Economic growth, financial liberalisation and poverty reduction of Pakistan (1970-2000)

This thesis investigates, theoretically and empirically, the relationship among economic growth, financial liberalisation and poverty reduction in Pakistan, between 1970' and 2000, with the aid of a rigorous co-integration analysis. A literature review provides an account of the existing models and other poverty reduction strategies in Pakistan. An analysis of poverty trends (1970-2000) in Pakistan shows large variations in poverty indices during all three decades under observation, at both provincial and intra -provincial levels. Ruman development indices show that poverty is highly concentrated in rural areas. Among provinces, the rural areas of Sindh and Balochistan provinces are worst affected. The trend of poverty shows a high rise during the 1990s, a decade of slow economic growth in Pakistan. The rural poverty nexus is correlated to the agricultural land reforms and weak institutional mechanism. Ineffective public services delivery to the poor has been the result of weak institutional response. The gender poverty is also all pervasive in Pakistan, as rural women are found to be more vulnerable to poverty shocks. Institutional failure has been found to be the main cause of the rising poverty in Pakistan. To analyse the relationship between economic growth and poverty reduction in Pakistan, we used the Dollar and Kraay model (2000) that predicts that economic growth reduces poverty. Using annual data sets for Pakistan from 1970 to 2000, our results show a positive relationship between economic growth and poverty reduction in Pakistan. We also tested the impact of financial development and growth in Pakistan. The McKinnon-Shaw hypothesis (1973) implies that increase in real rate of interest will increase savings and investment, which will lead to higher economic growth. The co-integration tests of the McKinnon-Shaw model (1970-2000) for Pakistan could not substantiate the prediction of the model. With a significant increase in savings over the period under observation, investment failed to rise. However, overall financial intermediation plays a significant and positive role in boosting economic growth. Authoritarian governments and the nationalisation policies are largely responsible for the inability to transform savings into investment.