## Determinants Of Economic Growth In Pakistan Economics Essay

There exist ample literature on economic growing and its determiners. Recent developments in growing theory have been chiefly theoretical although important advancement has besides been made in growing empirics. Among the determiners of economic growing, stock market development is progressively going an of import factor to impact upon it. The importance of stock markets lies in the parts of it. Some of the facts in respect to the relationship between fiscal markets development and economic growing extensively discussed in the literature are as follows. First, at the initial phases of economic development, fiscal markets are undeveloped and really little in their magnitude. During these phases, fiscal markets are chiefly dominated by Bankss and other similar types of fiscal mediators. There is about no function of stock markets or, even if they exist in any signifier, their size is negligible. Second, when fiscal mediators expand with capital accretion, the figure of sophisticated and more trim fiscal instruments increases, as do the degree of edification and complexness of fiscal contracts and the flow of resources and financess accruing to the fiscal market. Stock markets start developing both in footings of the figure of listed houses and market capitalisation. Third, when the economic system continues to turn, equity markets develop farther every bit good as the banking system. Similarly, other fiscal mediators besides develop. Fourth, research workers recognize the common position that the stock markets appear to develop in a non-monotonic ways. In economic systems where stock markets are comparatively little, capital accretion seems to be followed by a comparative addition in Bankss ‘ portion in the fiscal system and in economic systems where the stock market has already reached a sensible size, farther development of the market causes an addition in the equity markets ‘ portion. In other words, grounds shows that the equity/debt ratio first lessenings and, merely with farther development of the stock market, this ratio increases.

The phenomenal growing of equity markets during recent yesteryear along with the reeling growing in emerging equity markets have turned the focal point of new literature towards the linkage between stock market public presentation and growing of an economic system. However, there exists really small empirical grounds on the relationship between stock market development and long tally economic growing. In the development and emerging markets like Pakistan such grounds is about nothing with the exclusion of one survey by Levine and Zervos ( 1998 ) . Hence the importance of this survey is justified.

The aim of this paper is to analyze the effects of assorted determiners on economic growing with particular focal point on the consequence of stock market development on it in Pakistan both in the short tally and the long tally. To the best of our cognition, ours is the first effort that undertakes a survey where ARDL-bounds testing ( Autoregressive Distributive Lag Model ) is applied using the little clip series informations covering the period from 1971-2006. Hence it is a part to the bing literature.

The remainder of the paper is organized as follows ; subdivision 2 reviews the literature, subdivision 3 explains the theoretical account, informations and methodological model, subdivision 4 nowadayss the consequences and readings ; and subdivision 5 trades with decisions and policy deductions.

## 2. Literature Reappraisal

Since late, there has been important advancement in growing empirics. Most of the developments are concerned with the appraisal of cross state and clip series growing equations and the methodological analysis used is based on standard growing accounting. A more recent attack is concerned with gauging growing equations utilizing panel informations. Traditional growing determiners include variables such as fiscal development, factor productiveness, nest eggs, investing, rising prices rate, FDI, literacy rate etc. The relationship between growing and these variables are well-established empirical facts. Most of the recent accounts of economic growing focal point on accomplishing growing through additions in factor productiveness and/or factor use. Since the chief focal point of this survey is to analyze the relationship between stock market development and economic growing, this subdivision is dedicated to the reappraisal of available literature on this relationship.

Levine and Zervos ( 1998 ) showed a positive and important correlativity between stock market development and long tally economic growing in their survey of 47 states. However, their survey relies on a cross-sectional attack with good known empirical restrictions. Theoretically, the conventional literature on growing was non equal to research the relationship between fiscal markets and economic growing due to the fact that it is chiefly focused on the steady-state degree of capital stock per worker or productiveness, but non on the rate of growing, that is, in fact, endorsed to exogenic proficient advancement. The turning involvement of recent literature in the nexus between fiscal development and growing stems from the penetrations of endogenous growing theoretical accounts, in which growing is self-sufficient and influenced by initial conditions. In this model, the stock market is shown non merely to hold flat effects but besides rate effects.

