Chapter No.

INTRODUCTION

1.1 Background of the Study

Political stability plays an important role in economic development of a country while political
instability could seriously reduce the economic growth. The concept of political instability was
described by (Lipstel 1960). He stated, “a country is considered as stable if it has been a liberal
and consistent democracy or dictatorship for 25 years”. But recent political school of thought has
changed the tradition of political instability and defined as it is a situation where by a country is
currently going through political disorder. And it can be describe as tendency of a change in the
executive power, either by legal or illegal resources. Economic growth and political stability are
deeply interconnected. On the one hand, the uncertainty associated with an unstable political
environment may reduce investment and the speed of economic development. And poor
economic performance may lead to government fall down and political unrest.

Another definition of “political instability” was presented in the journalistic usage of the term
“political instability”. However, Journalists used the term political instability to reflect that a
government is weak and may not survive. A significant characteristic of this definition is
“uncertainty”. Modern politico-economic research finds association governments are considered
a sever threat and to be more prone to the government survival. (Siermann, 1998) has called
these assumptions as the weak government approach.

The instability of government, inefficiency of political parties, and a weak political culture create
the scenario for a politically instable state. Political instability has become a serious problem
especially for the developing and underdeveloped countries (Memon et al 2013).

In Pakistan, political instability has been mainly seen in the frequent changes of governments
(Qureshi, 2010). In the past years there has been no attempt by social groups to overthrow or
change the corrupt and weak political regime. Undoubtedly, various political, economic, cultural
and regional groups have frequently supported to violent and non-violent methods to exert
pressure on the government to accept their various demands. However, by and large, of the
components of instability that is government, society, and, regime, component that has been the

1
predominant factor in the in the Pakistan politics. In Pakistan frequent changes of governments
has created instability and uncertainty in the economic policies. Due to the frequent elections and
change coalition party governments the stability utopia was ignored and it became merely a
dream. Election procedure is expected to be a mainstay of all democracies and smooth transfer of
power from one party to another after elections and is expected to be the smooth functioning of
desirable democracy. However, when multi-party, intern-party or intra-party conflicts and
tensions lead a change in government this has a destabilizing effect.

The relationship between political instability and economic growth in a country is the subject of
old debate among many economists and political scientists. Political instability is one of the
major problems of Pakistan. Due to political instability there is uncertainty in productive
economic decisions as a result risk adverse economic agents may be uncertain to take economic
projects or may exit the economy, by investing abroad. Conversely, foreign investors prefer a
stable political environment, with less policy uncertainty about property rights (Alesina1996).

Political stability plays an important role in economic development of a country. There are
several reasons to believe in that democracy may promote economic growth. Relative to
dictatorships, democratic government that command popular support might be expected to be
more stable, to be less likely to star wars, and to have better relations with the advance industrial
nations, most of which are democratic countries. Dictatorial government may be better able than
a democratic one to enforce a high national saving rate and keep un-productive government
expenditures under control.” Most of the critics and researchers are of the view that dictatorship
is better style of ruling because it reduces consumption and unproductive investments and shifts
the savings to increase investments” (Perotti 1996).

Studies show that there is a negative effect on political instability and uncertainty on growth. It
has been argued that political instability raises political uncertainty and volatility has adverse
negative impact on economic policies and decisions. For, risk averse agents the high probability
of change of governments threaten future policies and they would like to invest somewhere else
in the safe place rather than to invest in a risky environment (Alisena et al;1996). Recent studies
regarding this issue show that there are so many growth variables as suggested as political
variables such as political violence, democracy and government stability (Barro, 1996).

2
Alisena and Perotti (1996) and Cukeirman (1992) argued that political instability creates
instability in economic growth by creating instability of inflation, reducing investment, increased
foreign debt, and budget deficit respectively. Pakistan has faced variations in growth rate since
1970, where a down turn in economic growth experienced due to political instability aftershocks
of 1971 war. During this war Pakistan has lost an ample share of financial as well as human
resources. From late 1970 Pakistan has enjoyed a sustainable growth rate till the year 1988, due
to Afghan war, consistent and sustained economic policies. After 1988 down turn has been seen
in Pakistan’s economic growth rate due to only political instability, inconsistent and irrational
political and economic policies. After 2000 again an upward and positive trend in GDP and
growth has been seen (Hussain, 2009).

Socio political instability increases uncertainty, weaken the reason for the accumulation of
physical capital and reduce the rate of economic growth (Compost and Nugent2002). Foreign
investors do not invest in countries where there is civil war, coups, army take over etc. The lack
of interest by the foreign investors in politically destabilized countries by giving access to the
productive markets slowly down the economic progress and thus the country is more likely to
rely on foreign aid. For example, the improper use of aid on the huge disasters like earth quake in
2005 and on the wake of flood in 2010 has lost the trust of donors to support Pakistan
sufficiently even in most difficult times. Political instability also limits internal investment.
Generally they avoid investing in their own country for fear of nationalization of their project,
large scale interfere of militant, trade union and harsh attitude of various government agencies.
The well off people including the politicians prefers to utilize their money outside the country or
want to invest out of their own country. The developing countries are deprived of investment
funds which badly effect economic growth (Mamoon et al;2017).Since independence, the
economy of Pakistan shows high economic growth in three different periods:1958 to 1970,1977
to 1988and 1999 to 2008.Surprizingly all the time periods are military led governments, By
keeping in view the type of government and high or low economic performance, the sixty three
years are divided in seven periods:

1. Post independence era (1947-1958)

2. Military led government era (1958-1971)
3. Elected government era (1971-1977)

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 4. Military led government era (1977-1988)
5. Elected government era (1988-1999)
6. Military led government era (1999-2008)
7. Elected government era (2008-onward)

During military regime in second (1958-1971), fourth (1977-1988) and sixth (1999-2008) high
economic growth trend was observed and unfortunately after every military government the
elected government even did not maintain the economic growth. On the contrary the economic
conditions became much poorer that sometimes the country was near to default. (Ali & et, al ;
2010). Pakistan has always struggled with democracy since its independence in 1947. During
past fifty seven years of political life, there have been many changes in the government, ranging
from democracy to dictatorship .The people of Pakistan are free for democratically voted
governments and the elimination of existing of government. This has been a steady problem,
especially in the post 1998 period after democracy was return in the country following eleven
years of martial law under General Zia Ul Haq. Pakistan has undergone these political crisis
because of two factors, both related to tug - of - war between politicians and military over
ultimate control of government. On one hand politicians have always blamed the military for its
extra constitutional politicians for their miss governance and corruption, justifying their military
rule as a means to cure the situations. It must be noted here that most of the national
governments in Pakistan were discharge on blame of corruption. Due to political risks capital
does not move from developed countries to developing countries, as a result there is decline in
economic growth (Jun and Singh1996). The world economy is only beginning to recover from
the effects, especially reduced capital flows to the real economy, arising from the recession that
started in 2008 in the US. Exports and imports are badly affected due to political instability
(Williams 2010).Political instability is measured by Cabinet changes (proxies of political
instability), that is the number of times in a year in which a new prime minister was named is
indeed internationally common displaying remarkable regional differences and negatively
affecting macroeconomic performance (Asian and Veiga 2011).Predictable policies and clear
rules are important for private investment. The uncertainties of macroeconomics policies have
powerful impacts on private investment. Firms delay investment and wait for new policies before
comment their resources, knowing they cannot separate from when policies change (Ali2001).
Higher migrant leads to increase in government military spending through the control of political

