The Effect of Political Instability on Economic Growth in Sub-Saharan African Countries: A Dynamic Simultaneous Equations Modeling Approach

Abstract

In this study, the relationships between political instability and economic growth in Sub-Saharan African countries are explored. The study used annual panel data from 2000 to 2019 for 48 Sub-Saharan countries. Six individual political instability indicators from the World Bank's world governance indicators database were used and aggregated into a single and more comprehensive political instability index by employing the techniques of principal component analysis. Then the impact of the composite political instability index on economic growth along with other economic variables is modeled by employing three simultaneous equations and estimated by the dynamic panel GMM estimation approach which accounts for the endogeneity issues. The results from the GMM simulations reveal that political instability significantly hampers economic growth in SSA directly by disrupting the available resources a country has at its disposal. The hypothesized indirect channel through which political instability negatively affects economic growth through FDI is found to be statistically insignificant. The governments and policymakers of Sub-Saharan African countries should target political instability as their policy variable since variations in economic growth other than its own shocks are also explained by the shocks from political instability. Countries in SSA should not ignore factors leading to political instability and policies aimed at decreasing political instability should be pursued by these countries in order to maintain stable economic growth.