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IMPACT OF POLITICAL INSTABILITY ON PAKISTAN'S ECONOMIC GROWTH
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Global Journal of Management, Social Sciences and Humanities 729
Vol 3 (4) Oct-Dec, 2017 pp.729-748
ISSN 2520-7113 (Print) ISSN 2520-7121 (Online)
www.gjmsweb.com.editor@gjmsweb.com
IMPACT OF POLITICAL INSTABILITY ON PAKISTAN’S

ECONOMIC GROWTH
Noor Ul Ann Sallahuddin1, Prof Dr. Abdul Ghafoor Awan2
ABSTRACT- The objective of this paper was to investigate the relationship between
economic growth and political instability. For this purpose, we selected three
variables such as political instability, inflation rate and public debt to measure their
impact on Gross Domestic Product (GDP). We used panel data and analyzed it
through SPSS software to draw the results. We applied Multiple Regression, ANOVA
and Correlation techniques for analysis of data. Our results show that there is a
negative correlation between public debt and economic growth. Similarly, there is
also a negative correlation between public debt and political instability. Our study
suggests that Pakistan must reduce level of public debt and political instability and
inflation in order to achieve high level of economic growth.
Keywords: GDP growth, Political instability, Inflation rate, Public debt.
Type of study: Original Research paper.
Paper received: 02.07.2017
Paper accepted: 18.08.2017
Online published: 01.10.2017
___________________________________________________________________
1. M.Phil Scholar, Department of Economics, Institute of Southern Punjab Multan-
Pakistan. iamnoorulain1@gmail.com
2. Dean, Faculty of Management and Social Sciences, Institute of Southern Punjab,
Multan-Pakistan. ghafoor70@yahoo.com. Cell # 923136015051
______________________________________________________________
Vol 3 (4) Oct-Dec, 2017 pp.729-748
1. INTRODUCTION
Political instability is a very scary and severe problem in the modern world;
it affects both developing countries as well as developed countries. Because of
political instability, the political environment of country become uncertain and this
will reduce the level of the investment, increase inflation rate and the rate of public
debt and slows down the speed of development process and economic growth of the
country. Inflation is a one of the main causes of political instability. High rate of
inflation leads the country towards uncertainty about future investments. This leads
to more conservative planning of investments, which in turn creates political unrest.
Inflations affect the political situation in many ways; it reduces the efficiency of a
country by restricting its exports. Inflation makes the exports of a country more
expensive. It is also affecting the tax system.
Public debt is another cause of political instability. Public debt is that part of
the total debt, which is secured by government from internal and external sources. It
has also affected the political situation of a country and creates unrest in the economy.
Heavy debt is a challenge for a developing country. Because developing countries
like Pakistan have a small stock of capital and investment opportunities.
In this study, we explore the association between political instability and
economic progress and also the role of public debt and inflation in creating political
instability and affecting indirectly the economic achievement of a country. We
appraise different complications on which social scientists opposed, for instance
antecedent and calculation of political unpredictability. During last five decades
Pakistan faced political turmoil, termination of elected government, imposition of
dictatorial rule and confrontation between politicians, bureaucracy, Military and
Judiciary. This situation is still prevailing.
Vol 3 (4) Oct-Dec, 2017 pp.729-748
1.1 Problems statement

