Political Instability

and
Economic Growth
ALEBERTO ALESINA
Department of Economics, Harvard University, Cambridge
SULE Özler
National Fellows Program, Hoover Institute, Stanford University
NOURIEL ROUBINI
Department of Economics, Yale University, New Haven
PHILIP SWAGEL,
Federal Reserve Board, Washington DC
April 22nd, 2018
Presented By: Farid Ahmad “AKRAMI” and Abdul Saboor “SAKHIZADA”
CONTENTS
 INTRODUCTION
 PURPOSE/RESEARCH QUESTION
 LITRETRUE REVIEW
 OBJECTIONS OF HYPOTHESIS
 DATA AND SOME BASIC
STATISTICS
 VARIABLES
 DATA COLLECTION
 RESEARCH METHODOLOGY
 RESEARCH FINDINGS
 COMMENTS
Introduction
 The tale between Argentina and Japan
 Political Instability: It is the propensity of a change in the
executive power, either by constitutional or
unconstitutional means
 Unstable political environment may reduce private
investment
 Poor economic performance may result in government
collapse
 The paper studies the joint determination (Political
Instability & per capita GDP) of propensity of
government collapse
Purpose
 The purpose of this paper is to investigate the
relationship between political instability and per capita
GDP. (113 Countries – 1950 through 1982)
 Does political instability foster economic growth or does
low economic growth lead to political instability.
Features of the study
 The paper focus on government changes as indicator of
instability
 The paper allow joint endogeneity of growth and
government changes
 What matters for economic activity is not only the actual
occurrence of a government change but also the
intention for it
LITRATURE REVIEW

 Longdregan and Poole (1990, 1991) addressed similar problem of joint

endogeneity where variables were growth and coups d’etat. (This study: 1)
Variable are different 2) Model is substantially different 3) the paper robust
evidence of a negative effect of political instability on growth while they
don’t)
 Hibbs (1993), Gupta (1990) and Alesina and Perotti (1996): Summarized data
on the occurrence of political violence and unrest.
 Barro (1960) and Benhabib and Spiegel (1994), and Easterly and Rebelo
(1993): add cross section- regression in which the dependent variable is
either growth or investment.
 Cukierman, Edwards, and Tabellini (1992), Roubini (1991), and Ozler and
Tabellini (1991) adopt measure similar to this study on inflation, budge deficits
and external debt. But didn’t take into account the reverse causality.
 These papers find that political instability reduce growth or investment, and
don’t take into account the joint endogeneity of growth and political
instability, not take the effect of instability on expectations.
LITRATURE REVIEW…

Political instability affects growth because it increases

policy uncertainty
Low growth increases government instability
Interaction between growth and political instability can
lead to vicious circle
The effect of uncertainty about government changes is
larger: the higher the degree of political polarization
Based on theoretical and on empirical grounds that
there is no obvious relationship between democracy
and growth.
Objections to paper’s hypothesis

Government change might be viewed favorably. But

in the sample the government competence is a
random walk.
If the probability of a government change is more than
50%, an increase in this probability might actually
reduce political uncertainty. It may still increase policy
uncertainty if the characteristic of the successor is not
known
Why don’t the paper focus economic policy directly
rather than on government changes? The policy
instrument might vary.
 Data and Some Basic Statistics (Methodology)
 113 countries observed: half from 1950 through 1982 for others
1960- through 1982
 The sample does not include former soviet bloc countries
 Economic Data (Summers and Heston -1991) and most of
political data come from Jodice and Tylor (1983) and Banks
(various issues)
 The innovative thing about this study is the dependent variable
for government change.
 There are three different variables
1- G CHANGE (Jodice and Taylor 1983
2- M CHANGE:
3- Coup:
 VARIABLES
Independent Variables Are Classified in Three Categories;

VARIABLE VALUE AND DESCRIPTION

Political
DEMOC 1 Democratic, elections with more than one party
2 mix of Democratic and Authoritarian, election with some form of limits
3 for Authoritarian, leader are not elected
EXADJ Dummy Variable, the number of changes in the composition of government
ATTEMPTS Unsuccessful attempts to overthrow the governments
Economic

VARIABLE VALUE AND DESCRIPTION

GROWTH Rate of GDP Per Capita
GDP Dummy Variable
Structure

VARIABLE VALUE AND DESCRIPTION

Geom

LATIN Dummy Variable for Latin and South America

AFRICA Dummy Variable
VARIABLES
Dependent Variables
VARIABLE VALUE AND DESCRIPTION
GCHANGE (Dummy Variable)
1, Government Change (Constitutional and/or Unconstitutional)
0, Otherwise
MJCHANGE Major change.
1, Government change (Constitutional )
0, Otherwise
COUP Indication of irregular transfer of power such as military coups
DATA COLLECTION AND ANALYSIS
 Collected data is the observation of 113 for countries.
 Data sample are gathered in two groups
 The large group, >50% are taken from period(1950-1982)
 The large group, <50% are taken from period(1960-1982)
 Data does include former Soviet bloc countries.
 The Source of data is;
 The economic data, from Summers and Heston(1991)
 The most of the political data, from Jodice and Tylor (1983) and
banks
DATA COLLECTION AND ANALYSIS
0.5
0.4
0.28
0.3
0.2
0.11
0.1
0
GCHANGE MJCHANGE