4
stability. The negative effect of immigrant political stability is stronger in place with assimilative
citizenship lows. By investigating the link with political stability is necessary because political
instability cause to slow down economic growth (Gevremedhin2010). Instability affects
economic performance through four ways directly. First instability will make local property
rights insecure because it produces a invalid in the exercise of public laws. This discourages long
term investment in physical capital and economic exchange. Second, without a single political
system it is difficult to predict the identity of future government and the dynamics of future
intuitional change. So investors will move their resources to safer and more predictable
intuitional environment. Third, political instability will increase the probability that individuals
will engage the opportunistic rent seeking, thus diverting resources to unproductive purposes,
Finally when political struggles involve the use of force, property will destroyed. This will
discourage investment since prices will have to take this treat into account. Additionally when
violence is widespread markets will be interdicted, further discoursing economic exchange and
therefore production and investment will be decline (Haber et al 2001). Aggressive changes to
the regime may damage or demolished physical capital and effect production levels. Moreover
political instability may slow down legal reforms since the marginal cost of reforms for now
politicians is likely to be larger than the benefits, since part of the benefit will flow to future. No
matter what framework is used, the theoretical prediction is very clear .Political instability and
economic growth is negatively related (Richard 2008).

1.2 Contribution in the study

This study is an attempt to investigate the relationship between political instability and economic
growth in Pakistan. For this analysis study uses time series data for the period 1980-2015. As
study find some gaps in previous studies like Hazem M. Zureiqat (2005) that utilized data from
1985 to 2002 for 25 countries in five different regions and study will check only according to
Pakistan. Secondly this study extends the time duration and by taking latest data we will be
applied. Thirdly these studies will also using the data of school enrollment which was not used
previously.

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1.3 Objective of the study

The general aim of this study is to study the relationship between political instability and
economic growth in Pakistan during the period 1980-2015. However, the specific objectives of
the study for the same time period are as follows/

 To analyze the impact of political instability on the economic growth in Pakistan.

 To recommend some policy implications

Based on the above objectives the following hypothesis has been narrated.

1.4 Hypothesis of the Study

H0; There is relationship between political instability and economic growth in Pakistan.

H1; There is no is relationship between of political instability and economic growth in

Pakistan.

1.5 Organization of the study

The rest of the study is organized as follows. In 2nd chapter we will discuss about the brief
overview of political instability and economic growth in Pakistan. A comprehensive reviews of
existing literature from national and international sources are presented.3rd chapter is reserved for
methodology and data sources. While results and empirical findings are explained in 4th chapter
and 5th chapter concludes the study.

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Chapter 2

REVIEW OF LITERATURE

2.1 INTRODUCTION

This chapter reviews the empirical literature related to the subject body of this thesis. This

chapter includes the studies which are valid in their objectives of study, methodology, theoretical

basis, econometric approach or the results about the impact of political instability on economic

growth in Pakistan.

2.2 Political instability and economic growth

The literature about political instability and economic growth is rich; several empirical papers
relied on exploring the relationship between political instability and economic growth. The
relationship between political instability and economic growth is not new. A good number of
studies are presented in this area in order to inform the readers that what the other researchers
have done in this area of research.

Tabbisum et.al, (2016) have investigated the effect of political unrest on economic growth of
Pakistan and its instability over the period of last 22 years. This study has utilized annual time
series data. Terrorism, election, regime and strikes have been used as political instability proxies.
Autoregressive Conditional Heterosekedasticity (ARCH) and GARCH models have been used
for investigating the outcome of political uncertainty on GDP in Pakistan. Through GARCH
model it was found that these proxies have significant negative effect on Gross Domestic Product
(GDP). The overall results imply that political instability has significant negative effect on
economic growth and suggested that government should take corrective measures to bring
political stability which will lead to economic progress.

Bayer and Aytemiz (2015) examined the impact of economic freedom, political stability and
policy uncertainty on economic growth of united states. Westerlund’s Durbin-Hausman
cointegration tests and Dumitrescu-Hurlin panel causality test were utilized for estimation for the

7
period of 2002-2013. Real GDP per capita growth, political stability and absence of violence,
economic freedom and economic policy uncertainty were the main variables of the study. By
utilizing several tests study reached to conclude that all above variables have long run impact on
economic growth by affecting institutions governing economic policies. The study found that
economic freedom is one of the most vital factors which promote economic growth. Empirical
results showed that economic growth and political stability feed each other.

Balan (2015) analyzed the causality between defense spending and economic growth in the
Middle East countries and Turkey for the period of 1988-2013. By applying Kónya (2006)’s
bootstrap panel Granger causality approach, empirical results obtained the finding that there is
positive causality relationship for political stability and economic growth to defense spending for
middle income countries.

Nurudeen (2015) examined the effects of political instability and corruption on saving and
further investigated saving depends on income levels. Economic Community of West African
States (ECOWAS) was utilized for investigating during the period 1996-2012.By using panel
Corrected Standard Error (PCSE) and the Two Stage Least Squares (TSLS) models study
concluded that there is a negative impact of corruption and political instability on saving. Also it
depends on income levels.

Arfaoui and Ziedi (2014) explored the causal relationship between political instability and
economic growth. The authors conducted an empirical investigation of 69 developing countries
for the period 1985-2012. They applied poolability test by considering the presence of fixed
effects, and Hausman test by considering the presence of fixed or random effects. By empirical
investigation study reached to conclude that there exist a causal relationship between political
instability and economic growth and political instability is harmful for the economic growth.

Zouhaier and Karim (2012) identified the effect of political instability on investment and
economic growth. They used a dynamic balanced panel data model on annual data from 11
countries from the Middle East and North Africa (MENA) region over the period of 2000 to
2009. Another aim of this paper was to study the effect of political instability on contribution of
investment to economic growth. The empirical tests proved that there is no effect of political
instability on investment and economic growth.

