1. to general strikes and violence not

1.      Introduction:

This study
revolves around the problem of political instability and its impact on economic
growth. Political instability is defined as “the propensity to observe
government changes” (Alberto Alesina 2010). Political instability has become a
serious and threatening problem especially in developing and underdeveloped
countries. It is creating many problems and disturbing the development of these
countries. The instability of government, weak political culture and
inefficiency of political parties create the scenario for a politically
instable state. Political instability has become a severe problem especially
for the developing and underdeveloped countries. The most significant part of
this study is that how political instability discourages economic growth.
Political instability reduces economic growth and this reduction and slow down
of economic activities threaten the local and foreign investors to put their
investment in such a risky environment. This fall in investment reduces the
productivity, savings, and also consumption level because of fall in earning
capacity and purchasing power of masses. The political instability causes
inflation and unemployment to rise and this high inflation and unemployment
create social un-rest and uncertainty among the people and this un-rest can
lead to general strikes and violence not only against employers but also
against Government policies. The rationale class of the society starts
criticizing on government plans. These social unrest and strikes will pass on a
negative signal to the investors. Consequently, investors hesitate to put their
huge investments at stake and risk. Political instability is supposed to slow
down economic activities and physical human capital adversely affects growth of
output, and it disrupts market activities and disturbs macroeconomic variables.
Political instability is seriously harmful for the economic policy makers and
it limits the scope of growth and prosperity. Political instability is measured
by various factors and determinants such as elections, terrorist attacks,
regime changes and strikes in the country over a period.

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Reasons of political instability:

The
instability of regimes, weak political culture and inefficiency of political
parties create the scenario of unstable political state. Political instability
has become a dangerous issue in developing and under developing countries but
the problem is severe in Pakistan, India, Afghanistan, and Burma etc. Other
major reasons of political instability are system of conflicts since
independence, role of opposition, role of media etc. Opposition works for
personal interest instead of national benefit. Media is in the hands of
dictators and they are using it for their own sake to promote every type of
corruption. Media keeps people ignorant and judges weak.

Effects of political instability on economic growth:

Political unrest affects every factor of economy directly and
indirectly. It effects investment and reduces it because when regime changes
again and again, risk averse people never invest because of fear to face loss
in business. Political unrest causes inflation and reduces productivity and
consumption of a country, consequently investment and exports declines. When
productivity and investment decreases, unemployment automatically increases.
This increment in unemployment affects the purchasing power of bodies.

I m doing this study because in the Pakistan almost a few
researchers have focused to explore the causes of low economic growth due to
political factors rather they have been trying to find the causes of low
economic growth, low productivity, low investment, high inflation and high
unemployment because of economic factors. If we look into history of Pakistan’s
economy we would come to the conclusion that political instability has
extremely hampered economic growth (Qureshi, 2010). Pakistan has gone through
the various phases of governments. It has been led by military regimes for the
period of 33 years and rest 37 years have been led by the political regimes.
This study uncovers those factors which show the behavior of economic growth in
Pakistan with the changes in government due to political instability.

2.     
Literature
Review:

The relationship between political
instability and economic growth is too old, a good collection of literatures is
present in this aspect.

Mauro (1995)
noted that low-income (less developed) countries tend to be corrupt and
politically unstable. Hence, higher-income countries (with improvements in
economic conditions) tend to have lesser corruption (Montinola & Jackman,
2002; Van Rijckeghem & Weder, 2001; Schumacher, 2013) and higher political
stability (Adelman & Morris, 1968; Helliwell, 1994).

Ali, Hashmi
& Hassan (2013) investigated both economic as well as political factors to
predict the reasons of volatile economic growth and low investment in Pakistan.
The study described that non-economic factors like corruption, political
instability, frequent regime changes, energy crisis and political conflicts
among parties and institutions have been the major cause of poor economic
performance and lower investment. These non-economic factors created uncertainty
and made the country risky. Due to this risk and volatility the domestic
investors have taken their capital away from Pakistan and they invested in
neighboring countries for better return. This capital movement has become the
reason of poor economic growth in Pakistan.

 Barro (2013) also stressed on corruption free
government. He explored that if a country is peaceful and corruption free than
investors will be encouraged to invest and it will promote the economic growth of
an economy. This will increase the living standard of the masses. Moreover, he
has also pointed out that such a peaceful environment and a democratic
government is favorable for the investors and general public.

The study of
Alisena et al. (1996) depicted that political instability is the major cause of
government’s weakness. Political variability creates democratic unrest,
frequent elections, intra-party conflicts, and inconsistence regime which lead
economic growth to fall. This socio-political instability has various adverse
effects. It not only creates uncertainty in political and legal environment but
also disrupts markets. Several other studies have also documented political
instability adversely affects economic growth. Similarly, these studies also
shed light on the relationship between economic crisis and regimes change and
government changes. Government crisis and regime changes have significant
effects on economic growth and there is a relationship between economic growth
and political instability (Campos & Nugent, 2002; Pei & Adesnik, 2010;
Görmüú & Kabaskal, 2010).

