Analyzing the Relationship between Economic Growth, Industrial Development, and Environmental Sustainability in Pakistan: A Long-Run and Short-Run ARDL Analysis

Abstract

This study examines the effect of carbon dioxide (CO₂) emissions, industrialization, foreign direct investment (FDI) and population growth on economic growth in Pakistan over the period 1970-2025. The study uses the bounds testing approach of the Autoregressive Distributed Lag (ARDL) model as the variables are mixed order of integration, I(0) and I(1). To check the stationarity properties of the variables, unit root tests were performed before the estimation. The ARDL bounds test was applied to check the presence of a long-run relationship between the variables and the long-run and short-run coefficients were estimated by the error correction model (ECM). To test the reliability and robustness of the estimated model, several post-estimation diagnostic tests were conducted, such as the Jarque–Bera normality test, the Breusch–Godfrey serial correlation test, the Breusch–Pagan–Godfrey heteroskedasticity test, the Ramsey RESET specification test, and the CUSUM and CUSUMSQ stability tests. The diagnostic results showed that the model meets the classical regression assumptions: normally distributed residuals, no serial correlation and heteroskedasticity, proper model specification and stable coefficients across the sample period. The empirical results show that there is a long-run equilibrium relationship between the economic growth and the selected explanatory variables. The findings have significant policy implications for sustainable economic growth through environmentally responsible industrial development, productive foreign direct investment and effective population management. The study suggests that Pakistan's policy makers should implement balanced economic and environmental policies to promote sustainable industrialization, foreign investment in the environment-friendly sector and reinforce environmental laws for sustainable economic growth in Pakistan.