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Does Human Capital Reinvigorate the Relationship Between Financial Development and Economic Growth: Evidence from Pakistan

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  • Tariq, Rameez
  • Rahman, Abdul
  • Khan, Muhammad Arshad

Abstract

This study examines the threshold level of human capital necessary for the finance-growth nexus in Pakistan. For a deeper understanding of the finance-growth relationship, we have disaggregated financial development into financial institution development and financial market development. To achieve this, we have employed the threshold regression model over the period from 1980 to 2018. The results of this study indicate that economic growth responds negatively to overall financial development when the level of human capital surpasses the threshold of 1.489. Similarly, when financial market development falls below the aforementioned threshold, its impact on economic growth is found negative. This suggests that financial market development does not contribute favorably to economic growth. However, the development of financial institutions contributes positively and significantly to economic growth when conditioned on the level of human capital. Among the other variables, physical capital, trade openness, and government expenditure exert a positive impact on economic growth. In contrast, the inflation rate has an insignificant impact on economic growth. The findings of this study suggest the need for further reforms in the financial sector policies in alignment with international best practices. These policies should also take into consideration the importance of redesigning and strengthening the human capital skills necessary to stimulate the finance-growth nexus.

Suggested Citation

  • Tariq, Rameez & Rahman, Abdul & Khan, Muhammad Arshad, 2023. "Does Human Capital Reinvigorate the Relationship Between Financial Development and Economic Growth: Evidence from Pakistan," Asian Journal of Applied Economics, Kasetsart University, Center for Applied Economics Research, vol. 30(2), July.
    • Handle: RePEc:ags:thkase:344189
    DOI: 10.22004/ag.econ.344189
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