Contribution of Financial Development in Poverty Reduction through Industrial Growth

Abstract

This study examines the role of financial development in poverty reduction through the development of manufacturing industry in the case of Pakistan by using data from 1971 to 2010 with the help of Johnson's co-integration test and error correction method. We find a long term relationship between financial development and industrial growth as well as between industrial growth and poverty reduction. The estimated coefficient of the ECM indicates a short run relationship between variables with a high speed of adjustment to equilibrium. On the basis of results we conclude that, a healthy manufacturing sector can not prevail in the absence of a sturdy and active financial sector, and a developed manufacturing sector creates more employment opportunities which lead to poverty reduction, hence economic growth. This shows that the financial development has a positive relationship with poverty reduction.

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