In this study, we empirically investigated that exports is function of economic growth and financial development in the case of Pakistan. We applied autoregressive distributive lag modeling approach, known as ARDL bounds testing approach, to cointegration for the long run relationship between exports, economic growth and financial development. The error correction method is used to examine the short run dynamics. The direction of causal relationship was investigated by applying VECM Granger causality approach.
Our analysis confirmed cointegration between exports, economic growth and financial development. This implies that exports, economic growth and financial development move in the same direction i.e. trending upward. The results postulate that economic growth and financial contribute spur the exports of Pakistan. The VECM Granger causality analysis validates feedback effect between economic growth and exports, financial development and economic growth, and exports and financial development.
Based on the findings of this research it may be suggested that the government of Pakistan should endeavor to accelerate the country’s economic growth. The government must create a good macroeconomic environment, develop infrastructure, and reduce/eliminate all sorts of trade barriers. These will increase local production and exports, and generate competition and efficiency in the economy. The private sector should be encouraged by providing different incentive packages to take more active part in development activities. The State Bank of Pakistan should be directed to launch loose monetary policy to enhance capitalization in the country which not only promotes exports volume of the country but also contributes to economic growth. A quick action is required to make financial sector transparent. Entrepreneurs should be supported with easy and available funds from banks and other financial institutions which in turn will increase the country’s business and development activities including exports.
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