POLITICAL INSTABILITY AND ECONOMIC GROWTH IN LOW-INCOME ECONOMIES: EVIDENCE FROM PANEL DATA ANALYSIS (2002–2022)

Abstract

This paper investigates the effect of political instability on economic growth in low-income economies over the period 2002–2022. While political stability is widely recognized as a precondition for sustained development, empirical evidence remains mixed, particularly for fragile economies with weak institutional capacity. Using a balanced panel of 32 low-income countries, this study combines country fixed-effects and year dummies to control for unobserved heterogeneity and global shocks. To address concerns of endogeneity and growth persistence, robustness checks were conducted using the Arellano–Bond dynamic panel estimator. The results demonstrate that improvements in political stability, measured by the Worldwide Governance Indicators’ Political Stability and Absence of Violence/Terrorism index, are positively associated with real GDP growth. Specifically, a one-unit increase in the stability index corresponds to an average increase of 1.7 percentage points in annual growth. These findings underscore the central role of political stability in shaping development trajectories, particularly in economies where institutional fragility magnifies the costs of instability. The study contributes to the political economy of growth literature by providing updated, low-income–specific evidence and highlights the need for policymakers to integrate governance reforms, institutional strengthening, and conflict mitigation into broader development strategies.