Khan, M. Arshad and Qayyum, Abdul (2006): Trade Liberalization, Financial Sector Reforms and Growth. Forthcoming in: Pakistan Development Review , Vol. 45, No. 4
Download (330Kb) | Preview
This paper empirically investigates the impact of trade and financial liberalization on economic growth in Pakistan using annual observations over the period 1961-2005. The analysis is based on the bound testing approach of cointegration advanced by Pesaran et al (2001). The empirical findings suggest that both trade and financial policies play an important role in enhancing growth in Pakistan in the long-run. However, the short-run response of real deposit rate and trade policy variable is very low, suggesting further acceleration of reform process. The feedback coefficient suggests a very slow rate of adjustment towards long-run equilibrium. The estimated short-run dynamics are stable as indicated by CUSUMQ test.
|Item Type:||MPRA Paper|
|Institution:||Pakistan Institute of Development Economics|
|Original Title:||Trade Liberalization, Financial Sector Reforms and Growth|
|Keywords:||Financial Sector Reforms; Trade Liberalization; Growth; Pakistan|
|Subjects:||G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation
O - Economic Development, Technological Change, and Growth > O5 - Economywide Country Studies > O53 - Asia including Middle East
|Depositing User:||Abdul Qayyum|
|Date Deposited:||10. Apr 2007|
|Last Modified:||13. Feb 2013 05:21|
Aziz, Jahangir and Christoph Duenwald (2002), “Growth-Finance Intermediation Nexus in China”, IMF Working Paper No. WP/02/194, International Monetary Fun: Washington D.C. Anwar, Tilat (2002), “Impact of Globalization and Liberalization on Growth, Employment and Poverty: A Case Study of Pakistan”, WIDER Discussion Paper No. 17 Arestis, P and Panicos Demetriades (1997), “Financial Development and Economic Growth: Assessing the Evidence”, The Economic Journal, Vol. 107, pp.783-799. Bernstein, D.J. (2000), “To What Degree Do Central Banks Sterilize the Effects of Capital Flows on Domestic Money Supply?”, Applied Economic Letters, Vol. 7, No.1, pp.15-19. Bandiera, O., G. Caprio, P. Honohan and F. Schiantarelli (2000), “Does Financial Reforms Raise or Reduce Savings?”, Review of Economic and Statistics, Vol. 82, No. 2 Barro, R.J. (1991), “Economic Growth in a Cross Section of Countries”, Quarterly Journal of Economics, Vol. 106, pp. 407-444. Benhabib, J. and Spiegel, M.M (2000), “The Role of Financial Development in Growth and Investment”, Journal of Economic Growth, Vol. 5, pp 341-360. Beck, T., Levine, R. and Loyaza, N. (2000), “Finance and the Sources of Growth”, Journal of Financial Economics, Vol.58, pp.261-300. Batra, R. (1992), “The Fallacy of Free Trade”, Review of International Economics, Vol.1, pp. 19-31. Batra, R. and Slottje, D.J. (1993), “Trade Policy and Poverty in the United States: Theory and Evidence, 1947-1990”, Review of International Economics, Vol.1, pp.189-208. Bencivenga, V.R, and B.D. Smith (1991), “Financial Intermediation and Endogenous Growth”, Review of Economic Studies, Vol.58, No.2, pp. 195-209. Bencivenga, V.R, B.D.Smith, and Starr, R. (1995), “Transaction Costs, Technological Choice and Endogenous Growth”, Journal of Economic Theory, Vol.67, pp.153- 177. Bahmani-Oskooee, M. and Bohl, M.T. (2000), “German Monetary Unification and the Stability of German M3 Money Demand Function”, Economic Letters, Vol. 66,pp. 203-208. ____________________ and Ng, R.C.W. (2002), “Long Run Demand for Money in Hong Kong: An Application of ARDL Model”, International Journal of Business and Economics, Vol.1, pp.147-155. Bhagwati, J. (1988), “ Export-Promoting Trade Strategy: Issues and Evidence”, The World Bank Research Observer, pp. 