Determining Pakistan's Financial Dependency: The Role of Financial Globalization and Corruption

Ali, Amjad (2022): Determining Pakistan's Financial Dependency: The Role of Financial Globalization and Corruption.

Abstract

This article has analyzed the role of financial globalization and corruption in determining financial dependency in Pakistan from 1980 to 2020. For checking the stationary of the data Augmented Dickey-Fuller and Zivot-Andrew structural break unit root tests. For examining the cointegration autoregressive distributed lag method has been applied. The results explain that the level of corruption has a positive and significant impact on financial dependency in Pakistan. Financial globalization has a negative and significant impact on financial dependency in Pakistan. The estimated outcomes explain that the unemployment rate and balance of payments have a positive and significant impact on financial dependency in Pakistan. The findings of this article suggest that for the reduction of financial dependency, the government of Pakistan should increase financial globalization and depresses corruption, unemployment, and balance of payments.

• Item Type: MPRA Paper
• Language: English
• Keywords: financial dependency, financial globalization, corruption, budget deficit
• Subjects: D - Microeconomics > D7 - Analysis of Collective Decision-Making > D73 - Bureaucracy ; Administrative Processes in Public Organizations ; Corruption; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration; F - International Economics > F3 - International Finance > F38 - International Financial Policy: Financial Transactions Tax; Capital Controls; H - Public Economics > H6 - National Budget, Deficit, and Debt > H61 - Budget ; Budget Systems

References

Abed, G. T., & Davoodi, H. R. (2000). Corruption, structural reforms, and economic performance in the transition economies.

Adil, M. (2007). Capital formation, Globalization, Imperialism and monopoly capitalism. International Journal of Business Research, 277-345.

Aguiar, M., & Amador, M. (2016). Fiscal policy in debt constrained economies. Journal of Economic Theory, 161, 37-75.

Ahiakpor, J. C. (1985). The success and failure of dependency theory: The experience of Ghana. International Organization, 535-552.

Ahmad, K., Ali, A., & Yang, M. (2022). The Effect of Trade Liberalization on Expenditure Structure of Pakistan. Bulletin of Business and Economics (BBE), 11(1), 73-84.

Ahmed, V., & Amjad, R. (1984). The management of Pakistan’s economy, 1947–82. Karachi, Pakistan: Oxford University Press.

Aiyagari, S. R., & McGrattan, E. R. (1998). The optimum quantity of debt. Journal of Monetary Economics, 42(3), 447-469.

Aiyagari, S. R., Marcet, A., Sargent, T. J., & Seppälä, J. (2002). Optimal taxation without state-contingent debt. Journal of Political Economy, 110(6), 1220-1254.

Alam, I., & Quazi, R. (2003). Determinants of capital flight: An econometric case study of Bangladesh. International Review of Applied Economics, 17(1), 85-103.

Alesina, A., & Tabellini, G. (1990). A positive theory of fiscal deficits and government debt. The Review of Economic Studies, 57(3), 403-414.

Ali, A. & Naeem, M.Z. (2017). Trade Liberalization and Fiscal Management of Pakistan: A Brief Overview. Policy Brief-Department of Economics, PU, Lahore. 2017 (1), 1-6.

Ali, A. (2015). The impact of macroeconomic instability on social progress: an empirical analysis of Pakistan. (Doctoral dissertation, National College of Business Administration & Economics Lahore).

Ali, A. (2018). Issue of Income Inequality Under the Perceptive of Macroeconomic Instability: An Empirical Analysis of Pakistan. Pakistan Economic and Social Review, 56(1), 121-155.

Ali, A. (2022). Financial Liberalization, Institutional Quality and Economic Growth Nexus: Panel Analysis of African Countries. Bulletin of Business and Economics, 11(3).

Ali, A. (2022). Foreign Debt, Financial Stability, Exchange Rate Volatility and Economic Growth in South Asian Countries. Journal of Business and Economic Options.

