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Services sector in Pakistan includes transportation, storage, communication, wholesale
and retail trade, finance and insurance, ownership of dwellings, public administration and
defense, community services, etc. Due to the growing volume of services sector in the
economic growth of Pakistan, several changes have been made to enhance its role in overall
growth. The liberalization of financial services, mainly insurance, banking and market securities
in the 1990s, is among the many steps taken by Pakistan for the development of this sector.
The services sector is believed to be the most affected by the financial liberalization
process, because it has long been dominated by the industrial and agriculture sectors in Pakistan.
The recent reforms in this sector include privatization of state-owned banks and
insurance companies, opening up of the stock market to foreign investors under the Private
Investment Act, 1976, prudential regulations and interest rate deregulation.
In order to be sustainable, the services sector growth must be accompanied by
a proportionate growth of the commodity producing sectors. The object of this study is
to evaluate the correlation between financial liberalization and services sector growth in
Pakistan's economy.
Three types of theoretical views are available in the literature of finance and growth.
First, finance is most crucial for economic growth (Schumpeter, 1911; Goldsmith, 1969;
Hicks, 1969; McKinnon and Shaw, 1973; Romer, 1986; Barro, 1991; Japelli and Pagano, 1994;
and Levine, 1997). The second view states that finance is relatively less important for
economic growth (Robinson, 1952; Lewis, 1955; and Lucas, 1988). The third view argues that
financial development impedes economic growth (Van, 1982; Buffie, 1984; and Stiglitz, 1994). |
