is goodfor the growth of an economy. In contrast with the Neo-classical approach theDependencia school emphasizes the risk and negative effects of FCI on growthand development. The proponents of the Bargaining approach argue that thedistribution of gains from FCI are generated by bargaining and negotiationbetween foreign investors and developing countries. The Structuralist schoolchallenges the Bargaining school’s relative optimism about long-term nego-tiations. By and large the bargaining power declines with the passage of time.

A number of studies have been carried out on this topic. These include Ali(1977), Aslam (1987), Bacha (1990), Burnside and Dollar (1997), Chenery andBruno (1962), Khan et al. (1992), Khan and Rahim (1993), McKinnon (1964),Rizvi (1984), Shabbir and Mahmood (1992), and Weisskopf (1972). Ali (1977),




Aslam (1987), Khan et al. (1992) estimated the growth and saving impacts ofFCI using different time periods. The perspective of the studies is mostly to fillin the saving-investment and import-export gaps. Since the resource gap issubstantially higher than the trade gap, FCI is urgently required. Aslam (1987)used FCI in the disaggregated form and found that public capital flow has anegative effect while private capital inflow is neutral on growth. At the sametime, project aid is positively and significantly related to growth whereas pro-grammed aid is not. Khan and Rahim (1993) disaggregating FCI in threecategories—FDI, grants and loans—investigated the relationship for the period1960–88. They found that FDI and loans have no effect on domestic savings.However, there was a positive effect of FCI on growth. Shabbir and Mahmood(1992) applied the simultaneous relation model to find out the impact of FCI ongrowth and savings for the period 1960–1988. Applying the 2SLS technique forestimation they found that foreign private investment, grants and loans had apositive effect on growth in Pakistan. Tyler (1993) applied 3-Gap Simultaneousanalysis of foreign capital inflows and concluded that a substantial realignmentin international payments would be required to accelerate the overall growth fordeveloping nations. Some panel data studies have also been conducted by Cheneryand Strout (1966) and Rana and Dowling (1990) for developing countries. Themain findings of these studies are that FCI leads to an enhanced domesticinvestment. Moreover foreign private capital has contributed more than theofficial aid to the economic growth of Asian countries. Another panel data studyfor 56 developing countries by Burnside and Dollar (1997) for 1970–1993 em-phasized the role of foreign aid in promoting growth and poverty reduction indeveloping countries that pursued sound economic policies. They advocatedthat if poor countries stabilize their macroeconomic situations and liberalizetheir trade they could create a sound environment for investment and growth.

Regarding the unfavourable effect of FCI on growth, Mahmood’s study (1997)demonstrates that foreign aid in Pakistan has had both positive as well as negativeeffects on economic development. On the one hand it has helped in the structuraltransformation of the economy and improved the condition of various sectorsby providing technical assistance and modern technology. On the other hand itseems to have substituted domestic savings. The debt-servicing problem hasincreased due to misutilization and mismanagement in the use of FCI.

Internationally, Mosley, Hudson and Horrell (1987) found that aid had an insig-nificant influence on growth in the sixties and seventies. They conclude that aidin the aggregate has no demonstrable effect on the economic growth of therecipient country. The reason again lies in the utilization of aid for unproductivepurposes. Lensink and Morrissey (2000) used time series from 1970–1995 toanalyze the relationship between aid and growth for 75 developing countries.They found that uncertainty in aid flows has an adverse impact on investmentand thus on growth.



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Most of the studies mentioned above have found a negative relationship betweenFCI and savings and a positive/negative relationship between FCI and growth.The time period covered by the studies is mainly from the sixties to eighties.Evidence from developing countries using panel data is available up to 1993. Inthe case of Pakistan the grant element was greater than loans in the seventies andeighties. Now Pakistan is receiving hard term loans and the grant element isdeclining. So the share of different kinds of FCI has changed its magnitude. Inthis study I have looked at an extended time period from 1970–71 to 2000–01.Applying the Simultaneous Equation System technique an attempt is made toinvestigate the two-way relationship between FCI and growth along with savingsin this paper. Moreover, the share and significance of different components ofFCI for growth are also evaluated. It is argued that FDI is the most desirableform of capital inflow. It has been larger in Asian countries as compared withother components of FCI. The FDI has increased from $33.74 billion in thenineties to $128.7 billion in 1996. Various forms of FCI are being increasinglyviewed as potentially significant source of capital to supplement domesticinvestment.

