The Role of Financial Crisis in Economic Growth; Empirical Evidence from Selected South Asian countries

Abstract

Financial crisis is a major global economic problem that disrupts the financial stability and overall economic performance of a country. The current study investigated the impact of the financial crisis on economic growth in selected South Asian countries. Panel data was collected from World Development Indicators (WDI) and Asia Development Integration Centre (ARIC) from 1995 to 2022 for India, Pakistan, and Sri Lanka. Random effect and fixed effect models were used to investigate the relationship between variables. The Hausman test was used to select the appropriate model between the Random effect and fixed effect models. The results indicated that the financial crisis has a negative and significant effect on economic growth. All control variables, including foreign direct investment, export, population growth, gross fixed capital formation, rule of law, and labor force’s basic education, have a positive impact on economic growth. Improving early warning systems, strengthening financial regulation, and macroprudential tools are crucial for stability. Encouraging investment by tax incentives, entrepreneurship, export-oriented regulations such as trade liberalization, expansion of markets, and infrastructural development support growth. Institutional quality, especially the rule of law, boosts the confidence level of investors and resource efficiency. Strict rules of law and the judicial system can enhance growth. Effective crisis management can accelerate recovery.