Does Financial and Trade liberalization Drive Private Investment in Pakistan?

Abstract

There is evidence in economic growth literature that private investment enhances economic growth of developing countries. Recent economic growth policies in Pakistan has concentrated more on encouraging private sector investment through the liberalization of the financial and trade sectors. However, previous studies have ignored the impact of trade and financial liberalization on private investment. This study investigates the short- and long-run impact of financial and trade liberalization on private investment in Pakistan. Using the data from 1971–2014 on the ARDL bounds testing approach to cointegration, our result suggests that: First, per capita real private income, public investment, and financial liberalization are positively related to private investment in the long run; Second, real interest rate and trade openness are negatively related to private investment in the long run; and finally, the short-run results indicate that capital account liberalization and financial openness are positively associated with private savings.