However, a argument now exists within this model. On one side, the position is that stock markets promote long-term growing. Greenwood and Smith ( 1996 ) argue that stock markets lower the cost of mobilising nest eggs easing investings into the most productive engineerings and diversifying the hazards. Obstfeld ( 1994 ) indicates that international hazard sharing through internationally incorporate stock markets improve resource allotment and accelerate growing. Bencivenga, et. Al. ( 1996 ) and Levine and Renelt ( 1992 ) suggested that stock market liquidness plays a major function in economic growing. While on the other, profitable investings require long tally committedness of capital rescuers prefer non to give up control of their nest eggs for long periods ( Holmstrom and Tirole, 1993 ) .

Considerable sum of literature suggest that the development of stock markets is positively related with the degree of economic development and accretion of capital. This decision unambiguously back up the thought that as economic systems develop equity markets tend to spread out both in footings of the figure of listed companies and in footings of market capitalisation [ Atje and Jovanovich, ( 1993 ) ; Korajczyk, ( 1996 ) ; Demirguc-Kunt and Maksimovic, ( 1996 ) ; Levine and Zervos, ( 1998 ) and Blackburn et, Al ( 2005 ) ] . However, these findings have non indicated a direct and monotone enlargement of the portion of equity markets in the fiscal system. In fact, the development of equity markets ever appears to be preceded and accompanied by the general enlargement of the overall efficient fiscal system. Therefore, the co-evolution of existent and fiscal variables is a complex and multifaceted phenomenon. In world, the enlargement of stock markets by and large follows the development of commercial Bankss and other fiscal mediators, which, in many instances, continues as equity markets expand [ Korajczyk, ( 1996 ) ; Demirguc-Kunt and Maksimovic, ( 1996 ) ; Levine and Zervos, ( 1998 ) and Blackburn et, Al ( 2005 ) ] . This development builds an seemingly enigmatic state of affairs: an spread outing equity market along with a development of fiscal system persistently dominated by Bankss and their advanced merchandises. Yet, if the grounds frequently appears to be inexplicable, and in many fortunes really hard to construe, some simple general stylize facts about the correlativity between fiscal development and economic growing can be drawn from the empirical literature [ Levine and Renelt, ( 1992 ) ; Roubini and Sala-i-Martin, ( 1991 ) ] .

Furthermore, Atje and Jovanovich ( 1993 ) have concluded that there is strong positive correlativity between the degree of fiscal development and stock market development and economic growing. Levine and Zervos ( 1998 ) besides emphasize on the fact that stock market liquidness measured as the value of stock traded comparative to the size of the market and the size of the economic system is significantly and positively related to the rate of economic growing. They besides suggest that the degree of banking development measured as the ratio of bank loans to the private sector to GDP, is straight related with the degree of economic growing. This similarity of significance in stock market development in the class of economic growing is besides confirmed by Beck and Levine ( 2001 ) ; and they argue that the enlargement of both Bankss and stock markets significantly affects growing.

Some general stylized facts about the development of equity markets can be drawn from the literature. Demirguc-Kunt and Maksimovic ( 1996 ) confirm that stock markets do non develop in a monotone manner, neither, does the development of equity markets straight crowd out the banking sector and other fiscal mediators. Rather, the kineticss of equity markets seem to depend on the degree of economic development and on the degree of the stock market development itself. In specific footings, when economic systems have little and developing stock markets, capital accretion leads to an addition in the portion in the economic system of debt and bank funding. Therefore, during the class of economic science development, stock markets besides develop farther. This development of stock markets leads to a comparative addition of equity funding in the economic system. In other words, given that the stock market development depends on growing, the bank debt/equity ratio in the economic system tends to increase at low degrees of capital accretion and to diminish merely when stock markets have reached a sensible size [ Atje and Jovanovich ( 1993 ) ; Demirguc-Kunt and Maksimovic, ( 1996 ) ; Levine and Zervos ( 1998 ) ; and, Beck and Levine ( 2001 ) ] . It is besides mentioned that partial compensation in company stocks mitigated the terrible chief agent jobs. The relationship is non monotone. As the figure of stockholders with vote rights increases, the diffused ownership makes corporate control more hard. Fiscal markets are besides considered as effectual and efficient channels of nest eggs mobilisation. Stock markets set up a market topographic point where investors are inclined and comfy to give up control of their nest eggs. A big fraction of little investors participate in stock market due to little denomination of securities.