8
Luckasz et. al; (2012) explored the link between political instability and its impact on economic
growth. The study used gross domestic product (GDP) growth rate, tertiary school enrollment,
trade openness, unemployment rate, and inflation rate, world growth rate as control variables and
political instability as a variable of interest. By using Maximum Likelihood Method for the data
from 10 Central and Eastern European (CEE) countries during 1990-2009, reached to conclude
that government changes were not constant, that is more recent political modification which
reduces the changes of elections in the following year. Another important finding is that major
government changes slowed down the economic growth and had a significant and negative
impact on economic growth.

Shahzad et, al; (2012) investigated major determinants which pressured foreign direct
investment (FDI) inflows in Pakistan. This study has examined the role of political instability on
the country’s economic growth, thus to explain that although Pakistan has many attractive
natural resources for investment, the political instability situation has been one of the main
causes of disturbing the FDI inflows in Pakistan. By using different macroeconomic variable
study suggests that there should be political stability for FDI which will lead to strong economic
growth.

Azam et, al; (2012) examined the potential effect of political risk and macroeconomic policy
uncertainty on FDI in South Asia. Autoregressive Distributed Lag (ARDL) approach and co
integration technique were used for estimation in the study. GDP, energy consumption per
capita, trade openness and FDI were utilized as independent variables in the study and political
instability as a variable of interest. The study also used inflation rate uncertainty, budget deficit -
uncertainty and exchange rate uncertainty as random variables. The result of study showed that
political risk has significant negative effect in short run. And impact of GDP on FDI is positive
in short run and impact of trade openness on FDI inflows is also positive in short run. The long
run results showed that there is negative impact of both political risk and trade openness on FDI.
And due to low foreign direct investment there will be decline in economic growth. The study
suggested that South Asian Economies should need to focus on political and macroeconomic
factor along with FDI to attract more FDI for more economic growth.

Kouba and Grochova (2011) worked on financial crisis, political instability and its impact on
economic growth on the example of Central and Eastern European (CEE) countries. They

9
described two types of political instability elite (cabinet changes, government crises, instability
because of minority governments) and non-elite (violent coups, riots, revolutions, civil wars).
GDP, investments, exports, number of graduates from a secondary school, fraction of seats held
by the government (in the lower house) and number of years that has the chief executive been in
office in the Baltic states – Estonia, Latvia, and Lithuania ware used as proxies of political
instability. By using single equation model it is concluded that elite political instability is not the
critical problem that hampers economic development.

Jafri et, al; (2011) analyzed the impact of political instability on foreign direct investment (FDI)
revenues in Organization of Islamic Conference (OIC) countries. The Study utilized annual data
of 16 countries over the period 2002-2009. By empirically analyzing it is concluded that
population and trade openness have positive and significant impact on FDI inflows and the
political instability has a negative impact on FDI inflows.

Aisen and Veiga (2011) empirically analyzed the effect of political instability on economic
growth. Linear dynamic panel data models were used from a sample of 169 countries during the
period 1960-2004.The Study took initial GDP per capital, investment, primary school
enrollment, population growth, Trade openness and political instability as control variables while
GDP per capita growth as variable of interest. By using Generalized Method of Moments
(GMM) the study found that higher degree of political instability is associated with lower growth
rates of GDP, decline in productive growth, physical and capital accumulation which results to
decline in economic growth. The study suggested that governments in political instability need to
address its root causes and tried to diminish its effects on its design and should implement on
economic policies also economies should have durable political activities that may lead to
economic growth.

Roe and Siegel (2011) addressed political instability’s measure on financial markets across time
and cross sectional data during 1960-1982 periods. By using component analysis and measuring
correlation between variables study concluded that political instability is fundamental for
financial development.

Arezki and Bruckner (2011) analyzed the effect of political instability on food prices. The study
used panel data for 120 low income countries during the period of 1970-2007. Beef, maize, rice,

10
sugar, wheat and simple average of all prices are used for making food price index. Executive
constraints, political competition, GDP demonstration and civil conflicts were main variables in
the study. Generalized Method of Moments and Least Squares Estimates were utilized for
developing a formal theory of democratic transition. Study focused on the principle that change
in food prices have particular effect on political and social stability on poor countries. By
empirical estimating study concluded that during times of international food prices political
institutions in low income countries considerably decline.

Dutta et, al; (2011) explored the link between socio political stability and its impact on economic
growth. The study took data from the panel of 138 developed and underdeveloped countries
during 1994-2005. Real GDP per capita, population growth, education and trade openness
utilized as control variables while socio political stability as a variable of interest. After
empirically analyzing the study reached to conclude that trade openness has positive and
significant effects on population growth. And socio political stability is strongly positive and
greater socio political stability is associated with higher domestic investment. They suggested
that there is empirical evidence that free media may contribute economic development by
encouragement of a stable socio political climate.

Dimitraki (2010) explored the links between political instability and economic growth in
Western Europe. The Study took panel data of 20 years over the period 1984-2004 from 20
European countries. They constructed the measure of political instability by using Time Series
Data, and the quality of Govt dataset and the social policy dataset, riots, political demonstrations,
strikes, assassinations and governmental crises coups as control variables and political instability
as a variable of interest. Generalized Method of Moments (GMM) estimators approach was used
to produce several interesting findings. First, the inverse relationship between political instability
and economic growth predictable by other studies is confirmed. Second, the result illustrates that
economic growth and political instability are jointly endogenous. Third, joint relationship
between political instability and economic growth. By empirically analyzing the study concluded
that there is adverse relationship between political instability and economic growth.

Qureshi (2010) analyzed political instability and economic development with the case study of
Pakistan. Annual time series data was used for the period 1971-2008.The author has constructed
the index of political instability by using seven different indicators which are general strikes,

11
demonstrations, Roits, GOVT longevity and war by employing principal component technique.
By using OLS estimations technique the study concluded that bad political situation is found in
Pakistan economy and there is negative relationship between political instability and economic
development in Pakistan. Study suggested that if the political scene is made stable it may leads to
higher level of economic development. Moreover, there should be smoothing political scene of
the country which broadly can contribute to the present development and average growth rate of
country.

Pei & Adesnik (2010) studied 22 developing countries from Asia and Latin America during
1945-1998 and they concluded that there were 93 economic crises happened and 30 of them
became the cause of government changes and 17 of them with regime changes. This paper
defined economic crises and government changes, which considered that an economic crisis
prevails when there is a decline in the GDP or growth rate of GDP. This study concluded that
number of government changes have deeply affect on economic growth.