3. Trends in FCI

In order to finance development activities and to increase the pace of economicgrowth, Pakistan has been receiving FCI since the fifties. The pattern of FCI wasfavourable during the fifties and sixties but easy loans and grants were replacedby hard loans during the seventies. Since the early eighties Pakistan has initiatedseveral incentives to attract FCI. In the nineties the percentage share of projectaid was 65.3 per cent which increased to 83.9 per cent in 1996. In 1998–99 aidwas 34.5 per cent of FCI, which increased to 35.7 per cent in 1999–2000 dueto higher disbursement of non-food aid. Foreign investment flow increasedfrom $36 million in 1978–79 to $1,532 million in 1994–95 and then decreasedto $822.6 million in 1997–98. The share of portfolio investment which was lowerbefore 1990–91 increased in the midnineties.

The main sources of FCI in Pakistan are consortium, non-consortium andIslamic countries. Belgium, Canada, France, Germany, Italy, Japan, UK, USA,Sweden and Norway are sources of consortium bilateral aid while multilateralaid comes from the Asian Development Bank (ADB), International Bank forReconstruction and Development (IBRD), International Finance Corporation(IFC) and International Fund for Agricultural Development (IFAD). Pakistanreceives investments from USA, UK, UAE, Germany, France, Italy, Korea,Netherlands, Canada, Japan and Hong Kong. The main recipients of FDI flowsare manufacturing, mining and quarrying and the commerce sectors.

As far as the share of FCI in the development of different sectors is concerned,FDI has contributed a lot in the agricultural, industrial, energy and social sectors.




United States Agency for International Development (USAID) helped to makea base for agricultural development. Over time, various forms of FCI are beingincreasingly viewed as potentially significant sources of capital to supplementdomestic investment. In the fifties USA was the largest single donor for agri-culture financing different rural development projects, canal building, fertilizerproduction, imports and agricultural research.

During the sixties aid had a favourable impact on the agricultural sector byproviding funds for imports of fertilizers, insecticides and pesticides and in estab-lishing research institutions. During the last three decades the main focus offoreign aid funds has been on the industrial sector where funds have been usedin the form of project aid, non-project aid and technical assistance. External as-sistance has provided for raw materials, semi-finished products, chemicals andmachinery for the agricultural sector. However, commodity aid has been veryuseful for sustaining the import requirements of a rapid industrializationprogramme (Noman 1997).

To attract FCI in the industrial sector, the government adopted deregulationpolicies, one-window facilities and sanctions for industrial investors and gaveconcessions and security to foreign private investment. Under the various schemesforeign investors were allowed to remit profit and capital. They were given incometax exemption and relief from double taxation. The social sector has, however,not been the main priority for the donors. For instance, foreign aid financedonly 2.5 per cent of all health expenditure in 1982–83. A small portion of aid wasallocated to education for financing higher education of those studying overseas.From the sixties to the early eighties the focus of Pakistan’s government, WBand USAID was on tertiary education. In the eighties WB and ADB focused onincreasing primary education in Pakistan. Major aid donors for this were WB,USAID, Japan, UNICEF, WHO and Canada.

4. Model Specification

The two-way relationship between growth and foreign capital inflows is morelikely because FCI not only influences growth but it is also attracted by thegrowth level of economy. Rana and Dowling (1990) tested this relationship inAsian countries whereas Shabbir and Mahmood (1992) conducted research tofind out the causality of FCI and savings in Pakistan. They applied the Simul-taneous Equation Model to investigate the above-mentioned channel. The twopropositions examined by Shabbir and Mahmood (1992) were that the NetPrivate Foreign Investment (PFI) promotes economic growth as measured bythe annual rate of growth of real GNP, and second that PFI displaces savings ofa country as measured by its national saving to GNP ratio. The 2SLS resultsshow that PFI and grants and loans have a positive impact on the growth ofPakistan’s economy. And that PFI decreases domestic public and private savingand resource mobilization efforts.



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The study by Rana and Dowling (1990) examined trends in foreign capitalresources in developing countries in Asia and assessed their contribution to eco-nomic growth and the impact that they have on economic efficiency. The researchused pooled data from 13 countries for the period 1968–1982. The results indicatethat an increase in foreign capital inflow contributed favourably to the growth ofthese developing countries.

In this study I have used the Simultaneous Equation approach but with dif-ferent equations—the growth equation and the FCI equation. Moreover, thisstudy has used an extended time series from 1970–71 to 2000–2001 to cover abroad time period and to overcome the effects of business fluctuations in theeconomy over time. This study has also disaggregated the components of FCIto observe the individual effects of each FCI component on economic growth.