0.6

0.4

0.2

0
COUP EXADJ

10000 0
DEMOC
8000

6000
3599
4000 2642
2000

0
GDP60 GDP

All Latine America Africa Asia Industrialized Countries Others

 RESEARCH METHODOLOGY
𝑐 ∗ = 𝛼𝑐 𝑋𝑐 + 𝛽𝑐 𝑋 + 𝛾𝑐 𝑦 + 𝑢𝑐
𝑦 = 𝛼𝑦 𝑋𝑦 + 𝛽𝑦 𝑋 + 𝛾𝑦 𝑐 ∗ + 𝑢𝑦

 Structural equations system, SEM includes a diverse set of mathematical

models, computer algorithms, and statistical methods that fit networks of
constructs to data
 Simultaneous estimation of two equation for growth and political instability
would produce unbiased results.
 A single equation approach had simultaneity problem.
 Standard Econometric Methods(2 stage Least Square) is applied.
DATA COLLECTION AND ANALYSIS
 The average GCHANGE for all
countries is 2.8 indicating a change in
every 3years.
 The MJCHANGE is 50% of GCHANGE
for all countries.
 COUP is most frequent in Latin
America and Africa and none
Industrialized countries.
 DATA COLLECTION AND ANALYSIS
𝛾𝐶 𝐺𝑅𝑂𝑊𝑇𝐻 + 𝛼𝑐1 𝐸𝑋𝐴𝐷𝐽−1 + 𝛼𝑐2 𝐺𝐶𝐻𝐴𝑁𝐺𝐸−1
Prob 𝐺𝐶𝐻𝐴𝑁𝐺𝐸 = ∅
+𝛽𝐶0 + 𝛽𝑐1 𝐺𝑅𝑂𝑊𝑇𝐻−1 + 𝛽𝑐2 𝐺𝑅𝑂𝑊𝑇𝐻−1 + 𝛽𝑐3 𝐿𝐴𝑇𝐼𝑁 + 𝛽𝑐4 𝐴𝐹𝑅𝐼𝐶𝐴

𝐺𝑅𝑂𝑊𝑇𝐻 = 𝛾𝑦 𝐺𝐶𝐻𝐴𝑁𝐺𝐸 + 𝛾𝑦 𝐸𝐷𝑈𝐶 + 𝛽𝑦0 + 𝛽𝑦1 𝐺𝑅𝑂𝑊𝑇𝐻−1 + 𝛽𝑦2 𝑊𝐺𝑅𝑂𝑊𝑇𝐻−1

+𝛽𝑐3 𝐿𝐴𝑇𝐼𝑁 + 𝛽𝑐4 𝐴𝐹𝑅𝐼𝐶𝐴 + 𝑢𝑦

Note: the same specifications are also adopted for MCHANGE and COUP and their results are
presented in the separate tables.

EDUC enters in the growth equation only.

EXADJ enters in the government change equation only.

EMPIRACALE ANALYSIS

The GCHANGE Coefficient in

growth equation is negative.

This coefficient is significant in

large sample (1%) and statistically
significant at a lower level of
confidence in small sample (10%)

GCHANGE (0-1) will bring a fall of

growth rate of 1.3 – 1.4 % per year.
EMPIRICAL ANALYSIS

MCHANGE on growth are negative

and statistically significant in both
samples

LATIN variables are positive and

significant in the large sample.
EMPIRICAL ANALYSIS

MJCHANGE and COUP have a

significant effect on growth

The Coup has a statistical significant

effect on government changes

Effects of growth on Coups is

substantial and magnitude

Importantly the regional dummies

(Latin America T4, 5 and 6) are
statistically significant with negative
sign.
FINDINGS
 Political Instability Reduces Growth: The changes such as coups and etc. that
can bring about significantly changes the ideology composition of the
executive in government is political instability measure.
 Low growth increases the probability of the government turnover, particularly in
the case of coup d'état.
RECOMMANDATION
 It is required to carry on this effort to figure out the case of routine changes and
major executive changes that entail serious ideological orientation.
 It is also necessary to classify the ideological orientation of executive changes and
test the effects different ideology on economic growth in the government.
 It is important to elaborate the channels linking political instabilities on growth.
Thank you!