How Does Political Instability Affect strongEconomicstrong Growth.pdf

WP/11/12 How Does Political Instability Affect Economic Growth? Ari Aisen and Francisco Jose Veiga © 2010 International Monetary Fund WP/ 11/12 IMF Working Paper Middle East and Central Asia Department How Does Political Instability Affect Economic Growth? Prepared by Ari Aisen and Francisco Jose Veiga Authorized for distribution by Ana Lucía Coronel January 2011 Abstract This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. The purpose of this paper is to empirically determine the effects of political instability on economic growth. 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. JEL Classification Numbers: 043, 047 Keywords: Economic growth, political instability, growth accounting, productivity.