Demirguc-Kunt and Maksimovic, ( 1996 ) besides argue that at initial phases of economic development, the enlargement of stock markets increases both the chance for hazard sharing and the flow of information in the market. These, in bend, allow houses easy and inexpensive entree to bank loans and to increase the degree of purchase. However, at the ulterior phase as stock markets develop farther, publishing equity becomes more convenient because of the worsening costs and houses substitute equity for debt. Pagano et, al, ( 1998 ) conclude that because of trading outwardnesss in the market and the calculated behaviour of naming companies, the size of the stock market is critical in explicating its ain development. Indeed, it will increase the hazard sharing chances through hazard portfolio variegation when house raise capital from equity funding.

The function of stock market in bettering informational asymmetrics has been questioned by Stiglitz ( 1985 ) . It is argued that stock markets reveal information through rapid monetary value alterations making a free rider job that reduces investors ‘ inducements to originate dearly-won hunt. There are besides some uncertainties in respects to part of liquidness itself to long-run growing. It is indicated that increased liquidness may forestall growing in three ways. First, it may cut down salvaging rates through income and permutation effects. Second, by cut downing uncertainness associated with investings, greater stock market liquidness may cut down salvaging rates because of the equivocal effects of uncertainness on nest eggs. Third, stock market liquidness encourages investors ‘ myopia negatively impacting corporate administration and thereby cut downing growing. The antique station monitoring of direction and effort of corporate control besides induces the demand for fiscal mediators. This is the focal point of the dearly-won province confirmation literature ( Williamson, 1987 ) . The proctor need non be monitored when his plus retentions are absolutely diversified ( Diamond, 1984 ) . Stock markets, in fact, let better corporate control. Equity capital introduces a new possibility of alining involvements between the direction and the ownership of the house.

## 3. Model, Data and Methodological Framework

To measure the relationship between stock markets ‘ development, and economic growing in a little developing economic system like Pakistan, we utilize log-linear theoretical account as follows:

( 1 )

Where ;

=Log of existent GNP per capita, = Market Capitalization ( the sum of capital as portion of GDP proxied by stock market development ) = Log of Financial Development ( proxied by recognition to private sector as portion of GDP ) , = Log of Financial Instability ( measured by standard divergence of the rising prices rates ) , = Log of Inflation Rate, = Log of Foreign Direct Investment ( in 1000000s of dollars ) as portion of GDP, = Log of Literacy Rate ( the ratio of the figure of people finishing primary instruction to entire population ) . The ground for taking log is that taking the natural logarithm of a series efficaciously linearizes the exponential tendency ( if any ) in the clip series informations since the log map is the opposite of an exponential map ( Asteriou and Price, 2007 ) .

## Table-1

## Theory Intuition and Expected Signs

## Variable

## Theory intuition

## Expected mark

## Market Capitalization

Improvement in the efficiency and size of stock markets will go around as cholesterin in the procedure of economic growing positively.

## +

## Financial Development

The expected mark of addition in recognition to private sector spurs the economic activity in the economic system through their causal channels.

## +

## Fiscal Instability

Fiscal instability induces to worsen the investing activities straight and indirectly that deters the economic growing

## –

## Inflation Rate

Inflation measures the pecuniary instability that affects the economic public presentation through its damaging impacts.

