The Dynamic Relationship Between Financial Development and Economic Complexity in Pakistan

Abstract

Abstract

Globalization places lots of challenges for emerging nations seeking long-term economic development. These are linked to several other issues, low exports as a consequence of worldwide competitiveness, low foreign currency reserves, rising fuel prices, WTO regulations, and so on. To overcome these obstacles, it is necessary to compete on a global scale. This can be attained by increasing specialization through technological innovation, new manufacturing methods, product diversification, etc. The current global competitive situation and complexity increased pace of the latest technological, financial development, and innovation led this study to examine this relationship in the case of a developing country like Pakistan. The objective of the study is to determine the dynamic relationship between financial development and economic complexity using annual time series analysis from 1990-2019, that was less evident in existing literature in case of Pakistan best of the authors’ knowledge. The modeling approach of this study was conducted by using economic complexity theory based on comparative advantage theory. The ARDL bond testing approach is used for empirical estimation. The findings suggests that, cointegration exists in the model, financial development positively impacted the economic complexity in Pakistan during the reference period. Thus, it is recommended that the State Bank of Pakistan should adopt flexible financial policies and ease of doing business, expands bank networks, which increases people’s access to finance and raises their capacity to invest in a business, research and Development.