Indian Growth and Development Review

Democracy and international financial integration in Pakistan

Syed Tehseen Jawaid, Shujaat Abbas, Shaikh Muhammad Saleem,
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IGDR
10,1
16
Received 15 July 2016
Revised 29 January 2017
25 March 2017
30 March 2017
Accepted 31 March 2017
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Indian Growth and Development
Review
Vol. 10 No. 1, 2017
pp. 16-31
© Emerald Publishing Limited
1753-8254
DOI 10.1108/IGDR-07-2016-0031
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1753-8254.htm
Democracy and international
financial integration in Pakistan
Syed Tehseen Jawaid
Applied Economics Research Centre, University of Karachi, Karachi, Pakistan
Shujaat Abbas
Department of Economics, Institute of Business Management,
Karachi, Pakistan, and
Shaikh Muhammad Saleem
Department of Economics, Pakistan Shipowners’ College, Karachi, Pakistan
Abstract
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.
Keywords Democracy, Time series analysis, International financial integration
Paper type Research paper
1. Introduction
International financial integration (IFI) has considerably increased in recent decades
because of rapid globalisation and trade liberalisation[1]. The efforts for financial
integration in Pakistan has witnessed considerable momentum along with adoption of
liberal international trade reforms. The greater IFI provides greater access to foreign capital
and boosts economic growth (Dreher, 2006). The history of transition economies, i.e.
Pakistan, are comprised of both autocratic and democratic rule. There has been a consistent
debate in Pakistan regarding the efficiency of each rule.
Financial integration can provide a fairly good indication of the overall performance of each
mood of government. Globalisation of international trade and finance and the political system
are important variables in contemporary international political economy (Li and Resnick, 2003).
Globalisation, according to Jakobsen and De Soysa (2006), depends on free-market and
JEL classification – F3, P26, C22
 democracy (DEM). Many transitioning and developing countries in East Asia, Eastern Europe International
and Latin America removed restrictions on international financial transactions in the early financial
1990s for the achievement of sustainable development objectives Agenor (2003).
Financial liberalisation provides opportunities for an investor to diversify their risk and for
integration
the recipient country to receive much needed foreign capital (Kose et al., 2003b). Local market
imperfections and a weak political system can distort financial integration (Bonfiglioli, 2008).
Gourinchas and Jeanne (2006) show that open and competitive capital markets encourage
efficient allocation of international capital. There is a plethora of empirical literature showing
17
the positive impact of IFI on economic growth[2]. There are a few empirical studies in the
literature in which countries favoring autocratic rule urge that foreign firms (MNCs) to invest
more in autocratic countries because of the better position of the autocratic ruler to facilitate
foreign companies (Li and Resnick, 2003).
Most of the empirical studies have focused only on the impact of IFI on economic growth
based on different type of independent variables, i.e. foreign direct investment (FDI), debts,
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portfolio, remittances (REM) and bank loan, as a proxy of IFI. These variables individually do
not completely portray IFI. Moreover, we do not think there is a rigorous treatment establishing
a relationship between DEM and financial integration in the literature. This study constructs
an IFI index by using principle component analysis on frequently used variables, i.e. FDI, REM
and external debts (ED), to investigate the impact of DEM on IFI.

1.1 Contextual setting

After partition in 1947, Pakistan adopted the Government of India Act 1935 to meet its
requirement as an independent state. The newly formed government did not pay much
attention to strengthening DEM because of fierce internal and external challenges. It witnessed
many democratic governments that could not complete their legislative tenures because of a
military takeover. The country has been ruled by the military except for a few complete
democratic tenures (i.e. 1971-1977, 2008-2013 and 2013-onward). Therefore, it is quite
reasonable to evaluate the effectiveness of DEM or autocracy in IFI of Pakistan.
The rest of this paper is organised as follows. Following the introduction, Section 2
overviews DEM and financial development in Pakistan. Section 3 reviews the theoretical and
empirical literature. Section 4 discusses the modelling framework and data. Section 5 analyses
the regression results, whereas Section 6 concludes the study with policy implications.

