Relationship between Economic Development & Political Stability

Introduction

Economic growth and political stability are deeply interconnected. While uncertainty associated with an unstable political environment may reduce the pace of economic development, poor economic performance may lead to government collapse and political unrest.

What is Economic Growth/Development?

Economic growth is the process whereby a country’s real national income increases over time with attendant socio-political & technological changes. An increase in national income due to windfall gains(oil price increase) is not economic growth

Similarly, economic growth must be inclusive, and sustainable and most importantly, its gains are equitably shared by all sections of society and all regions of the country.

What is Political Instability?

The standard definition of political instability is frequent regime changes in short periods due to agitational politics; in-house changes through the due constitutional process are not, political instability. Consider the UK. Litmus test? Public satisfaction

Do not equate the political stability of a democratic regime with that of the political tranquillity of a country under a dictatorship promoting crony capitalism. There are 3 dimensions of political stability:

1. stable government
2. stable political system
3. internal law & order

Economic growth and political stability are deeply interconnected; poor economic performance may lead to government collapse and political unrest through its adverse impact on the quality of life of citizens with detrimental spin-off effects on political stability

What is Quality of Life

Quality of life has three interrelated & interdependent components

1. Standard of Living: Increasing the quantity, quality and access to economic goods and services i.e., food, shelter, clothing, health, education etc.
2. Good Governance: Increasing the quantity, quality and access of political goods and services-protection from external aggression, internal law and order, access to justice, political empowerment etc.
3. Social Development: Increasing the quantity, quality and access to social goods and services- a classless society, equality of opportunity, cultural enhancement, amiable environment, absence of discrimination on the basis of race, religion and gender etc.

To achieve the above-mentioned objective, every state needs resources; the more, the better. Only through a decent rate of economic growth, a state can extract enough resources to improve the standard of living of the people and give them an environment for leading a happy life.

How does poor economic performance affect political stability?

There are four different ways in which poor economic performance can cause political instability

1. General Unrest
2. Regime Changes
3. System Changes
4. Existential Threat

Let me explain them in a bit of detail

A. General Unrest

A higher growth rate with social justice means a higher quality of life and general happiness; economic slowdown creates general unrest because of increasing unemployment, scarcity of goods and services, and resultant inflationary pressures

All these effects resulting from poor economic performance adversely affect the mental health of those badly affected. And hard hit is the poor and the salaried middle class, forcing them to reduce their expenditure on the health and education of their children.

It, in turn, adversely affects better income/ job opportunities for their children, perpetuating generational inequalities. Terrorism has multiple causes but poverty and inequality become major push factors for fuelling terrorism in a country.

General unrest caused by poor economic performance forces the government to devote its time & resources to suppressing this unrest if it spills over to violent agitation. Thus the regime is unable to devote its time and energy to long-term policy formulation, repeating the cycle

B. Regime Change

A regime change is not bad if it is orderly and timely but frequent regime changes due to this general unrest are invariably harmful to the country in the long run. It was the frequent regime changes during the 1950s which brought the military into politics.

We are still suffering from the frequent change of governments during the 1980s. And what causes a regime change? Generally poor economic performance. Churchill was enjoying huge popularity but lost the elections because the labour party came up with the slogan of social reforms

In 1991, days after the Kuwait War, George Bush was enjoying a 90% approval rating. Clinton’s campaign advantageously used the then-prevailing recession in the United States as one of the campaign’s means to successfully unseat George H. W. Bush.

C. System Survival

Poor economic performance of a country not only fails to improve the quality of life of the citizens endangering the regime’s survival, but even the system itself also comes under attack.

Iran’s transformation from a Shah-led regime to a Shia-led one was precisely for this reason; the system failed to improve the quality of life of the common man while enriching elites. Another example? Remember how the capitalistic development model of Ayub was toppled by a Socialist Bhutto?

D. Existential Threat

And do not forget, this deterioration in the quality of life of citizens due to the poor economic performance of the country could pose an existential threat to the country itself. Remember the fall of Dhaka in 1971?

Yes, the separation of East Pakistan from its Western wing and becoming a separate state had had multiple historical reasons but one major reason was this feeling of being left behind in terms of an improved standard of living of those living there

USSR broke up because they were trying to make it democratic without realizing that stable democracy stands on the shoulders of a stable economy. China has learnt the lesson; loosen the control on a need basis. Do not push the democratic pedal while the economic motor is idling

How Political Instability affects Economic Growth?

If the poor economic performance of a country endangers its political stability, then the political instability is also responsible for its poor economic performance. Both go hand in hand.

Political instability is the propensity of frequent governments to collapse either because of conflicts or rampant competition between various political parties. Also, the occurrence of a government change increases the likelihood of subsequent changes. It tends to be persistent. Political instability can adversely affect the economic performance of a country through its impact on four entities

1. State Performance
2. Corporate Sector
3. Society
4. Foreign Sector

Let me explain

1. State Performance is adversely affected because

a. Short duration of regime and uncertainty of its continuity affects its long-term public policy formulation leading to sub-optimal results b. Policy inconsistency as one government’s policies are rejected by its successors

c. Attention and resources of the regime are wasted on fire-fighting and survival manoeuvres with the result that it cannot give proper attention and resources to law and order, social welfare and development projects

d. To survive, the regime starts appeasing the public through dole-outs which are usually misused and announcing high-visibility grandiose projects, both badly affecting the economic macro-management, increasing the debt burden, fuelling inflation

2. Corporate Sector is adversely affected

a. Frequent regime changes leading to policy inconsistency give wrong signals to the private sector. Consequently, they withhold long-term investment decisions with disastrous impacts on employment, income, supply of goods, price stability

b. Political instability forces the private sector to retain their profits abroad, resort to under-invoicing of exports, over-invoicing of imports, capital flight etc with the result that the country faces a balance of payments crisis, which further accentuates currency crisis.

3. Society is adversely affected

With lower incomes, fewer employment opportunities, and increasing prices due to the corporate sector’s decisions to wait and see results in public frustration, leading them to start agitations, further complicating the situation for the regime

4. Foreign Sector is adversely affected

a. political instability in the country leads to a lower inflow of foreign direct investment and greater outflow of profits instead of investing them inside the country

b. foreign remittances are reduced, or sent through informal channel

Using a dataset covering up to 169 countries in the period between 1960 and 2004, an IMF study concluded that political instability is particularly harmful through its adverse effects on total factor productivity growth and, by discouraging the physical and human capital accumulation