Financial Development and Economic Growth; A Comparative Analysis of Autocratic and Democratic era of Pakistan

Abstract

This paper conducted co-integration and causality tests among real GDP per capita (RGDP) and financial development index (FDI), openness of trade, real interest rate, gross capital formation, and two political regimes using annual time series data from 1958 to 2018. We used real GDP per capita as
dependent variables whereas the financial development index and political regimes (Dummy variable) are our focused variables and rest trade openness, real interest rate, and gross capital formation are our control variables. We employed the ARDL bound testing approach and Johansen test to check co- integration or predict long term relationship and (VECM) Vector error correction model Granger-Causality test to check the relationship direction among variables. Our results show that only trade openness is significantly impacted economic growth whereas rest variables such as financial development index, real interest rate,
gross capital formation, and political regimes impacts are insignificant so accordingly we can provide little support to the view that financial sector growth in two different political regimes leads economic progress. We also do not find considerable evidence of a bi-directional and unidirectional relationship between
financial segment growth and economic progress in both political regimes. This research highlights a new dimension for future research and gives new insight for policymaking.