The Effect of Political Instability on Economic Growth in Sub-Saharan African Countries
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Date
2022-06-08
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A.A.U
Abstract
In this study, the relationships between political instability and economic growth in Sub Saharan African countries are deeply explored. Six individual political instability indicators from the World Bank’s world governance indicators database were used and aggregated into a single and more comprehensive political instability index by employing the techniques of principal component analysis. Then the impact of the composite political instability index on economic growth along with other economic variables are modeled by employing three simultaneous equations and estimated by dynamic panel GMM estimation approach which accounts for the endogeneity issues. The results from the GMM estimations reveal that political instability significantly hampers economic growth in SSA through its direct transmission mechanism by disrupting the available resources a country has at its disposal. The hypothesized indirect channel through which political instability negatively affects economic growth through FDI is found to be statistically insignificant. Panel causality tests along with the corresponding forecast error variance decompositions (FEVDs) and impulse response functions (IRFs) are performed to reinforce the results obtained from the GMM estimations. The results show that political instability and foreign direct investment (FDI) Granger-cause economic growth, while the reverse is not true. While it’s found that economic growth is the most endogenous of the main three target variables, FDI is the most exogenous one which is unresponsive to shocks of variables other than its own. The governments and policy makers of Sub Saharan African countries should target political instability as their policy variable since variations in the economic growth other than its own shocks are also explained by the shocks from political instability. Countries in SSA should not ignore factors leading to political instability and policies aimed at decreasing political instability should be pursued by these countries in order to maintain a stable economic growth.