MANAGEMENT AND ACCOUNTING REVIEW, VOLUME 22 NO 3, DECEMBER 2023

The Impact of Financial Globalization on Economic

Growth in the Kurdistan Region of Iraq:
An Empirical Investigation
Ahmed Abdulrahman Khder Aga1♣ and Jwan Saeed Hussein2
1
Ministry of Finance and the Economy, KRG, ERBIL, Iraq
2
Economics Department, Salahaddin University, ERBIL, Iraq

ABSTRACT

This article delves into the linkage between Economic Growth and Financial
Globalization within the Kurdistan context, utilizing yearly data spanning
from 2007 to 2020employing the Auto-Regressive-Distributed-Lag (ARDL)
method. Empirical investigation revealed that there is a positive and
significant linkage between Financial Globalization and economic growth
in the case of Kurdistan in the long run over the 2007-2020; specifically, a
1% upturn in Financial Globalization was linked to an approximate 0.014%
increase in GDP. Moreover, Oil Prices and Exchange Rate significantly
and positively impacted economic growth in Kurdistan, suggesting that
an increase in public revenue might result from an increase in oil price or
changing of the exchange rate. Overall, the result implies that financial
globalization, oil price, and exchange rate play significant roles in driving
economic growth in Kurdistan.

Keywords: Financial Globalization, GDP growth; Oil Price, Exchange

Rate, Kurdistan Region.

ARTICLE INFO
Article History:
Received: 01 October 2023
Accepted:30 October 2023
Available online: 01 December 2023

♣
Corresponding Author: Ahmed Abdulrahman Khder Aga; Ministry of Finance and the Economy,
KRG, Erbil, Iraq; Email: ahmedabdulrahman134@gmail.com; Tel: 009647501139613
MANAGEMENT AND ACCOUNTING REVIEW, VOLUME 22 NO 3, DECEMBER 2023

INTRODUCTION

The surge of financial globalization, notably from the mid-1980s, has seen
an upsurge in capital and human flows between developing and developed
countries. This rise is propelled by escalating cross-border trade in financial
assets facilitated by the removal of barriers and restrictions, effectively
amalgamating financial markets into a global entity (Das, 2010, p. 1).
Financial globalization pertains to linking a nation’s domestic financial
structure with worldwide financial markets and organizations. Generally,
achieving this integration requires governments to open up not only their
domestic financial sector but also their capital account, a transformation
often observed in countries with liberalized economies and increased cross-
border capital movements (Schmukler, 2008, p. 48).

Financial globalisation has become intertwined with market

deregularisation and liberalization, so that free capital movements have
resulted in wide expansion of international capital investment (Gál, 2015,
p. 105). This phenomenon has the potential to foster the advancement and
growth of the financial system, acting as a source of funds for borrowers
like firms, households, and governments with productive investment
opportunities (Schmukler, 2004, p. 8).

Further, changes in capital flows into developing countries are

influenced by both ‘push’ and ‘pull’ factors. On one hand, there are “push
factors” which encompass dynamics such as shifts in macroeconomic
policies and business cycle conditions within developed nations (Zakaria,
2009). On the other hand, “pull factors” arise from modifications in policies
and other elements related to the openness of developing countries. These
incorporate the liberalization of domestic stock markets and capital accounts,
as well as the presence of large-scale privatization programs. In the long
term, this latter set of factors is seen as including the increased influence of
institutional investors in developed countries as well as demographic shifts
(Egbetunde & Akinlo, 2019, p. 32).

Over the last thirty years, there has been consolidation across the
international financial system, so that it is dominated by a few banks,
whose headquarters are found in a few advanced countries. The growth of
these institutions has occurred concomitantly with increased pressure to

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eliminate obstacles to the unrestricted movement of capital Consequently,

these aspects of the banking sector dominate the provision of capital
internationally and they for many countries have held considerable balance
sheet positions (Cecchetti et al., 2012, p. 4).

The objective of this research was to shed light on the influence of

financial globalization on economic growth within the Kurdistan region;
a region within a decentralized Iraqi federation characterized by unequal
political power distribution. The Kurdistan Region’s legal and political
quasi-autonomous status, affirmed by the Iraqi 2005 Constitution, has
attracted substantial foreign direct investment. (Unegbu & Okanlawon,
2015, p. 39).

The research problem revolved around comprehending the linkage

between financial globalization and economic growth within the specific
temporal framework of 2007 to 2020. It delved into the empirical model
on financial globalization to analyze the intricacies of this relationship
and discern its effect on economic growth. The aim of this research was
to comprehensively investigate and quantify the relationship between
financial globalization and economic growth from 2007 to 2020. In terms
of hypotheses, the null hypothesis (H0) posited that there was no significant
linkage between financial globalization and economic growth during the
period 2007-2020, while the alternative hypothesis (H1) proposed that there
was a significant linkage between financial globalization and economic
growth during the period 2007-2020.”

The subsequent sections of this paper are organized as follows: In

the remaining part of the introduction, we delve into the evolving trends
and patterns of financial globalization, comprehensively exploring the
advantages and risks associated with it. Section 2 provides the theoretical
framework and conducts an extensive review of the empirical literature
while also shedding light on the landscape of financial liberalization
policies in the Kurdistan Region. Section 3 elaborates on the methodology
employed in this study. In Section 4, we elucidate and analyze the empirical
findings. Following this, Section 5 encapsulates our conclusions, suggests
policy options, and delineates the limitations of the study. Lastly, Section
6 comprises the comprehensive reference list.