Ali, A. and Bibi, C. (2017). Determinants of Social Progress and its Scenarios under the role of Macroeconomic Instability: Empirics from Pakistan. Pakistan Economic and Social Review 55 (2), 505-540.

Ali, A., & Ahmad, K. (2014). The Impact of Socio-Economic Factors on Life Expectancy in Sultanate of Oman: An Empirical Analysis. Middle-East Journal of Scientific Research, 22(2), 218-224.

Ali, A., & Audi, M. (2016). The Impact of Income Inequality, Environmental Degradation and Globalization on Life Expectancy in Pakistan: An Empirical Analysis. International Journal of Economics and Empirical Research, 4 (4), 182-193.

Ali, A., & Audi, M. (2018). Macroeconomic Environment and Taxes Revenues in Pakistan: An Application of ARDL Approach. Bulletin of Business and Economics (BBE), 7(1), 30-39.

Ali, A., & Rehman, H. U. (2015). Macroeconomic instability and its impact on the gross domestic product: an empirical analysis of Pakistan. Pakistan Economic and Social Review, 285-316.

Ali, A., & Şenturk, I. (2019). Justifying the Impact of Economic Deprivation, Maternal Status and Health infrastructure on Under-Five Child Mortality in Pakistan: An Empirical Analysis. Bulletin of Business and Economics, 8(3), 140-154.

Ali, A., & Zulfiqar, K. (2018). An Assessment of Association between Natural Resources Agglomeration and Unemployment in Pakistan. Pakistan Vision, 19(1), 110-126.

Ali, A., Ahmed, F., & Rahman, F. U. (2016). Impact of Government Borrowing on Financial Development (A case study of Pakistan). Bulletin of Business and Economics (BBE), 5(3), 135-143.

Ali, A., Ehsan, R., Audi, M., & Hamadeh, H. F. (2022). Does Globalization Promote Financial Integration in South Asian Economies? Unveiling the Role of Monetary and Fiscal Performance in Internationalization.

Altvater, E. (1988). The Two Sides of the Coin: The Relationship between Unemployment and Debt in the World Economic Crisis. International Journal of Political Economy, 18(2), 85-101.

Angeletos, G. M. (2002). Fiscal policy with noncontingent debt and the optimal maturity structure. The Quarterly Journal of Economics, 117(3), 1105-1131.

Angeletos, G. M., & Panousi, V. (2011). Financial integration, entrepreneurial risk and global dynamics. Journal of Economic Theory, 146(3), 863-896.

Audi, M., & Ali, A. (2022). Public Policy and Economic Misery Nexus: A Comparative Analysis of Developed and Developing World.

Audi, M., Ali, A., & Hamadeh, H. F. (2022). Nexus Among Innovations, Financial Development and Economic Growth in Developing Countries. Journal of Applied Economic Sciences, 17(4), 373-393.

Audi, M., Ali, A., & Roussel, Y. (2021). Measuring the Tax Buoyancy: Empirics from South Asian Association for Regional Cooperation (SAARC). Empirical Economics Letters, 20(12).

Azzimonti, M., De Francisco, E., & Quadrini, V. (2014). Financial globalization, inequality, and the rising public debt. American Economic Review, 104(8), 2267-2302.

Bachmann, R., & Bayer, C. (2013). ‘Wait-and-See’business cycles? Journal of Monetary Economics, 60(6), 704-719.

Backus, D. K., & Kehoe, P. J. (1989). On the denomination of government debt: a critique of the portfolio balance approach. Journal of Monetary Economics, 23(3), 359-376.

Baldwin, R. E., & Martin, P. (1999). Two waves of globalisation: superficial similarities, fundamental differences. NBER working paper, (w6904).

Barbosa-Filho, N. H. (2001). The balance-of-payments constraint: from balanced trade to sustainable debt. PSL Quarterly Review, 54(219).

Barro, R. J. (1979). On the determination of the public debt. Journal of political Economy, 87(5, Part 1), 940-971.

