Democracy, Economic Freedom and Growth: a Case Study of Pakistan
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DEMOCRACY, ECONOMIC FREEDOM AND GROWTH: A CASE STUDY OF PAKISTAN By Khalid Mahmood Ph.D (Scholar) Session 2005-09 Supervisor Prof. Dr. Toseef Azid & Prof. Dr. Imran Sharif Chaudhary DEPARTMENT OF ECONOMICS BAHAUDDIN ZAKARIYA UNIVERSITY, MULTAN. IN THE NAME OF ALLAH, THE COMPASSIONATE, THE MERCIFUL. i Democracy, Economic Freedom and Growth: A Case Study of Pakistan By Khalid Mahmood Supervisor: Dr. Toseef Azid Professor, Department of Economics Bahauddin Zakariya University Multan Supervisor : Dr. Imran Sharif Chaudahry Professor, Department of Economics Bahauddin Zakariya University Multan A Thesis submitted to the Bahauddin Zakariya University Multan in partial fulfillment of the requirement for award of the degree of Doctor of Philosophy in Economics Department of Economics, Bahauddin Zakariya University Multan Pakistan December, 2011 ii Dedicated to My Parents and Teachers iii DECLARATION I, Khalid Mahmood , Ph.D Scholar, hereby declare that the research work (Ph.D Dissertation) which I have submitted has not already been submitted and shall not in future be submitted for obtaining similar degree from any other university. Khalid Mahmood Ph.D Scholar, Department of Economics, Bahauddin Zakariya University Multan iv CERTIFICATE Certified that contents and form of this dissertation entitled “Democracy, Economic Freedom and Growth: A Case Study of Pakistan” submitted by Mr. Khalid Mahmood has been found satisfactory, and this research work has not been previously presented for higher degree. This dissertation is accepted by the Department of Economic, Bahauddin Zakariya University Multan for the degree of “Doctor of Philosophy (PhD) in Economics, because Mr. Khalid Mahmood has fulfilled all the requirements and is qualified to submit the thesis. Supervisor: Dr. Toseef Azid Supervisor: Dr. Imran Sharif Chaudahry Chairman: Department of Economics, Dr. Imran Sharif Bahauddin Zakariya University Chaudahry Multan v APPROVAL SHEET This thesis “Democracy, Economic Freedom and Growth: A Case Study of Pakistan” by Khalid Mahmood is accepted in its present form by the Department of Economics as satisfying the thesis requirement for award of the degree of Doctor of Philosophy in Economics. Supervisor: Dr. Toseef Azid Supervisor: ____________________________ Dr. Imran Sharif Chaudahry External Examiner 1: External Examiner 2: Internal Examiner : Chairman, Department of Economics, Bahauddin Zakariya University Dr. Imran Sharif Chaudahry Multan Dean, Faculty of Social Sciences, Bahauddin Zakariya University Multan vi ACKNOWLEDGEMENT This research is grateful to Almighty Allah, The Beneficent, and The Merciful, who gave me chance, courage and ability to complete this humble contribution. This dissertation is also thankful to Holy Prophet Muhammad (PBUH) who advised to get education from cradle to grave. This research is greatly indebted to honorable supervisor Dr. Toseef Azid (Professor, Department of Economics BZU Multan) for his encouraging inspiration and productive, thoughtful and worthy guidance regarding the every nook and corner of this dissertation. No traditionally but from core of heart this thesis would like to admit the guidance of co supervisor Dr. Imran Sharif Chaudahry who enhance my inner capabilities and enable me to complete this dissertation. Every word of applause and gratitude seems quite immaterial, if this dissertation did not admit the caring and loving encouragement of the generous personality of Dr. Shahnawaz Malik (Chairman, Department of Economics, BZU Multan) to complete this research work. This research especially acknowledges the contribution of Qazi Adnan Hye, whose worthy and notable comments did a lot in preparation of this thesis. Further I would like to say exceptional thanks to Dr. Babar Aziz, Mr. Shahzad Hussain, Mr. Rao Ishtiaq Ahemed, Mr, Imran Abbass and all my other fellows, who help me in every nook and corner of this research. I would like to say incomparable thanks to my wife, children and other family members, who offered scarifies for the research during study period. May Allah bless all these people, because without their contribution the compilation of this study was undoubtedly impossible. Khalid Mahmood vii LIST OF ABBEREVIATIONS Notation Definition Source ARDA Alliance for Restoration of Democracy in Asia ARDA 2005 ARDL Autoregressive Distributed Lag (Model) An estimation technique AR Autoregressive An estimation technique ADF Augmented Dickey Fuller Unit root test CDR Crude Death Rate HBS DCI Democracy Index Study made index DF Dickey Fuller DFGLS Dickey Fuller Generalized Least Square Unit root test ELF Employed Labor Force HBS EFI Economic Freedom Index Study made index ECM Error Correction