Pakistan descended into a fresh round of political instability in April 2022 after Imran Khan, the then Prime Minister of Pakistan, was removed from office through a vote of no confidence in the parliament.

The polycrisis that ensued in the aftermath of his ouster took twists and turns but largely remained under control until last week when Imran Khan was arrested from the veranda of the Islamabad High Court, where he had arrived to attend a court hearing.

Mr Khan was released through an order of the Supreme Court two days later, but the events that took place during those days threw Pakistan into a deeper abyss of political instability. While it is now established that political instability has adverse impacts on economic growth, the scale, intensity and transmission channels through which political instability casts its dampening effect on output/GDP growth are less known.

Settling the question of how political instability enters the world of economics are two seminal papers; the first by Harvard economist Alesina who has pioneered several empirical models and estimation tools to determine how political instability impacts economic growth.

The second are International Monetary Fund economists Aisen and Veiga, who draw extensively on Alesina’s works and have used similar techniques to arrive at conclusions which seem to be extensions of Alesina’s findings.

Frequent government collapses increase the probability of future collapses, creating a self-perpetuating mechanism

By defining “political instability” as the propensity of a change in the executive either by “constitutional” or “unconstitutional” means and using a sample of 113 countries for the period 1950-1982, Alesina finds out that in countries and time periods with a high propensity of government collapses, growth is significantly lower than otherwise.

He then classifies government changes to arrive at two types; all “government turnovers including those that do not involve a significant change in ideological direction or an irregular transfer of power or those government turnovers that involve only these two types of changes.”

He also found out that contemporaneous low economic growth does not increase the contemporaneous propensity of government changes. However, what’s interestingly relevant to many unstable democracies in the developing world is the fact that Alesina could not find any evidence that economic growth is significantly different when authoritarian regimes are compared to democracies.

Political instability tends to show an inherent self-perpetuating mechanism and persistence in that frequent government collapses increase the probability of future collapses.

Cabinet changes of the 1950s, military takeovers, and government changes in the 1990s may have had more dampening effects on output growth than the recent ousters

Alesina thinks that it would be interesting to analyse which politico-institutional characteristics of dictatorships make them more or less growth-enhancing. He refers to works by Poole and Londregan (1991), who find that the presence of unconstitutional leaders reduces growth. Their understanding of unconstitutional leaders captures some characteristics found in kleptocratic dictators.

Alesina also believes that a country’s existing level of development also determines the extent to which its economy will be affected by political instability. He suggests that the interaction between political stability, political change and growth may take different forms at different levels of development.

On the other hand, Aisen and Veiga define political instability as cabinet changes and use a sample comprising 169 countries and nine consecutive and non-overlapping five-year periods from 1960 to 2004.

They suggest that regime instability adversely affects economic growth and when there is an additional cabinet change per year, the annual growth rate decreases by 2.39 percentage points. A one-point increase in the index of economic freedom that counts for favourable economic institutions increases annual economic growth by one percentage point.

Pakistan has experienced military takeovers and vacillated between quasi-democratic and civil and military authoritarian regimes. Government and cabinet changes have been sudden, unexpected and irregular. It has also experienced what Alesina refers to as the persistence of political instability.

While no studies have quantified the cumulative economic impacts of such instability, one can surely imagine that the cumulative output losses are very large. There are some studies that also measure the impacts of political instability on other macroeconomic indicators, including trade and inflation, etc.

Despite large variations in the statistical significance of these results, political instability seems to have an overall negative effect on all macroeconomic indicators.

As the literature suggests, the growth impacts of political instability are much larger for economies at the initial stages of development. This implies that frequent cabinet changes of the 1950s, military takeovers of the past and irregular government changes in the 90s may have had more dampening effects on output growth and other macroeconomic indicators than recent ousters and takeovers.

Clearly, this assumption builds on the premise that Pakistan has climbed up the ladder of development since the 1950s.

One distinction that also needs to be made is between the direct and overall costs of disruptive events that are the cause or manifestation of political instability. Quite often, the analysis seems to rely quite heavily on vandalism, damage to government property and temporary suspensions of business activity to account for economic losses due to a disruptive political event.

This misleads one to imagine direct losses at the cost of losing sight of the long-term and overall growth and macroeconomic effects of such instability.

Imran Khan was arrested, government property was vandalised and business activity was stalled across the country. Imran was released later and businesses returned to business as usual. However, the impacts that this instability would have on the overall economy will only begin to manifest later.

The writer is an economist trained in Canada. He tweets @asadaijaz

Published in Dawn, The Business and Finance Weekly, May 15th, 2023

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