Sakir & Ali Kabaskal (2010) discussed that there is a relationship between political instability
and economic growth. Most of the studies like Campos and Nugent (2002) described that there is
a relationship between economic growth and political instability and political instability
adversely affect economic growth. Similarly, this study also shed light on the relationship
between economic crisis and regimes change and government changes. Government crisis and
regime changes have significant affects on economic growth. In this study 22 developing
countries of Asia and Latin America have been studied over a period of 1945-1998.It was
supposed that friendly and growing economic conditions encourage voters and re-election in the
country. To some extent few economist do not agree that political instability reduces growth.
However, later on we have seen several empirical and theoretical evidences that political
instability has some inverse effects on growth.

Polachek (2010) studied the relationship between political instability and its impact on the
performance of national economies. The study provided economic time series data for 188
countries from 1970-2000. Initial GDP, trade openness index, interactions variables for openness
and initial income, the fraction of the territory in the tropics, central government, budget balance,
institutional quality index, growth of the economically active population, the share of primary
product exports in GDP, the average life expectancy and finally the conflict variables are utilized

12
as explanatory variables and average growth rate as a variable of interest in the available study.
Using Ordinary Least Squares (OLS) estimation study reached to conclude that the short term
effects of conflict are more famous than long term effect. The effect of both is to decrease
economic growth. Civil war has negatively effects on all countries and specially effects no
democracies. Wars severity measured by fatalities as a percent of a country’s population appears
to yield most strong measures of the effect of wars on country growth then wars duration. Finally
the low income countries suffer from wars more than high income countries.

According to Dawn news (2010) the GDP growth rate in the financial year 2010 was recorded
4.1% and it is forecasted to 2.8% in the financial year 2011( Dawn News September,2010).
Pakistan political instability, conflicts among the coalition parties, terrorist attacks and
inconsistent economic policies are the main cause of falling growth rate. Government of Pakistan
is diverting a lion share of its developmental budget towards defense to keep the security and to
counter attack the terrorist activities. This reduction in development budget and curtailed
investment in agricultural and industrial sector is becoming the cause of high inflation in
Pakistan. It was also supposed by the writer that there is a reduction in foreign direct investment
above 50% in the current financial year due to political uncertainty and instability

Younis et al (2008) investigated the various factors of political stability on economic growth in
Asia. They took a sample of 10 Asian developing countries from 1990-2005. Ordinary Least
Square method was utilized for estimating. Longevity of the regime, Election Density Ratio,
Increase in the number of political parties, Strength of ruling party, Military Expenditure as a
percentage of GDP, index of democratization, Number of persons internally displaced and
Increment of political parties in national assembly was utilized as proxy variable of political
instability. By empirically analyzing study concluded that political stability is directly effecting
economic growth.

Campos (2008) investigated the effects of financial development and political instability on
economic growth. Cross sectional times series data of Argentina during 1896 -2000 was used for
estimation. By using Quasi Maximum Likelihood Estimated (QMLE) study reached to conclude
that informal instability have a direct negative effect on economic growth while formal
instability affects positive in the long run but negative in short run.

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Aslam and Sajid (2008) examined the effects of political instability on employee’s work
behavior with Information Communication Technology (ICT) industry of Pakistan. The study
based on the political and security conditions of Pakistan. Data collection was made through
questioners from 51 people who belong to 30 organizations working in ICT sector in Islamabad,
Lahore and Peshawar. By empirically analyzing study found instability put employs in some
mental distortion and stress. Professionals are facing lack of concentration on work. Political
instability has dead moral, motivation and interest in their work which decline in economic
efficiency and economic growth.

Campos & Karanasos (2007) found that the informal political instability has a negative effect of
growth rate, whereas formal political instability has indirect effect on economic growth by using
PARCH model. This model increases the conditional variance flexibility specifications to
determine the power of growth in the volatility pattern.

Ishrat Hussain (2007) in a news article argued that Pakistan is a country where still it needs to
improve the income level of the people and reduce poverty. The study has also commented that a
stable political and sustainable economic policies would enable Pakistan’s policy makers and
government to enhances the per capita income to $ 200 by the end of year 2002 and reduces the
poverty level by 50% by end of 2015 provided that Pakistan establishes and introduces stable
political system, consistent economic policies establishing a sound governance, stable
macroeconomic policies, creates friendly investment opportunities and human development.

Chowdhury (2006) investigated the relationship between political instability and GDP per capita
growth with the case study of Bangladesh. Data was collected from the sample of 113 countries
during 1950-1982.Degime change, government change, violent change and peaceful change
utilized as four main dimensions of political instability. Reliability of policy utilized as proxy of
political instability. Agricultural growth, flow of FDI social development sector are taken as
control variables while GDP is taken as a variable of interest in the model. The main objective of
the study is to analyze political development of the country and to justify that political instability
ensures economic and social development. By collecting political history of the country and the
experiences of cross countries it is concluded that political instability has negative effect on
economic growth.

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Pin (2006) worked on the measurement of political instability and its impact on economic
growth. The study took data from the sample of 98 developing countries in the period of 1984-
2003. Roits, strikes, executive changes, number of elections, government crises and et. al, were
utilized as main indicators in the study. Whereas real gross domestic per capita, investment,
secondary school enrollment, and the growth rate of population were as used as explanatory
variables and economic growth as a variable of interest. By using Generalized Method of
Moments study found that political instability has four directions. These are civil protest,
politically motivated aggression, instability within the political regime and instability of the
political regime. All indicators of political instability have different effects on economic growth.
Study concluded that political regime and civil protests are significantly related to long run
economic growth. And a higher degree of political instability leads to lower economic growth.

Campton (2006) examined the relationship between political instability with intuitions and
economic growth. Author used data of political instability across 69 countries between 1870-
2000.Study based on three hypothesis, firstly, political instability will result to decrease in value
of trade. Secondly due to decrease in the value of trade there is a change in long run growth
establishment. Thirdly, political instability also impact on formal institutions more than informal
institutions. Generalized Method of Moments (GMM) utilized to examine the link between
political instability institutions and economic growth institutions. Results indicated that political
instability does not cause of negative growth.

Benjamin (2006) study simply tried to put the link between, governments and markets form the
economic instability. Instability that results from changes in economic or political conditions can
therefore spread back and forth between the economy and the political system. Instability in the
economy can spread to the political situation via the weaknesses of government, and that
political instability can further impact economic conditions through markets. Political instability
is likely decreases government revenue generated from taxes. Taxable incomes will decrease and
the ability of government officials to collect taxes may diminish as well. Political instability
impacts economic conditions by influencing the confidence of market actors.

Zureiqat (2005) studied the relationship between political instability and economic growth. He
used data from 1985 - 2002 for 25 countries in five different regions. Human capital, physical
capital, technology and political instability were used as explanatory variables while economic

15
growth as a variable of interest. By single equation model study reached to conclude that
political instability causes slower economic growth. While using simultaneous equation model
study conclude that political instability and economic growth are jointly correlated and
endogenous.