Mechanism GFCF Gross Fixed Capital Formation HBS GDP Gross Domestic Product HBS GLS Generalized Least Square An estimation technique GTI Gross Total Investment HBS HE Health Expenditure HBS HC Human Capital HBS LCKSE No. of Listed Companies at Karachi Stock Exc. HBS LE Life Expectancy HBS M 2 M 2 Money Supply HBS M Imports HBS NS National Saving HBS PCGNI Per capita Gross National Income HBS viii LIST OF ABBREVIATIONS cont. OP Openness (Freedom to trade internationally) HBS POPG Population Growth HBS RDR Real Deposit Interest Rate HBS SBAGR Scheduled Banks Assets Growth Rate HBS TNS Total Number of Schools HBS TSBB Total Scheduled Banks Branches HBS TGFCF Total Gross Fixed Capital Formation HBS TCB Total Commercial Banks HBS X Exports HBS X+M Volume of Trade (Exports +Imports) HBS Vi Current Value of variable Vx Maximum Value of Variable V m Minimum Value of Variable NOTE: Where HBS stands for Hand Book of Statistics on Pakistan Economy ix LIST OF FIGURES No. Definition Page No. 2.1 GDP Growth (1947-58) 32 2.2 GDP Growth (1958-69) 35 2.3 Democracy and GDP Growth (1971-77) 37 2.4 Democracy and GDP Growth (1977-88) 41 2.5 Democracy and GDP Growth (1988-93) 43 2.6 Democracy and GDP Growth (1988-93) 45 2.7 Democracy and GDP Growth (1993-99) 48 2.8 Democracy and GDP Growth (1999-07) 52 3.1 GDP Growth (1947-70) 62 3.2.a Pakistan’s Economic Freedom (1970-77) 65 3.2.b GDP Growth and Economic Freedom (1970-77) 66 3.3 Pakistan’s Economic Freedom (1977-88) 67 3.4 GDP Growth and Economic Freedom (1977-88) 67 3.5 Pakistan’s Economic Freedom (1988-99) 70 3.6 GDP Growth and Economic Freedom (1988-99) 70 3.7 Area wise Economic Freedom (1999-07) 73 3.8 Pakistan’s Economic Freedom (1999-07) 73 3.9 GDP Growth and Economic Freedom (1999-07) 74 3.10 GDP Growth and Economic Freedom (1970-07) 75 x LIST OF TABLES T. No. Definition Pg.No. 6.1 Aggregate Index of Area 1: size of Government Expenditure, Taxes, 134 and Enterprises. 6.1.1 General Govt. Consumption Spending as % of Total Consumption 135 6.1.2 Subsidies as % of GDP 136 6.1.3 Public sector + General Govt. G F C F as a % of TGFCF 137 6.2 Aggregate Index of Area 2: Legal Structure and Security of Property 138 Rights 6.3 Aggregate Index of area 3: Access to Sound Money 139 6.3.1 Average annual Growth of Money Supply M2 in last 5 years minus 140 average annual Growth of real GDP in last 10 Years 6.3.2 Inflation Variability from last 5 years Average Inflation 141 6.3.3 Recent Inflation Rate 142 6.3.4 Percentage of Foreign Bank Branches to Total Commercial Banks 143 branches 6.4 Aggregate Index of Area 4: Freedom to Trade Internationally 144 6.4.1 Revenue from Custom Duty as a Percentage of Exports plus Imports 145 6.4.2 Percentage of Trade Deficit to GDP Ratio 146 6.4.3 Days Required for an Import Export Process 147 6.4.4 Percentage of Exports + Imports to GDP Ratio 148 6.5 Aggregate Index of Area 5: Regulation of Credit Markets 149 6.5.1 Domestic Banks Face Competition from Foreign Banks 150 6.5.2 Percentage of Credit Extended to Private Sector 151 6.6 Pakistan’s Economic Freedom Index From 1970 to 2007 152 6.7 Pakistan’s Democracy Index 156 7.1 ADF Unit Root Test Statistics 160 7.2 DF-GLS(Dicky Filler Generalized Least Square) Unit Root Test 160 Statistics 7.3 ARDL Co-integration Bound Testing 161 7.4 Long Run Results 162 7.5 Long Run Results 163 xi T. No. Definition Pg.No. 7.6 Short Run Results 171 7.7 Short Run Results 172 8.1 ADF Unit Root Test Statistics 178 8.2 DF-GLS(Dicky Filler Generalized Least Square) Unit Root Test 178 Statistics 8.3 ARDL Co-integration Bound Testing 179 8.4 Long Run Results 180 8.5 Short Run Results 185 9.1 ADF Unit Root Test Statistics 191 9.2 DF-GLS(Dicky Filler Generalized Least Square) Unit Root Test 191 Statistics 9.3 ARDL Co-integration Bound Testing 192 9.4 Long Run Results 193 9.5 Short Run Results 198 10.1 ADF Unit Root Test Statistics 204 10.2 DF-GLS(Dicky Filler Generalized Least Square) Unit Root Test 205 Statistics 10.3 ARDL Co-integration Bound Testing 206 10.4 Long Run Results 207 10.5 Short Run Results 209 xii TABLE OF CONTENTS Abstract 01 Chapter 1: Introduction 02 1.1 Introduction 02 1.2 Elucidation of Institutional Freedoms 04 1.2.1 Economic freedom 04 1.2.2 Quantification of Economic Freedom 05 1.2.3 Democracy 06 1.2.4 Measurement of democracy 08 1.3 Flash review of studies 09 1.3.1 Paradox of Economic Freedom and Economic Growth Relationships 10 1.3.2 Democracy and Economic Performance Nexus 13 1.4 Rationale of the study 19 1.5 Objectives of the Study 21 1.6 Structure of the Study 22 Chapter 2: Pakistan’s Political Structure and State of Economic Growth: 29 A Historical Perspective 2.1 Introduction 29 2.2 Democratic Beginnings (1947-58) 31 2.2.1 Vision, Strategy, Priorities and Progress 32 2.2.2 Economic and Political Record of Democratic Beginnings (1947-58).