Battaglini, M., & Coate, S. (2008). A dynamic theory of public spending, taxation, and debt. American Economic Review, 98(1), 201-36.

Berg, A., Borensztein, E., & Pattillo, C. (2005). Assessing early warning systems: how have they worked in practice? IMF staff papers, 52(3), 462-502.

Bianchi, J., Liu, C., & Mendoza, E. G. (2016). Fundamentals news, global liquidity and macroprudential policy. Journal of International Economics, 99, S2-S15.

Blanchard, O., & Perotti, R. (2002). An empirical characterization of the dynamic effects of changes in government spending and taxes on output. the Quarterly Journal of economics, 117(4), 1329-1368.

Bordo, M. D., Eichengreen, B., Irwin, D. A., Frankel, J., & Taylor, A. M. (1999, January). Is Globalization Today Really Different from Globalization a Hundred Years Ago?[with Comments and Discussion]. In Brookings trade forum (pp. 1-72). Brookings Institution Press.

Brown, R. L., Durbin, J., & Evans, J. M. (1975). Techniques for testing the constancy of regression relationships over time. Journal of the Royal Statistical Society: Series B (Methodological), 37(2), 149-163.

Caballero, R. J., & Yared, P. (2008). Inflating the beast: political incentives under uncertainty (No. w13779). National Bureau of Economic Research.

Caballero, R. J., Farhi, E., & Gourinchas, P. O. (2008). Financial crash, commodity prices and global imbalances (No. w14521). National Bureau of Economic Research.

Cahyadin, M., & Ratwianingsih, L. (2020). External debt, exchange rate, and unemployment in selected ASEAN countries. Jurnal Ekonomi & Studi Pembangunan, 21(1), 16-36.

Campos, J. E., Lien, D., & Pradhan, S. (1999). The impact of corruption on investment: Predictability matters. World development, 27(6), 1059-1067.

Chang, H. F. (2008). The Economics of International Labor Migration and the Case for Global Distributive Justice in Liberal Political Theory. Cornell Int'l LJ, 41, 1.

Chari, V. V., Christiano, L. J., & Kehoe, P. J. (1994). Optimal fiscal policy in a business cycle model. Journal of polítical Economy, 102(4), 617-652.

Collins, C. (1999). ‘Break the chains of debt!’international jubilee 2000 campaign demands deeper debt relief.

Cooper, R. N., Tarullo, D. K., & Williamson, J. (1999). Should capital controls be banished? Brookings Papers on Economic Activity, 1999(1), 89-141.

Corbae, D., Stinchcombe, M. B., & Zeman, J. (2009). An introduction to mathematical analysis for economic theory and econometrics. Princeton University Press.

Dailami, M. (1999). Managing risks of capital mobility. The World Bank.

Depken, C. A., & Lafountain, C. L. (2006). Fiscal consequences of public corruption: Empirical evidence from state bond ratings. Public Choice, 126(1-2), 75-85.

Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American statistical association, 74(366a), 427-431.

Dickey, D. A., & Fuller, W. A. (1981). Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica: journal of the Econometric Society, 1057-1072.

Dobson, W., & Jacquet, P. (1998). Financial Services Liberalization in the World Trade Organization. Peterson Institute Press: All Books.

Drábek, Z., & Laird, S. (2001). Can trade policy help mobilize financial resources for economic development? (No. 01/16). CREDIT Research Paper.

Eichengreen, B., & Mody, A. (2000). Lending booms, reserves and the sustainability of short-term debt: inferences from the pricing of syndicated bank loans. Journal of Development Economics, 63(1), 5-44.

Engle, R. F., & Granger, C. W. (1987). Co-integration and error correction: representation, estimation, and testing. Econometrica: journal of the Econometric Society, 251-276.

Esener, S. C., & Ipek, E. (2015). Expanding effects of military expenditures on external debt in developing countries. Journal of Business Economics and Finance, 4(4).

