Determinants of industrial development: a panel analysis of South Asian economies

Abstract

A well performing industrial sector plays an important role in poverty mitigation, unemployment reduction, trade promotion, exchange of goods and services, increased per capital income and GDP growth etc. Numerous studies have investigated the institutional financial performance and their outcomes for emerging states predominantly in perspective of South Asian and African economies. Nonetheless, after global financial crisis and fall of Bretton wood system a new debate was generated to re-examine the issue after implementation of financial liberalization policies in these economies. Numerous studies conducted in this context recommended further re-examination in order to develop a sound financial and Institutional framework which could prove to be productive for the financial development but very limited studies investigated the problem in the context of industrial development. Therefore, the central theme of the current study is to investigate the industrial development relationship for a sample of South Asian Countries. The occurrence of operational, administrative, political and institutional uncertainties in the South Asian region makes it important to study the issue from a policy perspective. With this background in mind the present study aims to ascertain numerous determinants of industrial development in terms of capital account openness, trade openness, equity openness, governance, domestic credit available to the private sector, inflation and foreign direct investment (FDI) for a sample of South Asian economies i.e. Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka except Afghanistan (No data). To carry out empirical analysis, the study utilized Panel data set over the period 1996–2015 (Post liberalization period). For this purpose Industry Value Added has been used as a measure of Industrial Development; Chinn Ito Index (KAOPEN) as a measure of Capital Account Openness, ratio of the sum of imports and exports relative to GDP as measure of Trade Openness, Equity Openness has been measured by Market Capitalization to GDP Ratio, World Governance Indicator (WGI) has been used to measure Governance and Domestic Credit Available to Private Sector, FDI and Inflation have been measured in terms of percentage of GDP. The data has been majorly collected from international financial statistics, world development indicators, World Governance Indicator (WGI) and Journal of Development Economics. Furthermore, Granger’s Causality Test to identify the unidirectional and bidirectional relationship and Panel ARDL technique to determine significant predictors of industry development in SAARC economies has been applied. Findings reported Governance, Foreign direct Investment, Equity Openness and Inflation as significant contributing factor in industrial development of South Asian region economies. The study also discussed the models from policy perspective and provides recommendations for the policy makers to improve or redesign favorable policies based on findings.