Political stability plays a prime role in keeping the nation unite and
maintaining rule of law in the country. Political stability is an imperative need for
the economic growth, social cohesion, and supremacy of the law. The development
and success of nation and state without a secure, solid and orderly political system is
not possible and government becomes a tug of war amongst numerous vested interest.
In case of instability, condition is inverse, people feel dissatisfied and helpless, lose
their confidence in the state and promote their personal interest and eventually society
is divided into waring groups fighting with one another to secure their individual
interest.
1.2 Research Questions
● What are the causes of political instability in Pakistan?
● How a country, which is suffering from political crises and instability for a
long time, can attain high and stable economic growth?
● How political instability affects real GDP growth rate?
● How instability creates inflation?
● What are relationship between economic growth and public debt?
● How sustainable economic growth can be achieved?
1.3 Objectives of Research
The objectives of the study are stated in the followings:-
1. To study the causes of political instability in Pakistan.
2. To measure the impact of political instability on economic growth.
3. To explore relationship between public debt and economic growth.
4. To explore relationship between inflation and economic growth.
5. To measure the impact of political instability on total factor productivity.
6. To study the mechanism of controlling inflation and public debt.
Vol 3 (4) Oct-Dec, 2017 pp.729-748
2 Literature Review
Alesina (1990) said when a government becomes unstable and have small
chances to remain in power then it starts excessive expenditure by borrowing
money.It creates problems for the new elected government because it increases the
debt payments and also generate inflation in the economy. Unstable government faces
inflationary condition and budget deficit. Grossman (1991) has given a different logic
of the same relation between growth and political uncertainty. He said that inn such
a situation where the government is not strong, the probability of revolution would
be higher and the public has a higher motivation to be involved themselves in
anarchist and revolutionary activities rather than productive activities. On the other
hand, in countries where the government is strong, people do not participate in
unhealthy and unproductive activities.
Siermann (1996) states that the absence of political stability has a negative
impact on economic growth. If the economy is unstable then the economy of the
country will suffer. If one is increased, then the other will decrease. When the political
situation is stable then economic growth will increase. To see the relation between
economic growth and political instability this study used data from 96 countries. The
study concludes that political instability delayed the investment in Asia and it is also
affect economic growth negatively in the sampling countries.
Elmendorf and Mankiw (1999) said that public debt directly and indirectly
affects a country’s economy. If a country has a high debt rate than the rate of interest
would also be high, and the government tries to reduce it with the help of monetary
policy. By the help of this planning the government may reduce the interest rate for a
short run but, in the long run the problems of high inflation and high interest rate will
stand exist. These two indicators reduce the private investment which affects the GDP
and economic growth. If the government borrows money rather than increasing tax
rate,it will give temporary relief to the people.
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Awan (2012) contends that the inflation rate is good for the economy to some
an extent because it provides incentive to manufacture to produce more goods by
hiring more labour. They took three South Asian countries, Bangladesh, Pakistan,
India; it is revealed by their study that moderate inflation is good and helpful for faster
economic growth. He believes that if the inflation rate is high in any economy, then
it will increase the economic growth of that country, it is always helpful for the
prosperity of the economy of a country. Through inflation the government can make
money from money and in this way it meets its growing expenditures..
Veiga (2005) does not only the investigate relation between instability and
inflation but also study effect of instability on inflation. The countries which have
high inflation rate have a negative relationship between inflation and political
instability as compared to those countries which have low or moderate inflation.
Swagel (2005) argued that political instability brought negative economic
growth. He used, concept of uncertainty in a political situation. It shows the high
propensity of government change lead to unreliability about the strategies of the new
government. Investors left the country. Because when a government changed then the
new government canceled all the projects and stopped funding, due to this reason the
development process stopped.
Hussain (2005) said that range from 4 to 6 percent inflation is tolerable for
Pakistan otherwise there is no threshold inflation in our country. He believes inflation
is a result of monetary policy. The central bank has to control monetary expansion.
The increase in money supply creates inflation because quantity of money increases.
The central bank has to make some strategies to control this problem.
Schimmelpfenning and Khan (2006) took the data from January 1998 to 2005
and construct a model. They find that the main cause of inflation in Pakistan is due to
monetary expansion. In their model they show the connection between inflation and
private sector. To get sustain and prolong the economic growth and macroeconomic
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stability they suggest five percent acceptable inflation rate. The main reason of
inflation in Pakistan is long run money supply, they disclosed.
Younas et al (2008) studied different factors that cause political instability
and lower economic growth during the time period of 1999 to 2005. He found that
there is a negative relationship between economic growth and political instability. It
means if political instability increases than economic growth decreases and vice
versa,
Nasir et al (2008) assessed the behavior of macroeconomic indicators in
different regions. This study revealed the aggregate growth of the economy during
the autocratic regime which rests better than a democratic government. His study is
about Pakistan. He argues that in Pakistan the autocratic regime performs better as
compared to a democratic regime. The average GDP growth rate was always high
during the autocratic regime.
Mahmood Azid and Siddiqui (2010) investigate the relation of economic
growth and democracy in Pakistan. By the usage of annual data, they conclude that
democracy is very important for Pakistan for its economic growth. Their findings
show that if there is continuous change in governments, it would affect the economic
growth. For good GDP and economic growth, the stable government is necessary.
3.RESEARCH METHODOLOGY
3.1 Econometric Model
We used secondary data in this study which was collected from the database
of IMF, World Bank, Asian Development, Ministry of Finance, Government of
Pakistan and State Bank of Pakistan. Multiple Regression method was used to
analyzed the data. For this purpose, an initial model was developed to measure the
strength of the relationship between dependent and independent variables. The
regression equations engrave as:
GDP = f (political instability)
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GDP = f (CPI + debt rate)