Farid, A., Ashraf, J., & Khan, A. H. (1995). Volatility at Karachi Stock Exchange [with Comments]. The Pakistan Development Review, 34(4), 651-657.

Friedman, E., Johnson, S., Kaufmann, D., & Zoido-Lobaton, P. (2000). Dodging the grabbing hand: the determinants of unofficial activity in 69 countries. Journal of public economics, 76(3), 459-493.

Gavin, B. (2001). The European Union and globalisation: towards global democratic governance. Edward Elgar Publishing.

Gouvêa, R. R., & Lima, G. T. (2010). Structural change, balance-of-payments constraint, and economic growth: evidence from the multisectoral Thirlwall's law. Journal of Post Keynesian Economics, 33(1), 169-204.

Gyimah-Brempong, K. (2001). Alcohol availability and crime: Evidence from census tract data. Southern Economic Journal, 2-21.

Hameed, A., Ashraf, H., & Siddiqui, R. (2006). Stock market volatility and weak-form efficiency: evidence from an emerging market [with Comments]. The Pakistan Development Review, 1029-1040.

Hussain, C. M., Shah, S. Z. A., Sohail, N., & Mahmood, I. (2002). The Impact of Financial Liberalization on East Asian Financial Crisis During 1990s: Lessons for Pakistan (Doctoral dissertation, University of Glasgow).

Ibrahim, M. E., & Alqaydi, F. R. (2013). Financial literacy, personal financial attitude, and forms of personal debt among residents of the UAE. International Journal of Economics and Finance, 5(7), 126-138.

Ilzetzki, E. (2011). Fiscal policy and debt dynamics in developing countries. The World Bank.

Jeffrey, D. (2002). millenium development goals report. UNDP.

Jermann, U., & Quadrini, V. (2012). Macroeconomic effects of financial shocks. American Economic Review, 102(1), 238-71.

Johansen, S. (1991). Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica: journal of the Econometric Society, 1551-1580.

Johansen, S. (1992). Determination of cointegration rank in the presence of a linear trend. Oxford Bulletin of Economics and Statistics, 54(3), 383-397.

Johansen, S., & Juselius, K. (1990). Maximum likelihood estimation and inference on cointegration—with appucations to the demand for money. Oxford Bulletin of Economics and statistics, 52(2), 169-210.

Johnson, S., Kaufmann, D., Shleifer, A., Goldman, M. I., & Weitzman, M. L. (1997). The unofficial economy in transition. Brookings papers on economic activity, 1997(2), 159-239.

Kato, P., & Hagendorff, J. (2010). Distance to default, subordinated debt, and distress indicators in the banking industry. Accounting & Finance, 50(4), 853-870.

Kenen, P. B. (2001). The international financial architecture: What's new? What's missing? (Vol. 61). Peterson Institute.

Khapoya, V. (2015). The African Experience. Routledge.

Kisunko, G., & Kapoor, K. (1999). Estimating the effects of corruption: implications for Bangladesh. The World Bank.

Klein, R., & Marmor, T. (2006). Reflections on policy analysis. In The Oxford handbook of political science.

Kono, M., & Schuknecht, L. (1999). Financial services trade, capital flows, and financial stability (No. ERAD-98-12). WTO Staff Working Paper.

Kose, M. A., Prasad, E. S., & Terrones, M. E. (2006). How do trade and financial integration affect the relationship between growth and volatility? Journal of international Economics, 69(1), 176-202.

Krusell, P., & Rios-Rull, J. V. (1999). On the size of US government: political economy in the neoclassical growth model. American Economic Review, 89(5), 1156-1181.

Kumar, R. and Debroy, B. (1999). The Asian Crisis: An Alternative View. Asian Development Bank, Staff Paper 59, 3: 9-11.

Lambsdorff, J. G. (2003). How corruption affects productivity. Kyklos, 56(4), 457-474.

Laurenceson, J., & Chai, J. C. (2003). Financial reform and economic development in China. Edward Elgar Publishing.

Levine, R. (2005). Finance and growth: theory and evidence. Handbook of economic growth, 1, 865-934.

