Political instability and economic growth: Evidence from two decades of transition in CEE

Abstract

This paper examines the nexus between political instability and economic growth in 10 CEE countries in transition in the period 1990-2009. Our results support the contention that political instability defined as a propensity for government change had a negative impact on growth. On the other hand, there was no causality in the opposite direction. A sensitivity analysis based on the application of a few hundred different variants of the initial econometric model confirmed the abovementioned findings only in the case where major government changes were applied to the definition of political instability.

Do government formation deadlocks really damage economic growth? Evidence from history's longest period of government formation impasse

“…According to the evidence discussed earlier (Aisen & Veiga, 2013;Alesina et al, 1996;Fatás & Mihov, 2013;Gurkul & Lach, 2013), political instability translates into political volatility, thus damaging economic growth. We believe this distinction to be useful for our purposes here, as it clearly recognizes that economic performance depends on factors that extend well beyond government policies.…”

“…We believe this distinction to be useful for our purposes here, as it clearly recognizes that economic performance depends on factors that extend well beyond government policies. According to the evidence discussed earlier (Aisen & Veiga, 2013;Alesina et al, 1996;Fatás & Mihov, 2013;Gurkul & Lach, 2013), political instability translates into political volatility, thus damaging economic growth. However, in countries with good governance, and above all with a high quality of government, political instability (in the form, for example, of protracted government formation deadlocks) does not automatically translate into political volatility, because long-term, pro-growth economic policies are not necessarily disrupted.…”

“…Likewise, economic growth has been found to be negatively affected by the uncertainty as to whether a government will remain in office after a forthcoming election (Angelopoulos & Economides, 2008). Recent studies by Fatás and Mihov (2013), Aisen and Veiga (2013), and Gurkul and Lach (2013) provide additional evidence that political instability negatively impacts economic growth. The causal mechanism proposed for this negative effect is that political instability shortens government perspectives, thus disrupting long-term economic policies that might promote better economic performance (Aisen & Veiga, 2013, p. 152).…”

“…Alesina, Ozler, Roubini, and Swagel (1996) report lower growth rates in countries during periods marked by a high frequency of government collapse. Recent studies by Fatás and Mihov (2013), Aisen and Veiga (2013), and Gurkul and Lach (2013) provide additional evidence that political instability negatively impacts economic growth. Recent studies by Fatás and Mihov (2013), Aisen and Veiga (2013), and Gurkul and Lach (2013) provide additional evidence that political instability negatively impacts economic growth.…”

The effect of political volatility on capital markets in EU accession and neighborhood countries

“…This instability has the potential to threaten economic gains made in transition economies over the previous two decades. This relationship between political instability and sub-optimal economic outcomes has been explored in recent papers such as Fatas and Mihov (2013) and Aisen and Veiga (2013), with empirical evidence showing consistently negative effects of political volatility on economic growth and investment: for example, Heinsz (2004) provides evidence for 172 countries that political volatility leads to policy volatility and dampened growth, while Gurgul and Lach (2013) show that government changes have a negative impact on growth in Central and Eastern Europe. Further extensions to this research have explored the effect of political volatility on other facets of the economy, including financial markets, with a large literature shows the effect of political changes on capital markets, either via the effect of political news on financial sector volatility (led by Engle and Ng [1993]) or the functioning of political institutions themselves.…”