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MANAGEMENT AND ACCOUNTING REVIEW, VOLUME 22 NO 3, DECEMBER 2023

Financial Globalization: Trends and Patterns

Since the 1980s, in contrast to the earlier postwar era, there has been
a trend towards increasing global capital flows, driven by a combination
of increased pull factors such as higher expected returns and a greater
diversity of financial instruments, additionally, push factors encompass
elements like growth and low-interest rates within developed economies.
(Mahraddika, 2021, p. 4-5). Financial globalization, in the modern era, has
involved a series of booms and busts in terms of capital flows, with the 2009
financial crisis being a recent instance. A distinctive element of what became
known was the Global Financial Crisis was that it largely affected financial
markets of advanced economies. This has called into question laissez-faire
approaches, and the scope for international as well as domestic regulation in
finance. In this respect, some developing economies introduced what might
be considered an international equivalent of macroprudential policies, in the
form of prudential controls on capital inflows, both of which aim to dampen
the severity of swings in asset prices and credit (Jeanne, 2012, p. 50).

Governments, borrowers, and private investors act as the principal

agents propelling financial globalization, with the liberalization of financial
sectors within countries and technological change advancing this process.
(Schmukler, 2008, p. 50). In the realm of foreign Inflows of capital, financial
globalization primarily manifests through Foreign Direct Investment (FDI),
standing out as a crucial and stable component compared to portfolio
investments and debt flows. FDI has risen to prominence and is now one
of the dominant forms of foreign Inflows of capital due to its stability in
the financial landscape (World Development Indicators, 2019; Agoba et
al, 2020, p. 1). Hence, FDI serves as the principal constituent of financial
globalization, and this study employed FDI as a proxy for assessing financial
globalization.

334
and stable component compared to portfolio investments and debt flows. FDI has risen to prominence
and is now one of the dominant forms of foreign Inflows of capital due to its stability in the financial
landscape (World Development Indicators, 2019; Agoba et al, 2020, p. 1). Hence, FDI serves as the
principal constituent of financial globalization, and this study employed FDI as a proxy for assessing
financial globalization. THE IMPACT OF FINANCIAL GLOBALIZATION ON ECONOMIC GROWTH

FDI, net inflows (in billions of current US$) into low & middle-income economies
800
700
600
500
400
300
200
100
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Figure 1: FDI, Net Inflows (in billions of current US$) into Low and Middle Income
Figure 1: FDI,Countries, World
net inflows (in Bank,
billions World
of current Development
US$) Indicators
into low and middle income 2022(WDI)
countries, World Bank,
World Development Indicators 2022(WDI).

Between
Between theand1990s
the 1990s and
2013, net 2013,
Inflows net Inflows
of capital ofand
(FDI) to low capital (FDI)economies
middle-income to low
and middle-income
expanded economies
significantly (see Figure 1). Overallexpanded significantly
capital influx into (see Figure
low and middle-income 1).
nations rose
Overall
over a longercapital influx
timeframe intobillion
from $20 lowinand 1990,middle-income nations
to $732 billion in 2011. rose overalsoa
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size of billion
official flowsindropping
1990, by to 50%
$732 andbillion
the maininsource
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composition also altered, with the relative size of official flows
developing countries becoming private capital flows. This increase in net private capital dropping
flows was
by 50%
uneven, withand
some the main
low and source
middle for many
income countries developing
receiving countries
much more than becoming
others, while the portion
private capital flows. This increase in net private capital flows
of financial movements received by low and middle-income nations generally increased until was uneven,
the 2009
with some low and middle income countries receiving much more than
financial crisis. Following this, improvements in the investment climate contributed to a sharp increase
others, while the portion of financial movements received by low and
in flows in 2011.
middle-income nations generally increased until the 2009 financial crisis.
Following this, improvements
Financial Globalization: in the investment climate contributed to a
Risks and Benefits
sharp increase in flows in 2011.
Financial globalization refers to the ability to tap into substantial capital reserves, and when

Financial Globalization: Risks and Benefits

invested wisely, it can drive growth. Moreover, the merging of financial markets has the potential to
facilitate effective global distribution of resources, offer prospects for risk spread (Setapa et al., 2020),
Financial
and promote globalization
the growth refers
of the financial sector, to theaiding
ultimately ability
growthto tap into
initiatives. substantial
Numerous research
capital reserves, and when invested wisely, it can drive growth. Moreover,
the merging of financial markets has 4
the potential to facilitate effective
global distribution of resources, offer prospects for risk spread (Setapa et
al., 2020), and promote the growth of the financial sector, ultimately aiding
growth initiatives. Numerous research has highlighted that although financial
globalization holds the potential to drive growth and enhance general well-
being, this positive outcome is not assured.

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MANAGEMENT AND ACCOUNTING REVIEW, VOLUME 22 NO 3, DECEMBER 2023

The question of whether the advantages of growth outweigh the

drawbacks and uncertainties remains unanswered. As a result, several
pathways can be identified that demonstrate how financial globalization could
increase productivity and output in a globalized economy. Nevertheless, in a
practical policy landscape characterized by macroeconomic imbalances, the
impacts of financial globalization could prove harmful, potentially leading
to disruptive crises. (Stiglitz, 2004; Das, 2010, p. 218-219).

Financial globalization has both positive and negative economic

consequences for a given state. Various studies have demonstrated three
potential advantages of tapping into global financial markets: expanding
funding sources, facilitating risk sharing, and subjecting policymakers to
international competition. On the downside, capital inflows may have an
adverse effect on a country’s international competitiveness by causing the
real exchange rate (RER) to appreciate. If the RER remains significantly
and persistently misaligned, it may lead to inefficient allocation of resources
and hinder economic growth in the long term. (Mahraddika, 2021, p. 1-2).
There are other benefits and risks to developing countries which are attendant
on financial globalization.

Financial globalization has the potential to bring about significant

advantages, particularly in regard to advancing the financial system.
However, it can also lead to financial crises and contagion. An additional
possible advantage of financial globalization is a more connected and
interdependent global financial landscape, as well as a greater degree of
the integration of financial markets and systems between less developed
countries and the global financial markets. (Schmukler, 2008, p. 50). In the
existing literature concerning economic policies and financial globalization,
scholars have highlighted several significant challenges that arise when
countries move from minimal to extensive levels of financial integration.
They maintain that, in theory, financial globalization can serve as a catalyst
for producing a range of additional benefits that promote sustained economic
growth. These additional advantages can include enhancing the domestic
financial industry, strengthening institutions, and implementing more
effective macroeconomic policies (Kose et al., 2010, p. 38).