Leybourne, S. J., & Newbold, P. (2003). Spurious rejections by cointegration tests induced by structural breaks. Applied economics, 35(9), 1117-1121.

Lucas Jr, R. E., & Stokey, N. L. (1983). Optimal fiscal and monetary policy in an economy without capital. Journal of monetary Economics, 12(1), 55-93.

Lumsdaine, R. L., & Papell, D. H. (1997). Multiple trend breaks and the unit-root hypothesis. Review of economics and Statistics, 79(2), 212-218.

Mah, J. S. (2000). An empirical examination of the disaggregated import demand of Korea—the case of information technology products. Journal of Asian Economics, 11(2), 237-244.

Malik, S., Mahmood-ul-Hassan, & Hussain, S. (2006). Fiscal Decentralisation and Economic Growth in Pakistan. The Pakistan Development Review, 845-854.

Marcet, A., & Scott, A. (2009). Debt and deficit fluctuations and the structure of bond markets. Journal of Economic Theory, 144(2), 473-501.

Mauro, P. (1995). Corruption and growth. The quarterly journal of economics, 110(3), 681-712.

Mauro, P. (1997). The effects of corruption on growth, investment, and government expenditure: a cross-country analysis. Corruption and the global economy, 83, 87.

Mendoza, E. G., & Oviedo, P. M. (2009). Public debt, fiscal solvency and macroeconomic uncertainty in Latin America: the cases of Brazil, Colombia, Costa Rica and Mexico. Economía mexicana. Nueva época, 18(2), 133-173.

Mendoza, E. G., & Tesar, L. L. (2005). Why hasn’t tax competition triggered a race to the bottom? Some quantitative lessons from the EU. Journal of monetary economics, 52(1), 163-204.

Mishkin, F. S. (2006). The next great globalization: how disadvantaged nations can harness their financial systems to get rich. Princeton University Press.

Mishkin, F. S. (2008). How should we respond to asset price bubbles. Financial Stability Review, 12(1), 65-74.

Mo, P. H. (2001). Corruption and economic growth. Journal of comparative economics, 29(1), 66-79.

Moreno-Brid, J. C. (1998). On capital flows and the balance-of-payments-constrained growth model. Journal of Post Keynesian Economics, 21(2), 283-298.

Narayan, P. K. (2005). The saving and investment nexus for China: evidence from cointegration tests. Applied economics, 37(17), 1979-1990.

Nelson, C. R., & Plosser, C. R. (1982). Trends and random walks in macroeconmic time series: some evidence and implications. Journal of monetary economics, 10(2), 139-162.

Obstfeld, M., & Taylor, A. M. (1998). The great depression as a watershed: international capital mobility over the long run. In The defining moment: The Great Depression and the American economy in the twentieth century (pp. 353-402). University of Chicago Press.

Pattichis, C. A. (1999). Price and income elasticities of disaggregated import demand: results from UECMs and an application. Applied Economics, 31(9), 1061-1071.

Perron, P. (1989). The great crash, the oil price shock, and the unit root hypothesis. Econometrica: journal of the Econometric Society, 1361-1401.

Perron, P. (1997). Further evidence on breaking trend functions in macroeconomic variables. Journal of econometrics, 80(2), 355-385.

Perron, P., & Qu, Z. (2007). A simple modification to improve the finite sample properties of Ng and Perron's unit root tests. Economics letters, 94(1), 12-19.

Persson, T., & Svensson, L. E. (1989). Exchange rate variability and asset trade. Journal of Monetary Economics, 23(3), 485-509.

Pesaran, M. H., & Pesaran, B. (1997). Working with microfit 4.0. Camfit Data Ltd, Cambridge.

Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of applied econometrics, 16(3), 289-326.

Pesaran, M. H., Shin, Y., & Smith, R. P. (1999). Pooled mean group estimation of dynamic heterogeneous panels. Journal of the American statistical Association, 94(446), 621-634.