Y = 𝜷𝟎 + 𝜷𝟏𝑿 + 𝝁
Y= 𝜷𝟎 + 𝜷𝟏(𝒙𝟏 + 𝒙𝟐) + 𝝁
Where Y is the dependent variable represent the real GDP growth rate of the country.
𝜷𝟎 is the regression coefficient or constant or Y-intercept 𝜷𝟏 is the slope of the
regression equation, 𝑿 shows the political instability which further based on two
independent correlated variable, e.g. 𝒙𝟏 shows the rate of inflation in CPI and 𝒙𝟐
shows the rate of the public debt of the country as independent variables and 𝜇 is an
error term normally distributed about a mean of 0 and for purpose of computation.
3.2 Hypothesis Development
The hypothesis is formulated for estimation and testing. Most of the
researcher noted that there is a negative and an inverse association between political
instability and economic growth. We have developed following hypothesis: -.
H1: There is a positive relationship between political instability and inflation.
H2. There is a positive relationship between political instability and public debt.
3.3 Analytical techniques
As per the collected data it is easy to measure the effect of independent variables on
dependent variable. The estimation techniques include: -
 ANOVA
 Regression analysis
 t-test.
SPSS software was applied to draw the results.
4. DATA ANALYSIS
4.1 Demographic statistics
The demographic statistics regarding real GDP, inflation rate and public debt
are given in table 1.
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Table: 1 Statistics
Real GDP Growth CPI Inflation rate Public Debt
Valid 15 15 15
N
Missing 0 0 0
Mean 4.3173 8.3480 63.5853
Median 4.0400 7.9200 61.8000
Mode .36a 3.10a 50.91a
Std. Deviation 2.11955 3.99008 9.20308
Variance 4.492 15.921 84.697
Kurtosis .914 -.029 4.046
Std. Error of Kurtosis 1.121 1.121 1.121
Minimum .36 3.10 50.91

Maximum 8.96 17.03 89.12
a. Multiple modes exist. The smallest value is shown
4.3. Descriptive Statistics

Table: 2 Descriptive Statistics
N Minimum Maximum Mean Std. Deviation Variance
Real GDP
15 .36 8.96 4.3173 2.11955 4.492
Growth
CPI
Inflation 15 3.10 17.03 8.3480 3.99008 15.921
rate
Public Debt 15 50.91 89.12 63.5853 9.20308 84.697
Valid N (list
15
wise)
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Descriptive statistics shows the statistics calculations of the variance, mean and the
standard deviation of the statistics coefficient.
4.4. Correlation Analysis
Table: 3 Correlations
Real GDP CPI Inflation Public Debt
Growth rate
Pearson Correlation 1 -.291 -.319
Real GDP
Sig.(2 tailed) .293 .246
Growth
N 15 15 15
Pearson Correlation -.291 1 -.480
CPI Inflation rate Sig.(2 tailed) .293 .070
N 15 15 15
Pearson Correlation -.319 -.480 1
Public Debt Sig.(2 tailed) .246 .070
N 15 15 15
4.5. Regression Analysis
Table: 4 Regression statistics