Nonetheless, at the global level, even disregarding financial crises,

it appears that discerning the advantages of financial globalization is

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 THE IMPACT OF FINANCIAL GLOBALIZATION ON ECONOMIC GROWTH

increasingly challenging. Additionally, scholars have argued that financial

globalization has not resulted in a surge of investment or improved growth
in less developed economies. Instead, countries which have experienced the
fastest growth are those that have relied less on inflows of capital (Rodrik
& Arvind, 2009, p. 136). It is also apparent that financial globalization has
not evened out fluctuations in consumption or dampened volatility.

These characteristics contribute to the occurrence of financial crises

and prolonged economic downturns which typically occur after a time of
excessive prevalence of risk-taking and over-leveraging (Cecchetti et al.,
2012, p. 22). Moreover, nations which have achieved financial integration
tend to receive a disproportionate amount of FDI inflows, which can
provide an avenue for technology spillovers and disseminating improved
management techniques. These spillovers may enhance overall productivity
and, therefore, promote economic growth (Prasad et al., 2003, p. 13).

To understand this, it’s worth noting that there are three primary
advantages to having greater openness to cross border capital flows. Firstly, it
could result in decreased expenses related to capital movements, particularly
for small and medium-sized businesses. Secondly, it can provide greater
capacity for managing income risks, leading to reduced susceptibility of
household consumption to changes in output fluctuations. Thirdly, it can
encourage more disciplined macroeconomic policies (Wei, 2018, p. 11). So,
motivated by such incentives, countries across the world have generally
become more financially integrated (Schmukler, 2004, p. 24).

Financial globalization carries the potential to enhance the economic

growth rate in developing countries. This could be via several channels,
some of which directly impact factors influencing economic growth, such
as decreasing capital costs, boosting domestic savings, technology transfer
from advanced to less developed countries, and developing local financial
sectors. More indirect pathways, which could outweigh the direct ones in
certain cases, involve improved specialization in production due to better
risk management and the enhancement of institutions and more efficient
macroeconomic policies, which are spurred by pressure to compete and
the so-called “discipline effect” of globalization; (Prasad et al., 2003, p.
8). See Figure 2.

337
which could outweigh the direct ones in certain cases, involve improved specialization in production
due to better risk management and the enhancement of institutions and more efficient macroeconomic
policies, which are spurred by pressure to compete and the so-called "discipline effect" of globalization;
(Prasad et al., 2003, p. 8). See Figure 2.
MANAGEMENT AND ACCOUNTING REVIEW, VOLUME 22 NO 3, DECEMBER 2023

Financial Globalization

Indirect Benefits Direct Benefits

• Encouragement of specialization
• Disciplining policymakers • Increase in domestic savings.
• Stimulus for better policies • Reduced capital costs due to improved risk
• Improvement of capital inflows through allocation.
improved policies
• Foster efficient global resource allocation.
• Improvements in institutions
• Better ability to handle income risks • Technology transfer
• Financial sector development

Increased Economic Growth

Figure 1: Benefits Through which Financial Globalization can Raise

Economic Growth, Adaptation based on Mahraddika, (2021, p. 1-2)
6

LITERATURE REVIEW

Several economic theories hold that foreign capital flows enhance economic
growth by improving capital accumulation, management techniques and
productivity while also introducing new technologies to host countries
(Agbloyor et al., 2016, p. 2). Additionally, the unrestricted flow of
capital across international borders can be advantageous for all countries
since it promotes efficient allocation of resources, leading to improved
productivity and economic growth globally. However, in reality, as is widely
acknowledged, substantial inflows of capital can cause difficult issues for
policymakers. (Ahmed & Zlate, 2014, p. 1).

The current research investigated three perspectives regarding the

suitability of financial liberalization as a policy choice for underdeveloped
countries. The first viewpoint, grounded in Allocative Efficiency, primarily
emanates from the tenets laid out in Solow’s (1956) neoclassical growth
model. According to the model of neoclassical economic growth,
liberalization of the capital account can improve international resource
allocation and have positive effects. This is because resources are transferred
from developed nations, characterized by an excess of capital and lower

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returns, to less developed countries where capital is in short supply, leading

to higher returns. As a result, the cost of capital in developing countries
decreases, which leads to an initial increase in investment and growth. This
increase in investment and growth (even though temporary) can have a
lasting impact on enhancing the quality of life in less developed countries.
(Henry, 2007, p. 1).

In line with the model of neoclassical economic growth, financial

globalization can potentially lead to capital flowing from economies that
are rich in capital to those that are poor in capital, as the returns to capital
are higher in the latter. This movement of capital should, theoretically,
supplement restricted domestic savings in economies with limited capital
resources and facilitate increased investment by lowering capital costs.
Additionally, specific types of financial inflows can facilitate technology
transfer and enable the assimilation of advanced managerial and
organizational expertise from more developed economies (Egbetunde &
Akinlo, 2015, p. 188). Neoclassical economics argues that liberalizing the
capital account can attract global capital to economies severely lacking it,
reducing the cost of capital and leading to increased domestic investment,
growth, and improvements in welfare. The economies that serve as the
source of capital also benefit by reducing risk through diversifying their
portfolio internationally. However, the efficiency of legal and market
institutions and their level of development vary among countries, which
affects the return on investment from foreign sources and the decisions made
by the global investment community (Das, 2010, p. 222).