Palkangas (2005) worked on political instability, gender discrimination and population growth in
developing countries. Author introduced gender discrimination and population into a model of
political economy. During 1989-1999 data was taken from 69 low and middle countries. As there
is high risk of internal conflicts, then government needs a bigger military and a large supply of
young men for it. By using OLS estimation technique it concluded that there is positive
association between the risks of internal conflicts, population growth and female discrimination.
Dimitrios Asteriou & Simon Price (2001) described the link between political instability and
economic growth by using GARCH-M models. The paper described that there is a negative
effect of political instability on growth in two ways. Firstly, the political instability stemming
uncertainty and this uncertain environment reduces private investment consequently it reduces
economic growth. Secondly, instability changes the investment and factor demands. Specifically,
a number of studies argued that political instability increases policy uncertainty which hinders
economic growth. A frequent change of government means that the future policies will remain
uncertain and volatile. So that, risk adverse investors would avoid investing in the volatile
environment and they would rather prefer to invest abroad in some safer economies.

2.3 CONCLUSION

There are number of studies that were carried out to identify the significant relationship between
PI and economic growth in Pakistan and other economies. Most of these studies have identified
that PI affects the economic growth negatively. But there has being no studies identified yet
which has investigated the causal relationships between PI and economic growth. The empirical
results of our study reveal that there are both long and short run relationship between political
instability and economic growth with economic growth being the strongest driver for political
instability. Therefore, our study aims to fill this gap in literature and would be of great use for the
policy makers and key decision makers of the economy.

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Chapter No. 3

METHODOLOGY AND DATA

This chapter explains the methodological background, model formulation, estimation and data
sources, which are used to detect the impact of political instability on the economy growth of
Pakistan.

3.1 Theoretical Framework and Model Specification

Economic growth refers to the increase in the amount of the goods and services preferred by an
economy over time. There are many economic growth models which show factors that lead to
economic growth. Solow (1957) indicates that physical capital and labor leads to economic
growth. Javons (1980) designate that increased in energy efficiency paradoxically tends to
increased energy consumption. Locus (1988) point out that economic growth is the result of
skills achievement, education and training. Joseph (1988) explains growth by innovation as a
process of creative distraction, which captures the dual nature of technological process in terms
of creation, entrepreneur introduce new products or process in the hope that they will enjoy
temporary monopoly like profits as they capture markets. Romer (1990) presented Endogenous
Growth Theory holds the investment in human capital, innovation and technological knowledge
is significantly contributed to economic growth. Romer (1990), and Barro (1991) have
emphasized that human capital is the most important factor in determining the economic growth.
This chapter discusses the model used to check the impact of political instability on economic
growth of Pakistan.

It is generally believed that political instability has a strong negative impact on economic growth
because it creates uncertainty that may reduce investment and the speed of economic growth. On
the other hand, poor economic performance may lead to government fall down and political
unrest. A political stable economy can ensure a smooth speed of economic growth and
development, so that it allows producers and investors to take long term decisions, which leads
to long term growth and development in the country. High economic growth with desirable level
of inflation is main aim of macroeconomic policy makers, as inflation is harmful for economic
growth. All data is taking in percentage form.

17
3.2 Theoretical model

GDP= f (INFR, EXP, PSE, GFCF, LE, PIINDX)

Where

GDP =Gross domestic Product

INFR=inflation Rate

EXP=Exports

PSE= Primary School Enrollment

GFCF=Gross Fixed Capital Formation

PIINDX=Political Instability Index

β =Coefficient of variables

µ=Error Terms

18
Chapter no 4

DATA AND METHODOLOGY

4.1 INTRODUCTION

Literature review and conceptual framework draw attention to the idea of the political instability

and economic growth. In this section methodology, data source, Trend analysis of variables and

econometric methodology will be discussed.

4.2 DATA SOURCES

The present study is going to study the impact of political instability on economic growth of

Pakistan during 1985 to 2016 with time series data mostly taken from the world development

indicators while political instability index will utilized made by tabbisium et al 2016.

4.3 VARIABLES OF THE STUDY

Dependent Variable GDP

Gdp = Gross Domestic Product is the sum of gross value added by all resident producers in the
economy plus any product taxes and minus any subsidies not included in the value of the
products. It is calculated without making deductions for depreciation of fabricated assets or for
depletion and degradation of natural resources (World Bank Definition). In this study economic
growth is taken as the dependent variable. In literature to measure the economic growth, gross
domestic product (GDP) was widely used. This study uses GDP as a proxy of economic growth
in Pakistan. This proxy has been utilized by Abbas and Peck (2007), Pin (2006), Nazeer and
Masih (2017), Islam, Wadud and Islam (2007) and Chaudhary, Iqbal and Gillani (2009).

INDEPENDENT VARIABLES

INFLATION RATE

19
Inflation as measured by the consumer price index reflects the annual percentage change in the
cost to the average consumer of acquiring a basket of goods and services that may be fixed or
changed at specified intervals, such as yearly. The Laspeyres formula is generally used (World
Bank Definition). Inflation rate has been taken as independent variable. Inflation utilized by
Malik (2011), Asian and Veiga (2013), Rani and Batool (2016).
SCHOOL ENROLLMENT
School enrollment ratio (%) as a measure of general school education. School education
enrollment ratio is derived by dividing total school enrollment (5-15 years) to the population of
that age group. This proxy has been used by Hassan and Ahmed (2008), Asia and Veiga (2013)
and Afzao et al (2010) to check its impact on economic growth.
EXPORTS
Exports are all goods and services produced in a country and sold in another country. Exports are
important and significant determinant of economic growth in Pakistan. Fatemah and Qayyum
(2018), Hameed and Iqbal (2012).analyzed its impact on economic growth.
GROSS FIXED CAPITAL FORMATION
Gross Fixed Capital Formation (GFCF) evaluates the value of achievement of new or existing
fixed property by the governments and households in the economy. Fluctuations in this pointer
are considered to indicate something about future business activities and the outline of economic
development. In Harrod-Domar model, the growth rate of income will be positively related to
saving ratio and capital formation. So, we can say that the more a country is able to save and
invest out of given national income, the greater will be the growth of that national income. As
explained in literature in case of Pakistan, GFCF is supported in the long run..

POLITICAL INSTABILITY INDEX

Political instability has a negative impact on the growth of a country and is still negatively
influencing adversely. Due to political instability the inflation rate is going higher and higher,
accompanied by falling foreign investment and ultimately declining growth rate. In this study it
is generally focused on the political instability and growth rather than investment, although there
is a strong link between growth and political instability.