2. Democracy and international financial integration in Pakistan

This section highlights the achievements of Pakistan in the sphere of DEM and financial
developments. The Polity index is a unique measure as it examines concomitant qualities of
democratic and autocratic authority in governing institutions, rather than discreet and
mutually exclusive forms of governance. It envisions a spectrum of governing authority that
spans from fully institutionalised autocracies to fully institutionalised democracies[3].
Figure 1 shows DEM and autocracy in Pakistan from 1975 to 2013 as per the Polity index
IV. Its range is based on a
10 to þ10 scale with three following criteria. Autocracies range
from
10 to
6, Anocracies range from
5 to þ5 and democracies range from þ6 to þ10.
We can see that DEM exists in 1975-1976 during which the Pakistan peoples’ party (PPP)
held power. General Zia-ul-Haq ruled up to 1987. After general Zia, the PPP again came back
to power in 1988. Between 1988 to 1999, two parties first PPP and then the Pakistan Muslim
League- (N) lead a DEM, but no one completed their five-year official tenure. At the end of
1999, General Musharaf rolled back DEM and ruled Pakistan up to 2007. Since then,
Pakistan has had a parliamentary DEM.
 IGDR
10,1

18
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Figure 1.
Democracy and
international
financial integration
in Pakistan

Foreign capital flows provide a fairly good indication for IFI of a country. FDI and REM to
Pakistan show considerable ups and downs throughout the sample period, whereas, ED is
continuously increasing. It is difficult to identify the relationship between IFI and DEM
without empirical analysis. This paper scrutinizes the relationship between DEM and IFI in
Pakistan by using advanced time series econometric techniques.

3. Literature review
This section discusses both theoretical underpinning and empirical literature on DEM,
economic growth and IFI.

3.1 Theoretical channel

The impact of DEM on IFI has remained a challenging task for the theoretical literature due to
the prevalence of large ambiguities in the explanation of its relationship with economic growth.
This study first links DEM with economic growth and then growth with financial integration.
3.1.1 Democracy and economic growth. Of the large empirical literature on the DEM-
economic growth nexus raises three controversial arguments[4]. Sirowy and Inkeles (1990)
propose three mutually exclusive views on DEM, i.e. a conflict view, a compatibility view and a
sceptical view.
Conflict view of DEM proposes an unfavourable impact of DEM on economic growth
arguing that democratic government policies are more redistributive and pro-poor as
compare to autocratic government phases, (Comeau, 2003). This redistribution reallocates
national income from investment to consumption activities and distorts economic growth
prospects, (Przeworski and Limongi, 1993). The political instability and ethnic conflict in the
democratic process also distort economic growth (Zakaria, 2003). Similarly, growth also get
undermined when the government initiates unpopular economic policies (Qureshi and
Ahmed, 2012).
 The compatibility view of DEM favours a democratic type of government for economic International
growth and are against dictatorships. Siegal et al. (2004), argue that dictators often convert financial
political monopoly into an economic monopoly and prefer those individuals and a group of integration
businessmen that support them. Olson (1993) believes that democracies have greater
property rights security than autocratic rulers as the long-term survival of DEM is
dependent on civil liberty and economic freedom.
The Sceptical view of DEM raises doubts about the systematic relationship between DEM 19
and economic growth (Helliwell, 1994; Rodrik, 1997).
3.1.2 Economic growth and international financial integration. Economic growth is
dependent on the soundness of the political and financial system. Financial integration is
considered an important tool, as it provides access to foreign capital, (Baele et al., 2004;
Fakhr and Tayebi, 2009) who argued for a strong growth effect of financial development
through the following three channels. First, reducing uncertainty by facilitating trade,
hedging and risk diversification. Second, efficient allocation of factors of production. Third,
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mobilising savings to needed sectors and countries. Levine (1997) believes that financial
development and integration provides countries with foreign capital and advanced
technology. Markusen and Venables (1999) urged that financial liberalisation increases the
degree of competition by reducing profits of local incompetent firms and promotes a culture
of competitiveness which promotes economic growth.

