Financial and Capital Markets and Institutional Freedoms in Pakistan: A Time Series Analysis

Institutional freedom is considered one of the most important factor in the debate of economic growth of nations. most prominent kinds of institutional freedom which actively take part in economic prosperity are democracy (political liberalization) and economic freedom (business liberalization). nature of impact of democracy and economic freedom on nation's economic growth is not crystal clear. Effectiveness of institutional freedom on national well being directly indirectly depends on social, economic, political, geographical and cultural aspects of society. This study presents the overview of significance of democracy and economic freedom for Pakistan's financial and capital markets. For empirical investigation this study measured the indexes of level of economic freedom and democracy annually. Alliance for Restoration of Democracy in Asia (ARDA) and The Fraser Institute Canada methodologies are adopted for measurement of democracy and economic freedom respectively, while statistics of financial and capital markets growth proxies are taken from State Bank of Pakistan and Federal Bureau of Statistics government of Pakistan reports. For study period 1970 to 2007 this thesis has constructed data set of 38 annual observations. most recent econometric technique ARDL approach is employed for examination of long run and short run relationships between targeted variables. Therefore in sum economic freedom did not contribute significantly toward financial and capital markets performance in Pakistan till 2007. On the other hand existence of fragmented democracy in past also did not support the financial and capital sector growth in Pakistan remarkably.