The theories posited by Shaw (1973) and McKinnon (1973) propose

that financial liberalization may stimulate greater saving and investment,
consequently fostering economic growth. These theories contend that
financial liberalization expands the accessibility of loanable funds, credit,
and investment prospects. It emphasizes the need for policies that encourage
higher levels of saving and provide outlets for investment. This perspective
underscores the importance of a financial liberalization in amplifying saving
rates and enhancing the productivity of investments. (Awoyemi & Jabar,
2014, p. 174).

The third theory is best characterized by Rodrik (1998). According to

Rodrik’s analysis, there is no clear linkage between economic growth and

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financial globalization. Further, he suggested that the potential advantages

of unrestricted capital account are not easily observable, while the costs
are clearly manifest in the form of repeated crises in rising markets. Rodrik
argued that a key rationale for abolishing capital controls is their detrimental
impact on economic performance. In this theory, the costs manifest in
various ways. Capital controls hinder the ability to spread risks through
the diversification of global portfolios, lead to an inefficient allocation of
capital, and encourage irresponsible macroeconomic policies in the domestic
economy. (Rodrik, 1998, p. 4-7).

Despite the clarity provided by theoretical perspectives, delving into

the empirical realm reveals the intricate nature of the connection between
economic growth and financial globalization, many scholarly articles have
diligently sought to scrutinize and understand this relationship: Ahmed and
Khan (2021) conducted an examination into the linkage between financial
liberalization and economic growth in Pakistan during 1970 to 2019.
Utilizing the ARDL model and ECM, the results demonstrated that financial
liberalization imparts momentum to both short run and long term economic
growth. Hye and Wizarat (2013, p. 270) examined economic growth in
Pakistan and the impact of financial liberalization. The study employed
the ARDL model to obtain the long-run and short run coefficients. The
research results indicated that financial liberalization had a positive effect
on the short-term growth in GDP per capita of Pakistan, but the long-term
effect was not significant. These findings are consistent with those of Rodrik
(1998), whose position is that the removal of capital controls negatively
impacts on economic output. Sulaiman et al. (2012, p. 16) examined the
impact of financial liberalization on Nigeria from 1987-2009, employing the
ECM and the Johansen Co-integration test. The research results indicated
that financial globalization had a positive effect on the economic growth of
Nigeria. However, it overlooked the contribution of financial liberalization
to bolstering economic growth, as emphasized by McKinnon and Shaw.

Banam (2010, p. 54) examined how Iran’s economic expansion was

impacted by financial globalization. The research employed the Johansen
test, analyzing data chronologically from 1965 to 2005. The findings
indicated a positive association between the growth in GDP per capita
and financial globalization. These results supported the theory of Shaw
(1973) and McKinnon (1973), and that economic growth is achievable

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and improved via financial liberalization. In a study by Adam (2009:1),

the influence of financial globalization on economic growth in Ghana, was
scrutinized, analyzing data chronologically from 1970 to 2007, employing
the ARDL model. The results revealed a significant and positive long-
term effect of financial liberalization on growth in GDP per capita. Prasad
et al. (2009, p. 38) analized the connection between economic growth
and financial globalization utilizing descriptive statistics. The findings
suggested a positive linkage between financial globalization and growth
in GDP per capita, suggesting that financial globalization can generally
act as a catalyst for generating a range of additional benefits that enhance
well-being and long-term economic growth. These additional benefits may
encompass the enhancement of the local financial system, and enhancements
in macroeconomic policies and institutions. The findings were inconsistent
with those of Shaw and McKinnon, that financial liberalization encourages
Growth in GDP per capita.

The influence of financial liberalization on Growth in GDP per capita

was examined by McLean and Shrestha (2002, p. 14-15), in respect to the
era from 1975-1990 across 20 developing and developed countries. Their
found a positive influence of financial liberalization on growth in GDP per
capita, consistent with McKinnon and Shaw. The most widely-cited work
supporting the contrary view is that of Rodrik (1998, p. 8-9). Examining
approximately 100 developing and developed countries from 1975-1989,
Rodrick used a regression to study the years where capital accounts were
free of restrictions and growth. His findings revealed no linkage between
financial globalization and growth, leading him to doubt whether capital
flows promote economic development.

In summary, this study explored three theoretical frameworks

regarding the influence of financial liberalization on economic growth in
less developed countries. The first, based on Allocative Efficiency and the
neoclassical growth model, posited that liberalizing the capital account
can enhance international resource allocation and stimulate growth via
reducing the capital cost and boosting investment, ultimately improving
living standards. The second theory, in line with McKinnon and Shaw,
emphasized that financial liberalization can increase savings and investment,
promoting economic growth through policies encouraging saving and
providing investment opportunities. The third perspective, proposed by

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Rodrik, challenged the assumption that financial globalization inevitably

leads to economic growth, highlighting potential costs that may outweigh
benefits, such as increased exposure to financial crises and inefficient
capital allocation. The choice of theory depends on specific country
contexts, institutional quality, and policy effectiveness. The literature
review showcases the complex linkage between Growth in GDP per capita
and financial globalization, presenting diverse findings and underscoring
the need for nuanced understanding and further research to inform policy-
making for sustainable economic growth.

Overview of Financial Liberalization Politics in the Kurdistan

Region

The Kurdistan Region of Iraq (KR-I) achieved its autonomy in 1991,

with a degree of protection provided by a no-fly zone, instituted following
a resolution of the UN Security Council. The first Kurdistan Regional
Government (KGR) was elected the following year. Kurdistan’s residents,
administer the affairs of state, and the KRG has governed the region since.
The political, economy and social authority of the KRG’s increased with the
collapse of the Ba’ath Regime. This encouraged inflows of FDI from several
countries (Adams, 2009; Kanabi Yaba, 2018, p.196). Being new to modern
capitalism, the KR-I followed a free market-oriented strategy following its
effectively separated from the capital of Iraq in 1991. The Kurdistan Region
of Iraq became more committed to laissez-faire policies following the Iraq
war in 2003. After that point, the Kurdistan Region began a transitional
period, during which there was some uncertainty. Following 2003, the
KR-I’s market-oriented approach towards socioeconomic advancement was
consistent with contemporaneous regional and global trends of the time. The
adoption of market-driven development policies (recommended for Iraq by
the United States), the dominance of free-market systems worldwide and the
requirement for international investment were the primary factors pushing
the Kurdistan Region of Iraq into adopting such policies. To improve its
security in a challenging regional context, the KRG encouraged trade and
economic connections with its influential neighboring countries.