20
4.4 Stationary and Non Stationery Data

Before analyzing the long run relationship among variables it is very important to note the
variables are stationary at same levels. Unit root test is used to check weather data is stationary
or not. A process is said to be stationary if its probability distribution remains unchanged as time
proceeds and we can say that data generation process does not changed. To test the unit root
most widely used test is Augmented Dickey Fuller (ADF) test. Non stationary of data as a rule it
is unpredictable and cannot be forecasted. The results obtained by using non stationary time
series may be wrong and may indicate a relationship between two variables which does not exist.
In this study we will use the approach of cointegration which relies on the long term relationship
between time series variables.

4.5 ECONOMETRIC METHODOLOGY

This study is based on the time series data of Pakistan from 1985 to 2016. Hence it is important
to check the survival of unit root before deciding any estimation technique. Unit root test is used
to check weather data is stationary or not. A process is said to be stationary if its probability
distribution remains unchanged as time proceeds and we can say that data generation process
does not changed. To test the unit root most widely used test is Augmented Dickey Fuller (ADF)
test.

Johnson Cointegration Technique

The Johanson test named after Soren Johansen (1988) who presented this method for testing
cointegration of several time series. There are two types of Johnson test, either with Trace or
with Eigen Value, and the inferences might be a little bit differences. In order to apply Johnson
Cointegration technique, it is necessary that all variables are stationery at their first difference.
And all variables are cointegrated at order one so that we prefer cointegration technique.

21
4.5 TREND ANALYSIS OF VARIABLES

This section shows the trend analysis of some important variables which are significant to this

study. GDP as dependent variable and Inflation Rate, Exports, Primary School Enrollment Gross

fixed capital formation and Political instability index are used as independent variables.

In the forthcoming lines trend analysis Primary School Enrollment and Gross Fixed Capital

formation are used as proxy of human capital.

Trend Analysis of Primary school Enrollment

The figure 1 shows the graphical representation of Primary School Enrollment in Pakistan. It

shows the trend in Primary School Enrollment in Pakistan over the 34 years from 1980 to 2015.

PSE
.88

.84

.80

.76

.72

.68

.64

.60

.56

.52

.48
5 10 15 20 25 30 35

22
 Year

The figure 1 shows that there is fluctuation in Primary School Enrollment. revenue is maximum

in 2000 after that there is slightly ups and down.

Trend Analysis of Gross Fixed Capital Formation

Gross Fixed Capital Formation is also used as proxy of human capital. The figure 2 shows the

trend GFCF over the period 1980 to 2015.

GFCF
20

15

10

-5

-10
5 10 15 20 25 30 35

Years

Figure 2

The figure 2 shows there is huge fluctuations and no stable behavior in GFCF throughout the

selected period. Over the period of 26 selected years there is maximum amount of GFCF but

soon there is decreasing trend over next years.

Trend Analysis of exports

This above figure plots the data of exports over the 34 years from 1980 to 2015 in Pakistan.

23
 EXP
18

17

16

15

14

13

12

11

10

9
5 10 15 20 25 30 35

Years

Figure 3

The figure 3 shows that EXP have no stable behavior and the Curve shows the upward trend

reflecting the increasing level of EXP while decreasing level shows decreasing level of exports.

Trend Analysis of Inflation Rate (INFR)

The figure 4 shows the trend in INFR in Pakistan over 32 years. The data of INFR is plotted

against the years 1980 to 2015 in this figure. The nature of curve shows that the INFR has

decreasing behavior in mostly in selected periods. It shows the downward decreasing level of

INFR.INFR is used as control variable in this study.

24
 INFR
18

16

14
INFLATION RATE

12

10

2
5 10 15 20 25 30 35

FIGURE 4

Trend analysis of Political Instability(PIINDX)

The figure 5 shows the trend analysis of PIINREX made by Tabbisum et al (2016) over the
period of 1980 to 2016.

PIINDX
200

160
POLITICAL INSTABILITY

120

80

40

-40
5 10 15 20 25 30 35

Years (Figure 5)

25
Figure 5 shows that there is almost stability over starting periods, but with the passage of time

there is no stable behavior over selected periods. Upward trend shows increasing level of PIINX

while downward trend shows decreasing level of PIINX.PIINDX is used as a control variable in

the study.

Trend of Gross Domestic Product (GDP)

Figure 6 shows the trend in Gross Domestic Product of Pakistan which is used as dependent

variable in this study.

GDP
12

10
Gross Domestic Product

0
5 10 15 20 25 30 35

Years (Figure 6)

This above figure plots the data of Gross domestic product over the 32 years from 1985 to 2016
in Pakistan. The figure 3 shows that GDP have no stable behavior and the Curve shows the
upward trend reflecting the increasing level of gross domestic product.

26
Chapter 05

EMPIRICAL RESULTS AND DISCUSSION

5.1 INTRODUCTION

In the earlier discussion variables were selected on conceptual and theoretical justification. In

this chapter various econometric approaches were applied to investigate the impact of political

instability and economic growth in Pakistan during 1980 to 2016. Section 5.2 is statistical

description, 5.3 is correlation analysis, section 5.4 is unit root test, and section 5.5 possesses

Ordinary Least Square (OLS) while section 5.6 is about Granger causality test.

5.2 STATISTICAL DISCRIPTION

Statistical description is the first stage of data analysis. Summary of the statistical description is
displayed in Table 1.

27
 GDP EXP GFCF INFR PSE PIINDX

Mean 4.90 14.024 3.95 8.86 0.66 23.96

Median 4.85 13.73 3.96 10.26 0.64 14,37

Maximum 10.21 17.36 18.53 16.04 0.87 160.00

Minimum 1.01 9.95 -6.70 2.59 0.50 -3.13

Std. Dev. 1.20 2.11 5.87 4.12 0.13 32.38

Skewness 0.20 0.10 0.46 -0.21 0.37 -2.38

Kourtosis 2.49 1.92 3.71 1.61 1.61 3.16

Jarque-Bera 0.60 1.70 1.93 2.98 3.51 104.93

Probability 0.74 0.427 3.37 0.26 0.17 0.000

Observations 34 34 34 34 34 34

Table 1: Statistical Analysis

Author’s own calculation

The above table shows the descriptive statistics of variables of Pakistan. Our study consists of
34 observations from 1980 to 2015. The descriptive statistics reveal that the mean of gross
domestic product (GDP) which is 4.90, median is 4.85 with standard deviation is 1.20.Average
value of gross fixed capital formation (GFCF) is 3.95. With standard deviation is 5.87.The
average value of Exports (EXP) is 14.024 with a standard deviation is 2.11. The mean value of
Inflation Rate (INFR) is 8.86 with the standard deviation is 4.12. The mean value of political
instability index(PIINX) is 23.96 and standard deviation is 32.38. And mean of Primary school
enrollment (PSE) is 0.66 and standard deviation is 0.13. The skewness is a measure of the lack of
symmetry in the data. Political instability (PIINX) and Inflation rate (INFR) are negatively
skewed.