## –

## Foreign Direct Investment

Economic growing is expected to be influenced positively by FDI alongwith spillover effects through employment bring forthing procedure.

## +

## Literacy Rate

Higher literacy rate improves the efficiency of an economic system by supplying more productive labour force.

## +

Annual informations of all variables have been collected from World Development Indicators database ( WDI, 2006 ) , World Bank, Economic Survey of Pakistan ( 2006 ) , and International Financial Statistics ( IFS, 2006 ) .

Descriptive statistics and correlativity matrix of the variables of our selected theoretical account are expressed in Table 2a and 2b severally.

## Table-2a

## Descriptive Statisticss

## Variables

## Real GNP Per Capita

## Market Capitalization

## Credit-Private

## FDI

## Fiscal Instability

## Inflation

## Literacy Rate

## Observations

## 36

## 36

## 36

## 36

## 36

## 36

## 36

## A Std. Dev.

A 0.356

A 4.226

A 0.128

A 0.942

A 1.264

A 0.549

A 0.236

## A Lopsidedness

-0.150

A 2.684

-0.559

-0.649

-0.319

A 0.192

-0.188

## A Kurtosis

A 3.259

A 10.697

A 3.687

A 2.605

A 2.308

A 2.653

A 1.912

## A Sum

A 332.880

A 88.462

A 115.192

-32.151

-131.818

A 71.733

A 123.360

## A Sum Sq. Dev.

A 4.319

A 607.466

A 0.562

A 30.179

A 54.395

A 10.250

A 1.901

## Table 2b

Correlation matrix

## Real GNP per capita

## A 1.000

## Market Capitalization

A 0.7303

## A 1.000

## Credit-Private

A 0.7718

A 0.4207

## A 1.000

## FDI

A 0.8397

A 0.5518

A 0.6083

## A 1.000

## Fiscal Instability

-0.5058

-0.3936

-0.3458

-0.4959

## A 1.000

## Inflation

-0.5194

-0.1804

-0.5228

-0.2538

A 0.1444

## A 1.000

## Literacy Rate

A 0.9252

A 0.6873

A 0.7100

A 0.8673

-0.3781

-0.4090

## A 1.000

## Methodological Background

## Unit Root Trials

We conduct three unit root trials viz. , the augmented Dickey Fuller ( ADF ) , Phillips-Peron ( PP ) and Kwiatkowski, Philips, Schmidt and Shin ( KPSS ) trials. The difference between the ADF and the KPSS trial is that while the former obtains the trial statistic under the nothing of nonstationarity, the latter assumes the nothing of stationarity to run the trial. As for the ADF trial, one can reject the void hypothesis in merely 13 out of 40 instances. On the other manus, the KPSS trial rejects the void hypothesis of stationarity in 20 out of 40. Literature reveals that ADF and P-P trials do hold low explicating power particularly in little sample informations set. Shift has been focused to Kwiatkowski, Philips, Schmidt and Shin ( 1992 ) to look into the order of integrating for concerned histrions in the theoretical account.

## ARDL Approach for Co-integration

This paper applies late developed the autoregressive distributed lag theoretical account ( ARDL ) attack introduced in Pesaran et Al. ( 2001 ) in order to look into long tally relationship between stock market development and economic growing in Pakistan. Traditionally, the cointegration attack has widely been used to set up long-term relationship among certain variables. The method of cointegration requires that variables be integrated of the same order. If the order of integrating among variables is non the same, so long-term relationship among them can non be established. The order of integrating is, nevertheless, established by utilizing unit root trials which might endure from low powers neglecting to reject the nothing of nonstationarity. Furthermore, the consequences of these trials mostly depend on the pick of optimum slowdown length, which can non be once and for all determined. The ARDL theoretical account overcomes this job by presenting bounds proving process to set up long tally relationship among variables. It does non necessitate, as such, that variables of involvement have the same order of integrating to pattern long tally relationship.