Starting from 2003, the KR-I embraced a free market-oriented strategy

for socio-economic advancement, aligning with the prevailing local and
global patterns of the time. The adoption of market-driven development

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policies, advocated for Iraq by the United States, was propelled by the
predominance of free-market models on a global scale and the necessity for
international investment. In seeking to enhance its security in a challenging
regional context, the KRG promoted trade and economic ties within its
influential neighboring countries. Consequently, Turkey emerged as KR-I’s
largest trading partner, with Iran closely following suit as the second largest
contributor to trade. Following the Iraq war in 2003, the region experienced
a decade marked by a semblance of peace and economic progress, which
came to an end with the rise of ISIS and the resulting conflict which affected
the Kurdistan region from August 2014 onwards (Anaid, 2019, p.11).

The Kurdistan Region, similar to other developing regions, offers

significant potential for FDI due to its implementation of free economic
policies, relative stability, and abundance of natural resources as well as
hotels and religious sites. However, the current investment climate may
not be fully supported by modern incentives that align with the current
economic reality. The KRG have implemented, several stimulus measures
to promote FDI, including legislation providing economic incentives
in respect to customs and taxation (Al-Mihya, 2017, p. 1). In Hussein’s
view (2015, p. 238), Contrasting with the remainder of Iraq, the KR-I has
undergone significant levels of peace, stability, and prosperity, resulting in
a relatively stable and self-sufficient economic system. This has led to a
flourishing of both domestic and foreign private investment. The Kurdistan
Region Investment Promotion Law No. 4 of 2006 was created to stimulate
investment in the KR-I. Its purpose was to remove legal barriers and
promote investment of both domestic and foreign capital across a range
of development projects which further the region’s development. This
investment was incentivized via numerous tax schemes and amenities
(Faiq, 2021, p. 110).

In conclusion, the KR-) has embarked on a remarkable journey

towards economic development and autonomy since 1991, buoyed by a
pro-market approach and relative stability. This transition, underscored by
a commitment to free-market policies following the Iraq war in 2003, has
attracted significant FDI and trade relationships, particularly with Turkey
and Iran. Despite periods of regional conflict and the rise of ISIS in 2014,
the KR-I has sustained its appeal to investors due to its economic incentives
and Investment Promotion Law No. 4 of 2006. However, the cautionary

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note remains that improper management of financial liberalization can

lead to severe financial crises, as highlighted by various studies. Hence,
while the Kurdistan Region offers substantial investment potential, prudent
management of its financial openness is crucial to ensuring sustained growth
and stability in the future.

METHODOLOGY

In this section, we delve into the empirical model concerning financial

globalization. Exploring this relationship in-depth, we utilized the Auto-
Regressive Distributed Lag (ARDL) model. This statistical approach
allowed us to derive both long-run and short-run coefficients approach,
offering estimations of the causal connection between the explanatory
variables and dependent variable. The analysis was based on time series data
between 2007-2020. The model was utilized to estimate the linkage between
financial globalization and economic growth. To rigorously examine our
hypothesis, we formulated the econometric specification as follows:

GDP = α + β1 FG + β2EXR + β3OP+ Σi. (1)

Where, the variables for the measurements were as follows:

GDP: Gross Domestic Product (GDP) serves as a fundamental gauge

of economic activity and stands as a representative of economic growth.
It quantifies the complete value of all ultimate goods and services created
within a nation’s boundaries during a year.

FG: Financial Globalization, to explore the influence of financial

globalization, we used FDIas a proxy variable for financial globalization.
FDI data, from 2007–2020 for Kurdistan was available to us. The metric for
financial globalization is represented by the degree of capital flow crossing
international boundaries. (Hussain et al., 2010; Jaumotte et al., 2013; Anwar
et al., 2016; Egbetunde & Akinlo, 2019, p:41; Farouq & Sulong, 2020, p.
280; Khan et al., 2021, p. 455).

EXR: Exchange rate: this study measured the exchange rate as the
prevailing average Central Bank of Iraq exchange rate for the US dollar

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 THE IMPACT OF FINANCIAL GLOBALIZATION ON ECONOMIC GROWTH

against the Dinar throughout the year. Previous studies that have employed
foreign exchange rates include: Precious et al. (2014); Sa’idu et al. (2014);
Udeh et al. (2014); Obidike et al. (2015); Idode and Sanusi (2019); Osu
(2020).

Oil Price: Oil price is a monetary value that is expressed per barrel
of crude oil in US dollars. It is stated in cash due to it being related to the
US dollar and can be shown to oil price in the crude oil market in different
notions such as the price declared, the price achieved, the price of signal,
and the tax rate (AKTUĞ, et al., 2019, p. 277).

Σi : indicates the presumption that the error term conforms to a normal

distribution characterized by a mean of zero and consistent variance. As per
Gujarati (2009), this error term encapsulates unaccounted factors affecting
the respective dependent variable in each model.

Sources of Data

Time-series data for key macroeconomic indicators in Kurdistan

covering the period 2007-2020 were gathered. Annual data was selected
due to the predominant availability of data reported on a yearly basis. It is
commonly advised to have a larger number of observations when testing
hypotheses (Hussein, 2015, p. 169). Data was compiled from various sources
given the absence of a single comprehensive data source, GDP data was
sourced from Ahmed (2021, p. 21). FDI data was obtained from the Board
of Investment database, while oil price data was collected from OPEC’s
annual statistics series. Exchange rate data was acquired from the Central
Bank of Iraq.

