Is there any relationship between political instability and economic growth?

Instability in the political system is common in all countries throughout the world. Political instability is typically defined as the likelihood that a government may fall either as a result of disputes or intense competition between different parties. 

A shift in government also enhances the chance of other changes in the future. Economic crises, for example, often develop as a result of prolonged political turmoil. Financial hardship can contribute to political unrest as well.

The more stable a country's political system, the greater its economic growth. In panel data from 98 nations, Barro (1991) examines the relationship between political unrest and economic expansion. The findings of this investigation show that political instability has a major detrimental impact on these countries' economic growth. 

Political instability, according to Haan and Siermann (1996), hampered investment in Asia and North America. Similarly, Aisen and Veiga (2011) argued that a high degree of political instability relates to a lower GDP. 

Since political stability and economic growth are intertwined, two things can happen. First, the political environment's unpredictability could slow growth and discourage both domestic and foreign investment. And second, a weak economy can result in political instability and the overthrow of a government.

Political chaos can impede growth through repression and unfavourable change. This can lead to social, ethnic or even national collapse. Additionally, it can lead to more significant foreign influence or foreign interference. Disputes on the political front can be a significant impediment to all elements of economic cooperation, including commerce, investments, supply chains and the logistics of transportation. 

A good example of this is the hartal or general strike in the South Asian subcontinent, especially in India, Pakistan and Bangladesh. In Bangladesh, the major export market of ready-made garments (RMG) bore the burden with daily losses totalling Tk600 crore, according to one earlier study. Economists, businesspeople and other stakeholders agree that, in 2014, the financial damages incurred by a day of protest ranged between around Tk1,500 to Tk2,000 crore. 

Bangladesh's economy suffered from hartals to a sufficient degree, especially during periods of extremely protracted hartals associated with political upheavals. According to an estimate, the average cost of hartals to the economy from 1972 to 2014 was between 3% and 4% of GDP. Additionally, the average decline in export values from 1972 to 2014 was 0.4633%. 

Another example would be the Syrian civil war that started in 2015 and is still continuing.  The political crisis was the underlying factor that led to the war, which in turn contributed to other disruptions like food shortages, skyrocketing prices for necessities, drought and the humanitarian crisis that led to the onset of the economic crisis. With surging inflation, a depreciating currency and chronic fuel shortages in both government-run and rebel-held areas, Syria's economy has fallen to its lowest point since the country's civil conflict began.

On the other side, Sri Lanka is experiencing the greatest economic crisis since its independence from Britain in 1948. This crisis is the result of a number of circumstances, including terrorist activity, the Covid-19 pandemic, the printing of money by the Central Bank and economic mismanagement and rampant corruption on part of the Rajapaksa family. 

The terrible state of the economy provoked outrage, both spontaneous and orchestrated, from individuals from political parties as well as non-partisan entities. Mahinda Rajapaksa stepped down as prime minister in the midst of the riots in May 2022. Gotabaya Rajapaksa, the president, had to resign from the post as well. As a result, the financial meltdown of the country directly affected the political unrest.

Correspondingly, the political landscape in Pakistan is also complicated. There have been 29 prime ministers in Pakistan since 1947, yet none of them could serve a full term. The last prime minister Imran Khan was also ousted through a no-confidence motion in the National Assembly in the midst of an economic crisis and mass protests. Pakistan's economic predicament appears to be getting worse every day. Its currency saw the largest one-day loss in more than twenty years, falling to 262 versus the dollar. 

Economic growth in a nation can be significantly impacted by political upheavals. Political unrest can temporarily lower investor confidence and discourage foreign investment, which might impede economic progress. Businesses could be reluctant to make investments in a nation with unrest in the political system and consumers might be less eager to spend money, which would result in a decline in economic activity. In addition, tax collections may suffer and public spending may be curtailed during political crises, which results in a loss of money for the government. 

All these may have detrimental effects on economic expansion. In addition, long-term political instability can also result in inconsistent economic policies which makes it challenging for companies and investors to make long-term plans. As a result, a nation may find it more difficult to attain sustainable economic growth.

Md Obaidullah is a Research Assistant at the Centre for Advanced Social Research, Dhaka. 

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.