The first advantage of ARDL is that it can be applied irrespective of whether implicit in regressors are strictly I ( 0 ) , strictly I ( 1 ) or reciprocally co-integrated ( Pesaran and Shin, 1999 ) . The 2nd advantage of utilizing the bounds proving attack to Co-integration is that it performs better than Engle and Granger ( 1987 ) , Johansen ( 1991 ) and Philips and Hansen ( 1990 ) co-integration trial in little samples. The 3rd advantage of this attack is that, the theoretical account takes sufficient figure of slowdowns to capture the informations bring forthing procedure in a general-to-specific mold model. Finally, ARDL is besides holding the information about the structural interruption in clip series informations.

Under certain environment, Pesaran and Smith ( 1995 ) subsequently PSS ( Pesaran, Shin and Smith, 2001 ) established that long tally association among macroeconomic variables may be investigated by using the ARDL Model. After the slowdown order for ARDL process, Ordinary Least Squares ( OLS ) may be utilized for appraisal and designation. Valid appraisal and illation can be drawn through presence of alone long tally confederation that is important. Such illations may be made non merely on the long tally but besides on the short tally coefficients which imply that the ARDL theoretical account is right augmented to account for contemporary correlativities between the stochastic footings of the informations bring forthing procedure ( DGP ) . It is concluded that ARDL appraisal is possible even where explanatory variables are endogenous. Furthermore, ARDL remains valid irrespective of the order of integrating of the explanatory variables. But ARDL process will fall in if any variable is integrated at I ( 2 ) .

After the completion of ARDL appraisal, the following measure is to build Error Correction Model ( ECM ) suggested by PSS ( Pesaran, Shin and Smith, 2001 ) .

First, we try to happen out the way of relationship between stock markets development and economic growing in the instance of Pakistan by analysing the PSS F-test statistics. The deliberate F-statistic is compared with the critical value tabulated by Pesaran and Pesaran ( 1997 ) or Pesaran et Al. ( 2001 ) . If the F-test statistic exceeds the upper critical value, the void hypothesis of no long-term relationship can be rejected irrespective of whether the underlying orders of integrating of the variables are I ( 0 ) or I ( 1 ) . Similarly, if the F-test statistic falls below the lower critical value, the void hypothesis is non rejected. However, if the sample F-test statistic falls between these two bounds, the consequence is inconclusive. When the order of integrating of the variables is known and all the variables are I ( 1 ) , the determination is made based on upper bounds. Similarly, if all the variables are I ( 0 ) , so the determination is made based on lower bounds.

The ARDL method estimations ( p+1 ) k figure of arrested developments in order to obtain optimum slowdown length for each variable, where P is the maximal figure of slowdowns to be used and K is the figure of variables in the equation. The theoretical account can be selected utilizing the theoretical account choice standards like Schwartz-Bayesian Criteria ( SBC ) and Akaike ‘s Information Criteria ( AIC ) . SBC is known as the penurious theoretical account: choosing the smallest possible slowdown length, whereas AIC is known for choosing the maximal relevant slowdown length. In the 2nd measure, the long tally relationship is estimated utilizing the selected ARDL theoretical account. When there is a long tally relationship between variables, there should be an mistake rectification representation.

To set up the stableness of the ARDL theoretical account, sensitiveness analysis. is conducted to do certain that there is no consecutive correlativity among the regressors, the theoretical account is decently specified, the remainders are usually distributed and that it is free from heteroscedasticity. The stableness trial is conducted by using the cumulative amount of squares of recursive remainders ( CUSUMsq ) confirmed that the theoretical account is stable. Analyzing the anticipation mistake of the theoretical account is another manner of determining the dependability of the ARDL theoretical account.