3.2 Empirical literature

There are a plethora of empirical studies on IFI and economic growth, whereas a limited
number of studies focus on the relationship between DEM and IFI. Li and Resnick (2003)
investigate whether sound democratic institutions promote or hinder FDI inflows in 53
developing countries from 1982 to 1995. The findings conclude significant positive effects.
They recommend adequate legislative representation, political mobilisation, private property
rights and protection of MNCs. Li (2006) investigates the impact of DEM and a tax incentive for
FDI in 52 developing countries. The result shows that the more democratic countries
implement the better rule of law and offer lower tax incentives the more inflow of FDI.
Mathur and Singh (2007) investigate how corruption perception and DEM influence FDI
in 29 developing countries. They argue that corruption perception does not influence
investor decisions to invest and find a low correlation between DEM and FDI. Asiedu and
Lien (2011) examine the relationship of DEM and FDI and also check whether natural
resources change this relationship in a sample of 112 developing countries from 1982 to
2007. They find that DEM promotes FDI when natural resources are optimally utilised. The
study also identifies 90 countries where expansion of DEM has attracted FDI and 22
countries where the expansion of DEM reduced FDI.
No study, to the best of our knowledge, has been done to find the relationship between
DEM and IFI in the context of Pakistan. Contrarily, many studies have investigated the
relationship of IFI (FDI, REM, ED) with other aspects[5]. The available empirical studies fall
roughly into different groups. The first group focuses on the determinants of IFI whereas
the second group focuses on the relationship between IFI and economic growth or related
macroeconomic variables (Tables I and II).
Liked that the above theoretical channels and inadequate empirical literature shows an
ambiguous linkage between DEM and IFI and needs to further investigation. The next
section describes the framework and estimation procedure for a clear relationship between
DEM and IFI.
 IGDR Authors Objective of the study Sample Results
10,1
Bashir and Javid Financial flows, external capital structure, 1984-2012 Negative
(2014) institutions and economic growth
Ramzan and Effect of external debt on growth: 1970-2009 Significant negative effect
Ahmad (2014) Pakistan
Iqbal et al. Impact of FDI on GDP in the context of 1983-2012 Positive effect of FDI
20 (2014) Pakistan
Yasin (2013) The impact of FDI on growth in the 1976-2010 No long-run relationship
context of Pakistan
Imai et al. (2014) Remittances, growth and poverty in Asian Positive effect
countries
Barajas et al. Do workers’ remittances promote growth? 1970-2004 Negative effect
(2009)
Qayyum et al. Impact of remittances on growth in 1973-2007 Positive and significant effect
(2008) Pakistan
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Kose et al. (2004) Trade and financial integration affect the 1960-2000 Negative
relationship between growth and
volatility?
Edison et al. International financial integration and 1980-2000 Negative
(2002) economic growth
Levine (2001) International financial liberalization and 1988-1995 Positive
economic growth
Chowdhury External debt and growth in developing Significant negative effect
(2001) countries
Ahmed et al. External debts and growth in Asian 1970-1997 Positive effect
Table I. (2000) countries
Literature on IFI and Reichert and FDI and growth in developing countries 1971-1995 Insignificant
economic growth Weinhold (2001)

Authors Objective of the study Sample Results

Schindler (2009) The real effects of financial integration 1995-2005 Positive effect of FDI
Vo and Daly (2007) Determinants of international financial 1980-2003 Positive
integration
Chambet and Gibson (2008) Financial integration, economic instability 1995-2004 Negative
and trade structure in emerging markets
Kolstad and Villanger (2008) Determinant of foreign direct investment 1989-2000 Positive effect of FDI
Table II. in services
Literature on
determinant of IFI Source: Authors’ construction