In order to find elasticities, natural scale variables have been converted intonatural logarithms (indicated by ln). Using the exponential log model theequations to be estimated are;

tttt DSFCIGNP 11210 Ulnnllnln ++++= ααα (I)

01 >α 02 >α

tttt DSGNPFCI 22210 Ulnlnlnln ++++= βββ (II)

01 >β 02 >β

Here t shows specific time period, FCI is Foreign Capital Inflow, S is savingand GNP is Gross National Product. D stands for dummy variable for trade lib-eralization that is likely to affect both the growth and FCI in the country. GNPand FCI are taken with a lag of one year to incorporate the sluggishness of theeconomy to respond. The a priori expected signs of parameters are providedimmediately below the two equations (I) and (II). The effect of trade liberalizationis expected to be positive as well. These equations are to be estimated simul-taneously. Equation (I) shows that GNP positively depends on FCI and S. AsFCI increases, FDI, being part of FCI, also increases leading to an increase ofGNP. Similarly, GNP will also increase due to rise in S because rise in S willlead to increase in investment, therefore, GNP, Equation (II) shows positiverelationship between FCI, and GNP and S. Normally GNP is considered as anindicator of market size, therefore, a higher GNP means a large market. Anda larger market is a big attraction for FCI. Similarly more savings mean moreinvestment leading to increase in GNP and therefore the market. Again, a largemarket in a big attraction for FCI. Another simultaneous equation model is alsoapplied on the disaggregated data of components of FCI, namely foreign directinvestment, portfolio investment and loans and grants.

For estimating the above relationships the Full Information MaximumLikelihood (FIML) method is applied that involves the usual application of the




Maximum Likelihood principle to all stochastic equations of the systemsimultaneously.

5. Data Description

Time series data from 1970–71 to 2000–2001 is used to analyze the dynamicrelationship between FCI and growth in Pakistan. The main source of data isvarious issues of the Economic Survey of Pakistan, International Financial StatisticalYearbook (IFS) and Balance of Payment Statistics Yearbook. The data on loans andgrants is taken from the Economic Survey of Pakistan (various issues). The data onGDP, savings, FDI and portfolio investment are taken from International FinancialStatistical Yearbook (various issues). Some missing values on FDI and portfolioinvestment are extracted from Balance of Payment Statistics Yearbook (1988). Thevariables as given in the data sources are not directly used. These are convertedinto well-formed comparable variables. All the variables are measured in millionsof rupees and in fiscal years. The data selected from IFS was provided in calendaryears and was converted into annual years by taking a two-year moving average.The definitions and method of construction are given in Table 1.

TABLE 1Data Description

Variables Description

lnGNP The natural log of Gross Domestic Product is the sum of market value ofall goods and services produced in a country for the given year.

LnFCI FCI is the sum of Loans and Grants, Foreign Direct Investment (FDI) andPortfolio Investment.

Loans and This comprises of project and non-project aid that further includes balanceGrants (LG) of payments and relief data.

FDI FDI consists of equity capital, reinvested earnings and other capitalassociated with intercompany transactions between affiliated enterprises.

Portfolio Portfolio investment covers transactions in equity and debt securities; theInvestment latter are sub-divided into bonds and notes, money market instruments(PORT) and financial derivatives.

Savings Savings are generated from the National Income Identity

MXGICY −+++≡MXGICY −++≡−

MXGIS −++≡

Trade A dummy variable is used for measuring the effect of trade liberalization.Liberalization (TL) 0 is assigned to time period before 1980 and 1 to the period after 1980 (as

TL started after 1980 in Pakistan).



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6. Empirical Results and Interpretation

The results of the Simultaneous Equation Model on aggregate data, are shownin Table 2. The first column of the table enlists the variables of our model whereasthe second and third columns show the results/estimates of equation with GNPand FCI respectively as left side variables. The results of log-converted data aremore comprehensive because they provide the elasticities. The coefficient ofdetermination R2 is high enough to show the predictive power of the model. TheDurbin-Watson model showed the sign of autocorrelation in the model hence,removed applying autoregressive scheme of order one. An assessment of the testsof significance and the regression equation indicates that the results are in linewith the conventional economic theory. As the time series data has the propertyof non-stationarity in level and the resulted estimates usually involve ‘spuriousregression’. First unit root tests are performed for a stationarity check both inlevels and first differences of the variables. (The results for the stationarity checkof the data are provided in the appendix).

