Political instability, a complex phenomenon that arises as a result of an amalgamation of numerous factors, plays a crucial role in shaping the current and the future state of the society we live in. Although events of instability are highly publicised and debated, many still question the exact impact that political instability has on their lives. A useful case to investigate is the growing region of Southeast Asia where a vast majority of nations are experiencing or have experienced countless episodes of instability.
Historically, the Southeast Asian region has been enriched with various forms of factor endowments (rubber, cotton, metals, and oil and gas) leading many of the nations to exploit their comparative advantage and becoming primarily focused on exporting. As Southeast Asia emerges as a major hub for trade and manufacturing, more interest in understanding the economic and social dynamics of the region has been generated. Countries such as Indonesia, Malaysia, the Philippines, Singapore, and Thailand have displayed an exceptional economic growth trend as seen in Figure 1, propelling many of these economies from low-income countries to middle-income and in some cases to upper middle-income countries (Naya, 1987, p.47). Moreover, the formation of the Association of Southeast Asian Nations (ASEAN) has allowed the region to gain a growing importance in the global political landscape.
Figure 1. Real GDP Per Capita Growth for ASEAN (1970 - 2014)
Source: Author’s output using PWT (Feenstra, Inklaar, and Timmer, 2015)
However, the region has experienced tremendous political instability over the past century. Many of the member nations had gained independence after the Second World War and proceeded to rapid constitutional development. This led to a collection of political systems that had emerged ranging from authoritarian regimes to Western democracies. Political institutions within Southeast Asia shared numerous fundamental deficiencies that would normally characterise a stable and efficient political system. The lack of an effective parliament, free and fair elections, and an independent judiciary remain commonplace in the region (Islam and Chowdhury, 2001). The fundamental deficiencies within the political system may have facilitated the rise of powerful authoritarian regimes in some member nations, or encouraged political conflict between civil and military elites in others.
Authoritarian rule was prevalent in Indonesia where the country had experienced a three decade-long reign under Soeharto before his resignation in the late 1990s and in the Philippines where civil protests led to a collapse of authoritarian rule in the 1980s. Thailand had endured multiple conflicts between military and civil bureaucrats where respective parties contested over political control to be able to govern policy and establish business relationships that ensured the benefits of economic development would be in the interests of those in power (Rodan, Hewison, and Robison, 2001, p.72). Moreover, political instability persists in Malaysia due to ethnic tensions between Malay and Chinese communities (Rodan et al., 2001, p.179). These political and social tensions are a few of many occurrences that are widespread in the region.
By investigating historical data from 1970 to 2014, we can find the impact that political instability has on economic growth in Southeast Asia. First, to define political instability, we use 14 different political instability indicators that range from political assassinations to the number of legislative elections. Through statistical methods (exploratory factor analysis), we can factor these 14 indicators into two indices (factors) with different common underlying interpretations. The two factors could be defined as the ‘instability of the political regime (henceforth referred to as regime instability)’ and the ‘instability by protest including violent action (henceforth referred to as protest instability)’. Regime instability is an index that includes the following indicators: changes in effective executive, cabinet changes, coups d’état, constitutional changes, and major government crises. Protest instability is an index that includes anti-government demonstrations, riots, assassinations, and general strikes.
By using a regression analysis (statistical analysis), we find that protest instability is the only political instability indicator that remains robust to various econometric models. Generally, a one-point increase on the protest index would result in as much as a 1.4 percentage point reduction in economic growth (with a minimum being approximately 1 percentage point). This result is significant at the 1 percent level (which means that the result is 99% likely to be true). Additionally, the most significant contributor to the protest index is the indicator ‘anti-government demonstrations’ where an instance would reduce growth by as much as 0.4 percentage points. Interestingly, we find that regime instability does not significantly reduce economic growth.
The results presented in this essay challenges some of the presumptions of the relationship between political instability and economic growth. As seen in Southeast Asia, it seems that regime instability does not significantly contribute to the decline in growth. Why is this so? This may be due to the fact that political instability (particularly regime instability where elites and bureaucrats in the country fight over power) is so commonplace that it is expected. Hence, we might find that regime instability has an insignificant effect on the economy as people are certain about the uncertainty that is likely to occur and continue to endure the instability in a ‘business-as-usual’ manner. On the other hand, instability by protest is likely to reduce growth regardless of whether it is expected or not as protests and violent action (notably anti-government demonstrations) usually results in ‘working days lost’ which directly impacts the productivity of workers. Therefore, protest instability is likely to lead to a reduction in economic growth (as found through the statistical analysis).
Conclusively, we find that instability by protest has a significant impact on economic growth whereas regime instability does not seem to have a robust association with growth. More importantly, we have demonstrated that political instability does play an important role in the economy and hence it is essential for further research to be done into understanding this complex phenomenon.
*Note: This article is a condensed version of an extended paper titled "Political Instability and Economic Growth: Evidence from Southeast Asia" by Karun Advani which is available by request.
References:
Feenstra, R. C., Inklaar, R., & Timmer, M. P. (2015). The Next Generation of the Penn World Table. American Economic Review, 105(10), 3150-3182, available for download at www.ggdc.net/pwt
Islam, I., & Chowdhury, A. (2001). The political economy of East Asia: Post-crisis debates.
Melbourne: OUP Australia and New Zealand.
Naya, S. (1987). Economic Performance and Growth Factors of the ASEAN Countries. In Martin, L. G. (2nd ed.), The ASEAN success story: Social, economic, and political
dimensions (pp. 46-87). Honolulu, HI: University of Hawai’i Press.
Rodan, G., Hewison, K., & Robison, R. (2001). The political economy of south-east Asia:
Conflict, crisis, and change, 2nd edition. Australia: OUP Australia and New Zealand.
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