27-57. Chandavarkar, A. (1992), “Of Finance and Development: Neglected and Unsettled Questions”, World Development, Vol.22, pp.133-142 Creane. S., Rishi Goyal, A. Mushfiq Mobarak and Randa Sab (2004), “Financial Sector Development in the Middle East and North Africa”, IMF Working Paper 04/201 (Washington: International Monetary Fund). Christopoulos, D.K and Efthymios G. Tsionas (2004), “Financial Development and Economic Growth: Evidence from Panel Unit Root and Cointegration Tests”, Journal of Development Economics, Vol.73, pp. 55-74. Craigwell, R. and Darrin Downes (2001), “The finance-Growth Nexus: A Multivariate VAR Analysis of a Small Open Economy”, Saving and Development, Vol. 25, pp209-233. Din, Musleh-UD, E.Ghani, and O.Siddique (2003), “Openness and Economic Growth in Pakistan”, The Pakistan Development Review, Vol.42, No.4, pp.795-807 Demetriades, P.O and Hussein, A.K. (1996), “Does Financial Development Cause Economic Growth? Time Series Evidence from 16 Countries”, Journal of Development Economics, Vol.51, pp.387-411. ____________ and Kul B. Luintel (2001), “Financial Restraints in the South Korean Miracle”, Journal of Development Economics, Vol. 64, pp.459-479. ____________________________ (1996), “Financial Development, Economic Growth and Banking Sector Controls: Evidence From India”, Economic Journal, Vol. 106, pp.359-374. De Gregorio,J., and P.E. Guidotti (1995), “Financial Development and Economic Growth”, World Development, Vol.23, No.3, pp.433-448. Darrat, Ali. F. (1999), “Are Financial Deepening and Economic Growth Causality Related? Another Look at the Evidence”, International Economic Journal, Vol.13, No.3, pp.19-35. __________, Khalid Elkhal, and B.McCallum (2006), “Finance and Macroeconomic Performance: Some Evidence for Emerging Markets”, Emerging Markets Finance and Trade, Vol.42, No.3, pp.5-28. Edwards, S. (1992), “Trade Orientation, Distortions, and Growth in Developing Countries, Journal of Development Economics, Vol. 39, pp. 31-57 Engle, R.F. and C.W.J. Granger (1987), “Cointegration and Error Correction: Representation, Estimation and Testing”, Econometrica, Vol. 55, No. 2, pp.251- 276. Fry, M.J. (1995), “Money, Interest Rate, and Banking in Economic Development”, Second Edition, London: The Johns Hopkins University Press. Fry, M.J. (1997), “In Favour of Financial Liberalization”, Economic Journal, Vol.107, pp.754-770. ______________ (1995), “Money, Interest Rate, and Banking in Economic Development”, Second Edition, London: The Johns Hopkins University Press. Goldsmith, R.W., (1969), “Financial Structure and Development”, Yale University Press, New Haven, C.T. Greenwood, J. and Smith, B. (1997), “Financial Markets in Development and the Development of Financial Markets”, Journal of Economic Dynamic and Control, Vol.21, pp. 145-181 ____________ and B.Jovanovic (1990), “Financial Development, Growth and the Distribution of Income”, Journal of Political Economy, Vol.98, No.5, pp.1076- 1107. Greenaway, D., W. Morgan and P. Wright (2002), “Trade Liberalization and Growth in Developing Countries”, Journal of Development Economics, Vol. 67, pp. 229- 244. Gelb, A.H. (1989), “Financial Policies, Growth and Efficiency”, World Bank Working Paper, Vol. 202, June Gelbard, A. and Sergio Pereira Leite (1999), “Measuring Financial Development in Sub- Saharan Africa”, IMF Working Paper No.99/105 (Washington: International Monetary Fund). Galbis, J. (1993), “High Interest Rates under Financial Liberalization: Is There a Problem?”, IMF Working Paper No. 07/93 (Washington: International Monetary Fund). Hachicha, Nejib (2005), “Banking Sector Controls and Financial Deepening: A Structural Error Correction Model for Tunisia”, The Developing