4. Methodological framework
This section discusses the modelling framework and methodology used to explore the effect
of DEM on IFI. Available empirical studies have used different weak proxies to represent IFI
to investigate its dynamics. This study constructs an index of IFI using the most commonly
used variables, i.e. FDI, ED and REM, using principle component analysis (PCA) introduced
by the Pearson (1901) and developed by Hotelling (1933).
Table III represents the results of PCA. The first eigenvalue explains 77.3 per cent, the
second 16.8 per cent and the last is 5.9 per cent of standardised variance. We use the first
 PCA No. Value Difference Proportion Cumulative value Cumulative proportion
International
financial
Eigen values: (Sum = 3, Average = 1) integration
1 2.32011 1.816513 0.7734 2.320109 0.7734
2 0.5036 0.3273 0.1679 2.823704 0.9412
3 0.1763 – 0.0588 3 1
Variable PC 1 PC 2 PC 3
Eigen vectors (loadings)
21
FDI 0.53456 0.803123 0.263143
ED 0.61678
0.157863
0.771142
REM 0.57778
0.57452 0.579738
FDI ED REM
Ordinary correlations
FDI 1
ED 0.66533 1
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REM 0.51111 0.793664 1 Table III.

Result of principal
Source: Authors’ estimation component analysis

eigenvector value (PC 1) as a weight to construct the IFI index because it explains a higher
variation as compared to other combinations of the principal components. The obtained
index is then used in the regression model:

IFIt ¼ f ð DEMt ; GDPt ; INFt ; TOPt Þ (1)

IFI denotes the international financial integration index used as a dependent variable. For
independent variables DEM is democracy measured by the polity index, GDP is real gross
domestic product per capita, INF is inflation measured by the GDP – deflator and TOP is
trade openness measured by trade (export plus import) as a percentage of GDP, respectively.
The estimation equation is:

IFIt ¼ a þ b ð DEMt Þ þ g ð X Þ þ m t (2)

where m, is the error term, IFI is the international financial integration index. DEM is a democracy
and X represents the set of control variables namely income, inflation and trade openness.
The selected series may contain unit root problem and regression of series with unit root
may result in a spurious regression. The existence and level of stationarity is analysed using
the augmented Dickey–Fuller (ADF) test proposed by Dickey and Fuller (1979), the Phillips and
Perron (PP) unit root test proposed by Phillips and Perron (1988) and Dickey–Fuller-
Generalised Least Square (DF-GLS) unit root tests proposed by Elliot et al. (1996). The
structural break unit root test proposed by Zivot and Andrews (1992) has also been used to
confirm stationary properties of the series with structural breaks. The Johansen and Juselius (JJ)
and structural break cointegration analysis proposed by Gregory and Hansen (1996) are used
to explore the existence of a long run relationship. Further, robustness is checked by using an
Autoregressive Distributed Lag (ARDL) cointegration analysis proposed by Pesaran and
Pesaran (1997) and Pesaran and Shin (1999).
The nature of the long-run relationship among selected variables is investigated using
dynamic ordinary least square (DOLS), fully modified ordinary least square (FMOLS) and
canonical regression (CR) analysis. DOLS is developed by Stock and Watson (1993) to check the
 IGDR nature of the long-run relationship and is a preferable estimation technique for the resolution of
10,1 serial correlation, endogeneity and small sample bias problems. The FMOLS developed by
Phillips and Hansen (1990) takes into account the problem of serial correlation and endogeneity
in regressors. To analyse the dynamics of relationship throughout the sample period, this study
used a rolling window analysis. The data of selected macroeconomic variables from 1975 to
2013 is collected from various national and international data sources, i.e. State Bank of
22 Pakistan, World Bank and polity IV project.

5. Regression results
This section discusses results of various estimation techniques used to establish a
relationship between DEM and IFI.
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5.1 Stationary analysis

The estimated result of the stationary level analysis in selected series estimated using ADF,
Phillips-Perron (PP) and DF-GLS in presented in Table IV.
The estimated result shows that all variables have unit root in their levels and become
stationary after first differencing. The results of the structural break unit root analysis validate
the estimated results (Table AI). The result thus confirms the same order of integration and
suggests cointegration analysis to check the existence of a long-run relationship.