## 4. Empirical Consequences

Since, present survey appears to be initial effort to place the links between different variables and economic growing with particular accent on the relationship between the stock market development and economic growing in the instance of a little developing economic system like Pakistan, we have through empirical observation estimated whether a statistically important relationship exists between economic growing and its determiners. in the long-run every bit good as in the short-run. The preliminary measure in this analysis is concerned with set uping the order of integrating of each variable. For this intent, to acquire dependable consequences of equation 1, the inexplicit premise is that variables in equation 1 are I ( 1 ) and co-integrated. We employed the trial for the being of a unit root in the degree and first difference of each of the variables in our sample utilizing the Augmented Dickey Fuller ( ADF ) and Philip-Perron ( P-P ) trials. ADF and P-P trials statistics check the stationarity of series. The consequences in Table 3 show that the Real GNP per Capita, Financial Development, Financial Insatiability, Market capitalisation, Inflation Rate, Foreign Direct Investment and Literacy Rate are I ( 1 ) . Both trials confirm the stationarity of variables at 1st difference.

## A

## Table 3

## Unit-Root Appraisal

## Variables

## ADF trial at 1stDifference

## Philip-Perron trial at 1stDifference

## KPSS trial at 1stDifference

## Intercept

## and tendency

## Prob-value

## Slowdowns

## Intercept

## and tendency

## Prob-value*

## Slowdowns

## Intercept and tendency

## Slowdowns

## LGNPC

-5.4412

0.0005

## 0

-5.4889

A 0.0004

## 5

0.0952

## 5

## Megahertz

-3.2718

0.0903

## 4

-3.7901

0.0295

## 2

0.0528

## 3

## LFD

-5.4461

0.0005

## 0

-5.4068

0.0005

## 2

0.0802

## 3

## LFNFD

-4.0445

0.0178

## 3

-7.0639

## 0.000

## 0

0.0673

## 3

## LINF

-5.3166

0.0007

## 0

-5.3044

0.0007

## 2

0.0962

## 6

## LFDI

-3.2084

0.1008

## 2

-10.8134

## 0.000

## 0

A 0.0820

## 3

## LLTR

-5.3681

0.0006

## 1

-10.9699

## 0.000

## 5

0.0501

## 0

## Lag Length Criteria

## Slowdowns

## Order

## Akaike Information Criterion

## Schwarz

## Bayesian

## Standard

## Log likeliness

## Determinant resid covariance

## Determinant resid covariance ( dof adj. )

## 1

-0.397956

2.116049

62.76526

5.88E-11

3.84E-10

## 2

-4.921927

-0.160312

186.2118

A 2.96E-14

2.06E-12

Notes: *McKinnon ( 1996 ) nonreversible p-values.

To detect the partial impact of independent variable on dependent one in long tally relationship, we turned to ARDL for long run relationships as mentioned in Table 4. The chief premise of ARDL is that included variables in theoretical account are holding co-integrating order I ( 0 ) or I ( 1 ) or reciprocally. This lends support for the execution of bounds proving, which is a three measure process, in the first measure we selected lag order on the footing of SBC because calculation of F-statistics for co-integration is really much medium with lag length, so lag order of 2 is selected on lowest value of SBC. The entire figure of arrested developments estimated following the ARDL method in equation 1 is 2187. Given the being of a long tally relationship, in the following we used the ARDL co-integration method to gauge the parametric quantities of equation ( 1 ) with a maximal order of 2 to minimise the loss of grades of freedom.

The consequences of bounds proving attack for long tally relationship represent that the deliberate F- statistic is 4.68 ( see table 4 ) which are higher than the upper degree of bounds critical value of 4.61 and lower bounds value of 3.88, connoting that the void hypothesis of no Co-integration can non be accepted bespeaking that there is so a co-integration relationship among the variables at 5 % degree of significance.