TABLE 2Estimates of Simultaneous Equations Model for GNP and FCI

Variables Dependent Variable: lnGNP Dependent Variable: lnFCI

C 4.638 0.056(4.35)∗ (0.026)

LnGNP (–1) – 0.726(2.69)∗

LnFCI (–1) 0.267 –(3.08)∗

lnS 0.258 0.307(3.128)∗ (1.89)∗

Dummy for trade liberalization 0.229 0.462(0 for before 1980 and 1 for after 1980) (1.918)∗ (1.83)∗

Adjusted R2 0.97 0.886

AR (1) 0.933 0.697(10.845) (3.016)

D-W 1.564 1.30

Note: (a) Values in parentheses show t-values.(b) ∗indicates significance at least at 10% level.

The results of equation (I) in column 2 indicate that FCI is statistically signifi-cant at the 1 per cent level and has a positive effect on GNP. The coefficient ofsavings also appears to be statistically significant at the 1 per cent level of signi-ficance and has a considerable positive impact on GNP. The variable tradeliberalization indicates a positive effect on the growth of the economy. The results




of equation (II) in column 3 where FCI is left side variable depicts that GNPand savings have a positive and significant effect on FCI. Moreover, TL has hada positive effect on FCI in the country. This shows that due to the opening up ofthe economy the growth in the country has increased mainly through foreigninvestment and that the volume of FCI in the country has also risen after liberal-ization. In this way both FCI and GNP become inter-related and simultaneouslyaffect each other.

The effect of FCI on GNP demonstrates that by filling in the gap betweensavings and investment FCI enhances production on the one hand and, since itincorporates technology and skill in the form of FDI, it also plays a pivotal rolein the enhancement of productive capacity and ability on the other that leads toa higher level of growth in the country. Out of total FCI the share of portfolioinvestment and FDI has increased while the share of loans and grants has de-creased over time. Loans and grants have increased the debt burden, as loanshave to be repaid with interest and the principal amount whereas the countrydoes not have to repay portfolio investments and FDI. The effect of GNP onFCI is also positive. If the GNP of a country is high, it is an indicator of the largedomestic market which attracts FDI and portfolio investment and hence thetotal FCI increases. The effects of savings both on GNP and FCI are positive andstatistically significant as savings indicate development in a country.

The findings are in line with the basic Harrod-Domar growth model thatpostulates a direct relationship between a country’s rate of savings and its outputgrowth. This model assumes that capital shortages are the main constraint in theway of economic growth of developing countries. If savings are low then theywould have to be supplemented by FCI so as to attain the required growth rateof investment. The increase in investment leads to a higher growth rate. Our re-sults are in line with those obtained by Khan and Rahim (1993), Rizvi (1984)and Shabbir and Mahmood (1992).

As mentioned earlier the role of FCI in economic growth has remained acontroversial issue. Its main concern has been to distinguish between variouskinds of FCI and their individual contribution to the growth process. To takethis factor into account another simultaneous equation was estimated for eachcomponent of FCI. This was done to find out the impact of disaggregating FCIfactors on growth. These factors include FDI, portfolio investment and grantsand loans. It should be noted that among these components, taken as endogenousvariables, the results for FDI only appeared to be significant, hence insignificantresults for portfolio investment and the loan and grant equation are not reportedhere (Table 3).

Table 3 shows the results for GNP as a dependent variable in the secondcolumn whereas the results for FDI as dependent are given in column 3. Veryhigh value of R2 shows the goodness of the fit of the model. As autocorrelationwas detected in the original model by the Durbin-Watson test and this wasremoved by taking autoregressive transformation of order one.



216 / BUSHRA YASMIN

TABLE 3Estimates of Simultaneous Equation Model for GNP & FDI

Variables Dependent Variable: ln GNP Dependent variable: ln FDI

C 4.82 –13.96(6.16)∗ (–4.06)∗

LnGNP – 2.747(4.53)∗

LnFDI 0.309 –(2.97)∗

LnS 0.251 0.55(2.07)∗ (1.46)∗

LnPORT –0.012 –(–0.46)

LnLG 0.035 –(0.317)

Adjusted R2 0.97 0.94

AR (1) 0.734 0.734(3.77) (5.39)

D-W 1.87 1.80

Notes: (a) Values in parentheses show t-values.(b) ∗indicates significance at least at 10% significance level.

The role of FDI appears to be positive and statistically significant in affect-ing the growth of the economy. The results confirm the role of FDI accorded ingrowth theories. FDI can endogenously affect the growth as it generates increasingreturn to scale in production via positive externalities and productivity spillovers.The impact of FDI on growth is obviously clear as FDI brings with it technology,experts and machinery and also generates tax revenues for the recipient govern-ment. It makes it possible for local entrepreneurs to emulate and learn fromforeign investors and therefore improve their own production process. This allleads to the development of local economy.