RESULTS AND DISCUSSION

Descriptive Statistics

Descriptive statistics are used for checking the average and standard
deviation of variables. These show the average value of variables within
different time periods and how much they deviate from average values. The
standard deviation, with minimum values, shows the stability of variables.

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Kurdistan was 18.9% integrated into the global financial system on

average and in case of its range varied from 15.08% to 21.60% during the
years 2007- 2020. The GDP growth of Kurdistan diversified, from 16.54
BL. to 17.33 BL. and on average GDP grew by 17.06%.

Table 1: The Outcomes of Testing Some Statistical Indicators

Descriptive Statistics GDP FG OP ER
Mean 17.06129 18.90047 4.325348 7.108986
Median 17.07833 18.99281 4.454966 7.109035
Minimum 16.54970 15.08181 3.767922 7.074963
Maximum 17.33639 21.60807 4.601865 7.150701
Sum Sq. Dev. 0.224312 1.941071 0.304716 0.026686
Std. Dev. 0.452844 33.90979 0.835668 0.006409

Unit Root Test

To assess the time series characteristics of the data, we employed the

Phillips-Perron (PP) test, conducting it for all variables in the model at both
the original level and after differencing. The analysis encompassed a time
series from 2007 to 2020.

Table 2: Displays the Outcomes of the Unit Root Tests

Phillips-Perron test statistic
Variables Level First Difference
Trend Intercept Trend Intercept
GDP -2.1497 -1.2498 -3.2158 -3.4799
(0.4512) (0.5953) (0.1669) (0.0456)
FG -1.7786 -1.7531 -2.8035 -4.0223
(0.6358) (0.3763) (0.2404) (0.0201)
OP -2.3571 -1.2407 -3.9769 -3.6168
(0.3802) (0.6223) (0.0433) (0.0230)
ER 26.4350 0.0477 -14.1574 -9.0347
(0.9999) (0.9971) (0.0001) (0.0000)

The results from the PP unit test, as presented in Table-2, demonstrated

that all variables [L (GDP), L (FG), L(OP), and ER] exhibited non-stationary
behavior and possessed a unit root at their level. Subsequent testing for
stationarity at the first difference revealed that all variables achieved
stationarity. In essence, this indicated that all the time series variables
became integrated of order one when considering their first differences.

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ARDL-bounds Test

Table 3: The Outcomes of the Co-Integration Test,

Conducted using the ARDL-Bounds Testing Approach
I(0) I(1)
Value Significant level
Lower Upper
18.5007 10% 2.97 3.74
(Upper) 5% 3.38 4.23
F-Bounds Test
1% 4.30 5.23

In the F-Bounds Test, the calculated F-statistic was 18.5007, surpassing

the upper bound critical value. Hence, this outcome indicated the existence
of a long-run linkage in the model. The rejection of the null hypothesis
suggested that there was indeed a long-period co-integration linkage among
the time series variables utilized in this study.

Granger Causality Test

The Granger causality test outcomes are displayed in Table 5.

Determinations regarding the presence or absence of causality were made
by considering the probability values.

Table 4: Pairwise Granger Causality Tests:

Conclusion
Null Hypothesis: Prob.
(Hypothesis)
LGDP does not demonstrate Granger causality on LFG 0.0000 Rejected
LFG does not demonstrate Granger causality on LGDP 0.0000 Rejected
LGDP does not demonstrate Granger causality on LER 0.0000 Rejected
LER does not demonstrate Granger causality on LGDP 0.0000 Rejected
LGDP does not demonstrate Granger causality on LOP 0.0000 Rejected
LOP does not demonstrate Granger causality on LGDP 0.0000 Rejected

The Granger causality test outcomes are showed in Table 4. The

determination of causality is based on p-values. The null hypothesis suggests
that each variable, taken in isolation, does not Granger cause the other(s).
If the p-value for a specific pair of variables is below 5 percent, we reject
the null hypothesis, indicating the existence of Granger causality between
the two time series variables. In this case, the direction of causality is from
the variable excluded in the model to the variable present in the equation.

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The outcomes in Table 4 demonstrated that individually, LGFG,

LOGOP, and LGER Granger cause LGDP at a 1 percent significance level.
The direction of Granger causality is indicated in the Table.

As shown in Table 4, there was bilateral causality among the dependent

variable and independent variables. Therefore, we did not accept the null
hypothesis.

Estimated Long-Run And Short Run Influences

Table 5: Estimated Long-Run and Short-Run Effects

Dependent Independent Short run Long run
variable variable Coefficient Prob. Coefficient Prob.
(C) -4.8355 0.0036 -4.8355 0.49
FG 0.0233 0.0797 0.0136 0.0174
OP 0.2636 0.0438 0.3139 0.0009
ER 4.3651 0.0450 2.5501 0.0061
GDP Coint Eq(-1) -1.7116 0.0036
(C)
R- Squared=0.99
Adjusted R- Squared= 0.96
F – statistic = 33.6695 (0.0291)
S.E of regression = 0.028
SSR = 0.001
AIC = -4.2407

The outcomes derived from Table 5 unveil the formulation of the

long-period co- integrating equation:

GDPt = -4.8355+ 0.0136FGt+ 0.3139OPt + 2.5501ER t + μ

(2)

According to the equation, keeping all independent variables constant,

GDP will decrease by 4.8355 units in the long run.

In this equation, with all independent variables held at a constant value,

GDP was expected to decrease by 4.8355 units in the long run. The estimates
for both long-run and short-run output, as detailed in Table 6, demonstrated
that all the variables held statistical significance. This implied that they had

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a significant impact on growth of GDP in the long term. The summarized

signs of the estimated coefficients were: FG (+), OP (+), and ER (+).

