Economic openness, institutional quality, and sectoral dynamics as determinants of water stress: Evidence from Pakistan's freshwater withdrawal (1999–2023)

The dynamics of water stress within Pakistan appears to be poorly understood hindering progress toward the Sustainable Development Goal 6. This study evaluates how the degree of trade openness, foreign direct investment, agricultural output, manufacturing output, population density, the stringency of environmental policy and GDP per capita directly impacted levels of water stress, through the lenses of Endogenous Growth Theory, Institutional Theory and the Environmental Kuznets Curve. The dynamics of water stress were evaluated through an Autoregressive Distributed Lagged (ADL) model, complemented by Fully Modified OLS, Granger causality tests, impulse response analysis and variance decomposition strategy applied to World Bank data covering the period 1999–2023. The research results suggest both agricultural output (β = 15.719, p < 0.01) and population density (β = 1.596, p < 0.01) have a significant positive effect in increasing water stress levels but the stringency of environmental policy (β = 24.448, p < 0.05) has an unexpectedly positive effect in increasing levels of water stress. The lagged effect of foreign investment (β = 31.010, p < 0.01) increases water stress levels but supporting hypotheses regarding sectarian and demographic causes of this effect but trade openness (β = -1.190, p > 0.10) does not positively influence levels of water stress. One possible explanation is that agricultural demands and urban agglomeration outweigh the deficiencies in effective regulatory control or implementation of policy, with weak enforcement mechanisms being further positive observations intensifying the adverse outcome of these regulatory measures. The research findings contribute to Institutional Theory through reinforcing how policy implementation deficiencies can reduce policy desirable outcomes leading to adverse outcomes. Recommendations or hope for policy reforms in irrigation efficiency, structures and urban planning are provided for policy makers. Methodologically, the construction of the ARDL-FMOLS framework represents a real advancement in empirically evaluating dynamic type relationships, while theoretically it is adjusted to represent existing models and weaknesses in institutional enforcement in legislative power. For input by policy makers the research highlights areas of leverage in altering governance and practices in water use. Limitations with regards to the provincial data bases used for the research restrict its usefulness beyond the provincial level. Future studies could assess, or explore, sub-national mode of policy variations. In a different vein, without collected granularity of regionalism as presented above, providentially based, national level policy strategies will be mis-aligned due to imprecise interpretation of local micro based regional water stress coordinating dynamics.