Examining the Effect of Geopolitical Risk and Inflation on Economic Growth of Pakistan

Abstract

In this study, the empirical impact of rising geopolitical tensions and macroeconomic instability in long-term economic growth of Pakistan is explored. In the context of Pakistan being the most vulnerable to the geopolitical threats, it is of paramount importance to manage the external shocks and price volatility within a country to create a sustainable economic growth pattern. In order to solve this problem, the study considers a linear-log production function to analyze the annual time-series data. It is designed for the classical production model to assess the effect of geopolitical risk on long run economic growth. The model has real GDP's log as its primary dependent development indicator, and evaluates it against the log of the Consumer Price Index (inflation), Gross Capital Formation Growth (capital accumulation), and the log of the labor force. In general, the study uses the Autoregressive Distributed Lag (ARDL) model and the data period is 1990 to 2025. This method can be used to examine both short and long run parameters. The ARDL bounds test corroborates the long term co-integrating relationship between the macroeconomic variables. According to the long-run results, the geopolitical risk has a significant negative effect on economic development. Higher instability and chronic inflation also hinders economic growth. It diminishes people's purchasing power and is a part of the vicious circle of poverty. Conversely, domestic saving is a great force in raising the national income. The study suggests more investment to build up capital and building up external and international threats by strengthening governance and political stability. The measures are required for sustainable economic growth.