The analysis of the coefficients revealed that Financial Globalization

(FG), Openness (OP), and Exchange Rate (ER) had positive signs in both
the short run and the long run. This suggested that an increase in these
variables positively affected economic growth in Kurdistan.

The consequence of the outcomes is a notable and statistically

significant positive long-run linkage between economic growth and
financial globalization in Kurdistan. Precisely, a 1% increase in financial
globalization is linked to an approximate 0.014% growth in GDP and
this can be attributed to various factors. Financial globalization attracts
foreign capital and investments, fostering job creation and economic
expansion. It offers easier access to international capital markets, enabling
infrastructure and technology investments. Diversification of investment
sources reduces reliance on a single funding stream, enhancing economic
stability. Technology transfer, risk-sharing, and competition driven by
globalization boost productivity and efficiency. Access to global markets
facilitates exports and economies of scale. Financial sector development,
improved financial intermediation, and sound economic policies further
contributed to long-term economic growth in Kurdistan.

This aligns with the argument presented by Shaw (1973) and

McKinnon (1973) concerning financial liberalization, wherein they
posited that a more open and liberalized financial policy and system would
incentivize greater investment, consequently fostering economic growth.
Moreover, OP and ER significantly and positively impacted growth of
GDP in Kurdistan throughout the period of investigation. This linkage may
indicate the increasing of public revenue, resulting from the increase in oil
price or variation of the exchange rate.

In addition, a 1% rise in oil prices leading to a 0.31% increase in

GDP in the Kurdistan region of Iraq can be attributed to the region’s heavy
reliance on oil exports as a primary revenue source. Higher oil prices
translate into increased government revenues, which are often channeled
into infrastructure development, public services, and economic projects.
This infusion of capital stimulates economic activity, creates jobs, attracts

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foreign investment, and fosters fiscal stability. Additionally, rising oil prices
bolstered consumer confidence and contributed to the region’s economic
growth by enhancing overall economic stability and attracting further
investment. While a 1% rise in ER increased GDP by approximately 2.55%.

An additional noteworthy discovery was the substantial correlation

between financial globalization and long-term economic growth. This
may suggest that political and security stability had an important role in
the Kurdistan Region of Iraq, and it is the main encourager for foreign
investment in it, and this helped to create a suitable investment environment
and helped to achieve growth of GDP in the Kurdistan Region of Iraq
compared to central and southern Iraq, and the majority of Iraqi internal
companies also invested in the region more than they invested in other Iraqi
regions as a result of political and security instability

However, as shown in Table 5 all the variables, except for Financial

Globalization, had a significant influence on short-term growth of GDP.
Financial Globalization showed a positive but insignificant influence on
changes in the growth of GDP, with a 1% increase in the degree of Financial
Globalization leading to approximately a 0.02% rise in GDP. In contrast, a
1% increase in OP resulted in a substantial rise in GDP by approximately
0.26%. Additionally, ER demonstrated a significantly positive effect, where
a 1% increase in the degree of ER resulted in a notable rise in GDP by
approximately 4.37%. The R-square of 99% and the corresponding adjusted
R-square of 96% implied that the independent variables explained more
than 96% of the variability in the dependent variable.

The F-statistic, with a value of 33.6695 and a corresponding probability

of 0.0291, tested for the overall significance of the model. This indicated
that the model demonstrated a good fit, signifying that the independent
variables collectively and significantly determined the dependent variable.

Overall, the analysis suggested that financial globalization, oil price,

and exchange rate played significant roles in driving economic growth in
Kurdistan. The positive signs of the estimated coefficients indicated that
increases in these variables contributed positively to growth of GDP in
both the short term and, more notably, in the long term. This information
can be valuable for policymakers and researchers seeking to understand

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the patterns of economic growth in Kurdistan and the role of financial

globalization within it.

Table 6: Summary of Long-Term Outcomes

(1) a 1% raise in FG boosts the GDPP by 0.014% a 1% ⇧ in FG ⇒ a 0.014% ⇧ in GDP
(2) a 1% raise in OP reduces GDPP by 0.31% a 1% ⇧ in OP ⇒ a 0.31%. ⇧ in GDP
(3) a 1% raise in ER reduces GDPP by 2.55% a 1% ⇧ in ER ⇒ a 2.55% ⇧ in GDP

Diagnostic and Statistical Checking for the Economic Growth

Model

To validate the economic growth models, it is crucial to utilize

diagnostic tests and key statistical indicators. The outcomes of these
diagnostic tests and statistical indicators are displayed in the following Table:

Table 7: Diagnostic Test and Statistical Indicators

for Accuracy in the Economic Growth Model
Ramsey Breusch-Pagan- Jarque-
LM test VIF
Test RESET test Gogfrey test Bera
(Serial Centered
statistics: (Function (Heteroscedasticity Test
correlation) test
form) test) (Normality)
(1.34-
0.6082 0.1315 0.3041 0.7295
1.98)

The diagnostic test outcomes are summarized in Table7. Serial

correlation of the residuals was assessed using the LM test. The standard
computer analysis affirmed that the model in question did not face the typical
issues encountered in standard analyses.

The outcomes of various diagnostic tests showed the robustness

and appropriateness of our model. Firstly, the null hypothesis of no serial
correlation was supported, with a p-value of 0.6082 surpassing the 5%
significance threshold, indicating an absence of serial correlation in the
model. Additionally, the Ramsey test yielded a p-value of 0.1315, which
exceeded the suggested 5% level of significance, confirming that our model
was correctly specified in terms of its functional form.

Moreover, the Jarque-Bera normality test produced a p-value of

0.7295, surpassing the predetermined significance level, suggesting that
the errors in the model followed a normal distribution. Furthermore, the
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Breusch-Pagan-Godfrey test indicated no heteroscedasticity, as evidenced

by a p-value of 0.6215, indicating that the errors were both independent
and homoscedastic concerning the explanatory variables.

