How does political instability affect economic growth?

– Is there an imminent political crisis in Guyana amidst GECOM’s seeming unpreparedness for early elections?

Political instability is regarded by economists as a serious malaise harmful to economic performance. Political instability is likely to shorten policymakers’ horizons, leading to sub-optimal, short-term macroeconomic policies. This, in turn, may lead to more frequent switches in policies, creating volatility and thus negatively affecting macroeconomic performance.
The empirical literature has documented ample studies of the negative effects of political instability on a wide range of macroeconomic variables, including, among others, GDP growth, private investment, and inflation. Alestina (1996) use data on 113 countries from 1950 to 1982 to show that GDP growth is significantly lower in countries in time periods with a high propensity of a government collapse.
In a more recent paper, Jong-a-Pin (2009) also finds that higher degrees of political instability lead to lower economic growth. With respect to private investment, Alesina and Perotti (1996) show that socio-political instability generates an uncertain political environment, raising risks and reducing investment. Political instability also leads to higher inflation, as shown by Aisen and Veiga (2006) wherein the authors argued that political instability shortens the horizons of governments, disrupting long term economic policies conducive to a better economic performance.
Moreover, Aesen and Viega (2011) contended that governments in politically fragmented countries with high degrees of political instability need to address its root causes and try to mitigate its effects on the design and implementation of economic policies. The authors argued that, only then, countries could have durable economic policies that may engender higher economic growth.
In the case of Guyana, readers would recall that this author had alluded to this notion in previous writings against the backdrop of what is currently developing in Guyana, both geopolitically and with the no-confidence vote – the repercussions thereof. In the most recent developments thereof, the President and the Opposition Leader had a meeting in which there were some broad agreements. It would appear now that the Guyana Elections Commission is deliberately delaying its preparations for early elections. Whether this is owing to Governmental influence, which would be unfortunate, this is up to the politicians on both sides to work out in a mature fashion and taking into consideration what is best for Guyana.
The propensity of a government change is not likely to have much effect on economic decisions if the next government is expected to follow similar policies to the current one. Thus the propensity of a government change should have stronger effects on growth, the higher is the level of polarization.
Taken together, political instability also affects growth through physical and human capital accumulation, with the former having a slightly larger effect than the latter. These results allow for a clear understanding as to why political instability is harmful to economic growth.
It is of paramount importance that a situation of political instability or crisis be averted at all cost. These situations dampen investors’ confidence and private investments become slumped or stagnated. And of course these are not events that any right thinking Guyanese would want for Guyana at this point in time. The country is already weakened within these frameworks, unless these matters are resolved at the polls.