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Financial development under the shade of globalization and financial institutions : the case of Pakistan

  • Muhammad Shahbaz
  • Akhtar Lodhi
  • Muhammad Sabihuddin Butt

    (Social Policy and Development Centre, Karachi, University of Karachi, Karachi)

This study investigates the importance of financial institutions, net capital inflows, and trade openness for financial-sector development in a small developing economy like Pakistan. Two approaches (Johansen test and autoregressive distributive lag approach) were employed for the robustness of long-run relationships among the variables under consideration and found that both techniques provide robust results for long-run relationships, in Pakistan’s case. Net capital in inflows has positive impact on financial-sector development in the long run. Trade openness is the main promoter of financial development in both periods. Finally, financial institutions and economic growth also help to improve the development of the financial sector. Further, it examined Rajan and Zingales’s [2003a] hypothesis that predicts combined influence of capital account liberalization and trade openness on financial-sector development. However, such relationship does not exist in the case of Pakistan. In terms of policy implications, our findings suggest that macroeconomic management, which could simultaneously stimulate foreign capital inflows and trade openness, improves quality of financial institutions, and high economic growth in the country would enhance the performance of both capital and financial intermediaries.

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Article provided by University of the Philippines School of Economics and Philippine Economic Society in its journal Philippine Review of Economics.

Volume (Year): 44 (2007)
Issue (Month): 2 (December)
Pages: 125-148

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Handle: RePEc:phs:prejrn:v:44:y:2007:i:2:p:125-148
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