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Trade openness, financial liberalization and economic growth: The case of Pakistan and India

Rana Muhammad Adeel-Farooq (School of Economics, Finance and Banking, Universiti Utara Malaysia, Sintok, Malaysia)
Nor Aznin Abu Bakar (Department of Economics, Universiti Utara Malaysia, Sintok, Malaysia)
Jimoh Olajide Raji (Department of Finance, Universiti Utara Malaysia, Sintok, Malaysia) (Department of Economics, Al-Hikmah University, Ilorin, Nigeria)

South Asian Journal of Business Studies

ISSN: 2398-628X

Article publication date: 2 October 2017

Abstract

Purpose

The purpose of this paper is to empirically examine the effects of financial liberalization and trade openness on the economic growth of two countries, namely, Pakistan and India for the period 1985-2014.

Design/methodology/approach

This study uses the autoregressive distributed lag technique, which allows mixed order of integration. In addition, it uses the principal component method to create an index for financial liberalization to examine how it affects the economic growth of the selected countries.

Findings

The findings reveal that in the short and long run, trade openness has positive effect on the Pakistan’s economic growth while the financial liberalization has positive impact only in the long run. In the case of India, both financial liberalization and trade openness positively and significantly influence the economic growth in the short and long run.

Practical implications

By comparing the results of both countries, trade openness and financial liberalization increase the economic growth of India more than that of Pakistan. These results suggest that Pakistan should consider appropriate positive policies regarding financial liberalization and trade openness to achieve high and stable economic growth in the future.

Originality/value

This study creates financial liberalization index by using the principal component analysis method to explain the role of financial liberalization in the economic growth of Pakistan and India. In addition, it makes comparison of the results based on which country benefits most from the liberalization of trade and financial sectors. Only very few studies have examined these countries, yet their results have remained inconclusive as well.

Keywords

Citation

Adeel-Farooq, R.M., Abu Bakar, N.A. and Raji, J.O. (2017), "Trade openness, financial liberalization and economic growth: The case of Pakistan and India", South Asian Journal of Business Studies, Vol. 6 No. 3, pp. 229-246. https://doi.org/10.1108/SAJBS-06-2016-0054

Publisher

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Emerald Publishing Limited

Copyright © 2017, Emerald Publishing Limited