There is a deep interrelation between political stability and economic development. It is often said and observed that political stability of the country lead to the higher rate of growth of the country. By political stability one understands the situation or the state where public can interact freely and openly by following the rules and legislations. When individuals get to provide their say in running the nation, political stability is created. It is where the ruling government is favoured by the population of the country and there are very low chances and experiences of social unrest. Economic growth, on the other hand is the growth of economy over a certain period of time. It is the increase in the capacity of the nation to produce goods and services which is adjusted with inflation (Fraj & Lachhab, 2015). The project report is about the research on the relationship between these two variables i.e. political stability and economic growth. The data will be collected through secondary sources by referring to different journal articles and books. At last, conclusion will be provided on the basis of findings.
The economic literature, the factors which determine growth are the most extensive subjects. There are many economists and authors which claimed that the lower economic growth is because of the instability in the political situations of the nation. The economic growth is observed lowest in the periods of government change and transitions. These situations will be studied in the literature which will provide an insight about the real effect of the political scenario on the economic growth of the nation (Peev & Mueller, 2012).
Project Objective
The main objective of the project report is to identify the relationship between political stability and economic growth. The study will investigate the effects of stability and instability of economic have on the economic growth of the country. It has observed from a long time that there is a positive relationship between the political stability and economic growth in the long as well as short run. The government of the countries should as a matter of importance identify the root causes of the unstable political situations so that considerable growth can be achieved (Ringen, 2017).
Project Scope
The scope of the project is wide. It is because the research report could be used as a helpful source of information to know the root causes of the instability in the political environment of the country and to measure the economic growth variations as per the conditions of political scenario. It has been the topic of debate for the politicians, economists and scholars that how much effect political stability have on the economic growth of the country. The deep connection between the two will help in getting various insights about economic growth and how it can be improved for the nation.
Literature review
This section will include the thoughts, observations and studies of various authors and scholars about the interrelation of the political stability and economic growth. According to Younis, Sharahili, & Selvarathinam (2008), just like a root develops growth for a tree, economic growth contributes for the economic development. The author conducted a study on the Asian countries and questioned that the reason for the slow growth of Asian countries is unstable political environment. There are some industrial countries in Asia like Taiwan, Singapore and Hong Kong and China has attracted the world. It is because of the powerful and stable political parties in these countries. The example of China has been discussed. China introduced one party political system in 1978 and since then it is growing at a good rate. There are other sources as well which are responsible for their good growth rate which includes human capital abundance, physical capital accumulation, improvement and focus on technology and innovation, increased foreign trade and changing attitude of people. All these factors have been the positive contributor to the economic growth of the nation but these factors are somewhat related to the political stability only (Wu, 2011).
Most of the countries which are growing at a good rate are in the period of development because of political stability. It shows that political stability is the major factor or contributor to the economic growth of the country. The real economic growth is the real increase in the gross domestic product or gross national product. The economic growth can be determined by savings and capital output ratio. The neo classical growth model showcases that the economic growth depends on the capital per worker. The author further added that the factors like higher life expectancy, better rules and regulations, stable inflation rate and many more have a positive impact on the economic growth. There are some studies which states that culture is also a determinant of the economic growth. The unstable political systems in the nation hampers the growth and productivity of the nation.