## Table-4

## Lag Length and ARDL Results

Test-statistic

Calculated-Value

## ( Wald-Test )

Lag-order

Significance degree

Bound Critical Values ( restricted intercept and restricted tendency )

F-statistic

8.654

## ( 7.355 )

4.681

## ( 3.241 )

1

2

1 %

5 %

10 %

I ( 0 )

I ( 1 )

4.99

3.88

3.82

5.85

4.61

4.02

## Short Run Diagnostic Trials

Consecutive Correlation LM Test =0.325 ( 0.574 )

ARCH Test = 0.276 ( 0.603 )

White Heteroscedisticity Test = 0.797 ( 0.679 )

Normality J-B Value = 1.688 ( 0.528 )

Ramsey RESET Test = 1.413 ( 0.247 )

Sensitivity analysis includes some diagnostic trials ( consequences shown at the lower portion of table- 4 where figures in the parenthesis show t values ) which confirm that there is no consecutive correlativity, the theoretical account is decently specified, the regressors are usually distributed and that there is no conditional heteroscedasticity in the distribution of remainders. Both theoretical accounts in Table-5 ( model 1a without the mistake term and theoretical account 1b with the error term ) indicate that, economic growing is positively and significantly associated with an betterment in the public presentation of stock markets in the state. This highlights the importance and part of stock market development to economic growing through its direct and indirect channels. Enhancement in fiscal intermediation and quality of fiscal establishments besides improves economic activities through causal channels as clearly apparent from literature. Financial instability weakens the stock market-growth and finance-growth link through damaging impacts that decelerate economic growing straight.

## Table-5

## Estimated Long Run Coefficients ARDL Approach

## Dependent Variable: LGNPPC

## Variables

## Co-efficient

## Prob-value

## Co-efficient

## Prob-value

## Changeless

6.1902

## ( 7.656 )

## 0.0000

7.1602

## ( 10.929 )

## 0.0000

## Megahertz

0.0192

## ( 3.427 )

## 0.0019

0.0228

## ( 4.621 )

## 0.0001

## LFD

0.4679

## ( 2.437 )

## 0.0214

0.7578

## ( 4.177 )

## 0.0003

## LFNFD

-0.0263

## ( -1.699 )

## 0.1003

-0.0240

## ( -1.589 )

## 0.1232

## LFDI

0.0773

## ( 1.986 )

## 0.0569

0.0929

## ( 2.715 )

## 0.0112

## LINF

-0.1139

## ( -3.2020 )

## 0.0034

-0.1393

## ( -4.096 )

## 0.0003

## LLTR

0.5498

## ( 2.858 )

## 0.0079

## Erbium

0.1634

## ( 2.949 )

## 0.0064

R2 = 0.94385 F-Statistics =78.452 ( 0.00 )

AIC = -1.734 Durbin-Watson =1.570

R2 = 0.9446 F-Statistics = 79.67 ( 0.00 )

AIC = -1.748 Durbin-Watson=1.78

Note: t-values are given in parentheses.

Foreign direct investing is appeared to be associated positively and significantly with economic growing. This indicates that foreign direct investing stimulates the economic activities and besides improves the quality of human capital through spillover effects. Inflation reduces the economic growing through its damaging impacts significantly. Improvement in human capital besides enhances the potency of the economic system as explained in steady-state phenomenon in economic development, which indirectly and straight increases economic growing. We besides see that economic reforms improve the long tally growing. We excluded human capital from the theoretical account due to specification job. Having found a long tally relationship, we applied the ARDL-ECM version to look into the short tally dynamic relationships. After look intoing the long tally impact of concerned variables in the basic theoretical account, we turned to short run dynamic theoretical account as follows ;

— — — — — — — — — — — – ( 2 )

The ECM consequences are reported in Table 6. The consequences indicate that, market capitalisation, betterment in the efficiency of fiscal sector ‘s public presentation promote the economic growing positively and significantly at 10 % and 5 % important degree and impact of slowdown of differenced term of FD is holding negative association with economic but enhances the economic growing in future period. Financial instability and literacy rate do non hold any important consequence on growing while rising prices influences the growing negatively and significantly at 5 percent degree of significance. Foreign direct investing is positively correlated with economic activity besides in the short span of clip in Pakistan bespeaking the grounds of bettering the economic growing by pulling more foreign direct investing in the state.

