Constraints of Economic Growth in Pakistan and Indonesia

In developing countries economy, there are several constraint to reach an optimum economic growth. In developing countries, the most constraints are lack of saving, corruption, and low human capital. Calculating the GDP of a country is the easiest way to know the country growth. I will explain the constrain faced with Pakistan and Indonesia.

A. Three Gap Approach of Constraint in Pakistan[1]

Zafar Iqbal in his paper shows that there are three gap approach to measure constraint in Pakistan. Each of  constraint provided with some equations, but I will not explain that deeply in this essay.

  1. Foreign Exchange Constraint

The Foreign Exchange Constraint refers to the growth of an economy being limited by the availability of foreign exchange for importing capital goods.

  1. Savings Constraint

The Savings constraint refers to the situation when the growth  of an economy is limited by the availability of domestic saving for investment.

  1. Fiscal Constraint

The fiscal constrain is intended to reflect the impact the availability of resources to finance the public investment required to support a level of potential output.

In the results, three gap model is used to examine selected macroeconomic constraint to Pakista economic growth over the 1977-1992. The result of foreign exchange constraint equation show that a real devaluation and the growth in foreign demand allow and accelerated of growth of potential GDP. In contrast, the result of the savings constraint shoe real devaluation and increases in foreign demand reduce Pakistan’s potential output growth , while increasing capacity utilization accelerates the rate of growth of potential GDP. Finally, the fiscal constraint equation shows that the growth of potential output increases with higher capacity utilization.

B. Legal and Bureaucratic as A Constraint of Economic Development in Indonesia[2]

According World Bank data in 2004, the private sector is the main driver of economic growth, especially in Indonesia. To create private sector, government around the world have implemented wide ranging reform. Furthermore, it recognized that the legal system and government regulation of business activity affect private sector performance to a significant extent . The variable observed in this research are enforcing contracts, closing a business, starting a business, hiring and firing workers, paying taxes, registering property, dealing with licenses, and trading across borders.

This research also told that there is some difficulties doing business during former second Indonesia president, Soeharto. One of the key empirical findings of these studies provides an alternative explanation for the obstacles to private sector activities—namely, that countries with a French civil law heritage appeared to perform worst on quite a wide range of indicators of financial and economic development[3]. Indonesia has implemented Dutch law because Indonesia is a former Dutch colony. In other hand, Dutch law is in the French civil law tradition.

In conclusion, the Soeharto’s regime made the business climate in Indonesia is not appropriate for investor starting a business for private sector because he and his family own the important sector of economies and doing collusion. Besides, French civil law implemented by Indonesia also made some difficulties to start business in this country.

[1] Zafar Iqbal. Constraint to The Economic Growth of Pakistan: A Three Gap Approach. The Pakistan Development Review. 1995

[2] Ross H. McLeod. Doing Business in Indonesia: Legal and Bureaucratic Constraints.The Australian National University. 2006

[3] La Porta, 1998 in Ross H. McLeod. Doing Business in Indonesia: Legal and Bureaucratic Constraints.The Australian National University. 2006


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