Exploring the causal relationship among social, real, monetary and infrastructure development in Pakistan

This paper examines the causal relationship among composite indicators for real, monetary/financial, social and infrastructure development in Pakistan. This is an effort to provide evidence on the two highly debatable issues, i.e. money-real causality and social-economic causality in a single multivariate framework. We use a large number of variables to construct the composite indicators of development in four major sectors of the economy: social development, real economic development, monetary and financial growth and infrastructure development. The data are collected from 1971-72 to 2003-04 on annual basis. The technique of factor analysis using principal component is employed to construct these indicators. The computed values of these indicators over the aforementioned time span constitute time series data. Using these time series data the paper assesses that a long-run relationship exists among social, real, monetary and infrastructure activities. The paper has applied Granger Causality test in a Vector Error Correction model and concludes that social development is caused by real economic development but not vice versa, which is indicative of ‘trickle-down’ development policies. It also concludes that in the context of Pakistan, no causal relationship exists between real economic development and monetary growth; meaning that monetary development has no impact on the economic growth of the country. However, both real development and monetary indicators appear to be exogenous in the system which implies that these can be used as instrument in developing social and physical infrastructure to boost investment and improving the quality of life of the people.