Inclusive Growth or Deepening Disparity? Assessing the Impact of FDI on Income Inequality in Pakistan

Abstract

Foreign direct investment (FDI) has emerged as a crucial driver of economic growth, particularly in developing countries like Pakistan. While FDI is generally considered beneficial for economic development, its impact on income inequality remains contentious. This study investigates the short-run and long-run effects of FDI on income inequality in Pakistan using the Auto Regressive Distributed Lag (ARDL) model. The findings reveal a complex relationship: FDI reduces inequality in the long term but exacerbates it in the short term, primarily because initial investments are capital-intensive. Additionally, socioeconomic variables such as secondary school education and urbanisation significantly mitigate inequality, while inflation widens the gap. The study underscores the importance of enhancing human capital and controlling inflation to optimise the social benefits of FDI. Policymakers should prioritise inclusive economic strategies to address transitional disparities arising from foreign investment.