Financial Development, Economic Growth and Adaptive Efficiency: A Comparison between China and Pakistan

The strong economic growth in China is difficult to reconcile with its inefficient financial system. The puzzle of China's financial development and growth can be explained through a dynamic criterion of adaptive efficiency, rather than through allocative efficiency. Using the framework of an autoregressive distributed lag model, the present paper tests the hypothesis that the GDP growth rate is dependent on financial development along with other variables in China and Pakistan. The hypothesis cannot be rejected in both cases. However, the results show that economic growth has a negative relationship with credit to the private sector in China. We conclude that financial development is a source of China's high growth rate and that the banking system is still under an evolutionary process, involving the pursuit of social objectives instead of the sole objective of profit maximization. Our results provide some implications for other developing countries like Pakistan. Copyright (c) 2008 The Authors Journal compilation (c) 2008 Institute of World Economics and Politics, Chinese Academy of Social Sciences.