Financial development has been extensively studied in the empirical literature. A well-determined financial system deals with risk diversification and effective wealth allocation. A higher level of financial development may result in higher savings and ultimately, in high returns. Financial development can be measured in different ways, for example, by including several factors, such as the size, depth, access, and accuracy of the financial system. It can also be measured by investigating the enacting actions of banks and different markets. There are many issues related to the economic growth and financial development associations that have been studied in the literature (Hye and Dolgopolova 2011
); however, the measurement of financial development remains unresolved.
Aggarwal et al.
) studied the linkages between remittances and financial development in the context of developing countries. They found that higher financial development was likely to have a weaker fringe effect on growth. As is obvious, economic development is associated with information creation, possible investment, and capital allocation; firms monitoring and exercising corporate governance; the diversification and supervision of risk; the deployment of savings; and enabling the exchange of goods and services. All of the above functions have an effect on savings and investment choices, and technical revolution, which eventually subsidizes economic growth (see Brown 1994
; Nyakerario 2007
; Nyamongo et al. 2012
). Financial development and economic growth have been widely researched topics in recent years. Researchers have attempted to find out how the development and structure of a monetary segment of the economy may affect economic growth and which factors affect the national savings, capital accumulation, and revenue growth of different economies.
In this context, the misery index (MI) is used to measure the economic well-being, which shows the condition of a country. The increasing index directs the waning economic wealth, which has an impact on the living standard of its populations. The MI is a combination of the unweighted sum of unemployment and the inflation rate, which is an indicator of the macroeconomic condition of different countries. This is the first effort to develop a single statistical tool to find the level of the economic malady of the populations. Arthur Okun defined the MI, and it has been further extended by others, assuming that higher rates of the misery index generate important economic and social shocking difficulties. We can say that the MI is used to measure the welfare of the economy. An increase in the MI shows the commonness of deteriorated economic and public well-being of a country. Economic development is well-discussed in the literature; however, some factors, including the misery index, have not addressed political instability, and the misery index is the primary source of the major impediment of economic development in society (Asteriou and Siriopoulos 2000
). Pakistan’s political instability (PI) has severely hurt its economic growth for the last 60 years, despite its great resources, military, and civil rules, as these did not facilitate efficient and independent institutions to function appropriately (Irshad 2017
; Hoque et al. 2018
). A decrease in the misery index and any increase in government effectiveness and/or the rule of law, result in political stability in the region (Agheli 2017
Remittances from overseas exchange are a significant source of earnings for emerging economies. Remittances are a dominant pointer of economic condition for the receiving countries. According to Ratha
), remittance is the second most prominent source of overseas finance after foreign direct investment (FDI). Remittances are considered the best constant source of finance in emerging economies from overseas as compared to FDI, foreign aid, and international obligation. The literature shows that remittances in emerging economies have increased at a higher rate. Ratha
) has indicated that remittances are sent via either formal or informal networks or channels. According to (Nyamongo et al. 2012
; Aggarwal et al. 2011
), foreign remittances, which are sent through an official channel, have a more significant influence on the financial sector, especially in cases where the receiver of the money opens an account with banks, or when they visit the banks, as they may ask about bank loan procedures and products from which they also receive an advantage. There is a higher presumption of financial development if the result in the financial sector is significant. Overall, financial development is believed to have an essential role in the economic growth of a country.
