Economic Liberalization and Economic Growth: An Empirical Analysis of Pakistan

Abstract

Since late 1980s, Pakistan’s policy makers have been following the economic liberalization policies, particularly financial and trade liberalization for attaining sustainable economic growth. Gauging the impact of such policies on Pakistan economic performance is indispensable to pave the way of sustainable economic growth. This study contributes to the existing literature in the case of Pakistan by estimating the impact of financial and trade liberalization on economic growth. Study applied autoregressive distributed lag approach (ARDL) on time series data from 1971 to 2014. Our results indicate that the long run relationship exists and the economic growth model shows that labor force (skill), capital stock, and financial liberalization index are positively related with the economic growth. The financial openness index and trade openness are negatively related to growth. Against this backdrop, study suggests policy makers to promote financial liberalization in banking and stock sector as such liberalization policies are positively linked to economic growth. In the context of negative juxtaposition of capital account liberalization/openness to economic growth, there is need to relook at the capital account liberalization policies. The study also highlights a need to revise import liberalization policy of discouraging the imports of luxury consumer goods and subsidizing the machinery for industry. The control variable of skill labor force is positively linked to economic growth, thus this study suggests that skill labor is playing an important role in the growth process. Presently Pakistan is spending 2.1 % of GDP on education (GOP 2011), which is lower than other regional countries like India, Bangladesh and Nepal. An increase in education expenditures and their effective allocation is vital in order to sustain EG by improving the quality of human capital.