5.2 Cointegration
The selected series with the same order of integration are subjected to a Johansen and Juselius (JJ)
cointegration analysis to explore the existence of cointegrating vectors. Johansen and Juselius
(1990) suggest two statistics for cointegration analysis, i.e. the trace statistic and the maximum
eigenvalue statistic. The results of the cointegration analysis are presented in Table V.
The result indicates the rejection of the null hypothesis of no cointegration based on the
trace statistics and maximum eigenvalue statistics at the 5 per cent significant level in favour of
the alternative hypothesis. The findings of the ARDL model and structural break cointegration
analysis proposed by Gregory and Hansen (1996) also confirm the existence of cointegration in
the model (Tables AII and AIII).

ADF test statistics PP test statistics DF-GLS test statistics

I (0) I (1) I (0) I (1) I (0) I (1)
Variables C C&T C C&T C C&T C C&T C C&T C C&T

IFI
2.572
3.196
5.417
5.605
2.384
2.290
5.418
5.608 0.749
2.296
3.551
4.930
DEM
1.977
2.285
5.710
5.783
2.235
2.474
5.710
5.793
1.754
2.024
5.789
5.929
GDP
2.293
1.755
3.939
4.587
2.557
1.332
3.961
4.603 0.429
1.380
3.983
4.563
INF 0.900
1.830
3.803
3.951 0.802
1.470
3.890
12.901 0.622
2.142
3.678
3.849
TOP
2.422
2.952
6.410
6.367
2.501
3.114
6.686
7.187
2.426
2.972
3.923
5.346

Notes: The critical values for ADF and PP tests constant (C) is
3.615,
2.941,
2.609 and constant and
Table IV. trend (C&T) is
4.219,
3.533,
3.198; similarly, DF-GLS test (C) value is
2.628,
1.950,
1.611 and
Stationary test (C&T) value is
3.770,
3.190,
2.890 at 1, 5 and 10 per cent level of significance, respectively
statistic Source: Authors’ estimation
 5.3 Long-run estimates International
The cointegration analysis only confirms existence of a long-run relationship. The nature of financial
the long-run relationship can be investigated using DOLS, FMOLS[6] and CR. The results
are presented in Table VI.
integration
The results in Table VI show that in the long run an increase in DEM is negatively
associated with greater IFI in the case of Pakistan, whereas domestic productivity growth,
measured by real GDP, inflation, measured by GDPD and trade openness is positively
associated with IFI. The negative impact of DEM on IFI may be because of other factors that 23
influence both DEM and IFI. It may be possible that military rule has undermined people’s
faith in DEM, and, in such a scenario, episodes of DEM only add to uncertainty and distort IFI.
In other words, it is not DEM which is negatively associated with IFI but the democratic
institutions which can be easily undermined by future military interventions.

5.4 Rolling window analysis

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The above estimation techniq2ues provide an average coefficient for the considered sample.
To explore the dynamics of the relationship throughout the sample period, we use rolling
window analysis[7]. The estimated result of the rolling window analysis is presented in
Table VII and Figure 2.
The results show the yearly coefficient of DEM’s impact on IFI. The blue line represents the
estimated coefficient whereas upper and lower lines indicate standard deviation. The findings
conclude that the coefficient of DEM shows a negative trend from 1984 to 1993, but it shifts to
positive in 1994 and it converts again into a negative trend from 1995 to 2007. The results also
show that from 2007 to 2013, DEM positively contributes to financial integration.

5.5 Causality analysis

A standard (Granger, 1969) structure has been used to determine the direction of causation
between DEM and IFI in Pakistan. Jones (1989) discusses that an ad hoc selection method for
lag length in Granger causality test is better than any statistical method used to determine
optimal lag. Therefore, we use one lag for the causality analysis[8]. The results of Granger
causality are reported in Table VIII.
The result of causality analysis reveals existence of a weak unidirectional causality
significant at 10 per cent level, from IFI to DEM in Pakistan. The result shows that IFI
integration is promoting DEM in the country.