Mean Std. Deviation N
Real GDP Growth 4.3173 2.11955 15
CPI Inflation rate 8.3480 3.99008 15
Public Debt 63.5853 9.20308 15
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Table: 5 Model Summaryb

Model R R Square Adjusted R Std. Error of Durbin-
Square Estimates Watson
1 .599a .358 .251 1.83405 1.734
a. Predictors;(Constant), Public Debt , CPI Inflation rate
b. Dependent Variables: Real GDP Growth
Table: 6 ANOVAa
Model Sum of Df Mean Square F Sig.
Squares
Regression 22.530 2 11.265 3.349 .070b

1 Residual 40.365 12 3.364
Total 62.895 14
a. Dependent Variable: Real GDP Growth
b. Predictors: (Constant), Public Debt , CPI Inflation rate
The Regression Method is used to analysiz the significant association between
independent variables: inflation, public debt and political instability and dependent
variable; real GDP growth. The table 6 shows the ANNOV results.
As we know that the null hypothesis of ANOVA was that there is close
positive relationship between both variables. And the alternate hypothesis was that
there is no relationship or negative relationship between independent and dependent
variable. A low value of F means that there is more chance of the Null Hypothesis
being accepted while alternate rejected, which shows that both variables are
correlated. Its value is 3.349 which is low. The significant shows the confidence level
(1- Sig) of accepting the null hypothesis. So, from F- values and Sig value of the two
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variables, affect the real GDP growth rate in a different manner. The ANOVA table
6 show the Y relationship with X. From the above table both variables are significant
at P value 0.000, which means that we accept alternate hypothesis and reject all null
hypothesis.
Table: 7 Coefficients
Model Unstandardized Standardize T Sig. Correlations
Coefficients d
Coefficients
B Std. Beta Zero- Partial Part
Error order
(Constant) 15.612 4.565 3.420 .005

CPI Inflation -
1 rate -.307 .140 -.577 .049 -.291 -.534 -.506
2.189
-
Public Debt -.137 .061 -.597 .043 -.319 -.547 -.523
2.262
a. Dependent Variable: Real GDP Growth
Table 7 describes the structure of the model. The value of Beta (ḅ)
demonstrates simply in terms of the observed regression result of the independent and
the dependent variables. They also called the point estimators that have given the
sample; each estimator will provide only a single value of the relevant population
parameter. The C is the constant which show estimated value of Beta and other
independent variable are shown with the unstandardized coefficients, standardized
coefficients, t-test statistics values in the table. The results of the model, analyze the
consistent coefficients of variable regression which is used to compare the values with
each other. From the results of this research study, we can examine both the
hypotheses that there is a positive significant association between political instability
and inflation. There is also a positive significant association between political
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instability and public debt as sig=.000, r=.46. R square value shows the multiple
correlation coefficients between the explained and the predictor variables.
5.6 Graphical presentation
A scatter plot is very helpful to discover the nature of the relation between the
variables, correlation for explaining the tendency in statistical data. Each point or
observation on a scatter plot has two coordinates. First is the part of the data in the
pair (that X coordinate with the amount that we go left or right) and, the second part
of the data (that Y coordinate with the amount that we go up or down). The point
shows that observation is located at the crossing of the two coordinates. Here is the
scatter plot of the regression standardized residual which represents the uphill patterns
of the data; this indicated the positive relationship between X (CPI inflation rate,
public debt) and Y (real GDP growth rate). As the value of X (CPI inflation rate and
public debt) or move rights then the value of Y (real GDP growth rate) tend to
increase. Both are moving in the same direction which describes the positive
relationship between both of them.
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5.7 Panel data base model

