Financial Sector Reforms and International Trade Competitiveness: A Case Study of Pakistan

Abstract

This paper explores the relationship between financial development and international trade competitiveness in the case of Pakistan. An earlier study on this issue, Hanif and Jafri (2008), has some empirical limitations as it is based on Engle-Granger (1987) two steps procedure while dealing with multiple variables regressions. In this study we have used ARDL model by Pesaran, Shin and Smith (1999). We have also applied Johansen test for cointegration and checked the robustness of results established by the ARDL model. We have estimated the cointegration vector using Stock and Watson (1993) dynamic OLS method. We find a stable long run positive relationship between international trade competitiveness of Pakistan and its financial sector development. The estimated external finance elasticity of international trade competitiveness of textile sector in Pakistan is found to be 0.26 which is significantly higher than 0.17 estimated by Hanif and Jafri (2008)