Gyimah-brempong
and Traynor (1999) defined political instability is that situation, activities
or patterns that threaten to change or actually change the political behavior
that threaten to change or actually change the political system in a
non-constitutional way. These politically unstable events often bring sudden
radical changes in property rights laws and the rules governing business
conduct.

 Alesina,
Ozler, Roubini and Swagel (1992) investigate the connections between economic
growth and political instability. For the period of 1950-82, they use the
sample of one hundred and thirteen countries. The authors conclude that when
there are high chances of government collapse, growth is considerably lower and
vice versa.

Cukierman, Edwards & Tabellini
(1989) showed that uncertainty about fiscal policies cause risk averse
investors fear of inconsistent government policies and they hesitate to invest
rather they prefer to invest abroad. This capital fight will reduce domestic
private investment and consequently reduction in economic growth.

Presently, Pakistan is confronting
serious troubles of political instability, and this is influencing FDI because
the confidence of overseas investors on political and economic conditions of
Pakistan is deteriorating

A different argument leading to a
similar relation between political instability and growth is implied by
Grossman’s (1991) analysis of revolutions. In countries where rulers are
relatively weak, i.e. more easily overthrown, the probability of revolutions is
higher and the citizens have higher
incentives to engage in revolutionary activities rather than productive market
activities.

While
discussing the determinants of economic growth, Mundell (1963) and Tobin (1965)
mention that it is high inflation which increases the cost of holding capital.
High inflation reduces investment and capital accumulation which further leads
to slow economic growth. Moreover, rising inflation work as helping hand for
inflation tax and reduces incentive to work. Hence low incentives to work rise
unemployment and process not only reduces national output but also lower
economic growth.

2.1.  
Problem statement:

This study deals with the discussion to find out the impact of
political instability on the economic growth of Pakistan. It is the most
problematic issue of Pakistan since its existence and not resolved yet.
Political instability is used to define political disorder or disturbance
within a country. It is a loss of control of countries territory and it hinders
the economic growth of a country. In other words it is inability to provide
public services and loss of sincere authorities. Back in 1960`s Pakistan has
high rate of economic growth as compared to China and South Korea. But later on
Pakistan involved itself in political games and the countries which were
lagging behind us defeated us in increasing economic growth. Nowadays political
unrest is disturbing our economy so much and it is considered as an ulcer for
our economy. An unstable political system could seriously hamper economic
growth.

Objective of the study:

The general objective of the study is the investigation of actual
relationship between economic growth and political instability.

Research Hypothesis:

There is negative impact of political instability on economic
growth.

Research question:

Does political instability negatively effect economic growth or
not?

3.     
Methodology:

This
study is associated with the relationship of political instability and economic
growth. Political instability is used as index (regime change, wars, terrorism
and strikes) as used by Muhammd Nadeem Qureshi (2010).Political instability is
taken as independent variable and economic growth is considered as the
dependant variable.GDP is considered as a proxy of Economic Growth. The
relationship between political instability and different components of economic
growth such as Foreign Direct Investment (FDI), Private Domestic Investment
(PDI), Exports (EX), Rate of Employment (EM) and Price level of goods (PL) are
discussed. These variables are considered as mediators which get affected by
political instability index and consequently economic growth reduces.

Theoretical
Framework:

Economic growth and political instability are deeply interconnected.
At the one hand, the uncertainty associated with an unstable political
environment may reduce investment and the speed of economic development. On the
other hand, poor economic performance may lead to government collapse and
political unrest.

In this study economic growth is taken as dependant variable and
GDP is used as a proxy of economic growth while the index of political
instability is used as independent variable. Index of political instability
contains different variables which are terrorism, Strikes, Elections, and
regime changes. Political instability means a political disorder; political
instability is the propensity of a government collapse.

Economic growth is the increase in the inflation-adjusted market
value of the goods and services produced by an economy over time. It is
conventionally measured as the percent rate of increase in real gross domestic
product, or real GDP. There are many factors which work as determinants of
economic growth and participate to increase it .The most important factor of
increasing economic growth is productivity which is defined as, increase in
labor productivity (the ratio of the value of output to labor input) have
historically been the most important source of real per capita economic growth.

Increases in productivity are the major factor responsible for per
capita economic growth; this has been especially evident since the mid-19th
century. Most of the economic growth in the 20th century was due to increased
output per unit of labor, materials, energy, and land. The balance of the
growth in output has come from using more inputs. Both of these changes
increase output. The increased output included more of the same goods produced
previously and new goods and services. The other factor which is strongly take
part to increase and decrease economic growth is investment which influences
the rate of economic growth because it is a component of aggregate demand (AD)
and more importantly influences the productive capacity of the economy.
Investment means expenditure on capital spending, e.g. buying new machines,
building bigger factories, buying robots to enable automation.

