The Role of Political Stability and Corruption in Human Development and Foreign Direct Investment in Pakistan

This study investigates the relationship of Foreign Direct Investment (FDI) with human development in Pakistan and considers corruption and political stability in this relationship. We extracted the data from World Development Indicators’ and Transparency International database. The period of study spanned from 1996 to 2022. We applied the Augmented Dickey-Fuller test to check the stationary condition of the data. The results suggest that some variables are stationary at level I(0), whereas others become stationary at first difference. So, the Autoregressive Distributed Lag (ARDL) approach is used to examine short-run and long-run relationships. The bounds test suggests a long-run relationship among the variables. FDI has a positive and significant relationship with the Human Development Index (HDI) in both periods, with a stronger long-run effect. The Corruption Perception Index (CPI) also has a positive and significant relationship with HDI. The interaction of FDI and CPI shows that the contribution of FDI to human development becomes stronger when corruption is lower. Political stability is also positively related to HDI. However, its interaction with FDI is significant over the long run but not over the short run. So, the results show that better governance, lower corruption and greater political stability can strengthen the contribution of FDI to human development in Pakistan.