Political instability is created by the revolutions, assassinations and coups. In the opinion of Nomor & Iorember (2017), there is a positive and a very significant relationship between the political stability and economic growth. The governments should find out the root causes of the unstable political environment and should also try to mitigate the effects of the instability so that a sustained growth can be achieved in the economy. The author discussed about the 1999 watershed in the history of Nigeria. Before becoming the democratic country, Nigeria was lying between the rule of civil and military. Since the year 1999, the political stability is attained but the growth is still not high and considerable. It is because of the lower participation of the citizens in the governance, lack of accountability and transparency between the government officials and citizens and the political investments are also not at boom which is hampering the overall growth of the nation. The author further added that political stability is the durability and integrity of the government body in the country which is ruling at present. With lower chances and experiences of social unrest and wars, the state can be the political stable one (Nugent, 2017). Political stability covers four dimensions which are stable government, stable political structure, internal laws and rules and external stability. A political systems which can handle or bear the internal or external shocks is the stable government. It has been investigated that the people will invest in the country and its ventures when a clear future is seen and visible. It saves people form the political unrest which is suddenly created. There is another theory to the stability and growth relationship. The activities and scenes like war and revolution disrupts the normal course of business and government of the nation for the short term but it provides chances of growth in the long term. The theory further suggest that in the long term stable government dysfunction the economic growth and reduces the chance of change and growth. The author points about that the societies who do not long for change and are stable are slow in taking up growth. They reduces the rate of economic growth of the nation. The author concludes that the positive scenario development of politics in the nation is the major contributor to the economic growth of the nation (Fabro & Aixala, 2012).
According to Borner, Brunetti & Weder (2016), when the elections of the country is elected peacefully, it is the example of political stability. There is a strong relationship between political stability and economic growth. If the nation has uncertain political environment, the chances of investments and growth may reduce. Unstable political scenario simply means that the government is not handling the resources properly and in their full capacity. It is clear that no one would like to invest in the country whose future is not stable and there is lot of uncertainty. Such type of investment contains high risk which is not likeable by many of the investors. More foreign direct investment will lead to more development and growth but unstable political environment lowers down the foreign direct investment and thereby the chances of growth. The lack of stability in the economy will lead to lower tourists, lower investments a lower amount of profits. The author shares the example of Namibia which is enjoying political stability since past 25 years and encouraged lot of investors to invent in the country which includes the Chinese investors as well. The cities of the nation has developed a lot in terms of infrastructure, employment and living standard of people. The other example can be taken of one of the fastest economy of the world, China. China is stable in terms of political scenario which results in the greater social, economic and cultural richness in the country. The communist party of china and other political parties work together to achieve a common goal so that a prosperous economy can be built up. China does not have any opposition party which does not create any instability in the government. The government of China worked on the agenda of single government who works for the wellbeing of people (Alexandrakis & Livanis, 2013).
Taking example of Africa, political stability is the biggest challenge for the government and people of African population. There are many African countries which are rates low in terms of political stability. Unstable political government leads to the criminal activities and unfavourable situations like the political assassinations, kidnappings, violence, civil wars and more. This worsens the economy and its difficulties. The instability in Africa shows why the countries in Africa are lagging far behind in terms of growth and development. Where stability prevails, economic development takes place just like Namibia and China. To bring stability, the policies should be made fair and for promoting equality across all the regions, ethnic groups and income groups. The implementation of the policies made should be done in the manner which promotes the stability of the political system and hence, stronger economic growth (Yang, 2015).
In the opinion of Hussain (2014), political instability is the degree of government collapse either because of the conflicts between different political parties or competition between them. The change in the governments increases the chances of other changes. It is studied that the unstable government may reduce the investments in the economy and therefore, the growth stops but there is another side to it. The poor economic performance can also lead to the downfall of government and unrest in the political powers of the country. Political stability can be taken as the double edged sword where at both the ends, one or the other has to suffer. Political stability may demoralise public because stability in the government may reduce the growth in innovation and chances of improvement is taken back. Because is change is necessary in all the spheres of life and change is evident, politics also need a change to support healthy competition, growth and prosperity. Politically stable systems might act as a barrier for the personal freedom of the individuals. Power and corruption might take place and freedom to speech and religion might get hamper. Author has further explained this with the help of an example. Vietnam is controlled by a single party but this economy is one of the most volatile in entire Asia. The economy was in distress which was stable once in 1997 to 2006 period. The country could not handle the financial turmoil of 1998 and the private and public sectors began to distress. The firms faced the problems of inefficiency, high risks, no proper use of resources and more. The inflation rose and it was at peak i.e.23% in 2006. Vietnam, soon began to fall from the competition with the comparative economies. When political stability is considered in the terms of growth, a specific kind of stability is been considered. The rule of law and powerful institutions are been considered instead of the power in the hands of single individual, corruption and bureaucracy. Ultimately, the author wants to say that the stable government is necessary for the growth of the nation. Government is not just about politics but much more than that. Political stability for longer period of time may be detrimental for the growth of the nation. It can have both positive and negative effects. On one hand, it provides higher foreign direct investment but on the other hand, it may lead to corruption and lack of competition in the nation because of which the chances and rate of growth will suffer (Aisen & Veiga, 2013).
