The Role of Political Stability on Economic Performance: The Case of Bangladesh

Political stability generally plays pivotal role in the process of economic development of any country. In this paper, we investigated the direct effect of political stability on the economic performance of Bangladesh for the period of 1984-2009. Two different techniques of cointegration have been used to analyse the long run and short run effect. The Engle-Granger method of cointegration did not find any cointegration while Bound Testing Approach did . Once cointegration is found the long run relationship as well as the short run relationship is established. Our findings indicate that political stability has negative effect on economic performance in long term while the short run effect is positive. This result is rare but not unique as it supports to the work of Goldsmith (1987) to shed light on Mancur Olson's theory of political stability and growth. (ProQuest: . denotes formulae omitted.)1. IntroductionPolitical instability has been a notable feature of Bangladesh since her birth in 1971. The country faced enormous challenges in the path of growth but still maintained a good rate. However, till now, the country still falls into category of the least developed countries . The population growth was around 2%3 until 1997 which swallowed up the economic growth to some extent. There are other adverse economic and socioeconomic situations which make it hard to grow the country faster. So, it is of importance to analyse the effect of non-economic factors like political stability on economic performance. The political and civilmilitary bureaucratic leadership has failed to meet people's expectation in the last four decades. Economic growth has been pretty steady but income inequality is very high as compared to other developing countries. In comparison basis the growth was lower than some countries in South Asia. So, if the country becomes politically stable will it be contributing to the growth? Or, is it already performing well in such adverse socio-economic situation? Is the effect long term or short term? These questions will be answered later in this paper. In this paper, the effect of political stability on economic performance of Bangladesh has been empirically analysed based on both theoretical specification and empirical specification.The paper is outlined as follows: section 2 reviews some previous studies regarding political stability and economic performance, section 3 specifies the theoretical model and data, section 4 focuses on the methodology and empirical specification, section 5 presents the results of estimation section 6 includes result discussion and sensitivity analysis and section 7 concludes the paper.2. Literature ReviewIn this section, some earlier studies regarding the relationship between political stability and economic growth are discussed. Most of the existing empirical studies link political instability rather than stability with economic growth. The earlier works include the studies by Venieris and Gupta (1986) and Gupta (1990). Barro (1990) in his cross sectional analysis found that economic growth is affected negatively by political instability as property rights are hardly implemented in unstable political situation. Edwards and Tabellini (1991) showed that a heavy borrowing due to short term fiscal policy by unstable political leaders deter long run economic growth. Devereux and Wen (1996) argued that unstable political situation discourages private investments which in turn affects economy negatively. Alesina and Perroti (1996) used three different variables to proxy for the political instability and found it causing a decrease in economic growth. In Edward's (1998) report negative relation is found between political instability and productivity growth for a panel of 93 countries for the period of 19601990, though the relation was relatively weak. Drazen (2000) identified two reasons for which political instability affects economic performance. Firstly, it creates uncertainty about future return from the investment of firms and private agents, which inhibits the society as a whole to accumulate physical capital. …