How Does Political Instability Affect Economic Growth?

Abstract

The purpose of this paper is to empirically determine the effects of political instability on economic growth. Using the system-GMM estimator for linear dynamic panel data models on a sample covering up to 169 countries, and 5-year periods from 1960 to 2004, we find that higher degrees of political instability are associated with lower growth rates of GDP per capita. Regarding the channels of transmission, we find that political instability adversely affects growth by lowering the rates of productivity growth and, to a smaller degree, physical and human capital accumulation. Finally, economic freedom and ethnic homogeneity are beneficial to growth, while democracy may have a small negative effect.Keywords: Economic growth, political instability, growth accounting, productivity AbstractThe purpose of this paper is to empirically determine the effects of political instability on economic growth. Using the system-GMM estimator for linear dynamic panel data models on a sample covering up to 169 countries, and 5-year periods from 1960 to 2004, we find that higher degrees of political instability are associated with lower growth rates of GDP per capita.Regarding the channels of transmission, we find that political instability adversely affects growth by lowering the rates of productivity growth and, to a smaller degree, physical and human capital accumulation. Finally, economic freedom and ethnic homogeneity are beneficial to growth, while democracy may have a small negative effect.

Internationalization and innovation performance of emerging market enterprises: The role of host-country institutional development

“…Democracies can protect property and facilitate human development (Kaufmann, Kraay & Zoido-Lobaton, 1999), which in turn encourages investment in innovation. Second, political stability affects economic growth by influencing investment in physical and human capital (Aisen & Veiga, 2013). A stable political environment reduces uncertainty (Schneider & Frey, 1985;Rodrik, 1989) and encourages innovators to take new innovative initiatives.…”

A Novel Methodological Approach to Estimate the Impact of Natural Hazard-Induced Disasters on Country/Region-Level Economic Growth

“…Qayyum and Haider (2012) extended the neoclassical growth model of Solow-Swan (Dowrick and Rogers 2002) to investigate the effect of institutional quality, that is, governance, financial debt, and foreign aid on the economic growth of low-income countries. Aisen and Veiga (2013) and Jong-A-Pin (2009) investigated the effects of political instability on the economic growth of countries using a panel data analysis approach and found that a higher degree of political instability is associated with a lower growth rate. Although this literature is not exhaustive, it is evident that the study of growth econometrics is an important topic that needs further attention.…”

Index of political instability in brazil, 1889-2009

“…The key studies in this category include those of Barro (1991 and, who used panel-data techniques to study the effects of political instability on economic growth in samples of countries. Several recent studies use the generalized method of moments (gmm) to deal with endogeneity problems, including Aisen and Veiga (2011) who attempt to identify the channels through which political instability manifests itself in the economic structure.…”

“…The second definition, used by Annett (2001) and Aisen and Veiga (2011), among others, views political instability as resulting from a set of multiple phenomena representing conflicts between different social groups. The phenomena in question could be civil wars, coups d'état, violent protests or new constitutions, or other events; and they are generally measured as categorical variables.…”