Another fundamental question and subject of interest and discussion, is whether trade liberalization also stimulates long-term economic growth. The main finding of previous research is that rules on trade openness are helpful to enhancing economic growth, although the exact real effect of trade is quite far from being undeniable. Some of the literature argues that the significance of trade openness may not be realized, or may be limited, due to country asset liking or imperfect market incorporation (McCallum 1995
), and the uncertainty of larger international trade indicates that the economy has a relative disadvantage (Grossman and Helpman 1991
). Blackburn and Hung
), in their theoretical model, also prophesied that international trade and financial development both improve productivity growth. In the literature, there is also an opinion that financial and economic development may grow autonomously of one another. This is the neutrality assumption presented by (Lucas 1988
To achieve our results, in the light of limited, contradictory, and unsatisfying results of earlier studies, this study: (a) proposes to construct a financial development index (FDI) for Pakistan using different enchanting indicators; (b) attempts to find out the impact of the misery index (MI) on the economic growth of Pakistan, which has been used for the first-time for Pakistan; (c) examines the effect of remittances on the economic growth of Pakistan in order to see whether it has positive and significant effects; and (d) seeks to find out whether trade openness has a role in the economic growth process of Pakistan. In short, the roles of remittances, the financial development index, the misery index, the real interest rate, and trade openness are not discussed in early literature, so this study aims to fill this gap. Furthermore, unlike previous studies, the current research covers the points mentioned above using data from 1989 to 2017. The study is implemented using the autoregressive distributed lag (ARDL) approach to cointegration. Because of the non-availability of data before 1989, the data chosen is taken from the period 1989 to 2017.
This study consists of the following sections. The second section presents a relevant review of the literature on financial development and economic growth, the misery index and economic growth, remittances and economic growth, and trade openness and economic growth. The third section details the model specification, variables, and data source, and the fourth section presents the econometric results and discussion. Finally, the fifth section gives the conclusion and some remarks on policies for remittances and the misery index.
This study empirically analyses the financial structure, misery index, and economic growth of Pakistan’s economy. Financial development has been extensively analyzed in empirical literature from different aspects, and different methods have been adopted in the literature, yet some issues are unsolved, so this study has tried to cover those aspects to fill the research gap. The study proposed a new index for financial development and the misery index to show the impact on economic growth for Pakistan. The study uses economic growth as the dependent variable, while the financial development index and misery index are used as independent variables and the real interest rate, trade openness, and remittances are taken as control variables. The data is taken from the period 1989 to 2017 and we applied ARDL to a coo-integration approach as the main method for the data estimations. The empirical results show three steps of ARDL: initially, the ADF test was used to obtain the lag-values that were used for the bound test. The bounds test provided information about whether a long-term relationship exists.
Our result shows the existence of a long-term relationship between the variables. The short-run estimation shows that in the short term, the FDI at a level has no relationship with growth, while at first lag, it has a negative relationship with GDP. Remittances are positive and display a significant relation with GDP at a 10% level using the level value, which indicates that it contributes to the GDP. However, the lag value of remittances is negative and significantly related to GDP. The misery index holds a negative implication for economic growth as it is a combination of unemployment and inflation and both have a negative implication for economic growth in the short run. Openness demonstrates a positive effect on economic growth in the short run as the increase of trade liberalization boosts economic growth. Comparatively, the real interest rate has a negative effect on economic growth, as a higher interest rate impedes the development process and thus economic growth. The co-integration equation coefficient has a negative and significant association, which is desirable according to the conventional ARDL approach, and it indicates that the model is stable and has a convergence property. Since a long-term relationship among included variables exists in the model and the results show that the FDI is positively and significantly associated with economic growth, similarly, remittances are positively and significantly associated with economic growth. The misery index indicates the negative effect on economic growth, while openness has a positive and significant association with economic growth, while the interest rate has a negative implication for economic growth in the long run.
Policy Recommendations and Study Limitations
This study suggests some policy recommendations. First of all, the government needs to improve financial structure reform, which will result in an increase in GDP and foreign remittances, and boost the economy of Pakistan. Besides, the government needs a policy to reduce inflation and unemployment, which is one of the core objectives of macroeconomic policy. This study also has some limitations as it only covers the aspect of Pakistan, and there are also data limitations as it only covers the period from 1989 due to the unavailability of data from previous years. Some factors of the FDI, including market capitalization data, are unavailable for Pakistan. This study can be extended in the future to more than one country using the panel data case.