THE EFFECT OF TRADE LIBERALIZATION ON EXPENDITURE STRUCTURE OF PAKISTAN

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 productive sector.   This study explores the effect of trade liberalization and trade tax revenue on expenditure structure of Pakistan during 1975-2019.  Autoregressive Distributed Lag approach has been used for examining the long run co-integration among the expenditure structure and trade liberalization and Error-Correction model is used for short run dynamics of the concerned variables. The empirical result shows that trade tax revenue has positive impact on expenditure structure in long run but not in short run. Trade liberalization, budget deficit and defence expenditure have negative association with expenditure structure. Underground economy has also negative impact on expenditure structure but most surprising result of political stability shows negative relation with expenditure structure.  As more political stability in Pakistan, the share of non-development expenditure is higher as compared to development expenditure during trade liberalization.