Openness Mitigates Elite Capture and Improves Financial Development: An Analysis of Pakistan

Abstract

This paper is an attempt to define elite capture and how elite capture is becoming a
hindrance in improving financial development and economic growth? Our main
argument is that financial development can be a moderator for economic growth given
the elite capture in developing countries like Pakistan. However, the elites do not like to
have financial development as it erodes their profits. Therefore, what measures can a
country take in this depressing environment to improve financial development which
can positively affect growth? We presented a political economy approach of analyzing
the state of Pakistan's financial market and proposed openness as a remedy. This
remedy not only like to decrease elite capture but also likely to improve financial
development. The important character of this remedy is that it will be less resisted by
the elites as they will benefit from it as well, so unlike other social and cultural changes
this change will met with least resistance. Our result indicates that individually, trade
and capital account are beneficial for improving the financial market development. In
other words, simultaneous opening of capital and trade account does seem to be a
necessary condition for improving financial sector development.