Impact of Natural, Physical and Human Capital Formation on Economic Growth in Pakistan: An ARDL Analysis

Abstract

Attaining sustained economic growth is one of the key objectives of any country to improve the well-being of its people and strengthen its economic position in the world. Capital formation is one of the crucial factors of economic growth as it promotes productivity, efficiency, and higher output growth. Therefore, this paper intends to analyze the impact of natural, physical, and human capital formation on economic growth in Pakistan by employing annual time series data from 1971 to 2020. Different econometric approaches such as unit root test, bound test, and ARDL model are utilized to estimate the results. The study found that labor force participation rate, physical capital, human capital, natural capital, FDI, and financial development are positively associated with economic growth in Pakistan. Instead of FDI, all the variables are found to be significantly related to economic growth in Pakistan. Considering the study’s findings, it is concluded that capital formation is essential to progress the economy of Pakistan, so policymakers must concentrate on investing in physical infrastructure, improvement in health and educational facilities, and efficient utilization of natural resources to promote economic growth.