Economies, Vol.XLIII, pp.265-284. Hanson, J.A. and C.R. Neal (1995), “Interest Rate Policies in Selected Developing Countries, 1970-82”, World Bank, Staff Working Paper No. 753 (Washington, DC) Haque, Nadeem Ul and Shahid Kardar (1993), “Constraints to the Development of Financial Markets in Pakistan”, IMF Mimeo Husain, Ishrat (2005), “Economy of Pakistan: An Overview”, Key Note Address at the Expo 2005 Conference held at Karachi on February 3, 2005. Ireland, P.N. (1994), “Money and Growth: An Alternative Approach”, American Economic Review, 47-65. Jin, Jang C. (2000), “Openness and Growth: An Interpretation of Empirical Evidence from East Asian Countries”, The Journal of International Trade and Economic Development, Vol.9, No.1, pp.5-17 Johansen, S. (1988), “Statistical Analysis of Cointegrating Vectors”, Journal of Economic Dynamics and Control, Vo. 12, pp. 231-254. _________ (1991), “Estimation and Hypothesis Testing of Cointegrating Vectors in Gaussian Vector Autoregressive Models”, Econometrica, Vol. 59, pp.1551-1580. ____________ and K. Juselius (1990), “Maximum Likelihood Estimation and Inference on Cointegration—With Application to the Demand for Money”, Oxford Bulletin of Economics and Statistics, Vol. 52, pp. 169-210. King, R.G. and Levine, R. (1993a), “Finance and Growth: Schumpeter Might be Right”, Quarterly Journal of Economics, Vol. 108, pp.717-737 _______________________ (1993b), “Finance, Entrepreneurship and Growth”, Journal of Monetary Economics, Vol. 32, pp.30-71 Krueger, Anne O. (1998), “Why Trade Liberalization is Good for Growth”, Economic Journal, pp. 1513-1522. Khan, S.M. and Senhadji, A.S. (2000), “Financial Development and Economic Growth: An Overview”, IMF Working Paper 00/209 (Washington: International Monetary Fund). Khan, M. Arshad (2003), “Restructuring of Financial Sector in Pakistan”, Journal of the Institute of Bankers Pakistan, Vol. 70, pp.49-68 35 Khan, M. Arshad, Abdul Qayyum and Saeed Ahmed Sheikh (2005), “Financial Development and Economic Growth: The Case of Pakistan”, Presented in the 21st Annual General Meeting and Conference of PSDE, 19th-21st December 2005. Kuznets, S. (1955), “Economic Growth and Income Inequality”, American Economic Review, Vol. 45, pp.1-28 Kapur, B.K. (1992), “Formal and Informal Financial Markets, and the Neo-Structuralist Critique of the Financial Liberalization Strategy in Less Developed Countries”, Journal of Development Economics, Vol. 38, pp.63-77. Kemal, A.R. (2001), “Globalization and South Asia”, Mahbub Ul Haq Human Development Review, Vol.1 No. 1, pp.61-74. Laurenceson, J and J.C.H. Chai (1998), “Financial Liberalization and Financial Depth in China”, Saving and Development, Vol.22, pp.393-413. Leamer, E.E. (1995), “A Trade Economist’s View of U.S. Wages and Globalization”, Brooking Conference Proceedings. Lucas, R.E. Jr. (1988), “On the Mechanics of Economic Development”, Journal of Monetary Economics, Vol.22, pp.3-42 Levine, R. (2004), “Finance and Growth: Theory and Evidence”, NBER Working Paper No. 10766 Levine, R. (1997), “Financial Development and Economic Growth: Views and Agenda”, Journal of Economic Literature Vol. 35, pp.688-726. Levine, R., Norman Loayza, and Thorsten Beck (2000),“Financial Intermediation and Growth: Causality and Causes”, Journal of Monetary Economics, Voil.46, pp.31- 77. Levine, R and Renelt, D. (1992), “A Sensitivity Analysis of Cross-Country Growth Regressions”, American Economic Review, Vol. 82, pp. 942-963. Luintel, Kul B and Mosahid Khan (1999), “A Quantitive Reassessment of the Finance⎯Growth Nexus: Evidence from a Multivariate VAR”, Journal of Development Economics, Vol.60, pp.381-405 Lee, Jong-Wha (1993), “International Trade Distortions, and Long-run Economic