How Does Political Instability Affect Economic Growth?

NIPE Working Paper No. 5/2010

37 Pages Posted: 28 Feb 2010

See all articles by Ari Aisen

Ari Aisen

International Monetary Fund (IMF) - Asia and Pacific Department; Central Bank of Chile

Francisco José Veiga

Universidade do Minho and NIPE

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Date Written: February 27, 2010

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

JEL Classification: O43, O47

Suggested Citation

Aisen, Ari and Veiga, Francisco José, How Does Political Instability Affect Economic Growth? (February 27, 2010). NIPE Working Paper No. 5/2010, Available at SSRN: https://ssrn.com/abstract=1560524 or http://dx.doi.org/10.2139/ssrn.1560524

Ari Aisen

International Monetary Fund (IMF) - Asia and Pacific Department ( email )

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Central Bank of Chile ( email )

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Francisco José Veiga (Contact Author)

Universidade do Minho and NIPE ( email )

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