The Economic Costs of Political Instability: Evidence from Pakistan

This study analyses the impact of Political Instability (PI) on economic growth. PI is referred as the frequent regime or government changes in a country. PI affects economic growth due to inconsistent and uncertain government policies regarding investment and trade, tax system, government spending and fiscal balance, debt structure, monetary policy, exchange rates and inflation. PI coupled with these factors affects internal and external investments and ultimately future economic growth rates. Employing data from Pakistan for the period of 1984-2018, a country with a long history of various episodes of political instability under various democratic and non-democratic regimes, this study finds evidence that PI leads to significantly lower economic growth. After accounting for the effect of political institutions as well as the impact of both internal and external conflicts, we find that the negative effect that PI has on economic growth has not been abated significantly. Our research contributes to a better understanding of the negative impact of political instability on the economy.