Growth”, IMF Staff Papers, pp.299-328. Mckinnon, R.I. (1973), “Money and Capital in Economic Development”, Brooking Institution, Washington, DC 36 Neusser, K. and Kugler, M. (1998), “Manufacturing Growth and Financial Development: Evidence from OECD Countries”, The Review of Economic and Statistics, pp.638-646. Obstfeld, M., (1994), “Risk-taking, Global Diversification, and Growth”, American Economic Review, Vol.84, pp.10-29. Odedokun, M.O. (1998), “Financial Intermediation and Economic Growth in Developing Countries”, Journal of Economic Studies, Vol. 25, pp.203-224. Pesaran, M.H. and Shin, Y. (1995), “Long-run Structural Modelling”, DAE Working Paper No. 9419 Cambridge, Department of Applied Economics, University of Cambridge. Pesaran, M.H. and Pesaran, B. (1997), “Working with Microfit 4.0: An Interactive Approach”, Oxford University Press, Oxford. Pesaran, M.H., Yongcheol Shin and Richard J. Smith (1999), “Bounds Testing Approaches to the Analysis of Long Run Relationships”, Working Paper, February 1999. ______________________________ (2001), “Bounds Testing Approaches to the Analysis of Level Relationships”, Journal of Applied Econometrics, Vol. 16, pp.289-326. Rodriguez, F., and D. Rodrik (1999), “Trade Policy and Economic Growth: A Skeptic’s Guide to the Cross-National Evidence”, NBER Working Paper No. 7081. Rivera-Batiz, L.A. and P.M. Romer (1991), “International Trade with Endogenous Technological Change”, European Economic Review, pp. 971-1004. Romer, P.M. (1986), “Increasing Returns and Long-run Growth”, Journal of Political Economy, pp.1002-1037. Robinson, J. (1952), “The Rate of Interests and Other Easys”, Macmillan, London. Rajan, R.G and Zingalas, L. (1996), “Financial Dependence and Growth”, Mimo, University of Chicago. Roubini, Nouriel and Sala-i-Martin, Xavier (1991), “Financial Development, Trade Regimes and Economic Growth”, NBER Working Paper No. 3876. Sukar, Abdulhamid, and G.Ramakrishna (2002), “The Effect of Trade Liberalization on Economic Growth: The case of Ethiopia”, Finance India, Vol.XVI, No.4, pp.1295-1305. 37 Sachs, J.D., and A Warner (1995), “Economic Reforms and the Process of Global Integration”, Brooking Papers on Economic Activity, Vol.1, pp.1-118. Stock, J.H. and M.W. Watson (1988), “Variable Trend in Economic Time Series”, Journal of Economic Prospective, Vol.1, pp.147-174. Shaw, E.S., (1973), “Financial Deepening in Economic Development”, Havard University Press, Cambridge, M.A. State Bank of Pakistan, “Annual Reports” (Various Issues), State Bank of Pakistan, Karachi. __________________, “Quarterly Bulletin” (Various Issues), State Bank of Pakistan, Karachi. _________________ (2002), “Pakistan: Financial Sector Assessment 1990-2000”, State Bank of Pakistan, Karachi. Theil, H (1971), “Principles of Econometrics”, London: North Holland. Tang, Cheong Tuck (2001), “Bank Lending and Inflation in Malaysia: Assessment from Unrestricted Error-Correction Models”, Asian Economic Journal, Vol. 15, No.3, Pp.275-289. _______________ (2002a), “Demand for M3 and Expenditure Components in Malaysia: An Assessment from Bound Testing Approach”, Applied Economic Letters, Vol.9, pp. 721-725. World Bank (1989), “World Development Report 1989”, Oxford University Press, New York. Wyplosz, C (2001), “How Risky is Financial Liberalization in the Developing Countries?”, G-24 Discussion Paper No. 14 (United Nations: New York and Geneva, September 2001). Xu, Z. (2000), “Financial Development, Investment, and Economic Growth”, Economic Inquiry, Vol. 38, pp. 331-344. Yasmin, Bushra, Zainab Jehan and M.A. Chaudhary (2006), “ Trade Liberalization and Economic Development: Evidence from Pakistan”, The Lahore Journal of Economics, Vol.11, No. 1, pp. 19-34.