The Impact of Trade Liberalization and Institutional Quality on the Services Sector of Pakistan

Abdul Farooq and A. R. Chaudhary

Abstract

Per capita income and productivity of the services sector are very low in the developing nations, including Pakistan as compared to the developed nations. The present study examines the short run and long run impacts of trade liberalization, financial development, and quality of institutions on the growth of the services sector of Pakistan using time series data over the period of 1984-2013.The Cobb[1]Douglas production function has been augmented by adding quality of institutions, trade liberalization, and financial development variables to probe the impacts they have on the growth of services sector of Pakistan. The most recently developed combined cointegration technique by Bayer and Hanck (2013) has also been used to check the cointegration among the variables. Long run empirical results show that trade liberalization and financial development contributes positively to the growth of the services sector of Pakistan. The role of institutions is insignificant which means that the institutional development is still far away from taking the advantage of trade liberalization. These results suggest that trade liberalization and financial development process should carry on in the services sector as well. Moreover, to procure further benefits of trade liberalization in this sector, Pakistan should pay attention to developing political and economic institutions, because well-functioning institutions are a prerequisite to boost foreign trade and growth of the services sector of the country.