The Financial Sector and Economic Growth

Although capital mobilization is an important determinant for economic growth in any country, its key indicators such as saving deposits, loan to private sector, market capitalization, domestic investment, foreign direct investment, profitability, interest rate, inflation, and trade openness have experienced continued decline and challenges in Pakistan. In order to understand this problem and suggest possible solutions, the study investigates the relationship between the capital mobilization variables such as commercial banking, market capitalization, investment (domestic investment; foreign direct investment) and nonbanking factors (interest rate, inflation, and trade openness) and economic growth (GDP) in Pakistan. The study, further, reviews the 1997 financial crisis to study its effect, if any, on the economic growth of Pakistan. The study finally identifies a predictive model of economic growth in Pakistan in comparison to other five ASEAN (Indonesia, Malaysia, Philippines, Thailand, and Singapore) countries. The study may be useful for the policymakers who may use the predictive model to link the financial sector indicators to the economic growth of Pakistan.