Nexus Among Economic Growth, Financial Development and Public Spending in SAARC Countries: A Panel Data Analysis

Abstract

The study empirically analyzes the impacts of public spending and efficiency of financial sector on economic growth in selected five SAARC countries (Sri Lanka, Bangladesh, India, Nepal, Pakistan) using panel data from 1994 to 2018. Levin, Lin, and Chu (LLC) and Im, Pesaran, and Shin (IPS) unit root tests are applied to check the stationarity of the variables. Pedroni test Kao-test and Maddala and Wu (MWU test) tests are used for co-integration which confirms long run relations in all the models. Three approaches i.e. auto regressive distributed lag, fully modified OLS and dynamic OLS are applied for long run estimates. Health expenditures and education expenditures are showing encouraging impacts on economic growth because these expenditures are considered as investment in human capital. These investments improve mental ability of labor force and raise their productivity. Whereas expenditures of military, show depressing effect on growth because more military expenses mean lesser resources are there for investment due to crowding out to other sectors that deteriorate output/growth. Market capitalization to GDP ratio shows worth of stock trading in the economy; higher value indicates higher ability to mobilize capital and diversification of risk which leads to growth. Domestic credit for private sector is an important factor because private investment projects which are funded by this credit efficiently have potential to enhance economic activities and economic growth in the economy. Financial system deposits show encouraging results because developed financial sector produces resources for investment and business in the SAARC nations.