Political stability and growth: An application of dynamic GMM and quantile regression

- Studies the effect of political stability/instability on Growth particularly in OIC countries.
- Initial study to test the importance of political stability from an Islamic growth perspective.
- Two-step system GMM and simultaneous quantile regression are applied.
- Political instability is higher in OIC countries than in non-OIC countries.
- Political instability affects Growth more severely in lower and middle income OIC countries.

This paper studies the effect of political stability on economic growth by taking 120 developing countries over the period of 1996-2014. We apply relatively advanced dynamic two step system-GMM and quantile regression. Political stability is found to be a key determinant of economic growth. More importantly, political instability (or risk) is found to be higher in the OIC countries and is a deterrent to economic growth. Also, for the lower and middle income OIC countries, political instability appears to affect economic growth more severely perhaps due to the absence of strong economic and political institutions. Moreover, political instability is also found to be significantly higher in the oil-dependent OIC countries. Notably, political instability is likely to affect growth through the channels of investment and human capital accumulation in the developing countries. Finally, the impact of political stability and political instability on growth is found to be equally distributed across the OIC countries with higher or lower growth level. Therefore, the development of political and economic institutions along with human capital development is recommended for all the developing countries in general and the OIC countries in particular.