THE IMPACT OF FINANCIAL DEVELOPMENT AND HUMAN CAPITAL ON ECONOMIC GROWTH: A CASE STUDY OF SAARC COUNTRIES

Abstract

This study investigates the empirical nexus between financial development, human capital, and economic growth within the context of seven selected South Asian Association for Regional Cooperation (SAARC) nations. Utilizing annual panel data spanning 41 years (1980-2021), implied by the Pooled Mean Group Autoregressive Distributed Lag (PMG-ARDL) model to examine long-run and short-run dynamics. The primary focus is placed on the interactive impact (A) of financial development (proxied by Liquid Liabilities, LL) and human capital (proxied by Secondary School Enrolment) on Gross Domestic Product (GDP). Where control variables including Inflation (INF), Gross Capital Formation (GCF), and Trade Openness (TO) are incorporated to ensure model robustness. Diagnostic testing, including the Levin-Lin & Chu and Pesaran & Shin unit root tests, confirmed stationary at both level and first difference, while Johansen and Kao cointegration tests established a stable long-term relationship among the variables. The empirical finding reveals that while financial development and the interaction term (A) exert a positive and statistically significant influence on economic growth, human capital along shows a positive but statistically insignificant effect in the short run. Furthermore, robustness checks conducted via Dynamic Ordinary Least Squares (DOLS) and Fully Modified Ordinary Least Squares (FMOLS) validates these results, confirming that the synergy between financial depth and educational attainment provides a more potent stimulus for growth than either factor in isolation. Based on these findings, the study recommends that SAARC policymakers adopt an integrated policy framework.