Investment is a component of Aggregate Demand (AD). Therefore, if
there is an increase in investment, it will help to boost AD and short-run
economic growth. There is a bidirectional relation between investment and
economic growth. The rate of economic growth also affects the level of
investment. Business investment tends to be quite volatile. If businesses see
an improvement in economical rest, they will increase investment to meet future
demand. Therefore, an improvement in the rate of economic growth can cause a
substantial rise in investment. But, if there is an economic downturn and a
fall in the rate of economic growth, business will cut back on investment.

Political instability also causes increase in price level of goods
and services which in return reduces investment this rise in price level is
called inflation. Inflation is a sustained increase in the general price level
of goods and services in an economy over a period of time. When the price level
rises, each unit of currency buys fewer goods and services; consequently,
inflation reflects a reduction in the purchasing power per unit of money, a
loss of real value in the medium of exchange and unit of account within the
economy. If price level is balanced there is an increase in investment.

If investment increases it increases employment rate of economy,
which means higher investment declines unemployment e. g if government
construct a hospital then at one side people will be benefited by getting the
facilities of medical care and at other side being an organization this
hospital will provide different types of employment to different people
according to their eligibilities.

The fourth determinant of GDP in this study is export. There is a
strong relation between exports and economic growth of a country. The term
export means sending of goods or services produced in one country to another
country, which when increases then positively increases a country’s economy and
vice versa.

3.2. Theoretical Framework:

This study deals with the impact of political crises on the
economic growth of Pakistan. Political unrest is the most problematic issue of
Pakistan since its existence. Political instability is used to define political
disorder or disturbance within a country. It is a loss of control of countries
territory and it hinders the economic growth of a country. In other words it is
inability to provide public services and loss of sincere authorities.

Historiaclly Pakistan has high rate of economic growth as compared to
China and South Korea. But later on Pakistan involved itself in political games
and the countries which were lagging behind us defeated us in increasing
economic growth. Nowadays political unrest is disturbing our economy so much
and it is considered as an ulcer for our economy. An unstable political system
could seriously hamper economic growth

Political unrest affects every factor of economy directly and
indirectly. It effects investment and reduces it because when regime changes
again and again, risk averse people never invest because of fear to face loss
in business. Political unrest causes inflation and reduces productivity of a
country, consequently exports declines. When productivity and investment
decreases, unemployment automatically increases. This increment in unemployment
affects the purchasing power of bodies.

When overall investment declines it results in decreasing
employment rate which further results as poor production and we have to face
poor exports rate.

Within the last two decades, a lot has been talked about and
written regarding the decisive role of FDI owing to its contribution in
developing countries’ growth. It supplies capital to developing nations for
making much needed investment, it also improves managerial skills, transfer
updated technology and creates more job opportunities which eventually results
in economic development and growth. The developing economies face a challenge
to attract overseas investment for fostering and regulating their industrial
sectors. The procedures are being formulated, revised, and implemented to
facilitate the overseas investors in making investment within these markets.
Luckily or unluckily, some of the countries succeed to attract overseas
investment whereas others failed in that process. It results in exploring the
causes and also to evaluate the nature of policies and strategies being
formulated by different economies for attracting and benefitting from FDI inflows.

The developing economies encounter gap in their savings and
investments and they need FDI to cover this gap, to foster economic growth,
transfer of advanced technology, rising productivity, creating more employment
opportunities and to also increase competition. The FDI is being considered as
the most crucial element for developing economies to support their national
markets. Consequently, majority of the developing economies want to magnetize
greater FDI inflows. The FDI inflows are essential for Pakistan’s economic
growth also because it also encounters gap in its savings and investments.
Pakistan’s economy is not able to generate sufficient internal sources for
maintaining the pace of its economic actions; therefore, FDI inflows are
extremely vital in complementing domestic investment for achieving economic
goals. FDI inflows are critical for Pakistan’s economy to facilitate the
financing of developmental projects, growth of industrial sectors, to reduce
level of unemployment, obtaining updated technology, improving local managerial
skills, escalating output and productivity, to improve BOP, improving foreign
reserves, improvement of infrastructural facilities and human resources and
eventually achieving higher economic growth.

Political unrest indirectly decreases the GDP of a country there
are some variables which are used as mediators in that process e.g. those
factors which are described as increasing units of economic growth ,they could
decrease it also by decreasing their selves, these are  investment,
production, employment and exports, etc. The process through which GDP of a
country decreases due to political unrest or political instability has many
stages according to many studies. Political instability is a form of
uncertainty of a country and when this uncertainty becomes sever it could
damage whole the process of development of nations.

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