As per Asteriou & Price (2003), the influence of political instability is high on the economic growth of UK. The research was conducted taking into account six variable which quantify the political instability and the effect on growth is examined. From results, it was clear that there is a strong link between two. The research also stated that the uncertainty of the political party is not the only factor which affect growth but is one of the factor. Bayar & Aytemiz (2015) added that emerging Asian countries have faced good economic growth in the last three decades. The study concluded that economic freedom provides the maximum growth to the economy. The developing or less developed countries need to increase and focus on their economic freedom so that they could grow and economic growth and political stability could feed each other (Tabassam, Hashmi & Rehman, 2016).
According to Pulok & Ahmed (2013), political stability plays a pivotal role in the economic progress of the country. The authors have taken the example of Bangladesh that what effect political stability have on the economic performance of Bangladesh. The long term and short term effect of the same has been investigated. The studies revealed that in the long term, political stability is positive and effective for the growth of nation while it is negative and ineffective in the short term. Bangladesh has an instable political regime since its birth in 1971. The country has gone through many challenges but still managed to maintain a good growth rate. Despite a good growth, the country falls into the category of the least developed countries. There has been many debates conducted on the role of politics in the social and economic growth of the economy. The role of political institutions are increasing in the structure of judiciary, regulations and quality and dependence of the nation. The sustainable growth of the political institutions are better for economic growth. The Third world countries are less developed and poor because of the instability in their political activities. The most stable countries are those which have a stable government and political party to rule. This sets up more reliability and helps in managing the conflicts between the opposite political parties. The author further adds up that the political instability is a big challenge for the African countries. They are highly ranked in terms of political instability (Schneider & Giorno, 2014).
In the opinion of Zghidi (2017), for the growth of an economy, the factors like Foreign Direct Investments, Research & development, human resources and technology plays a major role. In the uncertain political environment, the companies become more cautious and they do not get the chance to invest freely. The political stability has a strong connection with economic progress of the country. Democracy is also a variable which impacts economic growth of the country [Refer Appendix 1].
According to Okafor (2017), the relationship between political stability and economic growth is because of the labour and physical capital factors. The author has studied the history of many countries like Brazil, Romania, Indonesia and more. A panel data was collected which proved that the political stability have long term and short term impact on the economic growth of the country but labour have no impact on the countries and their economic progress. But it is also true that the countries which have low stability scores can also develop and have good economic progress. Knight (2013) adds up that social instability is the concept which is analysed rarely by the economists but is of prime importance. The author has taken up surveys and other evidences to test the effect of political stability on the economic progress and to find out economic causes which affects political stability. The author has shared the example of China and it is observed that China is full autocracy but is one of the best growing nations. The lower degree of political stability gives rise to the social and economic evils like corruption which further makes the nation hollow and lead it towards distress (Radu, 2015).
Conclusion
From the analysis of different journals, thesis and working papers, it is concluded that political stability and economic growth are interrelated. Not only political stability affects the overall economic progress of the nation but there are many other factors like human capital, availability and use of resources, technology, etc which helps in the growth of the country. The political stability, economic freedom and many other factors have impact on the economic growth of nation. It has also been identified that in the short run, political stability is positive for the economic growth of the country but opposite happens in case of long term political stability. It is because it ends up the chances of change, innovation and freedom of speech and region. The research has been done by taking examples of the political stability level of different countries and their growth. It has also been considered that what other factors are of prime importance in determining the growth of the country. Strong stability in political institutions can lead to the higher amount of FDI in the country but it can also hamper the innovation and change in the nation and its regulations iof same political party rules for a longer period of time.
