AN ANALYSIS OF EXTERNAL DEBT, URBANIZATION AND GOVERNMENT SIZE NEXUS: EVIDENCE FROM PAKISTAN

This study aims to analyze the nexus of external debt, urbanization and government size for Pakistan from 1972 to 2018. The study estimates two different models and employs four proxies of external debts such as (1) debt services to revenue ratio, (2) debt to revenue ratio, (3) debt services to exports ratio and (4) debt to exports ratio in addition to trade openness, per capita GDP, urbanization and inflation as control variables. The bound testing technique of autoregressive distributive lag (ARDL) has been employed. Data is sourced from the World Development Indicators (WDIs) and the International Financial Statistics released by the World Bank and the International Monetary Fund respectively. The study finds that the Law of Wagner is valid for Pakistan's data which states that the increase in per capita income leads to more government expenditures. Results further show that all four proxies of external debt are statistically significant in reducing government expenditures; and the association between government size and urbanization is positive owing to the fact that urbanization leads to the high government expenditure for social and economic development of its people. The study has generated some policy implications. The government should efficiently utilize resources vis-à-vis reducing reliance on external debt to finance public expenditures. Likewise, the development of rural areas should be considered seriously to reduce the pressure of population in some specific cities of Pakistan