First, we will examine if the financial crises create Political instability.
Second, we will examine how political instability affects economic growth in
Pakistan. The method for examining these relationships is panel data analysis. Such
model is often referred to as Random Coefficient Models or Mixed Models in the
multilevel literature.
As we know panel data shows the repeated observation on the same units, it
allows us for more complicated and realistic model than cross-sections or time series.
In this research study, unit of observations (i = 1, 2, 3…N) are followed over a period
of years (t = 1, 2, 3, …T). Data covering two dimensions, time and space, are more
informative, have more variability and less Collinearity among the included variables.
However, the major reason why many scientists apply panel data models is the
possibility of controlling for unobserved heterogeneity. This point deserves a closer
inspection and a general static panel data model can be used as a basis of explanation.
A general static panel data model can be used as a basis of explanation in equation
(1)
Y𝐢𝐭 = 𝜷𝟎 + 𝜷𝑿𝐢𝐭 + 𝝁𝐢𝐭 _________________________ (1)
This is referred to as the Least Square Dummy Variable approach, where the
intercepts capture all the factors that are unit-specific, or country-specific. We obtain
the same results without having to include numbers of dummy variables by
calculating Xit as deviations from individual means. The unit-specific effect αi is
included as a stochastic variable, assumed to be independently and identically
distributed over units. It refers to the error-components model since its error-term
includes two variables. Equation (2) estimates intercept terms in the regression
equation.
Yit = 𝛼i + 𝛽𝑋it + 𝜇it (2)
𝑌̅it = 𝛼̅it +𝛽𝑋̅it + 𝜇̅ it
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(𝛼i + 𝛼̅ it) = 0
(Yit -𝑌̅it) = 𝛽 (𝑋it − 𝑋̅it) + (𝜇it -𝜇̅ it)
Yit = 𝛽0 + 𝛽𝑋it + (𝛼i + 𝜇it) (3)
The main advantage of panel data involves reducing identification problems “in the
presence of endogenous variables or measurement error, robustness to omitted
variables and the identification of individual dynamics”
Yit = 𝛽0 + 𝛽1𝑋it + 𝛽2𝑋̅1 + 𝜀it (4)
Yit = 𝛽0 + 𝛽1(𝑋it − 𝑋̅it) + 𝛽2𝑋̅1 + 𝜇it (5)
̈ 𝜇it = (𝛼i + 𝜇it)
By including the variable group means as in equation (4) the correlation between the
unit-specific effect and the explanatory variable is removed. From equation (4)
Similarly, that the assumption that within- and between-effects are identical, may
easily be relaxed by using a model such as in equation (5).
From equation (4)
Yit = 𝛽0 + 𝛽1𝑋it + 𝛽2𝑋̅1 + 𝜀it
In this equation 𝛽1 shows the within effect and 𝛽2 Shows the difference between the
variables. From equation (5)
Yit = 𝛽0 + 𝛽1(𝑋it − 𝑋̅it) + 𝛽2𝑋̅1 + 𝜇it
In this equation 𝛽1 shows the within effect and 𝛽2 Shows the difference between the
variables
Y=𝛽0 + 𝛽1𝑋1 + 𝛽2𝑋2 + 𝛽3(𝑋1 ∗ 𝑋2) = 𝜀 (6)
Y=𝛽0 + 𝛽1𝑋̅1 + 𝛽2𝑋̅1 + 𝛽3𝑋̅2 + 𝛽4𝑋̅2 + 𝛽5(𝑋̅1 ∗ 𝑋̅2) + 𝛽6(𝑋̅1 ∗ 𝑋̅2) + 𝜀 (7)
̅ = deviation, mean
Where 𝑿
Therefore, I follow the procedure in (6) by modeling the interaction terms as seen in
(7), but examine possible multi-collinearity before including the interactions.
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5.8 FINDINGS AND RESULTS