References
Aisen, A. and Veiga, F.J. (2013). How Does Political Instability Affect Economic Growth? European Journal of Political Economy, 29: 151–167.
AlBassam, B.A., (2013). The relationship between governance and economic growth during times of crisis. European Journal of Sustainable Development, 2(2), 1-18.
Alexandrakis, C., Livanis, G. (2013). Economic Freedom and Economic Performance in Latin America: A Panel Data Analysis. Review of Development Economics, 17(1): 34–48.
Asteriou, D. & Price, S., (2003). Political instability and economic growth: UK time series evidence. Scottish Journal of Political Economy, 48(4), 383-399.
Bayar, Y. & Aytemiz, L. (2015). Impact of economic freedom, political stability and economic growth in the USA on emerging Asian economies. ????????? ???????? ?????????, (6), 62-73.
Borner, S., Brunetti, A., & Weder, B. (2016). Political credibility and economic development. Springer.
Fabro, G. and Aixala, J. (2012). Direct and Indirect Effects of Economic and Political Freedom on Economic Growth. Journal of Economic Issues, 46(4): 1059–1080.
Fraj, S. H., & Lachhab, A. (2015). Relationship between corruption and economic growth: The case of developing countries. International Journal of Economics, Commerce and Management, 3(9), 862-875.
Gurgul, H. & Lach, ?., (2013). Political instability and economic growth: Evidence from two decades of transition in CEE. Communist and Post-Communist Studies, 46(2), 189-202.
Hussain, Z., 2014. Can political stability hurt economic growth?. The World Bank. Retrieved from https://blogs.worldbank.org/endpovertyinsouthasia/can-political-stability-hurt-economic-growth
Knight, J. (2013). The economic causes and consequences of social instability in China. China Economic Review, 25, 17-26.
Nomor, D T and Iorember, P T (2017). Political Stability and Economic Growth in Nigeria. IOSR Journal of Economics and Finance, 8(2). 45-53.
Nugent, N. (2017). The government and politics of the European Union. Palgrave.
Okafor, G. (2017). The impact of political instability on the economic growth of ECOWAS member countries. Defence and Peace Economics, 28(2), 208-229.
Peev, E. & Mueller, D.C. (2012). Democracy, Economic Freedom and Growth in Transition Economies. Kyklos, 65(3): 371–407.
Pulok, M H & Ahmed, M U (2013). The role of political stability on economic performance: The case of Bangladesh. Journal of Economic Cooperation and Development, 34(3):61-100.
Radu, M. (2015). Political stability-a condition for sustainable growth in Romania?. Procedia Economics and Finance, 30, 751-757.
Ringen, S. (2017). The possibility of politics: a study in the political economy of the welfare state. Routledge.
Schneider, J.D. & Giorno, C. (2014). Economic Uncertainties and Their Impact on Activity in Greece Compared with Ireland and Portugal. OECD Economics Department Working Papers, No. 1151, OECD Publishing, Paris.
Tabassam, A. H., Hashmi, S. H., & Rehman, F. U. (2016). Nexus between political instability and economic growth in Pakistan. Procedia-Social and Behavioral Sciences, 230, 325-334.
Wu, C. (2011). Economic Freedom, Economic Growth and China. The Chinese Economy: 44(5): 104–119.
Yang, G. (2015). Political Stability vs Economic Development. Retrieved from https://www.newera.com.na/2015/03/13/political-stability-economic-development/
Younis, M, Sharahili, X X L Y & Selvarathinam, S (2008). Political Stability and Economic Growth in Asia. American Journal of Applied Sciences, 5 (3): 203-208.
Zghidi, N (2017). Do Political Stability and Democracy Increase National Growth? Evidence from African Countries Using the GMM Method. Journal of Global Economics, 5, 242