Petrou, A. P. (2014). Bank foreign affiliate performance in the face of pervasive and arbitrary corruption. European Management Review, 11(3-4), 209-221.

Petrou, D., Rabinovich, A., & Adam, H. (2014). U.S. Patent No. 8,670,597. Washington, DC: U.S. Patent and Trademark Office.

Quadrini, V. (2005). Policy commitment and the welfare gains from capital market liberalization. European Economic Review, 49(8), 1927-1951.

Reinhart, C. M., & Rogoff, K. S. (2011). A decade of debt (No. w16827). National Bureau of Economic Research.

Romero, J. P., & McCombie, J. S. (2016). The Multi-Sectoral Thirlwall’s Law: evidence from 14 developed European countries using product-level data. International Review of Applied Economics, 30(3), 301-325.

Schneider, F. (2005). Shadow economies around the world: what do we really know? European Journal of Political Economy, 21(3), 598-642.

Schneider, F., Buehn, A., & Montenegro, C. E. (2010). Shadow economies all over the world: New estimates for 162 countries from 1999 to 2007. World Bank policy research working paper, (5356).

Şenturk, İ., & Ali, A. (2022). The Relationship between Institutional Quality and Welfare: Panel-SUR Analysis on BRICS-T Countries. Journal of Policy Research, 8(1), 45-52.

Shin, K., & Sohn, C. H. (2006). Trade and financial integration in East Asia: effects on co‐movements. World Economy, 29(12), 1649-1669.

Siddiqui, R., & Malik, A. (2001). Debt and economic growth in South Asia. The Pakistan Development Review, 677-688.

Song, Z., Storesletten, K., & Zilibotti, F. (2012). Rotten parents and disciplined children: A politico‐economic theory of public expenditure and debt. Econometrica, 80(6), 2785-2803.

Stulz, R. M. (2005). The limits of financial globalization. The journal of finance, 60(4), 1595-1638.

Sulehri, F. A., & Ali, A. (2020). Impact of political uncertainty on Pakistan stock exchange: An event study approach. Journal of Advanced Studies in Finance, 11(2), 194-207.

Tanzi, V., & Davoodi, H. (1998). Corruption, public investment, and growth. In The welfare state, public investment, and growth (pp. 41-60). Springer, Tokyo.

Taylor, A. M. (1996). International capital mobility in history: the saving-investment relationship (No. w5743). National bureau of economic research.

Thirlwall, A. P. (1979). The balance of payments constraint as an explanation of the international growth rate differences. PSL Quarterly Review, 32(128).

Thirlwall, A. P. (2012). Balance of payments constrained growth models: history and overview. Models of balance of payments constrained growth, 11-49.

Tiruneh, M. W. (2004). An empirical investigation into the determinants of external indebtedness. Prague economic papers, 3(2004), 261-277.

Uppal, R. (1993). A general equilibrium model of international portfolio choice. The Journal of Finance, 48(2), 529-553.

Van Vu, H., Tran, T. Q., Van Nguyen, T., & Lim, S. (2018). Corruption, types of corruption and firm financial performance: New evidence from a transitional economy. Journal of Business Ethics, 148(4), 847-858.

Van Vu, H., Tran, T. Q., Van Nguyen, T., & Lim, S. Corruption. (2016). Types of corruption and firm financial performance: New evidence from a transitional economy. Journal of Business Ethics, 1–12.

Wei, S. J. (2000). How taxing is corruption on international investors? Review of economics and statistics, 82(1), 1-11.

World Bank (2000). World Development Reports. The World Bank.

Yue, V., Schmitt-Grohe, S., Uribe, M., & Na, S. (2015). A model of the Twin Ds: optimal default and devaluation. In 2015 Meeting Papers (No. 419). Society for Economic Dynamics.

Zivot, E., & Andrews, D. W. K. (2002). Further evidence on the great crash, the oil-price shock, and the unit-root hypothesis. Journal of business & economic statistics, 20(1), 25-44.