The mistake rectification term CEt-1, which measures the velocity of accommodation to reconstruct equilibrium in the dynamic theoretical account, appear with negative mark and is statistically important at 1 per centum degree guaranting that long tally equilibrium can be attained. The coefficient of CE ( -1 ) is equal to 0.801 for short tally theoretical account connoting that the divergence from the long-run inequality is corrected by 80.1 % per centum over each twelvemonth. The lag length of short tally theoretical account is selected on the footing of AIC and SBC.

## Table-6

## ECM Short Run Dynamic Version

## Dependent variable = I”LGNPC

## Regressors

## Co-efficient

## Prob-value

## Changeless

0.0290

## ( 1.053 )

0.3027

## I”MC

0.0092

## ( 1.943 )

0.0638

## I”LFD

0.7798

## ( 4.049 )

0.0005

## I”LFD ( -1 )

-0.4549

## ( -2.335 )

0.0283

## I”LFNFD

-0.0061

## ( -0.596 )

0.5566

## I”LINF

-0.0653

## ( -2.167 )

0.0404

## I”LFDI

0.0764

## ( 2.824 )

0.0094

## I”LFDI ( -1 )

-0.0270

## ( -1.119 )

0.2739

## I”LLTR

-0.5986

## ( -0.615 )

0.5446

## CR ( -1 )

-0.801

## ( -4.713 )

0.0001

R2=0.787302 Adjusted R2 =0.707540

AIC =-2.207044 Schwarz standard =-1.758114

Durbin-Watson=2.10 F-statistic=9.870659 ( 0.00 )

Note: ARDL ( 1, 1, 2, 1, 1, 2, 1 ) selected on the footing of AIC and SBC.

Finally, we examine the stableness of the long tally parametric quantities together with the short tally motions for the equation. To this terminal, we rely on cumulative amount ( CUSUM ) and cumulative amount squares ( CUSUMSQ ) trials. The same process has been utilized by Pesaran and Pesaran ( 1997 ) , and Mohsen et. , Al. ( 2002 ) to prove the stableness of the long tally coefficients. The trials applied to the remainders of the ECM theoretical account ( Table 6 ) along with the critical bounds graphed in Figures 1. As can be seen in the figures, the secret plan of CUSUM and CUSUMsq statistics stay within the critical 5 % bounds for all equations [ Insert Figure 1 & A ; 2 ] .

## 5. Decisions and Policy Implications

This paper employs FMOLS and ARDL bounds proving attack to analyze the relationship between assorted factors and economic growing with particular attending to the relationship between stock market development and economic growing both in the short tally and in the long tally utilizing clip series informations for Pakistan for the period from 1971 to 2006. Our findings suggest that there exist important positive relationship between stock market development and economic growing. The consequences are consistent with theoretical anticipations. The deductions of the present survey are that although there have been some developments in the stock markets of Pakistan in the recent yesteryear, yet, a strong demand for execution of effectual ordinances that contribute to transparence and effectivity, exists. At present, there are merely three stock markets in Pakistan. viz. Karachi Stock Exchange ( KSE ) , Lahore Stock Exchange ( LSE ) and Islamabad Stock Exchange ( ISE ) . The integrating of regional markets might be a feasible option for economic growing. Financial instability impedes growing. Our empirical consequences showed its expected negative impact on economic growing. The findings besides emphasize the negative impact of rising prices on economic growing. The banking reforms launched in Pakistan in the last few old ages reduced fiscal instability. Inflation should be limited to 4-5 % . and the authorities has important function to play to this terminal The consequence besides shows that human capital and physical capital influence economic growing positively.

Finally, this survey considers both public and private investing as complimentary ( crowding-in ) and emphasizes on the function of authorities to better the efficiency of fiscal sector of the economic system along with its direct function in heightening human and physical capital in hiking economic growing.

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