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Executive SummaryThe analysis of the consequences of socio-political instability has been a central theme in recent macroeconomic research, in general, and in the economic growth literature, in particular. There are two different views on the nature of the relationship between political instability and growth. Some authors submit that political instability disrupts productive activities and increases uncertainty. By doing so, it undermines the incentives for the accumulation of physical capital with detrimental consequences for the rate of economic growth. Other economists argue that economic growth leads to more political instability because growth entails substantial structural changes that undo political coalitions and induce painful read*justments in the balance of power among different interest groups.Despite the negative relationship between political instability and economic growth having been elevated to "stylized fact" status, the empirical studies on which this assessment is based have been heavily criticized for ad hoc selection of explanatory variables, excessively narrow definitions of political instability, insufficient sensitivity analysis and failure to investigate the direction of causality. Although not fully sharing this criticism, we believe that this finding should not be elevated to "stylized fact" status without demonstrating that causality exists and runs from political instability to growth, rather than vice-versa.The objective of this paper is to investigate the existence and direction of a causal relationship between political instability and economic growth. To do so, we construct two indexes of political instability (one for mild and the another for severe instability) for non-overlapping five-year periods, between 1960 and 1995, for 98 developing countries. We use the Granger causality framework and report Anderson-Hsiao-Arellano instrumental variable estimates.We find no evidence of the hypothesized negative and causal relationship between political instability and economic growth. Our sensitivity analysis, however, suggests two possible explanations for the apparent disagreement between our findings and those of the rest of the literature. First, for the full sample, the negative relationship obtains only contemporaneously (and independently of whether we use 25-or 5-year averages). Second, in the long run and ignoring institutional factors, the Sub-Saharan Africa sample seems to be the driving force in arriving at the negative relation between growth and political instability.Abstract: An unstable macroeconomic environment is often regarded as detrimental to economic growth. Among the sources contributing to such instability, the literature has assigned most of the blame to political issues. This paper empirically tests for a causal and negative long-term relation between political instability and economic growth, but finds no evidence of such a relationship. Sensitivity analysis indicates that there is a contemporaneous negative relationship and that, in the long run and ignoring...

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This paper constructs a model of the transfer paradox for a small open economy with nontraded goods. It demonstrates that increased production of nontraded goods can change their domestic price so as to offset the otherwise beneficial effect of aid and, under certain conditions, to create a transfer paradox even in a small country. The model is estimated with time-series data for 44 aid-dependent countries for the period 1970-90. The results support the model and show that the nontraded goods expansion effect is more likely to cause immiserization than Harry G. Johnson's (1967) tariff-distorting export-displacement effect.