ANALYZING THE IMPACT OF FINANCIAL DEVELOPMENT, TECHNOLOGICAL INNOVATION AND HUMAN CAPITAL ON ECONOMIC DEVELOPMENT IN PAKISTAN

Abstract

In this study, financial development, technological innovation, human capital and other factors on economic development measured by gross domestic product (GDP) per capita have been evaluated with a constant time-series of data from 1991 to 2024 in Pakistan after controlling the role of labor and physical capital. Characterization of the study variables was carried out using descriptive and correlation analyses, while the order of integration of each series was determined using Augmented Dickey-Fuller (ADF) test. Since cointegration of mixed order variables was detected, the Autoregressive Distributed Lag (ARDL) bounds test for cointegration was used to determine the existence of a long run cointegration relationship between the variables, and the short-run and long run ARDL models were estimated. The Breusch-Godfrey Lagrange multiplier test for autocorrelation, Breusch-Pagan-Godfrey test for heteroskedasticity and the Ramsey regression equation specification error test (RESET) for misspecification of the functional form were used to evaluate model adequacy. The results of the ADF test validated the integration order of GDP per capita, financial development, human capital, labor and gross fixed capital formation at one, while technological innovation was stationary in level, thus supported the mixed order of integration suitable for ARDL approach. The ARDL bounds test resulted that the long-run cointegration relationship between the variables exists statistically. The long-run ARDL results showed that financial development, technological innovation, human capital, labor, and gross fixed capital formation are all statistically significant and positively linked with economic development in Pakistan; and error correction term was negative and statistically significant, which was evidence of long run convergence to the long equilibrium after short run shocks. All of the diagnostic tests were found to be satisfied with the estimated model being free of serial correlation, heteroskedasticity and being correctly specified. The results of this study indicate that financial development, technological innovation and human capital have all been important complementary factors in Pakistan's long-run economic development during the study period. Policy implications are discussed.