THE EFFECT OF TRADE AND FINANCIAL LIBERALIZATION ON ECONOMIC GROWTH OF PAKISTAN (1973-2017)

Abstract

The present study is based on the objective to see the effect of trade and financial liberalization on
economic growth of Pakistan. Specifically two proxies for each trade and financial openness was
taken for Pakistan that are common in this area of research. Augmented Dickey-Fullar and Philip-
Perron tests for stationary executed and all variable are found stationary at first difference.
Autoregressive Distributive Lag model was applied because of its certain advantages followed by
bound test of co-integration which concluded with no co-integration or long run dynamic relationship
of GDP the dependent variable with selected predictors with two proxies each for trade and financial
liberalization. Trade liberalization measures were export to GDP ratio and ratio of exports plus
imports to GDP while net Foreign Direct Investment as percentage of GDP and foreign assets of
central bank were taken as measures for financial liberalization. The results showed that the both
measures of trade liberalization found significant and more elastic and net FDI found insignificant
and foreign assets with central bank was found statistically significant but less elastic. Model was
found stable successfully validating the necessary stability checks like CUSUM and CUSUMSQ,
heteroscedasticity, autocorrelation and normality tests. The study is important and significant in
understanding the behavior of liberalization measures in determining GDP in Pakistan but it's an
opening debate for many other measures for future research where literature is enriched and suggests
as many factor of liberalization determining economic performance.