De-jure Financial Liberalization and Economic Growth: An Empirical Analysis

Abstract

This paper investigated the finance-growth nexus by adopting a novel approach for Pakistan. Firstly, we constructed a financial liberalization index by incorporating several time-varying financial frictions and reforms which is a manifestation of the de-jure financial liberalization process. Secondly, for examining the impact of financial liberalization on growth, we extended the Solow-Swan growth model to construct a financial sector augmented growth model. By incorporating the de-jure financial liberalization index, we examined the growth-finance linkages. By employing the Auto-Regressive Distributive Lag model and error-correction mechanism, the results of the study showed that de-jure financial liberalization provides momentum to economic growth in the short-run as well as in the long run. Empirical findings highlighted that moving towards a more liberalized financial system by reducing rigidities and expediting an effective reform process offers very hopeful prospects of economic growth in developing countries like Pakistan. Keywords: Financial frictions, Financial Reforms, Economic growth, Principal Component Analysis, ARDL Model

Economic Growth and Financial Intermediation Nexus in Pakistan: An ARDL Analysis

“…Further to this, Shaheen et al (2011) endorsed this positive association by taking into consideration financial commerce in the analysis. However, Munir et al (2013) focused on financial liberalization and probed its association with economic expansion, however, Mahmood (2013) concentrated on financial development and explored its relationship with economic prosperity. We inferred from the aforementioned literature review that the majority of empirical research employed financial innovation, financial development, and financial liberalization to forecast Pakistan's finance-growth link.…”

“…Tahir (2008) agrees with this viewpoint, noting that financial development is critical in generating economic well-being. In the last four decades, various reforms have been exercised in Pakistan to develop and liberalize its financial system with the ambition to increase the contribution of financial sector in economic growth (Munir et al 2013). To increase the efficiency and innovation in the economy of Pakistan, significance of financial liberalization by easing of government regulations on financial institutions and markets is also emphasized by Naveed and Mahmood (2019).…”

Implications of financial liberalization for Vietnam's long‐term growth prospects

“…Hye and Wizarat [2] argue that FL leads to an increase in access to finance, improved allocation of resources, and increased efficiency, which in turn fuels economic growth. Others have argued that FL can lead to increased financial instability and , hence, low economic growth [4,6,[28][29][30][31][32][33][34][35][36]. A recent paper by Nguyen, et al [37] provides updated evidence on the influence of FL on growth.…”

Measuring the Financial Liberalization Index for Pakistan

“…During the early phase, prominent financial policies included the privatization of public banks, retrieval of banking credits and implementation of other policies toward efficient financial attainment and, subsequently, reforms associated with financial markets, such as the permission for subsidiaries, low capital ratios for banks and asset administration. Consumer financing was also familiarized in the same decade to maintain lower-and middle-level income division (Munir et al 2013). The term, financial liberalization, encompasses the removal of financial repression, restrictions and government control toward financial indicators, encouraging financial prospects through financial reforms.…”