IMPACT OF FINANCIAL CRISES ON PAKISTAN AND CHINA: IMPACT OF GLOBAL FINANCIAL CRISES ON CHINA

IMPACT OF FINANCIAL CRISES ON PAKISTAN AND CHINA: IMPACT OF GLOBAL FINANCIAL CRISES ON CHINAA. Chow Break point Test for Pakistan and China’s GDP growth
Chow Break point Test is used by the many researchers to find out the structural breaks of the relationship studied; see for example Guidolin & Tam who analyzed the effect of global financial crisis 2008 on the yield spreads and found, by applying Break point tests, the breaks in yield caused by this crisis. Chow & Wang also applied the Chow Test for analyzing the parametre stability while studying the inflation in China. The same test i.e. Chow Break point test is used by Mukhopadhyay & Pradhan for identifying the structural breaks in the finance-growth relationship of Indonesia. Last but not least, Hossain employed the Chow break point test and found a structural break in the money-demand relationship for Indonesia caused by the Asian financial crisis 1997.
The variations of GDP growth for Pakistan and China are analyzed by Chow Break point Test in our study too. Aforementioned five financial crises are observed by this methodology to conclude which of those hit the economy of both nations. GDP Growth (GDPGR) and Time (T) are the variables used. For each of the financial crisis, a separate equation is constructed for examining the relationship of GDPGR and T. Afterwards, the stability of all those equations is measured by the Chow break point test. The conclusion from Chow test is based on hypothesis testing which consists of the comparison of the probability of calculated F-value with Fa (a = 0.05).
If the probability of calculated F-value is greater than Fa (a = 0.05), then accept the null hypothesis (H0) i.e. there is no break point in GDP Growth.

B. Findings and Discussion
Using the results drawn from EViews shown in the Table 3 above for Pakistan, since the probability of F-statistic is less than level of significance (a = 0.05) in 1958, 1974 and 1997 so we accept alternative hypothesis (H1), i.e. there is Break point in GDP Growth. We further observed that break point of the financial crisis 1979 appears in Pakistan’s GDP during 1982 and 1983 at 10% and 5% level of significance respectively. This crisis was prominently severe from 1979 to 1982 and our analysis depict that Pakistan was affected when this crisis was already over; hence it was due to the other issues and not the financial crisis. For 2008, we accept the null hypothesis (H0) i.e. there is no Break point in GDP Growth because probability of F-statistic is more than the level of significance. One of its understandable causes is the deficit crisis of Pakistan’s economy just before this global crisis. Moreover, economy was not affected directly by this crisis and there were indirect effects on demand and trade.

Table 3: Results of Chow Break point Testing

Year Pakistan China
F-statistic Probability F-statistic Probability
1953 6.396777 0.019107 10.22604 0.001079
1974 11.37720 0.002553 13.76323 0.000236
1979 0.551311 0.465637 6.939374 0.004990
1997 7.033781 0.012737 44.42093 0.000000
200S 2.2363 26 0.153704 14.65499 0.001476