Financial Development and Economic Growth: The Case of Pakistan

Abstract

The pioneering contributions of Goldsmith (1969), Mckinnon (1973) and Shaw (1973) regarding the relationship between financial development and economic growth has remained an important issue of debate in developing economies. The theoretical argument for linking financial development to growth is that a well-developed financial system performs several critical functions to enhance the efficiency of intermediation by reducing information, transaction, and monitoring costs. A modern financial system promotes investment by identifying and funding good business opportunities, mobilises savings, monitors the performance of managers, enables the trading, hedging, and diversification of risk, and facilitates the exchange of goods and services. These functions result in a more efficient allocation of resources, in a more rapid accumulation of physical and human capital, and in faster technological progress, which in turn feed economic growth [Creane, et al. (2004)].

Trade Liberalisation, Financial Sector Reforms, and Growth

“…The low coefficient of real interest rate implies that an increase in interest rate alone is unable to expedite economic growth. These findings are consistent with earlier findings derived by Khan (2005).…”

Contribution of Financial Sector Development in Reducing Unemployment in Pakistan

“…Stock market liquidity and banking sector development indicators were found positively correlated with economic growth in both short run and long run scenario in most countries see{Levine and Zervos (1998); King and Levine (1993)}. A positive long-run effect of financial intermediation on output growth was also witnessed by Jalil and Ma (2008) and Khan et al (2005 in Pakistan and China but for short-run mostly negative relationship existed. A positive economic scenario is promoted through absorption of benefits created by foreign direct investment {Hermes and Lensink (2003) and Alfaro et al (2006)}.…”

Relationship between Financial Sector Development and Sustainable Economic Development: Time Series Analysis from Pakistan

“…Owing to this reason this measure appears to be less indicative of the financial dealings and transaction of the banking system. Now-a-days researchers are using the ratio of M2 minus currency in circulation to nominal GDP as financial sector development Abu-Bader et al (2005), Dematriads and Hussen (1996), and Khan et al (2005). M2 means total currency in circulation in the economy i.e.…”

“…Causality results showed finance led growth. Loayza and Ranciere (2002), Andries et al (2003), Seetanah (2007), Jalil and Ma (2008) and Khan et al (2005) used Autoregressive distributed lag (ARDL) technique was used to estimate the short run and long run effects of financial sector development on economic growth. A positive long-run effect was found of financial intermediation on output growth.…”