Brain Drain, Financial Development and Economic Growth in Pakistan: The Moderating Role of Political Stability

Abstract

This study examines whether political stability alters the growth effects of brain drain and financial development in Pakistan, using annual data from 2006–2023. The analysis employs a time-series moderation framework with Newey-West standard errors, evaluating direct effects, interaction effects, marginal effects, and extensive robustness checks. Results show that unconditional coefficients for brain-drain pressure and private credit are weak, concealing substantial institutional heterogeneity. Political stability significantly moderates both relationships: the marginal effect of brain-drain pressure shifts from negative under weak stability to positive under improved stability; private credit transitions from significantly growth-reducing (β = -0.372, p < 0.01) under weak stability to significantly growth-enhancing (β = +0.794, p < 0.01) under improved stability. The private-credit interaction is highly robust, surviving controls for capital formation, major shock exclusions, and dynamic specifications. Broad money does not reproduce the same pattern, underscoring the importance of credit allocation over liquidity expansion. Inflation exerts persistent negative effects, while capital formation contributes positively. The findings support an institution-contingent interpretation of both the migration-growth and finance-growth relationships. Policy simulations indicate that a 3-point expansion of credit under improved stability could boost GDP growth by 1.35 percentage points—equivalent to approximately $4-5 billion annually. The study contributes to the literature by integrating skilled-migration pressure, financial-sector depth, and political stability within one Pakistan-specific empirical framework. It recommends a phased policy roadmap prioritizing institutional credibility, productive credit allocation, diaspora investment mechanisms, and price stability to maximize development outcomes.

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