Fiscal policy, growth, income distribution and sociopolitical instability

- We present a model of fiscal policy that affects sociopolitical instability (SPI).
- Baseline level of SPI will determine if an economy is able to grow.
- SPI determines the growth path of the economy: linear, concave or convex.
- If SPI is high an economy remains in poverty trap even if policy is set optimally.
- Growth rate of the economy depends on: SPI, fiscal policy and income distribution.

This paper identifies the fiscal instruments that governments can use to promote economic growth when sociopolitical instability (SPI) is present. We show that fiscal policy that takes into account income distribution and SPI transforms a neoclassical growth model into one with both endogenous growth and a poverty trap. Under these circumstances, the growth rate of the economy depends upon SPI, fiscal policy and income distribution. The baseline level of SPI determines an economy's ability to grow. If SPI is high, the economy remains in a poverty trap even if fiscal policy instruments are set appropriately.