Political instability is regarded by economists as a serious malaise harmful to

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February 7, 2019

Political instability is regarded by economists as a serious malaise harmful to economic performance. Political instability is likely to shorten policymakers horizons leading to suboptimal short term macroeconomic policies. It may also lead to a more frequent switch of policies creating volatility and thus negatively affecting macroeconomic performance. Considering its damaging repercussions on economic performance the extent at which political instability is pervasive across countries and time is quite surprising. Political instability as measured by Cabinet Changes that is the number of times in a year in which a new premier is named and/or 50 percent or more of the cabinet posts are occupied by new ministers is indeed globally widespread displaying remarkable regional differences (see Figure 1). The widespread phenomenon of political (and policy) instability in several countries across time and its negative effects on their economic performance has arisen the interest of several economists. As such the profession produced an ample literature documenting the negative effects of political instability on a wide range of macroeconomic variables including among others GDP growth private investment and inflation. Alesina et al. (1996) use data on 113 countries from 1950 to 1982 to show that GDP growth is significantly lower in countries and time periods with a high propensity of government collapse. In a more recent paper Jong-aPin (2009) also finds that higher degrees of political instability lead to lower economic growth.1 As regards to private investment Alesina and Perotti (1996) show that socio-political instability generates an uncertain politico-economic environment raising risks and reducing investment.2 Political instability also leads to higher inflation as shown in Aisen and Veiga (2006). Quite interestingly the mechanisms at work to explain inflation in their paper resemble those affecting economic growth; namely that political instability shortens the horizons of governments disrupting long term economic policies conducive to a better economic performance.


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