Portfolio investment and disbursement of loans and grants appeared to beinsignificant in our model. Hence among components of FCI, FDI stands outas the most powerful factor affecting the economic growth of Pakistan.

Regarding the impact of GNP on FDI, this also appeared to be positively stat-istically significant. As GNP is an indicator of the market size, the market sizehypothesis emphasizes the need of a large market size for efficient utilization ofresources and exploitation of the economies of scale. It appears that a large demandmarket has a strong influence on foreign investors to locate in those markets,because large markets indicate more demand for goods and the absorptive capacityof economies. Saving (S) has also appeared to be a complement of FDI. This re-sult is also in line with literature. TL appeared to be insignificant and was hencedropped from the model.




7. Concluding Remarks

The relationship between FCI and growth appears to be two-sided. The growthperformance is positively affected by FCI and vice versa. Out of total FCI, FDIis statistically significant and has contributed more to the economic growth ofPakistan whereas portfolio investment and loans and grants have had noreasonable effect on the country’s economic growth. The findings suggest somepolicy implications. The worsening terms and conditions of loans have resultedin a deteriorating debt-servicing condition. FDI has contributed to growth moreby augmenting the available resources for capital formation and improving theefficiency of investment; therefore, the share of FDI should be increased. FDIcan be regulated by the host country while repayments on loans are out of itscontrol as they are affected by the interest rate set in the international market.Because most of the FDI consisted of reinvested earnings, only a portion of re-turns on investment is repatriated, as opposed to the need to repay interest andprincipal on loans. That is why there is an urgent need to adopt those policiesand measures which can help in changing the composition of FCI. Pakistanhas certain advantages for attracting foreign investors. These include a strategicgeographical location, low labour costs and cheap raw material. Regarding otherkey factors, Pakistan needs to improve on very crucial issues like the politicaland economic environment and the law and order situation.

References

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Appendix

TABLE A 1PP Unit Root Test for Stationarity

Variable Level/1st Difference Without Trend With Trend Conclusion

FCI ADF (1) level –1.43 –2.06 I (1)1st diff –5.16 –5.92

GNP ADF (1) level –0.99 –1.78 I (1)1st diff –4.17 –4.11

S ADF (1) level –0.76 –4.157 I (1)1st diff –10.27 –10.31

FDI ADF (1) level –1.010 –2.145 I (1)1st diff –3.83 –3.76

PORT ADF (1) level –1.239 –2.33 I (1)1st diff –6.104 –5.99

LG ADF (1) level –1.500 –1.93 I (1)1st diff –5.686 –6.64

Table A 1 provides the result for the Phillips-Parron (PP) unit root test of Station-arity. This is performed both in level and in the first difference of the variables. PP testshows the unit roots in levels of all variables. Therefore all variables are non-stationaryin levels at 95 per cent critical values with and without trends. However, in first differencesall of the variables are stationary at 95 per cent critical values.

Johansen-Co-integration Test

For the application of cointegration, Johansen and Juselius cointegration test is applied.For this purpose Eviews 3.0 is used to get results for likelihood ratios. The results arepresented in Table A 2.




TABLE A 2Johansen Test for Co-integration

Test StatisticHo: Ha: Maximum Eigen Value Test 95% Critical Value

r = 0 r = 1 69.0801∗ 62.99r = 1 r = 2 22.6038 42.44r = 2 r = 3 8.9594 25.32r = 3 r = 4 3.7414 12.25

Notes: LR tests were performed using Eviews 3.0.(∗) denotes rejection of the hypothesis at 5 % significance level.

The likelihood ratio (LR) tests indicate 1 cointegrating equation at 5 per cent levelof significance. The null hypothesis of no co-integration i.e., H0: r = 0 as against thealternative Ha: r = 1, for maximum eigen value test is rejected at 5 per cent significancelevel and suggests that the variables are cointegrated. So there is long-run relationshipamong the variables.

Table A 3 shows the normalized coefficients of the explanatory variables from theJohansen co-integration test. Significance of variables confirms their validity in the modeland suggests a long-run stable relationship between variables.

TABLE A 3Normalized Coefficients of Johansen Test

Variables Coefficients t-test

Lnfci 4.176∗ 2.33Lns 8.20∗ 4.13D1 1.112 0.48

∗ indicates significance at least at 10% level.



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