How Does Political Instability Affect Economic Growth?

How Does Political Instability Affect Economic Growth?

January 2011 | Ari Aisen and Francisco Jose Veiga
This paper examines the impact of political instability on economic growth, using a dataset of 169 countries from 1960 to 2004. The authors employ system-GMM estimators for linear dynamic panel data models to analyze the effects of political instability on GDP per capita growth. Key findings include: 1. **Negative Impact on Growth**: Higher levels of political instability are associated with lower GDP per capita growth rates. An additional cabinet change (a new premier or significant cabinet reshuffle) reduces the annual real GDP per capita growth rate by 2.39 percentage points. 2. **Transmission Channels**: - **Total Factor Productivity (TFP)**: Political instability negatively affects TFP growth, accounting for more than half of the total negative effects on GDP growth. - **Physical Capital Accumulation**: Political instability also reduces physical capital accumulation, with a slightly larger effect than human capital accumulation. - **Economic Freedom and Ethnic Homogeneity**: Economic freedom and ethnic homogeneity are beneficial to growth, while democracy may have a small negative effect. 3. **Robustness Tests**: The negative effects of political instability on economic growth are robust to various sample restrictions and alternative period lengths. 4. **Conclusion**: The paper suggests that governments in politically unstable countries need to address the root causes of instability and mitigate its effects on economic policies to foster durable economic growth. The study contributes to the literature by quantitatively identifying and quantifying the main channels through which political instability affects economic growth, providing valuable insights for policymakers and researchers.This paper examines the impact of political instability on economic growth, using a dataset of 169 countries from 1960 to 2004. The authors employ system-GMM estimators for linear dynamic panel data models to analyze the effects of political instability on GDP per capita growth. Key findings include: 1. **Negative Impact on Growth**: Higher levels of political instability are associated with lower GDP per capita growth rates. An additional cabinet change (a new premier or significant cabinet reshuffle) reduces the annual real GDP per capita growth rate by 2.39 percentage points. 2. **Transmission Channels**: - **Total Factor Productivity (TFP)**: Political instability negatively affects TFP growth, accounting for more than half of the total negative effects on GDP growth. - **Physical Capital Accumulation**: Political instability also reduces physical capital accumulation, with a slightly larger effect than human capital accumulation. - **Economic Freedom and Ethnic Homogeneity**: Economic freedom and ethnic homogeneity are beneficial to growth, while democracy may have a small negative effect. 3. **Robustness Tests**: The negative effects of political instability on economic growth are robust to various sample restrictions and alternative period lengths. 4. **Conclusion**: The paper suggests that governments in politically unstable countries need to address the root causes of instability and mitigate its effects on economic policies to foster durable economic growth. The study contributes to the literature by quantitatively identifying and quantifying the main channels through which political instability affects economic growth, providing valuable insights for policymakers and researchers.
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