How political instability Hampered Economic Growth?”The first lesson of economics is scarcity and the first lesson of politics is to disregard the first lesson of economics.” Thomas SowellIn order to understand the vital relatiinshio between politics and economics, it is necessary to understand the two parameters, first, the activities associated with the governance of a country, especially the debate or conflictamong individuals or parties having or hoping to achieve power. Second, the wealth and resources of a country, especially in terms of the production and consumption of goods and services.Politics often plays a crucial role in the growth of the economy as political parties of any countryis involved in practices like providing public goods, correcting market failures, reducing inequalities in income and opportunities, stabilizing excessive economic fluctuations etc. but the real involvement is made through basic institutional and legal infrastructures that protect property rights, enforce the rule of law and prevent abuse by governmentd as this would lead to political stability because its instability is one of the main reason which hinders the economic growth of any country.
Economic growth and political stability are strongly related. The uncertainty associated with an unsteadfast political environment may decrease investment and the speed of economic development. Moreover, weak economic performance may lead to government fall down and political instability. The history of political protests has been instrumental during the anti-colonial struggles of the subcontinent and later in strengthening the democratic progress in South Asia. However, even long after post-colonial periods and democracy restoration, political instabilities are still unappeasable part of the political culture of South Asia. Along with Bangladesh, India and Nepal still face a concerning number of political incidents on a yearly basis, and its occurrence is rising quite sharply over the years. Nowadays political instability has been a cause of concern for many countries around the world, irrespective of the state of development or their political regime.
Previous experiences tell us that political conflicts can have a disastrous impact on an economy. On the other hand, domestic conflicts under certain conditions can turn a country into a fragile state status. Fragile and conflict ridden countries usually lose the ability to develop constructive relationships within their societies and often suffer from a weak ability to undertake governance functions.
These countries are more vulnerable to internal and external shocks, and in turn face instability. Arguably, given the dominance of informal sector in economies like Bangladesh, the adverse impact of political instabilities could be lower when compared with more developed countries. Some other studies which have adopted a notion of political instability similar to ours have found effects of instability on inflation.GROSS DOMESTIC PRODUCT (GDP)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. 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.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.The negative effects of political instability on a wide range of macroeconomic variables including, among others, GDP growth, private investment, and inflation. political instability reduces GDP growth rates significantly.
This reduction is mainly due to the negative effects of political instability on total factor productivity growth, which account for more than half of the effects on GDP growth. Political instability also affects growth through physical and human capital accumulation, with the former having a slightly larger effect than the latter. These results go a long way to clearly understand why political instability is harmful to economic growth. It suggests that countries need to address political instability, dealing with its root causes and attempting to mitigate its effects on the quality and sustainability of economic policies engendering economic growth. The effects of political instability and institutions on physical capital accumulation. It is also possible that political instability adversely affects productivity. By increasing uncertainty about the future, it may lead to less efficient resource allocation.
Additionally, it may reduce research and development efforts by firms and governments, leading to slower technological progress. Violence, civil unrest, and strikes, can also interfere with the normal operation of firms and markets, reduce hours worked, and even lead to the destruction of some installed productive capacity. Thus, we hypothesize that higher political instability is associated with lower productivity growth. Finally, human capital accumulation may also be adversely affected by political instability because uncertainty about the future may induce people to invest less in education.
SCAMS AND CORRUPTION”Corruption poses a risk to India’s projected 9% GDP growth and may result in a volatile political and economic environment.” India’s coalition government is in the middle of another corruption scandal. India’s comptroller and auditor general (CAG) has accused the government of losing $210 billion in potential revenues by selling coal fields to top industrialists and giving the companies “undue benefits”.
This latest scandal is likely to impact India’s credibility abroad and deter foreign investors at a time when the Indian economy is already struggling.The 110-page report alleges that 155 coal blocks were sold without an auction between 2004 and 2009, and the opposition party is demanding a probe into the matter. A BJP leader told Times of India: “The coal allotment scam is a major scam. We demand a CBI probe and a court should monitor the probe. It is a government of scamsters (that is) involved in knee-deep corruption.” It is not about petty bribes (bakshish) any more, but scams to the tune of thousands of crores (billions of rupees) that highlight a political/industry nexus which, if not checked, could have a far reaching impact. most Indians routinely pay bribes for a number of services such as getting a driver’s licence or a passport. The worst-hit areas as identified by the report were real estate and construction – a priority for Delhi which plans to spend $1.
5tn over the next decade to improve its over-burdened infrastructure. Moreover, India is currently ranked 87th on Transparency International’s 2010 corruption perceptions index. And all of this is weighing on India’s economy. Late years we reported on India’s economic decline and wrote that foreign investors were pulling out of India in part because of corruption.
