Democracy and international financial integration in Pakistan

• Published in: Indian growth and development review Vol. 10; no. 1; pp. 16 - 31
• Main Authors: Jawaid, Syed Tehseen, Abbas, Shujaat, Saleem, Shaikh Muhammad
• Format: Journal Article
• Language: English
• Published: Bingley Emerald Publishing Limited 01-01-2017; Emerald Group Publishing Limited
• Subjects: Autocracy; Capital; Democracy; Developing countries; Econometrics; Economic growth; Economic models; Economic statistics; External debt; Foreign investment; Indexes; Institutionalization; International finance; International trade; LDCs; Liberalization; Minority & ethnic violence; Political economy; Political systems; Politics; Principal components analysis; Property rights; Remittances; Sovereign debt; Time series; Transition economies; Windows; Democracy; International financial integration; C22; Time series analysis; P26; F3
• ISSN: 1753-8254; 1753-8262
• DOI: 10.1108/IGDR-07-2016-0031

Purpose
The purpose of the study is to investigate the relationship between international financial integration (IFI) index and democracy (DEM) in Pakistan by using long-time series data from 1975 to 2013.
Design/methodology/approach
The IFI index is constructed by principal component analysis. IFI consists of foreign direct investment (FDI), remittances (REM) and external debt (ED), whereas the Polity IV index is used for DEM. Johansen and the autoregressive distributed lag method for cointegration methods are used to find a long run relationship. Dynamic ordinary least square (DOLS), fully modified ordinary least square (FMOLS) and canonical regression (CR) have been used to find the nature of the relationship. Rolling window analysis has been done to find the year wise coefficients.
Findings
DOLS, FMOLS, canonical regression CR and cointegration results suggest a significant negative long-run relationship between IFI and DEM in Pakistan. Rolling windows analysis highlights that DEM has improved IFI in Pakistan from 2008 to 2013.
Originality/value
This study constructs an index for financial integration using principle component analysis on capital inflows, i.e. FDI, REM, ED, to explore the impact of DEM on IFI in Pakistan from 1975 to 2013. This study investigates for the first time ever the relationship between IFI index and DEM in Pakistan.