From the above discussion, we find that GDP growth of Pakistan directly
affected by the political instability. Statistical techniques represent the quantitative
analysis of the dependent and independent variables. Whether the effect of financial
crises on political instability in Pakistan is contingent upon income, and whether the
effect on growth is conditional on the political environment, can be tested using a
model such as Equation (6). If Y is growth, X1 financial crises (β1< 0) and X2 is
democracy (β2> 0), the interpretation of β3 is that when β3> 0 the negative effect of
financial crises on growth is lower for higher democracy scores. To avoid multi-
collinearity and to make the interpretation of the interaction term more meaningful.
However, the variables are already constructed as means and deviations. Therefore,
we follow the procedure in (6) by modeling the interaction terms as seen in (7), but
examine possible multi-collinearity before including the interactions. In the end, it is
the incapability of data to distinguish sharply between autonomous effects and
interplay effects of a variable that leads to high multi-collinearity. Strong
measures may be taken to control political instability because it brings negative
impact of economic growth by creating uncertainty in the country
6. CONCLUSIONS
The result of this study is that the domestic political instability leads to slow
down economic growth and reduce GDP growth rate. Two factors influence the
political condition and economic growth of any country and they are public debt and
inflation rate. When the political conditions of a country are uncertain, then the
government adopts expansionary policies to remain in power and such policies are
harmful for the country’s economy. Political instability increases government
borrowing and thus create the situation of crowding out. When the political situations
are unstable the current government gets extra loans and start extra expenditures for
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new projects, to remain in charge or making their position stable before the next
election. The new government has to repay that debt or continue those projects.
The tax payment is also very poor in Pakistan due to the negligence of the
government and corruption, so they create inflation in the country to repay the debt
services or to complete the projects. Because of increase in money supply the inflation
rate is increased and these conditions leads to reduce economic growth. Political
instability. Thus, public debt and inflation are interconnected and affect the economic
growth. External debt has a pessimistic relationship with economic growth, when a
country increased its external debt, then its economy decreased because of the weak
political condition. It is generally observed that the larger debt is accumulated by
unstable countries. Public debt directly and indirectly affects a country’s economy. If
a country has a high debt rate than the rate of interest would also be high, and the
government tries to reduce it with the help of monetary policy. By doing this, the
government may reduce the interest rate for a short run but, in the long run, the
problems of high inflation and high interest rate would exist. Due to weak government
economic agents enhance their corruption, which cause high inflation rate and high
debt rate. Corruption is the leakage of public revenue and to meet the public
expenditures the government indulged in seignior age. China- Pakistan Economic
Corridor (CPEC) will likely to improve the level of stability of the economy in the
future. Pakistan would be the fastest growing Muslim economy in future.
6.2. RECOMMENDATIONS
1. Policy makers in developing countries like Pakistan should reform
institutions and create effective mechanisms toensure long run price stability.
If fiscal and political reforms are not executed, then the effect of stabilization
policies has just temporary impact.
2. Government should make some hard policies for tax collection to reduce
public debt. Because of tax collection the problem of debt will controlled.
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3. Policy makers should make strict rules to stop corruption in the country
which leads to lower economic growth and political instability.
4. Regimes can’t matter to get high economic growth. We can’t predict that
either democracy is good for Pakistan or autocracy is feasible, but only long
term consistence policies can contribute to economic growth. So Pakistan can
get high and sustainable GDP growth rate and development through adopting
good and consistent policies.
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IMPACT OF POLITICAL INSTABILITY ON PAKISTAN'S ECONOMIC GROWTH

Article · October 2017

Dr.Abdul Ghafoor Awan

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IMPACT OF POLITICAL INSTABILITY ON PAKISTAN’S

Noor Ul Ann Sallahuddin1, Prof Dr. Abdul Ghafoor Awan2

1.1 Problems statement

GDP = f (CPI + debt rate)

Std. Error of Kurtosis 1.121 1.121 1.121

Minimum .36 3.10 50.91

4.3. Descriptive Statistics

Public Debt Sig.(2 tailed) .246 .070

4.5. Regression Analysis

Table: 4 Regression statistics

Table: 5 Model Summaryb

Regression 22.530 2 11.265 3.349 .070b

(Constant) 15.612 4.565 3.420 .005

5.7 Panel data base model

5.8 FINDINGS AND RESULTS

Business Review, Vol.4 (3):35-40.

Awan, Abdul Ghafoor (2012). “Human Capital: Driving Force of Economic

Hazem M. Zureiqat, (2005), “Political Instability and Economic Performance: A

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