28
The Kurtosis is used to detect the levelness or Peakness of economic data. If the value of kurtosis
is greater than 3 in probability distribution it means that the distribution is leptokurtic. If thevalue
of kurtosis is less than three it means that the probability distribution is normal and platy-kurtic.
The results in table 1 show that all variables have kurtosis value less than three it means all
probability distributions are normal distributions except PIINDX. The Jarque-Bera probability
values also show that the residuals are normally distributed (Awan et.al 2014).
Correlation matrix among explanatory variables
A correlation matrix is also calculated to check the correlation among variables. A coefficient of
determinants between 0.7 and 0.9 is considered a strong correlation, which is viewed as posing
multi collinearity problems for the estimation (Dancey and Reidy, 2011).Results are given
below.

Table 5.3: CORRELATION MATRIX

GDP EXP GFCF INFR PIIDX PSE

GDP 1

EXP -0.28 1

INFR 0.49 -0.0296 1

GFCF 0.32 -0.184 0.2482 1

PIINDX -0.03 0.476 -0.185 -0.459 1

PSE 0.49 0.1671 -0.320 -0.947 0.422 1

Author’s own calculation

Table 4.3 represents the results of correlation matrix among variables. Correlation tells about the
strength of relationship among variables. Also explains the association of Economic growth
(GDP) with some other desired variables. The estimated results are nearly according to
expectations of the study. Our main focus is on GDP in relation to other relevant variables. Value
of Exports (EXP) is -0.28.which means there is negative and week association between exports
and GDP. Third variable is inflation rate. Results show that there is positive week relationship
between inflation rate and GDP. But coefficient of life expectancy shows that there is strong

29
negative association between LIFE and GDP. Here value of PIINDX shows that there is positive
week relationship between these two variables. Value of Primary School Enrollment (PSE) is
-0.49 which means there is perfect negative relationship with GDP.

5.4 Unit Root test

We have used ADF (Augmented Dickey Fuller ) method to find stationery of data. As suggested
in below table.The results of unit root test suggests that all variables are not stationery at level
but they are stationery at first difference, the value is 5 percent level significance at first
difference level.

Table 5.4 Unit root test (Augmented Dickey Fuller)

Variables At level At first Conclusion

difference
GDP -3.774602 -7.476546* I(1)

EXP -2.019835 -6.551920* I(1)

GFCF -4.584205 -8.325832* I(1)

INFR -0.421286 -6.228180* I(1)

LIFE -3.240570 -4.035062* I(1)

PSE 0.141320 -4.452359* I(1)

PIINX -3.400052 -7.200428* I(1)

*Significance at 5 percent level

Author’s own calculation
Results show that all variables are stationery at their first difference. As at level all the absolute
critic values are larger than the absolute test statistics. For stationery all the test statistics values
must be larger than the critical values. Hence the series is stationery at first difference and
rejected the null hypothesis.

30
Although there are many estimation techniques are available but we selected Jonhson Co
integration technique, which is suitable for above conditions that all variables are stationery at
first difference. We have used this test to find the long run relationships among variables.
Co integration is a statistical property of time series variable.

Table 5.5 Results of Co integration Test (Maximum Trace Value)

Hypothesized Trace 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.771223 132.5570 95.75366 0.0000

At most 1 * 0.712687 85.35672 69.81889 0.0018
At most 2 0.599108 45.44685 47.85613 0.0828
At most 3 0.271049 16.19683 29.79707 0.6984
At most 4 0.143374 6.080073 15.49471 0.6861
At most 5 0.034634 1.127931 3.841466 0.2882

Trace test indicates 2 cointegrating eqn(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

Table 5.6 Results of Co integration Test(Maximum Eigen Value)

Unrestricted Cointegration Rank Test (Maximum Eigenvalue)

Hypothesized Max-Eigen 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.771223 47.20028 40.07757 0.0067

At most 1 * 0.712687 39.90987 33.87687 0.0085
At most 2 * 0.599108 29.25002 27.58434 0.0303
At most 3 0.271049 10.11676 21.13162 0.7336

31
 At most 4 0.143374 4.952142 14.26460 0.7479
At most 5 0.034634 1.127931 3.841466 0.2882

Max-eigenvalue test indicates 3 cointegrating eqn(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values.

Table 5.5 and 5.6 shows the results of co integration test both Maximum trace value and
Maximum Eigen value results of co integration shows that there are two co integration equations
according to Trace Value and Three co integrating are according to Eigen Value.

5.7 Results of Long run Cointegrating Equations

Variables Coefficient Std. Error t-Statistic Prob.

GFCF 0.131569 0.043758 5.244190 0.0055

INFR -0.524648 0.187840 -2.793053 0.0093

PIINDX -0.030982 0.009300 -3.331325 0.0024

PSE
23.39224 5.806499 4.028630 0.0004
EXP
0.451804 0.128262 3.522500 0.0015
C
30.08460 5.736749 5.244190 0.0000
Durbin-
R-squared 0.674689 Watson stat 2.329146
Adjusted Prob(F-
Rsquared 0.616598 statistic) 0.000004

Table 4.4 shows that Gross Fix Capital Formation (GFCF) has positive and significant
relationship with Gross Domestic Product (GDP) as a proxy of economic growth in a way that 1
% increase in GFCF there will be will 0.13% increase in GDP. There is significant negative
relationship of inflation rate (INFR) on GDP showing that if 1% increases in inflation rate GDP

32
will be decrease by 0.52%. Political Instability has significant negative impact on economic
growth showing that in 1% increase in PIINX there will be 0.03 decreases in GDP. Primary
School Enrollment (PSE) has a significant positive impact on economic growth in a way that
1% increase in PSE, GDP will be increase by 23.39 %, on the other hand there exist a significant
positive relationship of exports (EXP) on GDP showing that 1% increase in EXP there will be
0.45% increase in GDP.

As R Square tells us how much dependent variable affect due to independent variables. The
regression for Gross Domestic Product has an overall R Squared value is 0.674689 indicating
that the explanatory variables in the model explain 67% of the variation in economic growth.

F statistic shows whether independent variables jointly effecting GDP or not. Here value of F –
statistic is greater than Probability value of F statistic so we can say that our independent
variables are jointly affecting GDP. Value of Durbin Watson stat is 2.32 tells us there is no
autocorrelation.

Looking at inflation, which illustrates a reduction in the GDP of Pakistan is normally observed
among economies because GDP is the total production that occurs in an economy thus as a result
of inflation price rise, this will increase the cost of factors of production (like raw material, labor
and capital, etc). This means that people will buy less of that commodity due to the increase in its
price (basic law of demand and supply). If we aggregate this phenomenon for all goods across all
sectors we see a huge drop in aggregate production which leads to a slowdown in the economy
and hence reducing the GDP.

