Effect of Political Instability on Economic Growth and Development

Effect of Political Instability on Economic Growth and Development

Economic growth and political stability are deeply interconnected. On the one hand, the uncertainty associated with an unstable political environment may reduce investment and the speed of economic development. On the other hand, if the economic performance is poor then it may lead to failure for the government and it will bring political mess. Political instability is regarded by economists as a serious disorder which is harmful to economic performance. Political instability is likely to shorten policymaker’s horizons leading to sub-optimal short term macroeconomic policies. It may also lead to a more frequent switch of policies, creating instability and thus, negatively affecting macroeconomic performance. If we consider the damaging consequences of political instability on economic performance of a country at the same way as the political instability is now prevailing across countries and time is quite surprising.

The widespread phenomenon of political (and policy) instability in several countries across time and its negative effects on their economic performance has arisen the interest of several economists. Such as, the profession produced plenty of literature documenting the negative effects of political instability on a wide range of macroeconomic variables including, among others, GDP growth, private investment, and inflation. Alesina et al. (1996) use data collected from 113 countries from the year 1950 to 1982 which shows that the GDP growth is significantly lower in those countries and time periods which have a high tendency of government collapse.

Back in 2009, Jong-a-Pin also found that higher degrees of political instability lead to lower economic growth. In favor to the private investment, Alesina and Perotti back in 1996 has shown that socio-political instability creates an uncertain political-economic environment which raise the risks and reduce the investment.

Political instability also leads to higher inflation as shown in Aisen and Veiga in the year of 2006. Quite interestingly, the mechanisms at work to explain the inflation in their paper resemble those affecting economic growth; namely that political instability shortens the horizons of governments, disrupting long term economic policies encouraging to a better economic performance.

Some recent result has found that in countries and time periods with a high propensity of government collapses, growth is significantly lower than otherwise. The effects of these are so strong for both of the two types of government changes considered: all the government turnovers which includes those that do not involve in a major change in the ethical path or an unbalanced transfer of power or instead those government turnovers that involves only these two types of changes.

There are few more findings, those are:

1) Contemporary low growth in economy is not found to increase the simultaneous tendency of government changes.

2) They did not find any evidence that shows the economic growth is considerably different when strict rules are followed compared to equality.

Other than all these information’s, there are some more bad effects that can happen because of the political instability of a country. When the political condition is unstable in a country, the international business companies don’t want to invest much on those countries. Because, an unstable political situation will always put their investment on high risk. There can be sudden strike or other problems can be happen in production or in the export import section of the country. Not only just foreign investors, the local investors also feel uninterested if the political situation in not stable. So the whole economy goes in trouble. It hampers all kinds of business sector of the country. After all these discussions we can easily understand the importance of political stability in a country. Without the stability in political section, the country won’t able to get the expected result from the economy and the overall development of the country will also be hampered.


References:

corescholar.libraries.wright.edu/econ_student/82/


You May Also Like

Author: Mahfujur Rahman

Mahfujur Rahman is one of the top contributors of GotAbout Business Strategy and Analysis. He has finished his BBA from North South University and currently doing his Masters of Business Administration in Dhaka University. He has a strong interest in Finance and Investment.

The Disclaimer is Also Found at the Bottom of Every Post of This Blog.The owner/contributor of Gotabout Business Management and Analysis is not a licensed financial analyst, investment professional, investment advisor, or tax professional. GOTABOUT SHOULD NOT BE VISITED FOR INVESTMENT OR FINANCIAL ADVICE. Read the Complete Disclaimer