Pakistan Institute of Development Economics



Financial Sector, Democracy and Economic Growth: A Panel DataAnalysis

Economic growth depends on many factors like the traditionalfactors of capital, labour and technological advancement and thesomewhat novel factors of financial development and the nature ofpolitical regime. The relationship between the nature of politicalstructure and economic growth is quite complicated. There may be directand indirect impacts of the nature of political set up on economicgrowth. However, these channels remain un-explored to larger extent. Thepresent study is conducted to analyse economic growth under democracyand dictatorship for a considerably larger set of countries from 1974 to2013. The indirect impact of democracy on economic growth is analysedthrough an unexplored channel of financial sector performance, which isexpected to be sensitive to regime type. The direct impact of democracyis found to be positively significant on economic growth. Likewise,direct impact of financial sector performance on economic growth is alsofound to be positive and significant. However, democracy had negativeindirect impact on economic growth through financial sector but themagnitude of this indirect negative impact is minute enough to beignored as compared to large individual direct effects of democracy andfinancial sector. JEL Classification: O40, O43, O16 Keywords: EconomicGrowth, Democracy, Dictatorship, Financial Sector Performance

Muhammad Ishtiaq,

Muhammad Tariq Majeed,

Muhammad Sohail