HI6008: Political Stability and Economic Progress Research Report

This report delves into the intricate relationship between political stability and economic growth. It begins with an introduction highlighting the interconnectedness of these two variables and sets the project's objective to identify and analyze their correlation. The scope encompasses a broad examination of how political stability, or the lack thereof, affects economic growth. The literature review synthesizes the perspectives of various authors and scholars, exploring how political stability can foster economic development by attracting investments, promoting fair policies, and providing a stable environment for business. Conversely, it also acknowledges arguments that excessive stability can hinder innovation and change. The report examines the impact of political instability, such as government collapses and conflicts, on economic performance. The conclusion summarizes the key findings, emphasizing the significant influence of political stability on economic growth and the need for governments to address instability to foster sustainable development. The report follows the structure of HI6008 Assignment 1, including an introduction, objective, scope, literature review, conclusion, references, and appendix.

Running head: Business Research
Business Research
Relationship between political
stability and economic progress

Relationship between political stability and economic progress 1
Table of Contents
Introduction ............................................................................................................................................ 2
Project Objective ..................................................................................................................................... 2
Project Scope .......................................................................................................................................... 3
Literature review ..................................................................................................................................... 3
Conclusion ............................................................................................................................................... 8
References .............................................................................................................................................. 9
Appendix ............................................................................................................................................... 11

Relationship between political stability and economic progress 2
Introduction
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).

Relationship between political stability and economic progress 3
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

Relationship between political stability and economic progress 4
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).

Relationship between political stability and economic progress 5
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).

Relationship between political stability and economic progress 6
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

Relationship between political stability and economic progress 7
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].

Relationship between political stability and economic progress 8
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.

Relationship between political stability and economic progress 9
References
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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. Актуальні проблеми економіки,
(6), 62-73.
Borner, S., Brunetti, A., & Weder, B. (2016). Political credibility and economic development.
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Management, 3(9), 862-875.
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Hussain, Z., 2014. Can political stability hurt economic growth?. The World Bank. Retrieved
from http://blogs.worldbank.org/endpovertyinsouthasia/can-political-stability-hurt-
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Okafor, G. (2017). The impact of political instability on the economic growth of ECOWAS
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Radu, M. (2015). Political stability-a condition for sustainable growth in Romania?. Procedia
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from African Countries Using the GMM Method. Journal of Global Economics, 5, 242.

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11
Appendix
Figure 1: The relationship between Democracy, political stability and Economic growth
Source: Zghidi (2017).