Some studies conducted recently in past on Pakistan like Fatemah and Qayyum (2018), used
cointigration analysis and dynamic error correction mechanism and proved that there exists a
solid relationship between exports and economic growth of Pakistan. Hameed and Iqbal (2012)
also found the same in case of long run. Pakistan has a developing economy with limitless
natural wealth, by well-organized use of labor, a contribution in the capital is observed and
quality product provides an incentive towards export to developed or developing economies,
which definitely play a vital role in the GDP growth. Exports are a key component of aggregate
demand (AD) in any economy. Growing exports will lead to boost in AD and are a cause
towards higher economic growth. Export growth can also have a knock-on effect to ‘service

33
industries’ that somehow is related, similarly plays crucial role in employment. The positive
coefficient of 0.57% of exports shows significant positive contribution in GDP of Pakistan.

Several studies show negative relationship between Political instability and economic growth.
-0.03 indicates the negative relationship between PIINDX and GDP. Qureshi (2010) conclude
the negative relationship between political instability and economic development with the case
study of Pakistan. No matter what framework is used, the theoretical prediction is very clear.
Political instability and economic growth is negatively related (Richard 2008).

Previous studies proved the positive relationship between Primary School Enrollment and
economic growth. Afzal et al (2010) investigated the short run and long run linkage between PSE
and GDP. And our results proved significant positive relationship between these.

Gross Fixed Capital Formation evaluates the value of achievement of new or existing fixed
property by the governments and households in the economy. Fluctuations in this pointer are
considered to indicate something about future business activities and the outline of economic
development. In Harrod- Domar model, the growth rate of income will be positively related to
saving ratio and capital formation. So, we can say that the more a country is able to save and
invest out of given national income, the greater will be the growth of the national income. Our
results proved his theory that there is significant positive relationship between GFCF and GDP.

Granger Causality

Granger Causality test helps in determining the direction of causal relationship between
variables. Granger causality is very sensitive with number of lags used. Four findings are
possible in Granger Causality test a) Neither variable ‘Granger Causes’ other b) Unidirectional
Causality from x to y but not vise versa C) Unidirectional Causality from y to x but not vice
versa d) Both variable cause each other.

Table 4.5 Results of Granger Causality test:

Null hypothesis F statistics Probability Direction of

causality
GFCF does not Granger Cause GDP 0.62025 0.5453 GDP →GFCF

34
GDP does not Granger Cause GFCF 9.03455 0.0010
INFR does not Granger Cause GDP 0.43627 0.6509 GDP →INFR
GDP does not Granger Cause INFR 3.40439 0.0480
PIINDX does not Granger Cause GDP 0.50943 0.6065 No
GDP does not Granger Cause PIINDX 1.50320 0.2404 relationships
PSE does not Granger Cause GDP 0.86050 0.4342 No
GDP does not Granger Cause PSE 0.05703 0.9447 relationships
EXP01 does not Granger Cause GDP 2.14175 0.1370 No
GDP does not Granger Cause EXP01 0.65628 0.5269 relationships
INFR does not Granger Cause GFCF 0.38853 0.6818 No
GFCF does not Granger Cause INFR 1.64140 0.2125 relationships
No
0.89559 0.4202
PIINDX does not Granger Cause GFCF relationships
GFCF does not Granger Cause PIINDX 0.59271 0.5599
PSE does not Granger Cause GFCF 1.65962 0.2090 No
GFCF does not Granger Cause PSE 0.10994 0.8963 relationships
EXP01 does not Granger Cause GFCF 1.36835 0.2716 No
GFCF does not Granger Cause EXP01 1.35761 0.2743 relationships
PIINDX does not Granger Cause INFR 0.11435 0.8924 No
INFR does not Granger Cause PIINDX 0.78045 0.4683 relationships
PSE does not Granger Cause INFR 3.09429 0.0617 No
INFR does not Granger Cause PSE 2.36805 0.1128 relationships
EXP01 does not Granger Cause INFR 0.31041 0.7357 INFR →EXP
INFR does not Granger Cause EXP 6.47124 0.0051
PSE does not Granger Cause PIINDX 5.10311 0.0132 No
PIINDX does not Granger Cause PSE 2.21072 0.1291 relationships
No
EXP01 does not Granger Cause PIINDX 1.80658 0.1835 relationships
PIINDX does not Granger Cause EXP01 1.02237 0.3733
EXP01 does not Granger Cause PSE 6.07952 0.0066 No

35
PSE does not Granger Cause EXP01 0.57137 0.5714 relationships

Results obtained are summarized in table 4.5.Results indicate that there exists unidirectional
causal relationships between GDP and GDCF, GDP and INFR and INFR and EXP. However
there exists no causal relationships between other variables.

36
Chapter 6

CONCLUSION AND POLICY IMPLICATION

6.1 Introduction of Study

The mail goal of this study is to investigate the long run relationship between political instability
and economic growth. For this estimation we employed Ordinary Least Square(OLS) Estimation
to show the long run relationships between Political instability and economic growth. By
OLS study found that Gross Fix Capital Formation (GFCF), Primary School Enrollment, Exports
(EXP) has positive and significant relationship with economic growth. The study found that
Inflation Rate (INFR) and Political Instability (PI) have the negative signswhich shows its
negative impact on economic growth. Results illustrates that PI has negative impacts on
economic growth. PI signifies that high tendency of a change of government is associated with
uncertainty with new policies of the new government. As a result risk adverse economic agents
may be uncertain to take economic projects or may exit the economy, by investing abroad.
Conversely foreign investors prefer a stable political environment which less policy uncertainty
and less policy unertaintity about property rights. Hence there is adverse relationship between
political instability and economic growth. Results also shows that INFR also negatively impacts
on economic growth. As due to INFR there is increase in cost of factors of production so people
will buy less of that commodity, if we aggregate this phenomenon for all goods across all sectors
we see a huge drop in aggregate production which leads to a slowdown in the economy which
causes to diminish economic growth.

5.2 Summary of the Results

The statistics concluded that PI has significant long run negative impacts on economic growth.
Primary School enrollment, exports, GFCF has positive impacts on economic growth, While
INFR and PI has negative impacts on economic growth.

5.3 Policy Implications

Our results suggests that governments in politically disjointed countries with high degrees of
political intability need to address its root causes and try to diminish its effects its effects on the

37
design and implementation of economic policies that may engender higher economic growth.
There should be maintaining political system in Pakistan so that every government should start
work according to the constitutional. Moreover there should be proper institutional framework
and continuity of the political process in the country.

38
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