Shadows of Instability: Trade Openness, Growth Paradoxes, and Pakistan's Quest for Economic Resilience

Abstract

This study examines the impact of political instability on investment behavior and economic growth in Pakistan, employing the Autoregressive Distributed Lag (ARDL) model to analyze annual data from 1990 to 2023. Using variables such as Foreign Direct Investment (FDI), private investment (GFC), political stability (measured via the ICRG index), trade openness, inflation, and real GDP, the research identifies a significant negative relationship between political instability and investment. Political instability results in a 0.381 percent decrease in foreign direct investment and a 0.376 percent fall in domestic investment over the long term. Military coups and constitutional crises precipitate heightened impacts on investment levels. The error correction technique indicates that foreign direct investment (FDI) adjusts annually at a rate of 25.7%, while domestic investment adjusts at 53.2%. The integration of trade openness and GDP growth mitigates the adverse effects of instability on the economy. This study demonstrates that Pakistan necessitates both institutional transformation and sustained policy measures to cultivate investor trust and foster long-term economic growth in the country.