6. Conclusion
The political history of Pakistan is divided between DEM and autocracy. There has been an
ongoing debate regarding the contribution to the economy by each type of government. This
study undertakes a systematic empirical effort to assess the relationship between DEM and
IFI of Pakistan by constructing an index of IFI, using principle component analysis on all
form of capital inflows. The existing theoretical and empirical literature presents an
ambiguous expectation on the effect of DEM on IFI.

Hypothesis Trace statistics 5% critical values Maximum Eigenvalue 5% critical values

number of CE(s) (calculated values) (tabulated values) (calculated values) (tabulated values)

None 83.072 69.819 38.608 33.877 Table V.

At Most 1 44.464 47.856 22.867 27.584 Johansen
At Most 2 21.597 29.797 12.758 21.132 cointegration
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24
10,1
IGDR

Table VI.
Long-run coefficients
FMOLS DOLS CR
Variables Coefficient t-statistic Probability Coefficient t-statistic Probability Coefficient t-statistic Probability

C 3.216 2.394 0.023 3.172 2.530 0.017 2.810 2.042 0.049

DEM
0.004
1.833 0.076
0.003
1.878 0.071
0.004
1.932 0.062
GDP 0.480 3.570 0.001 0.477 3.941 0.001 0.523 3.802 0.001
INF 0.383 5.332 0.000 0.388 6.024 0.000 0.363 4.760 0.000
TOP 0.449 2.613 0.013 0.391 2.241 0.033 0.444 2.311 0.027
Adjusted R2 0.993 0.992 0.993
D.W stats 1.141 1.365 1.075

Source: Authors’ estimation

 Year DEM Year DEM
International
financial
1984
0.0206 1999
0.0138 integration
1985
0.0134 2000
0.0102
1986
0.0241 2001
0.0006
1987
0.0191 2002
0.0029
1988
0.0043 2003
0.0071
1989
0.0034 2004
0.0062 25
1990
0.0026 2005
0.0049
1991
0.0032 2006
0.0061
1992
0.0016 2007
0.0030
1993
0.0011 2008 0.0162
1994 0.0014 2009 0.0190
1995
0.0020 2010 0.0197
1996
0.0028 2011 0.0216
1997
0.0487 2012 0.0225 Table VII.
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1998
0.0538 2013 0.0221 Result of rolling

Source: Authors’ estimation window coefficient

Figure 2.
Rolling window
analysis

Null hypothesis F-statistic Probability

IFI does not Granger cause DEM 2.88113 0.0985

DEM does not Granger cause IFI 0.75185 0.3918 Table VIII.
Granger causality
Source: Authors’ estimation test result
 IGDR The research objective of this study is realised using unit root analysis, cointegration analysis,
10,1 and rolling window analysis. The unit root analysis is performed using ADF, PP, DF-GLS and
structural break unit root analysis. The result of the unit root analysis shows the existence of a
unit root in level and becomes stationary after first differencing. The existence of cointegration
among selected series is investigated using Johansen cointegration and structural break
cointegration analysis. The result of cointegration analysis confirms the existence of a long-run
26 relationship among selected series. The nature of the long-run relationship is investigated using
DOLS, FMOLS and CR. The findings show a significant negative impact of DEM on IFI in
Pakistan. The negative impact of DEM may be because of the fact that the long run military
rule has undermined people’s faith in DEM and episodes of DEM only added uncertainty and
distorted IFI. In other words, weak democratic institutions that can be easily undermined by
future military interventions may be responsible for the negative coefficient of DEM. The
finding of rolling window analysis shows that DEM has started to improve IFI from 2008
onward. The result of causality analysis reveals that IFI promotes DEM in Pakistan.
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The government of Pakistan should reduce policy uncertainty by enhancing its

commitments that ensure continuity of DEM, civil rights, personal property protection, capital
mobility and ability to trade internationally. Foreign capital flow is dependent on market size
and response, therefore, the government should enact stable policies to overcome this issue.
The world community should increase assistance to highly indebted poor countries like
Pakistan for the promotion of democratic culture. It should strengthen its IFI which ensures
eradication of economic and political uncertainty, favouring democratic rule.