SocGen analyst Joseph Lau said last November:”General elections are not due for a while, but public outrage at alleged corruption and the government’s poor handling of the situation raise the risk of an early return to the ballot box. For now, the appetite for new polls is low even among opposition parties, but an improvement in political leadership and visible action to address public concerns (including inflation and delayed economic reforms) are needed to restore creditability to the government.”Lau’s point is important. The government is losing credibility abroad, and reports of corruption are only going to keep investors away.INCOME INEQUALITYWhatever the nature of political system, those who are well off have disproportionate political influence. In America’s political system, matters are worse because of the direct influence of money in political campaigns. This leads to a vicious circle— Economic inequality leading to political inequality. Political inequality leads to economic rules of the game that amplify economic inequality.
And to political rules of the game that amplify the political power of elites. Basis of “progressive movement” a century ago which embraced (in US) both democrats and Republicans (like Teddy Roosevelt). Income inequality, by fuelling social discontent, increases sociopolitical instability.
The latter, by creating uncertainty in the politico-economic environment, reduces investment. As a consequence, income inequality and investment are inversely related. Since investment is a primary engine of growth.
The socio-political instability with indices which capture the occurrence of more or less violent phenomena of political unrest.ECONOMIC POLICYThe political instabilities have hampered the business environment in Bangladesh, how it has jeopardized the commercial conditions in this country. Not to mention that, the economy of a country heavily depends on how many investments are made within that economy. For the reason which makes the investment environment in Bangladesh unpleasant can also be the same reason which would hamper the economic development of the same economy. Now it is also shown the impact of political instabilities on the economic development of Bangladesh.The year 2013 had been one of the most disturbing years for Bangladesh in the recent past in terms of domestic political instability caused by hartals, oborodhs and deadly violence for months.
As a result, the economy had to bear the brunt in many ways. The World Bank International Monetary Fund, Bangladesh Bank (BB) and many experts have projected the gross domestic product (GDP) to be lower than 6 per cent, which is much below the target of 7.2 per cent for FY2014.
Some even project that it would be lower than 5 per cent. It would have been a blow to the growth momentum though it was considered to be a paradigm in the international economy by other countries. During the last three decades, this country had obtained a 1 per cent growth per decade Which means it would be very hard to maintain this 1 per cent growth rate in the decade if we fail to reach the 7 per cent annual growth mark.
This negative growth will have ramifications in every parts of economy of Bangladesh and will also hamper the goal of poverty reduction. As a result of the ensuing political instability. The remittance had fallen short by USD 1.
18 billion, which was even lower by USD 64.62 million compared to the estimated. Hard-working Bangladeshi migrants become even reluctant to send money home in these event of a prolonged crisis.CONCLUSIONThe government-enforced policies and administrative norms known as political factors can influence economic development.
Political factors that tend to have an important impact on economic development include:•Regime type•Political stability or instability•Policy management•CorruptionRegime type is the form of government within a country. This includes whether a country is democratic, authoritarian, communist, or other. The regime type influences the policies that affect personal and public economic development. For example, in a democratic nation, people are able to obtain small business loans and start their own company. The business is able to expand exponentially and pay employees different rates depending on the work they are doing. However, in a communist nation, there are strict regulations such as paying all staff equally, which can impact how businesses operate and prevent growth that would increase economic development.Political stability, or instability, refers to the reliability and durability of a government’s structures.
The more stable a political system is, the less risk a business operating in that country will face. Nations where there is a high risk of terrorism or internal conflicts are less stable. This makes opening and operating a business expensive and risky in the region. When a country goes to war, this decreases business and it can harm the quality of the currency exchange rate, or the amount the country’s money is worth when compared to that of other nations. Thus, less stable systems are less likely to see an increase in economic development because they are risky to operate in.Political management refers to how well the government monitors and enforces national and international policies or laws. Countries where copyright and piracy laws are not enforced are less desirable for businesses to operate in. Failure to enforce copyright or piracy laws means that a company may not make money and, in turn, this increases the risk of operating in the region.
For example, a company that wants to sell music may change their mind because this won’t be profitable. Everyone will illegally download the music for free.Level of corruption identifies the level of dishonest, unethical, and illegal practices that are imposed on people and businesses operating in a region. Corruption can include bribing politicians, bribing local companies for materials, or paying to prevent competitors from entering the market.
Imagine that a company pays the government to keep a competitor out. This prevents further economic development and can cause a monopoly that makes services overly expensive.
