Political instability, investment and economic growth in Sub-Saharan Africa

Abstract

This paper explores the relationship between political instability and economic growth in Sub-Saharan African nations. A more comprehensive measure of political instability than has previously been developed is used in combination with a simultaneous equations model and dynamic panel estimation approach to produce several interesting inferences. First, the statistically significant inverse relationship between political instability and economic growth identified by earlier studies is confirmed by the estimates presented here. Second, the estimated system of equations indicates that economic growth and political instability are jointly endogenous. Third, in addition to the direct impact that political instability has upon growth, estimates confirm the hypothesis that political instability indirectly decreases economic growth by decreasing long-run capital accumulation. Fourth, failure to account for the dynamic nature of growth equations as well as the endogeneity of explanatory variables may produce biased effects of political instability on growth. Fifth, the broad measure of political instability we use in this study can better capture the effects of political instability on economic growth than `elite` instability that has been used by earlier researchers. Finally, principal components estimation is used to develop a measure of political instability that can serve as an alternative to the arbitrary weighting scheme used in previous research.