Notes
1. Agenor (2003) and Kose et al. (2003a).
2. These studies measured IFI using different proxies, i.e. Asiedu and Lien (2011) used FDI; Li
(2006), Waddell (2014) used remittances; Van Rijckeghem and Weder (2009) used foreign debt.
3. Official website of systematics peace www.systemicpeace.org/polityproject.html retrieved on
January 29, 2017.
4. Kurzman et al. (2002) reviews 47 quantitative studies of the effect of democracy on economic growth;
19 find a positive relationship between democracy and growth, 6 find a negative relationship and 10
report no statistically significant relationship. Seven studies find a combination of positive and
insignificant results, depending on the model used and the cases included; two find a combination of
negative and insignificant results; two find mixed positive and negative results.
5. Abbas (2016) investigates the flow of remittances from international financial channels to
Pakistan and highlights the importance of greater financial integration.
6. Jawaid (2014) and Jawaid and Raza (2015) have used these methods for robustness of their initial
results.
7. Jawaid and Saleem (2017) also find year wise coefficients in their study.
8. See Jawaid and Haq (2012), Jawaid and Raza (2013) and Jawaid et al. (2016).

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Appendix

At level At first difference

Variable t-statistics Time break t-statistics Time break

IFI
1.984 2006
4.605** 2007

DEM
2.049 1999
7.430* 1990
GDP
3.421 1987
4.585** 2004
INF
2.314 2002
5.514** 1997
Table AI.
TOP
3.184 1998
7.098* 1981
Zivot–Andrews
structural break Notes: *Represents significance at 1% level; **represents significance at 5% level
trended unit root test Source: Authors’ estimation

Lags order AIC SBC F-test statistics

0 0.77 0.994 23.29*

1
10.13
8.809*
2
9.79
7.368
Table AII.
3
10.471*
6.953
Lag length selection
and bound testing for Note: *1% level of significant
cointegration Source: Authors’ estimation
 International
financial
integration
ADF procedure
Structural break 2006
t-statistics
5.14
p-value 0.000
Phillips procedure
31
Structural break 1995
t-statistics
5.15
Table AIII.
p-value 0.000 Gregory–Hansen
structural break
Source: Authors’ estimation cointegration test
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About the authors

Syed Tehseen Jawaid is currently working as an Assistant Professor/Research Economist in
Applied Economics Research Centre, University of Karachi, Pakistan. His area of interest
includes international economics, international trade and financial economics. He has also
authored many international research papers in renowned journals like Economic Modelling,
International Migration, Quality and Quantity, Foreign Trade Review, Journal of Transnational
Management, South Asia Economic Journal and Transition Studies Review, Global Business and
Economic Review and others. Syed Tehseen Jawaid is the corresponding author and can be
contacted at: stjawaid@hotmail.com
Dr Shujaat Abbas is an Economist with expertise in International Economic and Development
Issues, especially related to developing countries. He holds a PhD degree in Economics from the
University of Karachi, Karachi, Pakistan. He also holds MBA-Finance and BBA-H degrees from
Federal Urdu University of Arts, Sciences, and Technology, Karachi, Pakistan. He has a teaching
experience at the University of Karachi. Currently, he is associated with the Institute of Business
Management, Karachi, Pakistan as an Assistant Professor of Economics. He has published
various research articles on reputed national and international refereed journals. His research
objective is to explore and address international economic and development issues of developing
and least-developed economies. The major areas of his research interest are international
economics and finance, economic development, defense and peace economics, international
political economics, open economy macroeconomics, general equilibrium modelling analysis and
globalization and developing economies.
Shaikh Muhammad Saleem is currently working as a Lecturer of Economics in Pakistan
Shipowners’ Government college, Karachi, Pakistan. His area of research interest includes
economic development and growth, foreign capital inflows and financial integration. He has also
authored in international and national research papers in renowned journals such as Journal of
Transnational Management and Journal of Management Sciences.

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