The Effect of Political Instability on Economic Growth in Iran between Two Revolutions (1907-1979)

Abstract

From constitutional revolution (1907) to Islamic revolution (1979), Iranian governments had been fluctuated sharply (longevity of government from 3 days to more than 12 years). This situation was the result of permanent competition between the king, parliament, government, interest groups and also international political conditions. In this paper, we study the effect of mentioned conditions on economic growth. For this purpose, we define 7 political instability indices and examine the best definition for political instability that was suitable for Iranian condition in mentioned duration. Using Solow growth model and OLS approach, we find that when the longevity of government was smaller than four years, or the longevity of two of three sequential governments were smaller than one year, then Iran experienced the political instability and it shrinks the economic growth. Finally, we find that when government was politically stable, and institutional constrains on government by other branches were strong, then Iranian economy experienced positive and reliable economic growth. These conditions had been experienced in three periods of time: 1927-1939, 1955-1960, and 1964-1977. It means that duration of 1907-1979 can be divided into two major parts: duration of political stability with remarkable economic growth (for three mentioned periods), and duration of political instability with high economic fluctuations or recession.