Journal of International Academic Research (2011) Vol.11, No.1. 30 April 2011
Similar conclusions have been made in case of Fiji, Samoa, and Tonga in the Pacificregion when remittance inflows and exports of goods and services are taken into account(Jayaraman, Choong and Kumar, 2010a; 2010b; 2009).In regards to Pakistan’s financial sector, it has undergone various reforms over the years(c.f. Ahmad, Malik and Humayoun, 2010; World Bank, 2009c). Subsequently, variousresearchers have given importance to financial development as contributing to economicgrowth (Anwar, Shabir and Hussain, 2011; Atif
, 2010; Muhammad and Umer, 2010;Lal
., 2009). However, some of these studies estimate growth equation without regardto capital and labour as fundamental contributing factors (Muhammad and Umer, 2010; Atif
, 2010; Anwar, Shabir and Hissain, 2011; Khan, 2008) while others used grossfixed capital formation, which is often used as investment, as a proxy for capital stock (Lal
., 2009). Ahmad and Malik (2009) in a panel study of 35 countries including Pakistan,find that financial development has a very small effect on per capita GDP. In another study, Jalil and Ma (2008) find that financial development has a significant effect oneconomic growth of Pakistan. However their study show a relatively high capital share(0.75) when credits to private sector is used as a proxy for financial development.This study deploys the Solow-type specification under the Cobb Douglas framework. Themethod of analysis used is the auto regressive distributed lag (ARDL) bounds testingprocedure where the short-run and long-run effects of exports of goods and services,remittances and financial development on per worker income are estimated. Therefore, inthis specification, capital stock data is built using perpetual inventory method together withlabour input as fundamental variables and other variables like remittances, exports andfinancial development included as shift variables.Therefore the study is different in at least two ways. Firstly, the capital stock and labour data are presented and secondly, the role of financial development, exports of goods andservices and remittances on per worker income is explored. The rest of the paper is setout as follows. The data profile is given followed by the method and analysis, and finally,the results and conclusion with some policy implications are discussed.
2. Data and Method of Analysis
The perpetual inventory was used to compute capital stock with a 10 percent depreciationrate and the initial capital stock was approximated to be 1.2 times the real GDP at 1975level. Investment data is proxied by gross fixed capital formation at constant prices.Labour data is computed using the employment to population ratio, which is the averagerate of 1991-2008 (48%). The data used in the study are from 1980 to 2009 and isderived from the World Development Indicators (World Bank, 2009b) (Table 2).
Do Remittances, Exports and Financial Development Matter for Economic Growth? A Case Study of Pakistan using Bounds Approach 19