DEMOCRACY, ECONOMIC FREEDOM AND GROWTH: A CASE STUDY OF PAKISTAN

Abstract

Institutional freedom is considered one of the most important factor in the debate of economic growth of nations. The most prominent kinds of institutional freedom which actively take part in economic prosperity are democracy (political liberalization) and economic freedom (business liberalization). The nature of impact of democracy and economic freedom on nation’s economic growth is not crystal clear. The nature of impact of democracy and economic freedom on national well being directly indirectly depends on social, economic, political, geographical and cultural aspects of society. This dissertation presents the overview of significance of democracy and economic freedom for Pakistan’s economic growth. This thesis starts with the explanation of notion of democracy and economic freedom and comprehensive review of various measures of level of democracy and economic freedom. Followed by theoretical and graphical analysis of economic freedom – economic growth and democracy – economic growth trends in Pakistan. 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 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 the data set of 38 annual observations. The most recent econometric technique ARDL approach is employed for examination of long run and short run relationships between targeted variables. To observe the comprehensive impact of institutional freedoms (democracy and economic freedom) on economic growth of Pakistan’s economy this study regress a number of regressions. Therefore in sum economic freedom in the presence of poor infrastructure and illiterate society in Pakistan hindered the pace of economic prosperity. Democracy on the other hand approximately enhances the pace of economic growth, but apart from national incomes growth proxies’ democracy shown insignificant touches toward growth proxies of financial, capital and fiscal markets. The most important finding of this dissertation is that, stable democratization alone is not to key of economic growth in Pakistan but it is necessary condition. Therefore, Pakistan will have to focus on stable democrization, which ultimately will encourage or reinforce the economic freedom and economic growth.