Moreover, the estimated Variance Inflation Factor (VIF) parameters

ranged from 1.34 to 1.98, comfortably below the 10 thresholds, indicating
the absence of multicollinearity in our models. To summarize, these findings
confirm the normal distribution, serial independence, and homoscedasticity
of error terms at the 5% significance level, validating the appropriateness
of our model for analysis.

Stability Test

The parameters in both models were stable because they are within
the critical region and do not exceed it, and this was clear evidence that the
two selected models were considered good models.

-2

-4

-6
2016 2017

CUSUM 5% Significance

Figure 2: Cumulative Sum of Recursive Residuals (CUSUM,)

1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
2016 2017

CUSUM of Squares 5% Significance

Figure 3: Cumulative Sum of Squares of Recursive Residuals (CUSUM of Squares)

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Testing the Predictive Performance of the Error Correction

Model

The last and important step in completing the stages of building

the standard model is the step of forecasting the behavior of economic
phenomena, so that the predictable model is devoid of standard problems and
includes stable data and parameters to a large extent, so that it is possible to
rely on it for predictive purposes. There are several methods and models for
forecasting, but this study was based on the ARIMA model and the results
of that analysis are reported as follows, in Figure 5.
17.8
Forecast: LGDPPFF
Actual: LGDPPF
17.6
Forecast sample: 2007 2020
Adjusted sample: 2009 2017
17.4
Included observations: 9
Root Mean Squared Error 0.093440
17.2
Mean Absolute Error 0.083977
Mean Abs. Percent Error 0.488757
17.0
Theil Inequality Coef. 0.002726
Bias Proportion 0.005709
16.8
Variance Proportion 0.001690
Covariance Proportion 0.992601
16.6
2009 2010 2011 2012 2013 2014 2015 2016 2017 Theil U2 Coefficient 0.691530
Symmetric MAPE 0.488643
LGDPPFF ± 2 S.E.

Figure 4: Testing the Predictive Performance of the Error Correction Model

As shown in Figure 5 the depicted data indicated excellent prediction

accuracy, with minimal errors for key metrics such as RMSE, MAE, and
MAPE. Notably, The Inequality Coefficient, regarded as the most robust
predictive performance indicator, approached a value of approximately
0.003. This signified a remarkably strong predictive efficiency of the
estimated model, underscoring its reliability and precision.

CONCLUSION

The primary aim of this study was to empirically explore the influence of
financial globalization on economic growth in Kurdistan. A comprehensive
literature review, including the theories of Shaw (1973) and MacKinnon
(1973) regarding financial liberalization, was conducted. The research
utilized the ARDL Model for analysis. The research findings suggested
that, on the whole, Kurdistan has experienced positive benefits from
the liberalization policy. The results indicated a substantial and positive

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long-term linkage between Financial Globalization and economic growth

in Kurdistan during the timeframe 2007-2020. Specifically, a 1% rise in
Financial Globalization resulted in an approximate 0.014% increase in
GDP and this can be attributed to various factors. Financial globalization
attracts foreign capital and investments, fostering job creation and economic
expansion. It offers easier access to international capital markets, enabling
infrastructure and technology investments. Diversification of investment
sources reduces reliance on a single funding stream, enhancing economic
stability. Technology transfer, risk-sharing, and competition driven by
globalization boost productivity and efficiency. Access to global markets
facilitates exports and economies of scale. Financial sector development,
improved financial intermediation, and sound economic policies further
contributed to long-term economic growth in Kurdistan.

Moreover, a 1% rise in oil prices led to a 0.31% increase in GDP

in the Kurdistan region of Iraq can be attributed to the region’s heavy
reliance on oil exports as a primary revenue source. Higher oil prices
translate into increased government revenues, which are often channeled
into infrastructure development, public services, and economic projects.
This infusion of capital stimulates economic activity, creates jobs, attracts
foreign investment, and fosters fiscal stability. Additionally, rising oil
prices bolster consumer confidence and contribute to the region’s economic
growth by enhancing overall economic stability and attracting further
investment. Overall, the result implied that financial globalization, oil
price, and exchange rate play significant roles in driving economic growth
in Kurdistan. The positive signs of the estimated coefficients indicate that
increases in these variables contribute positively to GDP growth in both
the short term and, more notably, in the long-run.

On the contrary, concerning short-term effects, all variables except

Financial Globalization had a significant influence on growth of GDP.
Financial Globalization exerted an insignificant positive influence,
explaining changes in economic growth, as a 1% rise in the degree
of Financial Globalization increased GDP by approximately 0.02%.
Furthermore, a 1% increase in OP correlated with about a 0.26% increase
in GDP. Moreover, ER had a significant positive effect, with a 1% increase
in the degree of ER associated with approximately a 4.37% rise in GDP.
This information can be valuable for policymakers and researchers seeking

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 THE IMPACT OF FINANCIAL GLOBALIZATION ON ECONOMIC GROWTH

to understand the dynamics of economic growth in Kurdistan and the role

of financial globalization within it.

This study also provides some specific recommendations:

1. Recognize the positive influence of financial globalization on growth

of GDP and consider policies that encourage further integration with
global financial markets.

2. Given the positive linkage between ER and GDP, consider policies

that maintain exchange rate stability to support economic growth.

3. Develop risk mitigation strategies to manage the potential challenges

associated with increased financial globalization, including financial
crises.

4. Invest in education and skills development to prepare the workforce for

the opportunities and challenges that come with financial globalization.

5. Implement effective monitoring and regulatory mechanisms to oversee

the flow of capital and financial transactions, safeguarding against
potential risks.

6. Encourage a diversified base of investors and investment types to

reduce reliance on a single source of capital.

7. Finally, foster a competitive business environment to incentivize local

companies to improve efficiency and product quality in response to
foreign competition.

The major limitation of this paper was the difficult experience in

obtaining the latest relevant and available data in this hitherto unstudied area
of research, because of the typical crude manner of data storage in Kurdistan.

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