How does political instability affect economic growth?

The purpose of this paper is to empirically determine the effects of political instability on economic growth. By 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.

► We empirically analyze the effects of political instability on economic growth. ► We perform system-GMM estimations on a panel of 169 countries (1960 to 2004). ► Political instability is found to lead to lower growth rates of GDP per capita. ► The channels of transmission are analyzed through a growth accounting exercise. ► Pol. instability lowers the growth rates of TFP and of physical and human capital.