Financial Sector Reforms and International Trade Competitiveness: A Case Study of Pakistan

Hanif, M.N. and Husain, F. and Jafri, S. (2008): Financial Sector Reforms and International Trade Competitiveness: A Case Study of Pakistan. Published in: Finance Research , Vol. 1, No. 1 (31 January 2012): pp. 27-34.

Abstract

This paper explores the relationship between financial development and international trade competitiveness in the case of Pakistan. An earlier study on this issue, Hanif and Jafri (2008), has some empirical limitations as it is based on Engle-Granger (1987) two steps procedure while dealing with multiple variables regressions. In this study we have used ARDL model by Pesaran, Shin and Smith (1999). We have also applied Johansen test for cointegration and checked the robustness of results established by the ARDL model. We have estimated the cointegration vector using Stock and Watson (1993) dynamic OLS method. We find a stable long run positive relationship between international trade competitiveness of Pakistan and its financial sector development. The estimated external finance elasticity of international trade competitiveness of textile sector in Pakistan is found to be 0.26 which is significantly higher than 0.17 estimated by Hanif and Jafri (2008).

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial Development, Competitiveness
• Subjects: F - International Economics > F1 - Trade > F14 - Empirical Studies of Trade; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance

References

Ang, James B. (2008), A Survey of Recent Developments in the Literature of Finance and Growth,” Journal of Economic Surveys, Volume 22, No. 3, pp. 536-576

Balassa, Bella (1965), “Trade Liberalization and ‘Revealed Comparative Advantage’,” Manchester School of Economics and Social Studies, 33, 99-123

Beck, Thorsten (2002), “Financial Development and International Trade: Is there a Link?” Journal of International Economics, Vol 57, 107-131

Detragiache, Enrica and Kenichi Ueda (2004), “Does Financial Sector Development Help Economic Growth and Welfare,” in World Economic Outlook, April 2004, Washington,

Dickey, D. A. and W. A. Fuller (1979), “Distribution of the Estimators for Autoregressive Time Series with a Unit Root,” Journal of the American Statistical Association 74: pp 427–31

Engel, Robert, and Clive Granger (1987), "Co-Integration and Error Correction: Representation, Estimation and Testing," Econometrica 55, March, 251-276

Fanelli and Medhora (2002), “Finance and Competitiveness: Framework and Synthesis” in “Finance and Competitiveness in Developing Countries” edited by Fanelli and Medhora, published by International Development Research Centre, Ottawa

Frankel A. Jaffery and Romer David (1999), “Does Trade Cause Growth?” American Economic Review, Vol. 89:3, June, 379-399

Government of Pakistan (1998), “50 Years of Pakistan in Statistics,” Volume – IV, published by Federal Bureau of Statistics, Islamabad

Granger, C. (1969), “Investigating Causal Relations by Econometric Models and Cross Spectral Methods,” Econometrica, 37, 424—438

Gurley, John G. and Edward S. Shaw (1955), “Financial Aspects of Development and Growth,” American Economic Review, (September): 515-38

Hanif, M. N. and Jafri, S. K. (2008), “Financial Development and Textile Sector Competitiveness: A Case Study of Pakistan,” SBP Working Paper Series, Working Paper Number 20, January.

Khan, MS and AS Senhaji (2000), “Threshold effects in the relationship between inflation and growth,” International Monetary Fund, Working Paper WP/00/110

King G. Robert and Levine Ross (1993), “Finance and Growth: Schumpeter Might be Right,” Quarterly Journal of Economics,” Vol. 108: 3, Aug, 717-737

Kletzer, Ken and Bardhan, Pranab (1987), “Credit Markets and International Trade,” Journal of Development Economics, Vol. 27, 57-70

Levine, R. (1997), “Financial Development and Economic growth: Views and Agenda”, Journal of Economic Literature, Vol. 35, (June), pp. 688-726

McKinnon, Ronald I. (1973), “Money and Capital in Economic Development,” Washington, DC: Brookings Institution

Pesaran, M. H., Y. Shin and R. Smith (1999), “Bounds Testing Approaches to the Analysis of Long Run Relationships,” Cambridge University Discussion Paper

Rajan R. and Luigi Zingales (1998), “Financial Dependence and Growth,” The American Economic Review, Vol 88: 3, June, 559-586

Shaw, E. S. (1973), “Financial Deepening in Economic Development,” Oxford University Press, New York

State Bank of Pakistan (2005), “Handbook of Statistics on Pakistan Economy,” published by State Bank of Pakistan, Karachi

Stock, James, and Mark Watson (1993), “A Simple Estimator of Cointegration Vectors in High Order Integrated Systems, Econometrica, July, 783-820